Europe is currently engulfed in an unfolding energy crisis, raising concerns about Vladimir Putin’s Russia’s role in capitalizing on rising demand, limited supply, and geopolitical unpredictability. The issue of rising gas prices is not unique to the United Kingdom and countries like Spain, Italy, Greece, and France have taken drastic measures in recent weeks to mitigate the impact on consumers.
In Italy, Roberto Cingolani, the minister for ecological transitions, has already warned Italians that their utility prices will climb by 40% in the next months, France’s government said that it will make one-time payments of €100 to around 5.8 million low-income households, and Spain’s government has committed to bring prices down to 2018 levels by the end of the year. Additionally, Madrid wrote a letter to Brussels requesting EU-wide action stating “We urgently want a pre-designed European policy menu capable of responding swiftly to major price spikes”. However, Britain is particularly vulnerable to the current price crisis due to the country’s reliance on gas for energy as it is critical for heating, industry, and power generation. Beyond that, the country’s gas grid serves more than 22 million households.
Europe is experiencing a natural gas crisis and, to a lesser extent, coal scarcity. Regrettably, the pandemic increased demand for natural gas and coal exceeding the current supply, which has resulted in price spikes and manifested in shortages throughout Europe. Arguably, Europe has been impacted for the following reasons:
- Europe had a particularly cold winter last year which meant people were heating their homes longer than they should. If the same situation occurs this winter, it might be a very expensive winter for Europe.
- In line with the climate goals, some countries have been getting rid of their fossil fuels and coal capacity. For instance, The Netherlands began phasing out its gas fields through various efforts in 2018 and in 2020 and the EUs production of hard coal reached 46 million tons, 80% lesser than what was produced in 1990.
- The problem has been exacerbated by Russia’s decisions not to expand gas supplies through Ukraine and to replenish its European storage facilities. Nevertheless, Russia has promised to raise Europe’s energy output in the future. Market analysts quickly deduced that the offer to increase supplies to Europe was likely made to exert pressure on Germany to approve the Nord Stream 2 gas pipeline, which will transport Russian gas to Germany via the Baltic Sea. Russia is currently awaiting approval of the $11 billion pipeline by Germany’s energy regulator, a process that could take several months. For several years, policymakers in the region and the United States have prioritized Russia’s reliability as an energy supplier to Europe. The Russian gas company Gazprom, Europe’s largest gas supplier, reaffirmed that its top goal was to shore up domestic supplies. The business will consider potentially increasing exports to continental Europe only when it has stocked up its own storage facilities by the end of October. The last two presidential administrations in the United States have been outspoken in their opposition to the Nord Stream 2 project, warning that it will erode Europe’s energy security and increase its reliance on Russia. The United States, for its part, wishes to expand its own liquefied natural gas exports to Europe. Experts warned that Russia’s offer demonstrated Europe’s growing vulnerability to Moscow’s ability to turn on and, more importantly, turn off gas supplies as and when it pleased.
These reasons explain why Europe’s gas prices have sky-rocketed by 600% from 20 euros per MWG to nearly 150 euros MWH per hour. Also, Europe’s coal prices have shot up by nearly 400% from $50 per metric tonne to $240. To sum up, the rise of coal and natural gas prices negatively affected energy prices as natural gas and coal account for about 20% of the EU energy.
One of the major issues with this is the economic impact, as the EU operates a common energy market and attempts to harmonise prices across the continent so that EU states pay comparable energy prices. This requires states to share their energy resources, which is fine when there are plenty of resources to go around, but becomes problematic when there aren’t enough. If circumstances continue to deteriorate, European governments may refuse to share their energy. For example, France, which is primarily fueled by nuclear energy, is currently exporting ten billion watts to EU member states such as Germany and Italy. The energy crisis is sweeping Europe as a result of limited supply. While rising demand threatens to stymie the region’s economic recovery, businesses and consumers are dealing with rising costs and increasing inflation rates.
According to Commissioner Simson’s speech at the EU Parliament’s plenary session on energy prices on the 6th of October, “…the current price increase has nothing to do with our climate measures and a great deal to do with our reliance on imported fossil fuels and their very volatile prices. The Green Deal is the only long-term answer to Europe’s energy crisis: increased renewable energy and increased energy efficiency. In recent months, wind and solar have continued to generate the cheapest electricity in Europe and they are not subject to price fluctuations”.
On October 13th, 2021, the EU Commission published a toolbox in response to inquiries about the current energy crisis. Among them are the following:
For immediate consumer and business protection measures:
- Provide emergency income assistance to energy-insecure users, such as vouchers or partial bill payments, which can be funded from EU ETS earnings;
- Authorize temporary bill payment deferrals;
- Put precautions in place to prevent grid disconnections;
- Reduce tax rates for poor households temporarily and on a targeted basis;
- Provide assistance to businesses or industries in accordance with EU rules on state aid;
- Increase worldwide energy outreach to ensure the market’s openness, liquidity, and flexibility;
- Conduct an investigation into alleged anti-competitive behavior in the energy market and request that the European Securities and Markets Authority (ESMA) strengthen its surveillance of the carbon market’s development;
- Facilitate broader access to renewable energy purchase agreements and bolster their effectiveness through flanking actions.
Measures for a decarbonized and resilient energy system for the medium term:
- Increase investment in renewable energy, renovations, energy efficiency and expedite renewable energy auctions and permitting;
- Develop energy storage capacity, particularly batteries and hydrogen, to support the growing percentage of renewable energy;
- Instruct European energy regulators (ACER) to conduct an assessment of the benefits and drawbacks of the current electricity market structure and make appropriate suggestions to the Commission;
- Consider amending the rule governing security of supply to ensure the optimal use and operation of gas storage in Europe;
- Investigate the possible benefits of voluntary coordinated procurement of gas supplies by Member States;
- Establish new cross-border regional gas risk groups to conduct risk assessments and advise Member States on the development of their national preventative and emergency action plans;
- Enhance customers’ participation in the energy market by giving them the ability to pick and switch suppliers, generate their own electricity, and join energy communities.
The Commission also encourages Member States in the toolbox to expand access to PPAs (Power Purchase Agreements) beyond large firms, including SMEs in accordance with competition laws and including through end-user demand aggregation. Additionally, Member States should support PPAs through matchmaking events, standard contracts, and risk mitigation via InvestEU financial instruments. PPAs are identified as a critical instrument in the European Commission’s toolbox for protecting European enterprises from uncertain market developments. PPAs are often contracted for an extended period of time ensuring corporate customers a set electricity price and mitigating market risk.
According to Lukasz Kolinski, the EU’s Commission’s head of renewables and energy system integration, “[in] the long run, the solution to EU energy surge is quicker renewables deployment and increased energy efficiency”. Beyond that, speakers at a web event hosted by the European electricity lobby Eurelectric said on Wednesday 13th October that a faster rollout of renewable energies such as wind and solar is the best response to recent spikes in gas and power prices.
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