European households should be prepared to pay even higher electricity and gas bills in the coming months. Some European countries, like Spain, are adopting emergency measures such as price caps and limits on the benefits of public services. The aim is to slow the current rise in prices and avoid social and political repercussions.
“Climate and energy policies have become a dividing line and conflict in our societies. This must be politically covered and managed to maintain social peace and avoid ramifications for cohesion in the European Union”, Kirsten Westphal, senior analyst at the German non-profit institute. for international and security affairs (SWP), told DW.
The EU has many programs to intervene in long-term measures aimed at accelerating the transformation of energy systems and promoting its plan for a so-called green recovery after the pandemic. Member states, whose budgets are already overburdened, are responsible for immediate action to curb price increases. But Spain is now calling for “a preconceived European political menu to react to spectacular price hikes”.
The Spanish example shows that the emergency measures will have consequences for energy companies, whose profits will decline, also affecting their ability to invest in future-proof energy systems.
“This price crisis with spikes and enormous volatility comes at the worst possible time for green recovery. It has destroyed the capital much needed to invest in renewables and technology,” Westphal said.
A perfect storm brewing
Wholesale energy prices, the prices paid by energy companies, have more than doubled this year for a number of reasons, including the stronger-than-expected rebound in the economy and the limited supply of fossil fuels. Russia, for example, sells a limited amount of gas to customers in the European spot market. Some commentators have even suggested that the strategy aims to speed up approval of the controversial Nord Stream 2 gas pipeline by EU market regulators.
At the same time, some energy infrastructures are being updated this year. It was originally the subject of regular maintenance work last year, but then the pandemic arrived.
Added to this are temporary factors of pressure, including the closure of the power cable between Great Britain and France due to a fire, or the numerous power cuts caused by extreme weather events.
“There is little evidence to suggest that the rise will stop anytime soon,” Tom Marzec-Manser, chief European gas analyst at energy consultancy ICIS, told DW.
These global trends have added to the weather conditions, which are undeniably determining for the gas and energy markets.
“In Europe, the winter lasted almost until May with temperatures colder than average. In addition, we recorded cold spells in January and February in Asia, Europe and North America, which greatly increased the gas requirements for heating and electricity production, ”said Jean-Baptiste. Dubreuil, senior natural gas analyst at the International Energy Agency (IEA), told DW.
The shortage continued through the summer, as heat waves coupled with drought put pressure on power systems in the United States, Brazil, China and the Mediterranean. Heat waves increase the demand for electricity for air conditioning, while droughts decrease hydropower, pushing energy companies to rely on fossil fuels.
This sequence of weather events decreased the amount of gas available to be injected into the underground facilities, which are normally replenished during the summer months as a form of insurance against additional demand during the following winter.
“Low storage levels have a double impact on prices: first, injection demand is quite high, which supports spot prices; second, the low levels of storage make the markets more nervous. It’s a global story, ”said Gergely Molnar, energy gas analyst at AIE. European storage levels are now 15-18% lower than last year.
The role of climate change and carbon prices
Climate change is primarily responsible for the current situation, according to think-tank Ember, as it increases the likelihood of extreme weather events, which create shocks in the market and ultimately drive up energy prices.
“The recent IPCC report makes it clear that man-made climate change is causing extreme weather and climate events around the world. We saw local evidence of this with the unprecedented flooding in Germany in July, with hundreds of lives lost and estimated reconstruction costs to be hit. 30 billion euros (35 billion dollars). And that’s just one of the many incidents that happen around the world every day, ”Sarah Brown, senior electricity analyst at Ember, told DW.
The ongoing transformation of energy systems is such that the limited production of electricity from renewable sources is pushing energy companies to use more fossil fuels. Considering the high gas prices simultaneously, the switch from gas to coal is a global phenomenon.
“Europe has seen less switch from gas to coal than other markets because of its carbon market. If Europe had not had an EU carbon price, it would probably burn a lot more coal and would generate a lot more emissions than what we are seeing now, ”Dubreuil said.
Coal makes an unexpected comeback, also with a 30% increase in energy production in the United States
Carbon prices are a pillar of the European strategy to make its economy greener. These prices have doubled over the past year and reached new highs at the end of the summer. Some politicians have blamed carbon prices for the rise in total energy prices, but experts disagree.
“It is the rise in fossil gas prices that mainly causes the rise in electricity prices. It is not the carbon costs,” said Frans Timmermans, vice-president of the European Commission. “The increase in the price of carbon represents only about one-fifth of the increase in electricity prices,” Ember’s Brown explained. According to the analyst, the only solution is to accelerate investments in renewable energies.
The oil and gas industry affirms that the role of gas in the energy transition is central and that the consequences on household bills are due to underinvestment in gas capacities. In June, Christyan Malek, head of oil and gas research at JP Morgan, said the bank had identified a $ 600 billion shortfall in upstream investment needed between 2021 and 2030 to meet global demand for oil and gas.
A harsh winter ahead?
Last week, Russian gas giant Gazprom decided not to maximize gas shipments to Europe, while Norway announced plans to increase its natural gas exports to the rest of Europe.
The impact on households, businesses and national budgets will depend on these business decisions and other factors, including potential emergency measures adopted by governments across Europe.
The weather conditions will however remain crucial. A cold winter will indeed increase energy demand, while extreme weather events could also cause supply disruptions.