In recent weeks, there has been increasing mainstream coverage of the impending energy crisis in the UK and across Europe. While this issue is not news to those who are regularly engaged with energy markets, the looming impact on domestic utility bills is steadily being given more press coverage.
In April 2022, regulator Ofgem increased the UK Energy Price Cap by 54% from £1,277 per year to £1,971 per year, based on typical use. In May, Ofgem stated this would rise again up to £2800 per year in October, however, it is widely expected that the actual increase may be even greater. More can be read on the specifics of the price cap rise on MoneySavingExpert.
The price cap rise comes largely as a result of the skyrocketing cost of Natural Gas; Image 1 below shows Dutch TTF Gas Prices, the European benchmark, over the past 12 months. The price rally over the Winter and major price shock following Russia’s invasion of Ukraine immediately stand out, although the more recent rise is the most concerning for households across Europe. The price has jumped from €47.99/MWH on August 16th, 2021 to now stand at €220.11/MWH, and this article will look at a few of the key driving factors behind this climb which has led to the gas crisis in Europe.
Image 1; TTF Gas prices over the past 12 months
Gas and Geopolitics
As with almost every story relating to commodity markets this year, there is a Russian-shaped elephant in the room. As a bloc, around 40% of the European Union’s gas was supplied by Russia prior to 2022, with Germany being the largest importer. Since economic sanctions were imposed against Russia in retaliation for the invasion of Ukraine, Moscow has been able to use this energy reliance to build pressure on its geopolitical opponents.
After the Nord Stream 2 pipeline project was suspended in February due to the initial build-up of Russian troops near the Ukrainian border, Germany was left being served with Russian gas through the Nord Stream 1 pipeline. Gas flows through the pipeline have been slow throughout the year, and recently dropped down to 20% of capacity - Russia has cited faulty turbine infrastructure as the reason for the decline in gas flows.
Meanwhile, however, Russia has increased gas flows to its political ally Hungary. On this issue, the Guardian reported that “by the end of August, Gazprom would supply Hungary with an additional 2.6m cubic metres a day”. The willingness of European nations to continue with economic sanctions against Russia will certainly be put to the test if this pattern of gas distribution continues.
Hot Summer, Cold Winter
Much of the plan to cope with the gas crisis has revolved around building up storage facilities ahead of the winter. For example, EU nations committed to attempting to fill their gas storage facilities to 85% by November, while they have simultaneously pledged to reduce gas consumption by 15% over the winter months. The winter is, of course, crucial as it usually represents the period of peak seasonal demand, with gas being used for heating and lighting.
However, summer has burned a hole in these plans. Many nations across Europe have been experiencing record-breaking heatwaves, which have in turn led to a rise in the demand for air conditioning, which tends to be powered with gas-generated electricity. Therefore, at a time when Europe needed to minimize its consumption in order to build up supplies as much as possible, there has in fact been an unusually strong demand for gas which has slowed the building up of gas reserves.
Lack of Alternatives?
One aspect of Europe’s energy supply that has been launched into the spotlight by the present crisis is the lack of alternative sources once Russian gas has been taken out of the picture. In the past few weeks, for example, the British government has been engaged in negotiations with energy-giant Centrica to revive the offshore gas storage site Rough, located in the North Sea. Rough was closed in 2017 as it was not deemed sufficiently necessary to warrant its required investment, a decision emblematic of the lack of foresight for an energy crisis across Europe.
Elsewhere, Germany closed 3 of its 6 operational nuclear power facilities at the end of 2021. The final 3 were due to be closed this year but, owing to the crisis, the government looks set to U-turn on that policy. More can be read on this subject via the WSJ here. However, even those countries that have backed nuclear energy are not safe in 2022. According to the World Nuclear Association, France derives around 70% of its electricity from nuclear energy, but these plants have been adversely impacted by the European drought. The cooling waters used at the plants are usually discharged into rivers, but the heatwave has been so intense that the rivers have been too hot for this process.
Other alternative energy sources have been stalling too. The droughts across Europe have also led to failing hydroelectric power facilities, while even solar panels become less efficient in extreme heat. The long-term impact of the present energy crisis may be to force countries to consider how they could have greater control over their energy security through investing in renewable energy infrastructure within their own borders, but such planning occurs in times of peace, not war. The battle to fuel the homes of millions of people around Europe is only going to intensify.
Image 2: ChAI’s 12 month average forecasts for TTF prices (16/08/22)
ChAI’s forecast for TTF prices over the next 12 months does not make for comforting reading. The average monthly price forecast, as shown above in Image 2, indicates that prices may continue to rise from their already record-high levels. Heavy industries, who have already had their profit margins consumed by the increase in manufacturing costs, will likely be the first to bear the brunt of this with respect to any enforced blackouts. For households across Europe, decisive government action will be needed to mitigate the inevitable damage that the next 18 months of energy costs will bring. For this reason, the rise in recent media attention given to this subject is much needed; time will tell as to whether those in positions of power have the aptitude to tackle the issue.
More Top Reads From Oilprice.com:
- BP To Sell Mexican Oil Assets As It Ramps Up Renewable Business
- Cotton Prices Soar As Texas Megadrought Persists
- Falling Prices And High Costs Eat Away At Steelmaker Margins