Industrial Miner. | Photo Credit: Albert Hyseni, Unsplash

Europe’s Energy Crisis – Present To Future

In September 2021, gas prices in Europe began to surge, leading to fears of gas shortages for energy supply for the winter. The Gazette’s Ryan Toh has dug deeper into the issue to shed light on what led to Europe’s energy crisis and how they plan to approach future energy policies.

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From COVID-19 to Afghanistan, the road travelled since 2019 have been tempestuous for the world including Europe.

Crises have been popping up one after another, directly challenging Europe in key areas such as their healthcare system and national security.

Now, the global energy supply crisis, with Europe being the focal point, signals another pressing threat posed to its commitment in its energy policy and climate goals of reaching net-zero carbon emissions. 

With the conclusion of the 2021 United Nations Climate Change Conference (COP 26) at Glasgow, the European Union (EU) renewed its efforts in the fight against climate change to limit global average temperature rise increase to 1.5 degrees Celsius. This includes phasing down coal, curbing methane emissions by 30 per cent in 2030 with the Global Methane Pledge, and raising the target of US$100 billion (S$136.7 billion) in climate finance towards net-zero carbon emissions. 

But what does this mean for the future of Europe’s energy policy? Is the aggressive push of climate politics out of touch with reality and possibly worsen the energy crisis in the foreseeable future?

Rising prices of natural gas in Europe

While Europe’s economy was in the midst of recovering from the economic fallout of COVID-19, the sudden threat of natural gas and coal shortages rattled the economy last September.

Prices of natural gas climbed at the Dutch Title Transfer Facility (TTF), the European trading benchmark for natural gas from €16 (S$24.63) in January last year to €88 (S$135.42) megawatt per hour by late October. This represented a price leap by over 450 per cent in just 10 months. 

Electricity prices spiralled out of control in Europe, spreading fears over possible power outages and shutdowns of energy-hungry factories.

Title Transfer Facility prices.| Photo Credit: Fitch Ratings, Bloomberg

The significant increase in gas prices was mainly driven by the upsurge in demand for natural gas as more countries began easing COVID-19 restrictions and reopened their economies. Additionally, the decrease in temperatures during winter meant homes would be heated longer than usual, thus accelerating the burning of natural gas for more energy.

According to the Gas Market Report by the International Energy Agency (IEA), demand for natural gas is expected to have a strong rebound of 3.6 per cent by the end of 2021 and to jump by 7 per cent from 2019 pre-covid levels in 2024.

What led to the energy crisis?

As the demand for natural gas recovers to pre-COVID levels, this puts the spotlight on the reasons behind Europe’s inability to ensure an adequate energy supply. Analysts have attributed the energy crisis to a number of causes:

Firstly, one of the main causes commonly referred to is the decrease in Russian exports of natural gas to Europe. In 2021, 61 per cent of the EU’s energy sources can be traced to imports from Russia in the form of fossil fuels such as crude oil, natural gas and solid fuels. The Independent Commodity Intelligence Services (ICIS) noted that natural gas exports from Russia along the Yamal-Europe pipeline dropped from 49 million cubic metres (mcm) to 20 mcm in mid-August. 

Another factor being highlighted is the aggressive energy transition goals put forward by the European governments without any safeguards in place. European leaders have been pushing to limit dependence on fossil fuels in favour of sustainable energy like solar and wind. 

“Europe’s Power Sector in 2020.” | Photo Credit: Ember and Agora Energiewende on 25th January 2021.

By the end of 2020, renewables surpassed fossil fuels as Europe’s main energy sources, accounting for 38 per cent of Europe’s electricity production as opposed to fossil fuels at 37 per cent. However, the effectiveness of using solar and wind is hindered by the main problem: intermittency. Though solar and wind are able to produce enough energy with the right environmental conditions, it is largely affected by seasonal changes, influencing the level of energy output. 

The Wall Street Journal reported that the wind in the North Sea off the coast of Britain stopped blowing last September. This rendered wind farms in the area ineffective in producing adequate electricity consistently to meet energy demands. Britain’s system operator ended up having to ask Électricité de France, a state-owned multinational French company, to restart a coal plant in Nottinghamshire to supply electricity. However, this fallback option will not last long as the British government called for all coal plants to close by 2024.

Lastly, stockpiles at European natural gas storage sites are at their lowest levels in comparison to 2020 due to diminishing Russian gas imports and the increasing demand for energy.

EU27 natural gas storage levels on the first of each month | Photo Credit: AGSI Gas Storage

The UK and EU combined were recorded to have only 75 per cent filled capacity at storage sites in October 2021, as compared to 94 per cent in 2020. S&P Global Platts noted that European gas storage sites were emptied during the previous winter and gas storage levels are currently less than optimal as compared to the previous five years. Mr James Huckstepp, manager of EMEA Gas Analytics at S&P Global Platts, made a grim assessment that if the energy crisis is not solved quickly, there will be just 14 per cent of storage levels left once the winter season ends in March 2022. 

Relationship between Russia and EU on Energy

Although the EU has been actively finding ways to be energy independent, many European states continue to rely on importing fossil fuels from Russia, their main partner. This dates back to the 1940s when the Soviet Union (USSR) started small-scale gas exports to Poland. The USSR continued to expand its gas network by laying pipelines in the 1960s to transport gas from Siberian fields into Europe. Even after the fall of the USSR in 1991, Europe maintained its energy relationship with Post-Soviet Russia, untouched by the shift in the geopolitical landscape.

Russia is seen as a dominant power capable of exerting a huge influence on the EU’s energy security because they export 41.1 per cent of natural gases and 46.7 per cent of solid fuel to the EU. However, due to their political history, many European leaders have been sceptical of Russia’s intentions and accuse them of using them for leverage over the EU for political agendas.

EU imports of natural gas from partners in 2019. | Photo Credit: Eurostat

The arrangement of natural gas exports to Europe is mostly handled by Gazprom, Russia’s state-owned energy company under long-term deals and fixed purchases of gas which are also known as “spot” deals. Spot deals are more volatile to market forces and are expensive whereas long-term contracts are cheaper, reliable and stable as prices are fixed. It also delivers a steady stream of income for Russia as Europe is one of its biggest customers of hydrocarbons.

Nevertheless, the stances on energy contracts favoured by Russia and Europe couldn’t be more different. 

European leaders have been pushing for an end to long-term natural gas contracts and focus on spot deals in the bid for sustainable energy. It has since been reflected in the European Commission’s press release in mid-December 2021 where the EU planned to end all long-term unabated natural gas contracts by 2049. 

This contrasts Russia’s efforts to convince Europe to extend long-term contracts. The decision to end long-term deals was deemed foolish and irrational by the Russians including Mr Konstantin Simonov, head of Russia’s energy security fund. Europe’s shift from long-term contracts during the energy crisis meant they will be at the mercy of volatile spot market prices, potentially driving energy prices up and worsening their situation.

Accusations against Russia for the decrease in gas exports

After reports came of Russia decreasing their exports of natural gas to Europe, they were accused by the EU and the United States (US) of deliberately slowing output of natural gas to Europe via the Yamal-Europe pipeline, the second-largest gas pipeline after Nord Stream 1. These accusations were hardly a surprise, given the long history of the geopolitical tensions between Russia and Europe over Ukraine. 

Speculations were rife, with analysts suggesting that Russia wanted to pressure the EU into approving the recently completed controversial Nord Stream 2 Pipeline.

However, Gazprom denied reducing gas supplies, calling such accusations “absurd”. Sergey Komlev, Head of the Contract Structuring and Pricing Directorate at Gazprom Export stressed that their exports to European countries grew by 23.2 per cent between January and July 2021.

Russian President Vladimir Putin also refuted the allegations during the Russian Energy Week in mid-October 2021. He supported Gazprom’s claims that they have been increasing gas exports to Europe in accordance with their contract and gave further assurances they are prepared to increase exports if required. 

Russian President Vladimir Putin delivers a speech at a plenary session of the Russian Energy Week International Forum in Moscow. | Photo Credit: Sergei Ilnitsky via Reuters

President Putin added that the energy crisis was self-inflicted by Europe for failing to ensure an adequate supply of gas in their gas facilities and that the EU and the US are using Russia as a scapegoat.

Controversy over the Nord Stream 2 pipeline

The construction of the highly controversial Nord Stream 2 – a natural gas pipeline, was also defended by President Putin. 

Nord Stream 2 began construction as a 1,230-kilometre pipeline under the Baltic Sea in 2018. The pipeline connects Russia directly to Germany through the waters of Denmark, Finland and Sweden, bypassing Ukraine as the transit country. Hence, President Putin asserted that their intentions are purely focused on economic rather than political agendas as the new pipeline will reduce transit fees, making the supply of gas cheaper. 

Nord Stream 2 pipeline route underneath the Baltic Sea. | Photo Credit: Gazprom

Furthermore, the pipeline’s presence will offer great benefits for Europe as it can handle higher gas pressures as compared to the original Nord Stream. Russia will also be able to double its total gas capacity alongside the original pipeline from 55 to 110 billion cubic metres (bcm). It is currently awaiting regulatory decisions and is expected to be able to hold enough gas to power 26 million households.

Although Germany, Denmark, Finland and Sweden approved the construction, countries such as the US, Ukraine and other European countries cited geopolitical conflict.

Ukraine in particular has been worried about possible repercussions, given its rocky relationship with Russia on the gas dispute in 2009 and the annexation of Crimea in 2014. Before Nord Stream 2, Ukraine had been acting as the “middle man”, earning transit fees from the transportation of gas to Europe. However, the new pipeline could potentially threaten their position as the transit country, removing any leverage they have and possibly costing them US$3 billion (S$4.1 billion).

The US is also on edge over the presence of Nord Stream 2. They believe it will enhance Russia’s control over the distribution of natural gas and prices to Europe, allowing them to use it as a bargaining chip for future political conflicts.

The Future of the EU’s energy policy

The European Commission, an executive branch of the EU, has set the European Green Deal in 2019 in order to meet the targets of the Paris Agreement of limiting global warming.

Greenhouse gas emissions targets, trends and projections in the EU, 1990-2050, Trends and Projections in Europe 2021. | Photo Credit: European Environment Agency (EEA).

Under the European Green Deal, the EU aims to work towards a net-zero economy by 2050, with no net emissions of greenhouse gases. This strategy works towards the decarbonisation of Europe’s energy production beyond 2030. Since the Green Deal, the EU’s goals have been met with positive results, seeing a 31 per cent drop below 1990 levels in greenhouse gas emissions in 2020.

The Netherlands, one of Europe’s leading natural gas producers, has taken the first step towards decarbonisation. They will begin phasing out extraction of the Groningen field, Europe’s largest gas field in mid-2022, and leave only a small section open for emergency uses. 

An assessment conducted by McKinsey proposed that as solar and wind technologies are already available at scale in the EU, the energy system is the easiest to decarbonise. They recommended having renewable energy meet at least 80 per cent of the power demands by 2050. This would mean the majority of coal consumption to be terminated by 2030 and reduce oil and gas consumption to under 10 per cent by 2050. 

Since 2019, the European Commission’s State of the Energy Union Report 2021 revealed that the European Green Deal has been proceeding steadily. Nine EU member states have already phased out coal and 13 have made national commitments to follow suit by their set deadlines.

Europe has also made huge investments in the renewable sector to improve the system. However, whether their efforts pay off, we will just have to wait and see.

Lessons to learn from Europe’s energy crisis 

The energy crisis highlighted how dependent Europe is on foreign energy imports for energy production, thus emphasising the importance of improving and diversifying their existing sources. 

If Europe were to continue their pursuit of being the world leader of renewable energy, there must be a continuous and concentrated effort to expand its electrical grid to ensure minimal disruptions to its energy supply. Additionally, they must not neglect contingency plans in cases of disasters.

This situation is also a good indication of what could happen if energy policies are not well thought out and are poorly executed, which often leads to disastrous results. 

Hence, forward-thinking and strategic decisions in policy-making with the absence of emotional reactivity are extremely important to avoid running into pitfalls that may possibly cripple the system. 

As the EU pour their efforts into the fight for renewables, it is with this hope that they will overcome this crisis and build a more sustainable future for everyone.

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The IAS Gazette is a news site run by undergraduates from the Singapore Institute of Management’s International Affairs Society (IAS). Founded in 2018, it traces its roots to The Capital, a now defunct bimonthly magazine previously under the IAS.

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