Running out of gas as the cost of energy hits record highs, Europe is facing a “power crunch”—one that has been years in the making. As the global demand for gas soars, Europe’s uptake of intermittent renewable energy sources such as wind and solar, combined with its aggressive shutdown of coal and heavy EU carbon taxation, has caused its electricity supply to tighten.
The continent’s gas crunch is causing extreme volatility, with the U.K. On Thursday seeing its electricity price jump 10-fold during one seven-hour period, to a record high of £2,300 ($3,180) per megawatt-hour (MWh), as Ireland, which regularly exports wind energy to the U.K., itself faced supply shortages.
They’re not alone.
This volatility has brought higher prices, hitting record highs across Spain, Germany, and France. Residential users, meanwhile, bear the brunt of the cost.
The eye-watering bills come as both the European Union and United Kingdom push to become global leaders in decarbonizing their energy grids. Last year, for example, the EU pledged it would achieve net zero by 2050, a commitment that means phasing out carbon-intensive energy sources over the next decade for more sustainable sources like wind and solar. Complicating matters: Energy prices have soared this year as demand everywhere picks up, leaving homeowners in the middle of the push and pull of an increasingly volatile global market.
Customers in both Spain and Portugal are now paying an average of €140 ($165) for a MWh of electricity, according to Iberian Peninsula electricity market operator OMIE—the highest since 2002. And on Thursday, Spain’s day-ahead electricity was at a record €152.32/MWh. Over in France and the U.K., EDF Energy said it would raise its standard variable tariffs by 12% from Oct. 1 to account for rising wholesale energy costs. And France’s benchmark power price for delivery next year also hit a record high, at €99.50 per MWh.
Such record gas prices are not usually seen in the months before winter, when more power is needed to heat homes.
A controversial connection
If there’s a lifeline, it could come from Russia.
Russia’s state-owned energy giant Gazprom announced Friday that it had finished construction of the controversial 750-mile Nord Stream 2 natural-gas pipeline to Germany. The timing couldn’t be any juicer, as it comes just a day after U.K. Electricity prices hit an all-time record and Ireland warned that a power shortfall could lead to blackouts.
If all goes to plan, Russian gas could begin flowing to the European continent within a month.
Until then, European consumers will have to pay the price. “I don’t see a reason for blackouts, because there are more than enough sources of electricity supply. It’s just going to be expensive,” says Carlos Torres Diaz, head of gas and power markets at energy research firm Rystad Energy.
Years in the making
The current power crunch is the product of years of policy choices, many made with the best of intentions, and has left Europe in a sticky political situation.
For the past several years, Europe has been shutting down its own gas fields domestically to reduce impact on the environment. The largest gas field in Europe, the Dutch Groningen field, is currently being decommissioned eight years earlier than initially planned, with its output reduced to a “minimum” flow that is meant to be used only as a backup energy source. Similarly, gas production in the U.K. Is down 28% year to date, according to global natural resources consultancy Wood Mackenzie, with Norwegian gas production also stilted due to maintenance.
Russia has not ignored Europe’s increasingly precarious energy supply. Russia limited export flow of natural gas over the summer in a criticized move to maximize profits, leaving Europe in a tight spot, and now, with Europe’s anguish rising, Russia is making noise about getting gas flowing through the Nord Stream 2 pipeline as soon as possible.
The Gazprom-owned $11 billion Nord Stream 2 pipeline, which runs under the Baltic Sea, will send 55 billion cubic meters of gas to Europe each year, enough to supply 26 million households annually. The project, which has been 10 years in the making, was met with intense regulatory pushback and sanctions over fears the pipeline would make Europe too reliant on Russian gas.
Now, this drop in European gas production, along with a boom in energy consumption related to the COVID-19 economic recovery—the International Energy Agency found that European gas consumption in Q2 2021 rose by 25%, the largest year-on-year quarterly increase since 1985—has made the idea of buying more gas from Russia increasingly palatable.
“Europe is desperate for this additional source of gas, and that helped move the approval of the pipeline,” says Diaz.
Farther out east
Europe has few good alternatives aside from Russian gas. The most likely replacement for Russian gas would be going to Asian markets—where there is stiff competition from other countries—to buy liquefied natural gas (LNG).
China, Japan, and South Korea have spurred a buying spree of LNG this summer, hoping to have enough gas stored to last the winter, while burning enough now for a post-COVID-19 economic recovery. This buying spree has sent the price of LNG soaring, w i th the spot price of LNG cargoes above $15 per million British thermal units in July, according to energy consultancy ICIS, from its December low of $8 MBtu.
“There has always been this argument about Russia versus LNG,” says Rystad’s Diaz, who thinks Europe needs both sources of supply. “If we don’t import Russian gas, the alternative is LNG. And to attract LNG, we will need to compete with Asia, which has the potential for higher prices.”
Net zero’s net effect
The last lever pushing prices higher has been a knock-on effect of Europe’s efforts to bring down its emissions.
Renewable energy produced by wind and solar, which produces 20% of the electricity in Europe, is intermittent, which means it does not produce power when the sun doesn’t shine and the wind doesn’t blow. And without batteries, storage is limited.
This summer was a bad season for wind, with output in the U.K. Dropping to as low as 409MW on Monday, compared to a record high of 17,600MW set on May 4. Things were equally grim in Germany, with renewable energy output at one point making 8.1 percent less in the country’s total energy makeup.
And another self-inflicted cost is borne from the record high price that comes along with releasing carbon dioxide into European air under the EU’s emissions trading scheme. Normally when gas prices increase, there “tends to be a switch from gas to coal power generation,” says Diaz, but given the tax under the emissions scheme, “there will be less switching that we can expect.”
