What's causing soaring energy prices in Europe

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Europe is facing an energy crunch caused by surging wholesale prices for natural gas, raising the prospects of higher utility bills for customers and forcing some manufacturers to halt operations.

A complex brew of forces is causing the European gas market’s unprecedented surge, creating a “perfect storm” of higher than expected demand and low supply.

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"We have never seen prices like this,” said Ira Joseph, the global head of generating fuels and electricity pricing at S&P Global. “We expected some sort of recovery after COVID because prices were so extremely low last year, but this is really extreme stuff."

Global demand is up as economies open from the coronavirus pandemic, while a cold snap that occurred in the latter part of winter this year drained storage levels below normal levels, meaning there is little spare capacity.

There are other factors at play. Stronger demand for liquefied natural gas exports in more competitive Asian markets has diverted cargoes away from Europe.

Europe has also experienced unusually calm weather in recent weeks, leading to less wind power output and creating additional strain on gas supply, particularly in the United Kingdom, where wind normally provides 20% of the country’s electricity.

“You ended up with almost a perfect storm with lots of things put together,” said Anna Mikulska, a nonresident fellow in energy studies for the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

The spike in natural gas prices is causing pain across Europe, where the fuel is used for home heating and cooking, as well as power generation.

A leading fertilizer company announced it is shutting down two factories in the U.K. due to high natural gas prices. UKSteel, an industry group, said this week that some steelmakers have had to suspend operations periodically because of “extortionate” power prices.

Governments of some countries, including Spain, Italy, France, and Greece, have taken action to lower consumers' power bills.

And it might get worse as the winter approaches, when demand for fuel is usually highest. That possibility prompted top U.S. official Amos Hochstein, the State Department’s envoy for energy security, to warn this week that Europe is not doing enough.

“I worry because I don’t think we should ever be in a position knowing that if it’s a cold winter, there’s not enough supply,” Hochstein said during a visit to Warsaw, Poland.

Gas prices in the U.S. have risen as well, but to not the same extent. The U.S. is less vulnerable to price spikes because of its large domestic supply of cheap gas from shale drilling, while Europe must import most of its gas.

Additionally, Russia, the top exporter of natural gas to Europe, is not sharing as much as would be expected when gas is at such high prices, even as its production has remained steady at home.

“This is not just about some geopolitical games,” Hochstein told the Financial Times. “People’s lives are at stake.”

The Biden administration has tasked Hochstein with working to mitigate risks posed by Russia's Nord Stream 2 natural gas pipeline to Germany, which is slated to be operational this year after the U.S. recently dropped sanctions against it despite concerns the project would worsen Europe’s reliance on Moscow for energy.

A group of lawmakers in the European Union has called for an investigation into the influence of Gazprom, Russia’s state-run energy company, on the price spike, accusing Moscow of deliberately curbing natural gas supplies to Europe.

Analysts, though, say there is inconclusive evidence about that. Gazprom has denied the accusations.

"There hasn't been the kind of response one would have expected from Russia at these prices,” Joseph said. “But what’s happening now isn't anything out of the ordinary in terms of their export levels."

Critics of the European Union’s aggressive climate policies, including fossil-fuel-dependent Poland, have blamed Brussels for the higher prices.

As countries close conventional “baseload” coal and nuclear plants and rely more on renewable energy such as wind and solar to meet emissions reduction targets, it places more strain on natural gas when those intermittent sources aren’t available.

Costs for permits to emit carbon as part of Europe’s emissions trading system are at record levels, so there hasn’t been as much switching from natural gas to higher emitting coal as would be expected with gas prices surging.

Nikos Tsafos of the Center for Strategic & International Studies said there is no evidence to support the idea that Europe’s climate policies are causing the natural gas shortage.

“There has been no clean energy transition-driven restriction of gas supply justifying these prices,” said Tsafos, who studies the geopolitics of energy and natural gas and European climate policy.

But the European Union is guarding against the possibility of a prolonged energy price surge that could cause a popular backlash toward its climate policies.

“The one thing we cannot afford is for the social side to be opposed to the climate side. I see this threat very clearly now that we have a discussion about the price hike in the energy sector,” Frans Timmermans, the European Commission's vice president in charge of climate issues, said at a parliament meeting this week.

But he argued that higher natural gas prices strengthen the case for a rapid shift to cleaner energy sources to lessen dependence on fossil fuels.

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Tsafos said transitioning to renewables won’t prevent temporary swings in energy prices, as damages from extreme weather made worse by climate change can wreak havoc on the output of all types of energy sources.

“The idea that if we had a faster transition, we wouldn’t have huge price swings is insane,” Tsafos said. “You would still have volatile output and demand that could go up and down with extreme weather. The question is do you have a system to swing flexibly to these shifts?”

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Tags: News, Energy and Environment, Europe, Natural Gas, United Kingdom, Germany, France, Climate Change, Russia, Foreign Policy

Original Author: Josh Siegel

Original Location: What's causing soaring energy prices in Europe

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