The European electricity market is in crisis as a perfect storm pushes prices up to ever higher heights. The timing could not have been worse as countries on the continent reopen and demand for energy increases. Most signs point to the likely continuation of the current situation when things may get worse. There is an opportunity to balance the electricity market towards “normal prices”, but that means geopolitical concessions that not everyone is ready to make.
The rising costs are a consequence of bad luck in terms of weather, geopolitical developments and ambitious decarbonization policies. According to Julien Hoarau, director of EnergyScan, the analysis unit of the French utility Engie, “the problem has not even started yet. Europe will have to face a very tight winter.
The unusually cold weather during the last heating season has increased the demand for natural gas supplied by domestic production, imports and underground gas storage. Under normal circumstances, these storages are filled in the summer when demand is low and prices are favorable. This year’s buying season is interrupted because there is less natural gas on the market. As usual, East Asia is ready to pay a premium which attracts LNG cargoes to the Far East. Russia, on the other hand, does not seem willing to fill the void this time around.
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In addition, Scandinavia’s electricity export capacity is considerably lower than normal, as drought hit the region this summer. Several submerged cables connect hydropower rich countries such as Norway and Sweden to the Netherlands, Denmark and Germany. However, water levels are unusually low, which means there is less cheap electricity to export south.
In addition, the industrialized northwest of Europe is less windy in summer, which is the main source of green electricity in this region of the continent. Solar plays a marginal role in the north compared to the south. Europe therefore relied on traditional thermal sources: coal and natural gas.
Demand for coal has increased dramatically, pushing prices up 70% this year. In addition to higher demand, the costs of carbon emission certificates have further increased the financial pressure. Speculators and increasing demand are the main factors behind ETS’s record prices. Coal, which emits twice as much CO2 as natural gas, has a greater need for these certificates.
The most interesting part, arguably, of the growing electricity bill on the continent, is the lack of sufficient volumes of natural gas. European production has steadily declined over the years for technical and political reasons. Europe’s largest gas field in the north of the Netherlands is being shut down after residents successfully pushed for the shutdown due to mining-induced shaking in the production area. The most obvious solution would be to increase imports, but pipeline exporters of LNG and natural gas have failed to meet demand.
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Among these exporters, Gazprom has the best cards to considerably increase its sales in Europe. But so far the Russian company has been reluctant to meet demand. Although there are more companies active in the European market, none has the production and transport capacity to act as a back-up producer like Gazprom. The Russians, however, have not reserved additional transit capacity through Ukraine’s pipeline network except to supply customers under regular contractual obligations.
Gazprom, for its part, completed the controversial Nord Stream 2 (NS2) pipeline which will double its direct export capacity to Europe’s largest importer and consumer of natural gas: Germany. Some analysts explain Moscow’s reluctance to send more gas as a method to pressure the EU on the NS2 green light. The rapid approval and certification could allow the gas to flow before the end of the year. Regardless of Gazprom’s need to complete the pipeline, the company seems comfortable with high prices.
For years, the main goal of the company was to increase its market share. Gazprom has changed course and is aiming instead for higher profits. The current situation can be seen as compensation for the dramatic losses of the past year when the global economy came to a halt.
There is no quick fix to the current situation. European customers are therefore hoping that the winter will be mild and that favorable windy conditions mitigate the increase in costs this year. When it comes to NS2, however, there is no easy fix. The current situation is a wake-up call for the European establishment, which urgently needs to rethink how to improve the continent’s energy security. Climate change increases the number of days with extreme weather conditions. This means that large price fluctuations could occur more often, as the energy system becomes increasingly dependent on weather conditions.
By Vanand Meliksetian for Oil Octobers
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