What’s the outlook on energy for Europe?

What’s the outlook on energy for Europe?

Analysis: a year on from Russia’s invasion of Ukraine, volatility continues to be key theme shaping the energy landscape

“It’s been an incredible year of volatility and uncertainty right across all energy markets. Unfortunately that is likely set to continue across 2023, even one year after the invasion,” says Dr Paul Deane, research fellow at the MaREI, the SFI Research Centre for Energy, Climate and Marine at UCC. “Even though we’ve moved away from using a lot of Russian gas over the last year, we’re still relying on the global supply of Russian gas and there hasn’t been any significant structural changes to global gas markets. So we’re essentially shopping in the same global supermarkets, for the same amount of gas and there’s actually less gas available.”

Russia’s invasion of Ukraine in February 2022 fuelled an energy and cost of living crisis across Europe, as well as concerns about energy security and a reappraisal of the energy system. The crisis saw people looking to alternatives to cut their energy bills, from turning down the thermostat to switching to wood burning. Like in Greece, where loggers in the north worked hard to keep up with rising demand. Meanwhile, Swedish and Finnish producers of pulp and paper experienced record profits.

The sudden change in the energy landscape also fuelled a renewed focus on green solutions from governments and businesses. Swiss parliament approved a “solar offensive” bill, aiming to speed up construction of solar parks to help avoid winter energy shortages, and as one climate economist argued, the high energy prices could be seen as necessary for energy transition. Meanwhile, Governments took a number of different fiscal policy measures to help households and companies cope with the rising bills, from tax breaks to price caps to credit schemes.

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From RTÉ Radio 1’s Today with Claire Byrne, why is the drop in gas prices not reflected in our bills?

Before the war Russia supplied nearly 40{6d6906d986cb38e604952ede6d65f3d49470e23f1a526661621333fa74363c48} of Europe’s gas. But the EU’s reliance on Russian gas has more than halved and is now down to under 15{6d6906d986cb38e604952ede6d65f3d49470e23f1a526661621333fa74363c48}. Instead, the EU has leaned more heavily on gas imported from Norway, as well as from Algeria, the US, Qatar and Nigeria. As of February 2, 2023, EU gas reserves are on average 71.64{6d6906d986cb38e604952ede6d65f3d49470e23f1a526661621333fa74363c48} full, according to Gas Infrastructure Europe, and gas prices have returned to levels last seen in late 2021 before the war.

But because there’s been no structural changes, we would expect gas prices to remain high throughout 2023, Deane says. At the moment we’re seeing a significant drop in natural gas prices internationally, particularly in Europe, but prices remain comparatively high.

Three things have really determined the price of natural gas over the last year: the war, the global economy and the weather, says Deane. We feared a cold winter, but the weather has been incredibly mild, which significantly reduced the demand for natural gas around Europe, taking pressure off the supply. Deane explains that the data shows the drop in gas use is particularly seen across residential users who haven’t needed to heat their homes as much, especially in Germany where natural gas would be used a lot.

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From RTÉ Radio 1’s Morning Ireland, Bloomberg’s Javier Blas explains impact of unseasonable temperatures on European wholesale gas prices

“The other thing that played into Europe’s hands is the Chinese economy. Particularly as we came towards the end of 2022, the COVID lockdowns in the Chinese economy really suppressed demand growth within their economy, that then reduced the global demand for gas,” he says. “We’re in a much healthier place now than what we would have thought we were going to be, let’s say, 12 months ago. But primarily for factors outside of our control. That’s why we think that prices will remain high across 2023 and the new feature will be volatility.”

One the one hand, if the weather stays mild, prices will stay down. But if there’s a quick economic rebound from the Chinese economy, we’d expect prices to go up very quickly again and very sharply, says Deane. “Unfortunately we’re not out of the woods yet and we’re in an era where the new normal is high electricity prices and the root cause of those electricity prices is the price of natural gas and the drivers of the price of natural gas are outside of our control in the short term.”

On January 23 this year the European Commission launched a consultation on the reform of the design of the European energy market, to protect against the volatility and insecurity of the current market. “They’re looking at a number of measures around restructuring electricity markets, about putting in more price flexible plans for consumers, about looking at new technologies. But a lot of those things are relatively cosmetic, they won’t make a significant change,” Deane says.

Timeline of EU response to the energy crisis

  • March 24-25: Leaders of the 27 EU member states agree to phase out the EU’s dependence on Russian fossil fuels as soon as possible (Versailles Declaration)
  • May 30-31: European Council agrees ban on almost 90{6d6906d986cb38e604952ede6d65f3d49470e23f1a526661621333fa74363c48} of all Russian oil imports by the end of 2022
  • June 27: European Council adopts new regulation on gas storage to ensure member states’ gas storage facilities are filled before winter and can be shared between member states
  • August 5: European Council adopts regulation on reducing gas demand by 15{6d6906d986cb38e604952ede6d65f3d49470e23f1a526661621333fa74363c48} across Europe
  • October 6: EU countries adopt emergency regulation addressing high energy prices
  • November 24: European Council agrees on the content of new measures aiming to secure and share gas supply in the EU (joint gas purchasing)
  • December 3: European Council agrees on a price cap on Russian oil
  • December 19: EU energy ministers agree on new rules to set a market correction mechanism which aims to protect citizens and the economy against excessively high prices
  • January 23, 2023: European Commission launches consultation on reform of the EU’s electricity market design

The war in Ukraine has caused a fossil fuel crisis, but natural gas is the root cause of the problem that Europe need to move away from, he says. “We’ve got plans at the European level called RePower EU which is specifically to move away from Russian natural gas and in Ireland we have our own climate action plans. But we must realise that that’s going to take a couple of decades. It’s going to take a significantly long time, but we need to start that now.”

European countries tried to adopt a common approach for months, says Dr Andrea Paltrinieri, Associate Professor of banking and finance at Università Cattolica del Sacro Cuore in Milan. It finally came together in December 2022 with an agreed price cap on the TTF. The Title Transfer Facility, commonly referred to as the TTF, is a virtual trading hub for natural gas in the Netherlands that acts as a benchmark for gas prices in Europe. The cap can be triggered from 15 February, 2023.

But Paltrinieri sees the cap as a political achievement rather than a technical one and argues it will be difficult to apply even if prices were to reach such high levels again, for example due to further interruption of the flow of gas from Russia. “Moreover, [the cap] can be suddenly stopped if the supply is at risk, if the trading volume is reduced at the TTF, or if risks overcomes the benefits,” he adds. A potential cap could also cause sellers to jump away from the market or reduce flow, or see supply redirected to other markets, if the price on the European TTF market is kept below the Asian JKM (Japan Korea Marker) benchmark, for example, putting storage levels at risk, he explains.

Commenting on some of the measures taken across Europe by individual governments, he says the Spanish “tope al gas” — a form of subsidy to energy companies buying gas to produce electricity — has reduced price, but increased the overall natural gas demand at a time when reduction should be a target of each measure. Meanwhile, he says the German government were right to apply the €200 billion package but that it potentially “creates some distortion within the EU”.

The lack of diversification of supply sources takes time to be solved, he says. “Therefore right now the priority is to buy floating storage regassification unit, like Germany is doing. And I would suggest a form of EU common debt to raise money in order to help European countries.” Paltriniere says the natural gas situation in Europe will likely be in undersupply until 2025.

What measures have countries put in place?

As part of wider energy packages of tax breaks, subsidies and caps, European countries have been supporting households with payments:

  • Norway: The Norwegian government will pay 80{6d6906d986cb38e604952ede6d65f3d49470e23f1a526661621333fa74363c48} of energy on bills with prices above 0.70 crowns per kilowatt hour (KWh), with a max consumption of 5,000 KWh per month.
  • France: In France, the government has approved a package that includes capping energy price rises at 15{6d6906d986cb38e604952ede6d65f3d49470e23f1a526661621333fa74363c48} and “energy cheques” from €100 to €200 given to lower-income households.
  • The Netherlands: The government offered a €190 contribution to energy bills and a one-off energy allowance of €1,300 to eligible households.
  • Italy: Low-income households earning less than €12,000 a year have had their energy bills frozen, while a one-off payment of €200 was made to people earning up to €35,000.
  • Germany: Germany introduced a €200 billion aid package that included lump sumps of €300 transferred to taxpayers, as well as further one-off payments to students, pensioners and families in receipt of child support.
  • United Kingdom: The UK government has introduced a cap on the price of a unit of energy, in place until until April 2023, which means a typical household bill for gas and electricity will be £2,500 a year. Households reliant on electricity and gas were given a £400 energy grant.
  • Spain: People who earn less than €27,000 are entitled to a one-off payment of €200 euro. This was previously limited to €14,000.

Russia was the largest supplier of natural gas to Europe. But Ireland primarily relies on importing natural gas from the UK, specifically through two undersea pipelines coming from Scotland, so our gas markets are linked. “Although not as traditionally reliant on Russia for gas in comparison to other European countries, Britain uses gas for a greater percentage of energy supply than its peer countries,” says Professor Thomas Scotto, professor in politics at the School of Social and Political Sciences, University of Glasgow. Scotto says there is a “long game” to be played and governments should try to speed up reduced reliance on gas and improvements in energy efficiency.

Commenting on the UK measures, Scotto argues that communication has been poor and there are misperceptions about the government’s policies — “some consumers may falsely believe that everyone’s energy bill is capped at £2500 rather than a typical household being charged £2500. Communication is key and the government haven’t been good at this—much of this was a function of the chaos over Liz Truss’ short tenure in office.”

But Putin’s strategy to use energy as a geopolitical tool might not have worked as he had hoped. As weird and unusual as it sounds, the warm weather is having a huge impact on reducing hardship right across Europe at the moment, says Deane. “If we had had a cold winter in Europe this year, it would have created a huge amount of hardship for families, probably a lot of social disruption. But because it’s been so incredibly mild, it has allowed us to escape a lot of that hardship within the wider EU system and that has really gone against the Kremlin in terms of the social discord and political discord that they like to try and create. Weather has gone against them big time.”

Additional reporting by Alina Trabattoni for the European Broadcast Union‘s A European Perspective initiative.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ