Russia’s invasion of Ukraine and the subsequent global energy crisis are spurring a profound transformation in the global energy system.
About three decades ago, most European governments opened up their energy markets in a bid to foster competition and lower prices for consumers across the continent. Back then, European energy markets were dominated by monopolies that gave consumers a few choices. However, by the turn of the millennium, the European Union Deciding to gradually open up its energy markets driven by the belief that more competition would strengthen the security of supply, lower costs, and address energy poverty. Over the past decade, the urgent need to lower carbon emissions has gradually reshaped the global energy order, but many governments have mostly taken a hands-off approach.
Fast forward to the present, and Europe and other countries across the globe are finding themselves in a deep energy crisis with energy supplies tighter than they have been in decades and consumer prices skyrocketing, a situation compounded by slowing economic growth and the threat of a full -blown recession. Gas prices in the Netherlands, the leading European benchmark, are already 8x higher than normal, while power for 2023 delivery is changing hands at prices 6x higher than the 5-year average in Germany, Europe’s biggest market, driving up costs for consumers and energy -intensive industries including steel furnaces, metal smelters, cement, and chemical plants.
Europe has been particularly badly hit because it is so reliant on Russian gas, which President Vladimir Putin is now weaponizing in response to Western sanctions and a global outcry against the invasion. Gazprom PJSC has declared force major on at least three European gas buyers, and even the return of gas flows through Nord Stream 1 is expected to do little to help the continent stockpile enough gas ahead of the winter season.
No country exemplifies this situation better than Germany, Europe’s largest economy. Germany is in dire straits after effectively boxing itself into a corner with its energy policies. For decades, successive governments in Berlin have pursued a policy of maximizing the country’s dependence on Russian oil and gas, and almost completely ditched nuclear energy, with the final two functional reactors set to be turned off in 2022. As a result, Germany has become heavily reliant on natural gas, which accounts for 25% of the country’s total primary energy consumption. Although Germany has substantial supplies of natural gas of its own that could be accessed by fracking, Berlin has banned the technology, meaning it has to import 97% of its gas mainly from Russia, the Netherlands, and Norway. It, therefore, comes as little surprise that Germany has just reported its first trade deficit since 1991.
With a calamitous energy crisis unfolding, Germany has announced it will join the bandwagon of nations rolling back their climate goals by increasing its use of coal, which overtook wind to become the biggest input for electricity production globally in 2021. Indeed, Germany is left with little choice but to burn lignite in its power plants – one of the dirtiest fossil fuels and extracted in vast open-pit mines that litter the German countryside. The European Commission has already given its absolution the ok to countries replacing Russian gas with coal and producing higher emissions as a result.
Meanwhile, France is grappling with faulty reactors that have turned the formerly net-power exporter into an importer.
Europe is now paying a heavy price for its false sense of political security post-Cold War, which left it too dependent on Russian gas supply and intermittent renewables generation.
Suddenly, Europe and the world’s governments are waking up to the folly of leaving energy security in the hands of the markets. Western governments are now recognizing the need to play a more expansive role in everything from building fossil fuel infrastructure to determining where private companies can buy and sell energy to limiting emissions through carbon pricing, subsidies, mandates, and standards. In addition to economic nationalism and deglobalization, experts have predicted that the coming energy order will be defined by government intervention in the energy sector on a scale not seen in recent memory.
However, the situation is even more extreme in Europe, where governments have started nationalizing energy assets in a bid to salvage their imploding energy sector.
According to Bloomberg, Germany is currently engaged in talks to bail out struggling gas giant Uniper SE; Britain has completed the £1.7bn government bailout of failed gas and electricity provider Bulb Energy Ltd while France is considering nationalizing Electricite de France SA.
European governments are also stepping in with other measures to soften the blow to the consumer. Berlin is issuing one-time payments to households this month to shield them from what Economics Minister Robert Habeck has termed “bitter news;” The UK government has put down some £37 billion ($44.7 billion) to ease the impact on consumers, while France plans to double down on the 25 billion euros in spending and tax cuts.
Meanwhile, in the Czech Republic, the government is seeking ways it can compensate for state-controlled utility CEZ In the case of extreme events, such as the termination of natural-gas supplies from Russia.
Overall, Bloomberg has reported that wide-ranging international support packages for consumers will likely hit 100 billion euros.
“That governments are having to bail out energy companies is a sign of their failure to consider the impact of price shocks on their policies. This is a serious oversight which will add to the already high costs faced by consumers,” Kathryn Portera consultant who has worked for Centrica Plc and EDF Tradinghas told Bloomberg.
Beyond straight financial aid and bailouts, the looming supply bottlenecks and surging prices have prompted governments to intervene in other ways. For instance, several European governments have ordered utilities to replenish storage sites, while nations like Austria and Germany have been paying premium rates to refill their storage sites.
The ongoing energy transformation in Europe is reminiscent of the 1970s when excessive government interventions in energy markets exacerbated energy crises repeatedly. However, energy experts believe that appropriately limited and tailored measures can be taken to address specific market failures in order to mitigate many energy security risks and help manage the biggest geopolitical challenge the energy markets have faced in the decades.
By Alex Kimani for Oilprice.com
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