The gas energy crisis in Europe


Central to the last European Council meeting of 2021 was the discussion of the current worsening of the epidemiological situation across Europe. During the European Council, national representatives touched upon the current issue of the surging energy prices. However, in this regard Member States did not adopt conclusions since views continue to diverge on dossiers such as the energy market and EU Taxonomy.

Where the latter is concerned, Member States are still debating on whether gas and nuclear energy should be classified as transitional or green in the upcoming Commission delegated act. Heads of States and governments also exchanged views on many topics related to the EU external relations agenda. While addressing the situation in the Ukraine, they called on Russia to “de-escalate tensions at the border”. Commission President Von der Leyen stated that the EU in coordination with the United States is prepared to put into place sanctions should Russia not refrain from further acts of aggression.

The biggest ally of Europe in the gas crisis has so far been the weather. Only a month ago, many feared the 50% level would be breached on New Year’s Day. Unseasonal temperatures cut consumption and helped to avoid that scenario. The arrival of liquefied natural gas (LNG) cargos also alleviated the crunch. Some big energy consumers — like fertilizer companies, glass manufacturers and aluminum and zinc smelters — also shut down production. With nearly half of January gone, there are few meteorological signs of the feared cold snap. Indeed, if the current forecasts hold, temperatures may rise above seasonal levels during the second half of the month.

It could still get colder, but typically Jan. 28 marks an inflection point in European winter, when the season starts to gently warm, according to 30-year average trends. Each day without a cold snap after that date is a day closer to spring — and relief for the gas market. Still, prices for European gas — and electricity — remain elevated, with benchmark gas trading around 75 to 80 euros ($86 to $91.74) per megawatt hour, about 300% above the 2010-2019 average but well below a peak of nearly 188 euros per MWh set in December.

Gazprom is the main reason why – and not because of its tweets. Russia has kept the pressure on the European gas market by turning down supplies. The Yamal-Europe pipeline, a major conduit of Russian gas into Germany, hasn’t shipped a single molecule of gas for 23 consecutive days. Flows via other pipelines remain well below normal levels. Gazprom says it’s meeting all its contractual obligations with customers in Europe. And the customers agree. What the Russian energy behemoth isn’t doing, as it does normally in winter, is to offer gas on the spot market above and beyond its long-term contracts.

Why not is a matter of hot debate. Some argue the company doesn’t have the gas to sell because domestic demand is running very high and exports to China are rising. Others, however, believe Russia is manufacturing a gas crisis for political leverage over Ukraine. What’s clear is that with half of January gone, and the weather indicating more mild temperatures until February, the biggest risk is no longer a cold winter — but what Russia can do to supplies.

This year households in Europe are set to pay an average of 54% more for energy than they did two years ago, due to soaring natural gas and power prices across the region. The average residential consumer will spend 1,850 euros on energy this year, up from 1,200 euros in 2020, analysts at the bank said in a research note. The biggest increases will be in Italy and the U.K., where bills will jump by about 950 euros.
Europe’s energy crisis is hitting households, sending bills rocketing and pushing many into fuel poverty.

Policymakers are under pressure to find ways to shield consumers while not sending energy suppliers into bankruptcy. Of the European Union’s 27 members, 20 have acted to soften the blow for the most vulnerable consumers and households — most effectively via tax cuts, according to the European Commission.
“We see a return to early-2021 price levels as unlikely in 2022,” wrote the analysts, including Harry Wyburd and Karen Kostanian. Even if this were to occur, “it would likely be too late to avert significant cost increases which have already been locked in via hedging.”

Businesses are also set to be hit hard, with typical industrial consumers seeing an increase of as much as 70% in their electricity costs and 100% in their gas costs this year. That follows a roughly 20% increase in electricity and 15% rise in gas costs in 2021, they said.
While gas and power prices have dropped from December’s record levels, the risk of high prices is far from over, with the likelihood increased by low gas storage in Europe. That could be a boost for utility companies, who are expected to see increased earnings but are also at risk of government interventions.

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