Who’s to blame for high energy prices?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

IA lack of wind in the last year, coupled with a shortage of natural gas, has led to a spike in energy prices and emphasised the role of traditional generation. [Matthias Böckel / Pixabay]

A group of MEPs and the US administration have accused Russia of market manipulation. The situation is however much more complex and nuanced than that, writes Danila Bochkarev.

Danila Bochkarev is associate researcher, UCLouvain. The opinions expressed in this article solely reflect the views of the author, not of his organisation.

Europe’s leading indicator for the gas market, the Dutch TTF, has spiked over 300% since January. Following this spectacular increase, a group of MEPs wrote a letter accusing Gazprom of market manipulation, and the US administration joined the chorus. Amos Hochstein, the US State Department’s senior adviser for energy security, said that Russian supplies are “inexplicably low,” suggesting that it was a move linked to Russia’s push to proceed with Nord Stream 2.

The situation is, however, much more complex and nuanced than that. The price surge is due to a whole spectrum of market and regulatory factors that have coalesced to form this perfect storm. One major contributor is the rebounding demand for energy in China, Europe and elsewhere as the world recovers from the COVID-19 pandemic. This trend was also paired with an unusually cold winter that led to record-breaking underground gas storage net withdrawals in not just the EU and US but in other energy-rich countries such as Russia. Wind and solar power production in Europe were also insufficient due to weather conditions. Furthermore, investors were reluctant to rapidly increase funding for oil and gas amid pressure from regulators and environmental activists to abandon support of new hydrocarbon upstream projects. Uncertain forecasts for future energy demand also do not favour funding commitments to these new projects.

European gas storage levels are at their lowest in at least a decade. By the end of September this year, the EU-27 and UK gas stores were 72% full, compared to 94% full at that time in 2020, and 85% full on average over the past 10 years. While in the gas-exporting US, the situation is not as dire. Gas stockpiles there are still 7% lower than normal for this time of year. According to Bloomberg, Gazprom has “just two months to build its depleted inventories” and must therefore pump 80% of its’ daily exports to Western Europe into storage in that time.

Additionally, Gazprom faces increased demand for gas at home due to abnormally cold temperatures during the past winter and heatwaves over the summer. In January-September 2021, Gazprom increased gas supplies to domestic consumers by 23.9 bcm (+15.9 % YoY), while the company’s gas exports beyond the former Soviet Union increased by 19.3 bcm to 145.8 bcm (+15.3 % YoY).  The company also increased supplies to Germany (+33.2 %) and Poland (11.2 %), to name a few. Considering the increase of supplies to Europe, demand growth/social responsibilities in Russia, weather conditions, Gazprom’s strategy could hardly qualify as market manipulation.

Renewables play an important role in Europe’s power balance, especially wind, which accounts for 19 % of electricity demand. However, a lack of wind, coupled with a shortage of natural gas, has led to a spike in energy prices and emphasised the role of traditional generation. In the first half of 2021 German power consumption increased by 5.5%. This growth was mostly covered by coal, gas and nuclear (+19.7%), while onshore wind production decreased by 20.6%. Despite a minor increase in solar power output (+1.5 %), Germany’s renewables went down by 11.3% from a year earlier.

Lack of wind is not the only challenge to renewable power generation, either. A number of wind turbine manufacturers warned of increased CAPEX due to the rising price of commodities. In August, Siemens Gamesa announced its plans to increase turbine prices. Meanwhile, Vestas sold onshore wind turbines at an average price of €790/kW in the second quarter of 2021 – up from around €700/kW one year earlier. The troubles with renewables resulted in the increased use of highly polluting coal despite record prices: EU carbon allowances reached €65 for the first time while coal prices in North-Western Europe reached US$232.2/tonne, exceeding the previous price record set in 2008 by 6%. In July, coal burn in western Europe also almost doubled on the year. Aggregate coal-fired generation in Germany, Spain, the UK and France increased by around 1.9TWh on the year to 4TWh that month. This trend is hardly compatible with Europe’s ambitious environmental aspirations.

Other reasons for the current price spike include a directive attitude toward the energy markets, regulatory flexibility, and the uncompromising approach to the energy transition. Investors have been constantly discouraged from providing funding for oil and gas projects, while the companies were pushed towards short-term contracts and hub-based pricing. When prices went up, European politicians suggested that they “amend” the market mechanisms they had created earlier. For example, the Commission proposed the collective purchase of gas stocks to form a “strategic reserve” for emergencies. The French government also called for a review of the European gas and power markets to shed light on a current price spike and come up with a coordinated response.

It is however unclear whether a “collective purchase” measure would be compatible with the EU energy rules. New gas storage requirements might indeed put a cap on the gas prices – but would also lead to a tariff increase.

Blaming energy exporters has also once again become popular among EU politicians. French Economy Minister Bruno Le Maire recently proposed diversifying energy supply and reducing dependency on gas-exporting countries as soon as possible. When it comes to the diversification of gas supplies per se, there are plenty of opportunities with liquid natural gas (LNG) – the EU-27 plus UK regasification capacity currently stands at 217.7 bcm. Still, EU regasification capacity remains underutilised. During 3-10 October, Europe’s LNG imports rose 16% to 1.65 bcm, which resulted in an average utilisation rate of 39%, though the LNG sellers preferred other locations (Asia and Latin America) with premium prices. Furthermore, gas market in the US – a major LNG exporter – is so tight that Americans are staring down their own supply squeeze as major shale drillers have been “funnelling cash to shareholders and focusing on climate goals rather than boosting production”.

With any luck, the energy market crunch will teach regulators a lesson that leads to more realistic approaches to the speed of the energy transition and eases the related costs for society. It would be even better if this realism is accompanied by more clarity and stability in regulations, without the unnecessarily critical view of technologies like carbon capture and storage (CCS), nuclear or “blue” hydrogen.

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