Europe’s desperate struggle to solve its energy crisis as winter approaches

On Tuesday. Germany’s inflation rate hit 8.8 percent and is heading toward double-digit rates and its highest level in nearly half a century, with energy prices rising 36 percent and food prices nearly a 17 percent.

While the UK is not dependent on gas from Russia, huge increases in gas prices around the world are taking a heavy toll on UK households, which rely on gas for heating. Last week, the UK energy retailer said the typical home energy bill would rise from £1,971 ($3,352) to more than £3,500 ($5,950) in October and could be substantially higher than in the first half of next year.

Both the EU and the UK are trying to devise short-term and long-term answers to their energy crisis.

The Europeans are well aware that even if Nord Stream comes back online after its maintenance, Russia has reduced gas flows through the pipeline to 20 percent of capacity and could, if it wanted, cut off supply indefinitely. .

The Europeans are well aware that even if Nord Stream comes back online after its maintenance, Russia has reduced gas flows through the pipeline to 20 percent of capacity and could, if it wanted, cut off supply indefinitely. .Credit:access point

In the short term, they are providing some subsidies to households and, in some cases, to businesses.

The UK introduced a windfall profits tax of 25 percent for oil and gas producers in the British North Sea to help finance its aid programmes. The EU has discussed something similar for energy companies that are profiting from the spikes in oil and gas prices that the invasion has generated. (A similar discussion is going on here.)

There is also the very real possibility of energy rationing for homes and businesses.

Charging

With Shell, among others, warning that Europe’s energy crisis will not be resolved even if Europe can keep the lights and heating on this winter, yet the kind of short-term action that the EU and UK are allocating or recital are Band-Aids, not solutions.

Even the reopening of coal mines in Germany and the continued operation of nuclear plants in Germany and France, scheduled to close by the end of this year, will not provide a long-term solution to Europe’s energy challenges.

In their quest for long-term energy security independent of Russia, European states are scrambling to contract with an alternative supplier of gas from the US, Africa and the Middle East. Germany, the most dependent on gas from Russia, has leased four floating LNG terminals and other states are also leasing or building their own terminals.

However, the pipeline infrastructure to distribute gas by sea will have to be built, and in any case, there is not enough LNG available on global markets right now to be a solution to Europe’s energy problems in anything other than long-term. .

The president of the European Commission, Ursula von der Leyen, has said that in a few days or weeks a

The president of the European Commission, Ursula von der Leyen, has said that in a few days or weeks an “instrument” will be unveiled to respond to rising energy costs and deal with the dominance of gas in energy prices. .Credit:access point

Nor is it a perfect substitute for the cheap Russian gas that Europe previously enjoyed.

LNG prices have soared amid global competition to secure supply, as Europeans compete against traditional Asian buyers for spot loads. (It’s that dramatic rise in spot prices in the context of potential domestic gas shortages and rising prices that has prompted talk of a windfall tax here.)

Asian prices have been at record levels: Last week, the average price for delivery next month topped $70 per million British thermal units, nearly 25 percent higher than the previous week.
It wasn’t that long ago, about two years during the early phase of the pandemic, that spot prices were in the single digits.

Unprecedented circumstances require unprecedented action, but the risks of market interventions are always unintended consequences.

The gas crisis in Europe has become a general energy crisis due to the central role that gas plays in its energy mix and, more particularly, the price of energy in Europe.

Gas and other fossil fuels are at the upper end of Europe’s energy cost curve and, as in most energy markets, it is the last tranches of energy that balance demand that set energy prices .

The EU is considering doing something similar to what Spain and Portugal have already done and capping gas prices, with government payments to producers effectively subsidizing prices for consumers.

That is a strategy that really only works if it is pan-European because of the incentive for producers to supply markets where prices are not capped.

The EU is also seeking to separate the price of gas and coal from those of renewables and nuclear power so that gas prices no longer lock in the full cost of energy. Renewables have few, if any, marginal costs, and unbundling would lower energy prices, albeit at a loss of profits for renewable energy producers.

Charging

The Europeans are well aware that even if Nord Stream comes back online after its maintenance, Russia has reduced gas flows through the pipeline to 20 percent of capacity and could, if it wanted, cut off supply indefinitely. (albeit at some financial cost and with potential damage to the pipeline, its processing facilities, and its gas fields).

The president of the European Commission, Ursula von der Leyen, has said that in a few days or weeks an “instrument” will be unveiled to respond to rising energy costs and deal with the dominance of gas in energy prices. .

Unprecedented circumstances require unprecedented action, but the risks of market interventions are always unintended consequences.

Whatever the new design of Europe’s energy markets looks like, it will have to recognize that removing or reducing the incentives for producers to produce, traders to trade or generators to generate could be counterproductive, could exacerbate the crisis, unless the design addresses all the complexities of an extremely complex and sensitive industry within a highly volatile environment.

That is a very challenging question, perhaps impossible.

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