The tightening of Russian control over the gas supply led to an increase in energy costs throughout Europe. The issue that poses a threat to the biggest economies on the continent is becoming worse. On Tuesday, electricity prices in the continent’s two largest power markets, Germany and France, soared to all-time highs. The next year’s coal futures hit a record high, while natural gas prices rose by as much as 21.5%. This is depriving Europe of the necessary resources to keep the lights on at a time when nations are rushing to secure energy ahead of winter.
Higher energy costs might make life more difficult for European households, businesses, and industries. They already experience devastating living costs as a result of the greatest inflation rates in decades. Europe’s largest economy, Germany, has already begun the first two stages of its emergency gas plan. And they may act decisively if the situation seemed to be getting worse. Due to a multitude of market, geographical, and political factors, a perfect storm has developed. As October nears on the continent, temperatures begin to progressively drop, and heating becomes necessary, which doesn’t seem to be helping.
Analysts are already worried that the scenario, which is being exacerbated by a mix of structural and short-term problems, will persist and get worse before it improves. Costs for natural gas have skyrocketed. The key benchmark for Europe, the Dutch Title Transfer Facility, saw prices rise from €16 per kilowatt hour in early January to €88 by late October. a rise of more than 450% in less than a year. The price of electricity has consequently risen.
Coal and natural gas still account for more than 35% of the total production in the EU, with gas making up more than a fifth. While fossil fuels make up less than 60% of production in the Netherlands, Poland, Malta, and Cyprus, they make up more than 60% in Sweden, France, and Luxembourg. The composition of the energy mix varies substantially within the EU. Coal, the dirtiest fuel, continues to be phased out.
Natural gas is frequently utilized as a stopgap fuel in countries before installing alternative energy sources like wind turbines and solar panels. Additionally, gas is used in households for heating and cooking. highlighting the price increase in consumers’ overall spending.
The problem of high-energy bills
Currently, citizens of countries like Spain, Italy, France, and Poland must contend with historically high energy costs. This makes the economic repercussions of the pandemic harsher. Due to public discontent, governments are on high alert, and ministers are working quickly to create emergency measures. Even if they only partially succeed and only briefly lessen the blow.
Roberto Cingolani, the minister for ecological transitions, has already warned Italians to expect a 40% increase in their bills in the coming months. France declared that it would provide one-time payments of €100 to almost 5.8 million low-income households. The Spanish government has promised to bring prices down to last year’s levels. Madrid also requested travel throughout the entire EU in a letter to Brussels.
We urgently require a European policy option that is prepared to act quickly in the face of significant price increases, the letter stated. But as the crisis spreads throughout the bloc, locals’ worries increase. Uncertainty exists around how much control the European Union has over the extremes of a liberalized energy market, whose primary source is located outside of its boundaries.
Why are energy costs in Europe Skyrocketing?
“To get beyond the pandemic’s restrictions, we will need to use more energy. In addition to a reduced gas supply on the global market,” Tim Gore, the program director for the Low Carbon and Life Cycle evaluation at the Institute for European Environmental Policy (IEEP), “In especially in Europe, additional factors are making the problem worse. We’ve been effective in removing coal off the grid, which also happens to coincide with a recent period of weather-related decline in wind generation.”
Because of the colder-than-expected weather throughout the winter, there were higher-than-normal electrical demands to heat buildings, which led to issues. As a result, gas reserves have dropped. It had reached an alarming 30% by March. As the continent-wide immunization campaign picked up steam in the spring. As soon as the offices, restaurants, and other businesses reopened and consumers flocked in eager to spend their lockout savings, business activity swiftly soared. The economic recovery led to a new spike in energy demand.
Then, as people employed central air and cooling systems to combat the hot weather throughout the summer, the problem intensified. Then, countries in East Asia joined Europe in its quest for energy to resurrect their COVID-devastated economies. But the supply did not increase at the same rate as the increased demand. Prices started to progressively rise as firms from all over the world fought for access to energy supplies. In August, they first began smashing records. Summertime usually results in cheaper gas prices. To be well-prepared for winter, enterprises take advantage of the chance to store it in large amounts. However, the tradition has been ruined by the current pricing problem. Additionally, the current reserve level is historically low at this time. a word of caution for the next months.
Rising gas prices influence the price of electricity
Due to rising gas prices, the cost of power has generally climbed by approximately 230% in the last year. Their integration is supported by the rules governing the EU energy market. It has progressively become increasingly integrated over the last few decades. Currently, the wholesale energy market in the bloc runs on the “pay-as-clear market,” or marginal pricing, approach. With this structure, all electricity producers, including those that rely on fossil fuels, wind, and solar energy, are welcome to compete in the market and supply energy depending on production costs.
The most affordable resources, often those that are natural gas, are bid upon first, then the most expensive ones, typically those that are renewable. Considering that most countries still obtain all of their energy needs from fossil sources. The final price of electricity is typically calculated using the cost of coal or natural gas. If gas prices rise, electricity prices will also climb. Despite being cost-effective, clean sources also increase the amount of energy available overall.
Several of the member states have criticized the “coupling” of gas and electricity pricing. Particularly France and Spain assert that the final draught does not account for the benefits of the green transition. However, this view is not shared by the majority of member states or the European Commission. And keep advocating for the marginal pricing strategy as the most successful, transparent, and competitive for the liberalized market of the bloc. According to Brussels, encouraging individuals to switch to low-carbon technology can be accomplished by making renewables the least priced and most tempting option during the bidding process. It will also promote investment and minimize the need for government assistance.
All energy producers would be able to offer the price they want from the market rather than the price based on energy cost by adopting the so-called “pay-as-bid” technique, an alternate model. The Commission claims that this would lead to less openness and higher costs for consumers.
Concerns over Russia’s role in the crisis
The unexpected lack of new supplies from Russia, the major gas exporter to the EU, is causing anxiety. Moscow is concerned about this and wants to take advantage of the situation to support the divisive Nord Stream 2 pipeline. 1,230 kilometers underground, beneath the Baltic Sea. And now there is a complete direct link between Germany and Russia. But due to administrative challenges, operations have not yet begun. The project has come under heavy fire both within and outside of the EU because of its potential to maintain the EU’s dependency on fossil fuels. boosting President Putin’s influence on the world stage. The main investor in the pipeline, Gazprom, as well as the Russian government, have both denied any involvement in the current energy shortfall. However, they emphasize that the pipeline needs to be turned on “as soon as possible.” Putin, on the other hand, has ridiculed the EU for its unwillingness to sign long-term agreements and a trend toward more flexible arrangements. Additionally, he asserted that Russia might supply 10% more gas if Nord Stream 2 is approved.
Critics, though, contend that the timing of the crisis appears to be too favorable for the Kremlin’s goals. A group of more than 40 members of the European Parliament sent a letter to the European Commission. They should “start an investigation into any deliberate stock manipulation by Gazprom right away. additional potential violation of EU competition regulations “.
Washington, one of Nord Stream 2’s most vocal opponents, is aware of the worries about the Kremlin’s direct interference.
The EU’s green transition is being closely examined
The surge in energy prices has unavoidably raised interest in the EU’s climate policies. Power companies must participate in the EU’s Emissions Trading System (ETS), the largest carbon market in the world. Based on the “cap and trade” concept, the ETS currently comprises over 10,000 power plants and industrial sites across the bloc. On the one hand, the EU places a cap on the number of greenhouse gases that facilities are allowed to emit. For every unit of discharged carbon dioxide, it does, however, generate allowances. Businesses can purchase these permits and trade them with one another to fulfill their yearly needs.
The cap is strengthened with time, and permit prices gradually increase. This pattern promotes the energy sector to move away from fossil fuels and toward environmentally friendly options. As the green transition is still in its early stages, companies covered by the ETS are required to continue buying and exchanging carbon allowances. Due to the robust recovery and energy deficit, the price of carbon has climbed by around 76% since mid-January, from €34 to about €60 in late October. Consumers run the risk of picking up the majority of that additional cost, particularly in countries with high coal dependence.
Polish Prime Minister Mateusz Morawiecki recently alleged that the problem in energy costs was caused by the EU’s climate policies. The European Commission actively defends the ETS. It is making an effort to justify itself by asserting that the global economy is the main contributor to the current price problem.
Moreover, there is a substantial demand from Asian countries. Estimates from Brussels indicate that the ETS permits only make up a small percentage (greater than 20%) of the total spike. July is a risky month for the Commission because of the energy situation. The government released a thorough set of legislative suggestions to cut the EU’s greenhouse gas emissions by 55% by the end of the decade. One of the proposed laws calls for the creation of a brand-new, independent emissions trading system to cover the hazardous fuel used for transportation and building heating.
European Union storage of natural gas
For Dimitri Vergne, a sustainability policy officer for the European Consumer Organization (BEUC). The energy crisis does not weaken the EU’s green agenda; on the opposite, it strengthens it.
According to Euronews, “There is a strong call for us to move quickly toward an energy system that depends more and more on renewable resources. Our dependence on fossil fuels, including gasoline and natural gas, is what makes our energy bills so expensive. The cost of electricity produced by solar and wind has remained steady, according to the numbers.
The problem is energy costs peaks for both gasoline and natural gas. The increase in electricity prices is a result of this. This can be explained simply or technically: to feed the system during times of high demand for electricity, coal and gasoline power plants must be turned on. Additionally, using gas and coal to generate electricity is much more expensive than using renewable energy sources.
The EU’s susceptibility to sharply shifting energy costs is likely to continue to be a threat until the green shift delivers the promised market stability. In the interim, governments will need to come up with workarounds. The idea includes lower tax rates and increased surcharges on electricity costs, which in certain countries might make up half of the overall expense. Spain’s special electricity rate has temporarily been lowered from 5.1% to 0.5%, the absolute minimum mandated by EU rules. Governments can provide direct financial assistance to those who are having problems paying their bills as France does with its “chèque énergie.” Although such an instrument can easily exceed a budget if prices continue to rise as they are predicted to.
By renegotiating their contract with the electrical companies, consumers could be able to save themselves. Fixed-price agreements aid in maintaining stable and predictable pricing, even if the price does not exactly reflect market realities or the client’s actual usage. Customers with variable-price contracts are much more susceptible to adjustments as energy prices decline. The entire economy collapsed last year as a result of the coronavirus outbreak. Their monthly expenses drop dramatically, but as prices continue to climb, as they already have, people start to lose control over their budgets.