Mission impossible: Europe’s desperate struggle to solve the energy crisis as winter approaches

On Tuesday, German inflation reached 8.8 percent and is moving towards double digits and the highest level in nearly half a century, with energy prices rising 36 percent and food prices nearly 17 percent.

While the UK is not dependent on Russian gas, the huge spikes in gas prices around the world are have serious implications for UK householdsthat rely on gas for heating, the British energy retailer said last week that the typical household energy bill in October would rise from £1971 ($3352) to more than £3500 ($5950) and could be significantly higher than that in October. the first half of next year.

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

In the short term they provide some subsidies to households and in some cases to companies.

The UK has introduced a 25 per cent tax on oil and gas producers in the UK’s North Sea to help fund its aid programmes. The EU has discussed something similar for energy companies benefiting from the spikes in oil and gas prices caused by the invasion. (A similar discussion takes place here.)

There is also the very real prospect of power rationing for households and businesses.

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With Shell warning, among others, that Europe’s energy crisis will not be solved even if Europe can keep the lights and heating on this winter, but the kind of short-term actions the EU and the UK are imposing or considering are plasters, not solutions .

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

In their pursuit of long-term energy security independent of Russia, European states are struggling to connect alternative gas suppliers from the United States, Africa and the Middle East. Germany, most dependent on Russian gas, has leased four floating LNG terminals; other states also rent or build their own terminals.

However, the pipeline infrastructure for the distribution of sea gas will have to be built and in any case there is not enough LNG available in world markets at the moment to be a solution to Europe’s energy problems in the longer term.

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

LNG prices have soared amid global competition to secure supplies as Europeans bid against traditional Asian buyers for spot cargo. (It’s that dramatic spike in spot prices against the backdrop of future domestic gas shortages and rising prices that has led to talk of an unexpected profit tax here.)

Asian prices are at record levels. Last week, the average price for delivery next month was above $70 per million UK 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 single digits.

Unprecedented circumstances require unprecedented actions, but the risks of interventions in markets are always unintended consequences.

The gas crisis in Europe has evolved into a general energy crisis due to the central role that gas plays in its energy mix and especially the pricing of electricity in Europe.

Gas and other fossil fuels are at the top of the European energy cost curve and, as is the case in most energy markets, it is the last tranches of energy balancing demand that determine electricity prices.

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

That’s a strategy that only really works if it’s pan-European, because of the incentive for producers to supply markets where prices are limitless.

The EU is also considering separating the price of gas and coal from that of renewables and nuclear, so that gas prices no longer determine total electricity costs. Renewables have little or no marginal cost and the separation would lower electricity prices, albeit with lost profits for renewable energy producers.

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Europeans are well aware that, even if Nord Stream is put back into service after maintenance, Russia will have reduced the gas flow through the pipeline to 20% of capacity and, if it so wished, could cut supply indefinitely. (albeit at some financial cost and with possible damage to the pipeline, processing facilities and gas fields).

European Commission President Ursula von der Leyen has said an “tool” will be unveiled within days or weeks to respond to the rising cost of energy and to cope with the dominance of gas in the energy prices.

Unprecedented circumstances require unprecedented actions, but the risks of interventions in markets are always unintended consequences.

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

That is a very challenging, perhaps impossible question.

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