A rare sight occurred in the United Kingdom the week before last: a mothballed coal power plant was fired up and restarted.

Despite providing the majority of Britain's power for centuries, a belching coal smokestack is an increasingly uncommon sight in the UK and across Europe. Coal provides only around 2% of the power load and was scheduled to be even less by the end of the year. That is now all out the window and problems may just be starting in the United Kingdom and across Europe.

Regardless of a possibly bleak future, the return of the idled British plant neatly underlines some of the challenges with the brave new carbon-conscious world we are entering.

It also provides an opportunity for eagle-eyed investors.

The reason the UK has had to turn to coal?

Somewhat counterintuitively, the need to bring a coal plant out of retirement has been driven by the unseasonably warm weather the UK (and Europe) has been enjoying over the last month.

Why?

Well, the warm weather has also been unusually calm. And the UK relies on wind power for a small but rapidly growing portion of its power output.

This lack of wind combined with very expensive gas prices (more on that below) has meant that the UK power grid was suddenly in a nasty supply pinch and had to ask the EDF-run West Burton power plant to restart its coal burners and come online.

Why is this important? There are a four takeaways:

1) We have mentioned before that the energy transition may be very necessary but, as the UK powerfully demonstrates, it is also quite difficult to do smoothly. As we iron out the kinks in a radically different power grid it is very natural that there will be some price volatility and also uneven power for consumers and businesses. Natural does not mean pleasant however. European energy policy is looking naive at best, incompetent at worst.

In case this seems like much ado about nothing, United Kingdom natural gas prices are up around 450% since last year and are historically expensive. Europe's prices have followed suit.

What this means is that this isn't a purely a rebound from Covid-19 induced lows.

If this also seems like UK's (or Europe's) problem then you should recall that America is also trying a similar transition and has recently experienced its own supply and demand crunches. See, our pieces on Texas and California.

(This is actually why many power grid authorities have wisely kept from decommissioning all of their coal power plants. Good thing too because they have been needed. The UK this September and Texas during their frigid January are two good and recent examples of two very different electric systems and regulatory environments (and climates!) that have both suddenly needed to rely on the dirtiest of dirty fossil fuels in a hurry.)

2) So far, so basic. But the unheralded part of this story is that the other reason more coal has been burnt this summer is the fact that, even with punishing carbon tariffs, coal is still often relatively very cheap. Natural gas - the transition fuel upon which so much depends - has gotten very expensive as demand has risen and, as with nearly all other aspects of the climate emergency, people would rather choose cheap and dirty over expensive and clean. Every. Single. Time.

3) Third, there is also a supply problem. UK and Europe (like Texas) had an unusually long winter which led to gas stores being slowly but steadily depleted. This has been happening for months and months and so long predates the unnatural calm of the North Sea in September. Less available supply means that - in a free global gas market - prices rise.

You can see the UK and Europe's prices rising in lockstep and European storage capacity plummeting in this excellent graph from The Economist.

4) Lastly and most uncomfortably, geopolitics is playing a role. We wrote back in June (you can find it here) that there is a real risk that the West's determination to "go green" may make us more, not less dependent on autocratic and antagonistic regimes. In other words, we may just export our fossil fuel dependency to less moral and anti-democratic regimes. This won't exactly save the planet and it may also put us in a tough political and strategic trap.

Well, that is exactly what is happening at present in Europe. Since the 1970s Europe has imported ever larger amounts of gas from Russia and now many countries find themselves caught in a very unpleasant jam: halfway to a robust renewables energy grid in the long term but ever more dependent on Russian gas in the short term.

Russia knows this of course and there is considerable suspicion that they are NOT sending more natural gas to refill those storage tanks until Europe approves and opens the controversial Nordstream 2 pipeline that bypasses Ukraine and goes directly to Germany. Here is a great summary of this important issue.

Russia is thrilled at this state of affairs, of course, because they gain steady customers for a key export and much more importantly, they are forcibly aligning Europe's interests with their own. Who would want to criticize (or sanction) a country whose state owned energy firms literally keep Europe's lights on?

So, there are the four ingredients of a serious energy crunch:

1. a transforming and therefore less stable grid,

2. energy demand rising more than expected thanks to unusual weather and a rebounding economy,

3. energy supply less available (for nefarious Putin-flavored reasons and otherwise),

4. and the relative cheapness of coal, with carbon tariffs or not.

The question is what do we do about it?

There is one world where the UK and Europe keep investing in green energy, hope the wind keeps blowing and the sun keeps shining and that autocratic power hungry regimes decide to be kinder and less self-interested.

This seems unwise.

A more practical approach might be to confront and be clear and transparent that the switch to a greener and more sustainable economy involves hard choices. Sometimes very hard choices. And then make some of them.

What about the opportunity?!

No, it is not coal. Stay away from that politically toxic fuel.

The opportunity is very simple though perhaps morally problematic. There are two possible scenarios:

• Europe subsidizes gas prices in the short term, becomes more dependent on Russian gas in the medium term and spends a higher and higher percentage of GDP keeping the lights on and industry humming over the long term. This equals higher profits for some.

• Uses this lesson to realize that its dependence on Russian gas during a difficult energy transformation is dangerous and builds liquefied natural gas facilities to bring in American gas supplies as an alternative to Russian pipelines and recommit to other forms of green power such as nuclear energy.

Given what you know about political decision making and the tendencies of "green" policies what do you think is more likely?

Gazprom has a 10%+ dividend yield right now and winter hasn't even started.

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