Europe’s emerging energy crisis

After the pandemic, is energy the next European crisis? Gas prices have hit new records, reaching $180 per barrel in the Netherlands, representing a fivefold increase over the past six months. This is driven by news that Russia has diverged gas flows from its main European pipeline to one that is going east via Poland. Experts are pondering over the reasons, be it geopolitical muscle-flexing or the fact that Russia is hit by a cold front of minus 20 degrees. The results are the same: Vladimir Putin promised more gas for Europe, and it is still not coming. The prospect of a Russian invasion in Ukraine just adds more uncertainty and pressure on the market.

Europe still depends on Russian gas, amounting to 35 per cent of European supply. Will there be enough gas to get through the winter? European wholesale buyers remain discrete over how much they get. Will there be hoarding and other beggar-my-neighbour tactics in times of shortages? Will this trigger a common procurement procedure similar to the vaccines? Will Europe divide over energy? Lots of questions and no clear answer yet.

Even in France, the nuclear power nation, there are surprise shortages emerging. Of its 56 nuclear reactors, 15 were out of operation for maintenance yesterday, according to Les Echos.

France usually is an electricity exporter but is now forced to import electricity and even burn fuel oil. The crunch comes after EDF said it would halt four reactors accounting for 10 per cent of the nation’s nuclear capacity. A total of six oil-fired units were turned on in France on Tuesday morning. Only 5 per cent of the electricity was delivered from nuclear power stations on Tuesday and 13 gigawatts imported from neighbouring countries. Almost a third of France’s nuclear capacity will be offline at the beginning of January. Germany too is closing almost 50 per cent of its nuclear capacity before the end of 2022. This will leave the European energy market at the mercy of the weather and Russian gas.

Where does this leave Macron’s commitment for more nuclear power stations, which are costly and won't help with the shortages here and now? There are some efforts to mitigate the extent of the shortages. Macron’s energy minister pledged to get nuclear reactors up and running earlier. There are also contracts with some companies to smooth electricity production for which the state will pay extra money. This energy crisis will be expensive for electricity-intensive companies and the French state. The French government has committed to cap the price hikes for consumers to 4 per cent and to pay the difference.

The severity of this crisis depends on Russia and how harsh the winter will be. Just a couple of degrees make a huge difference. January and February are the two months to watch out for.

This article was first published in the EuroIntelligence morning briefing. For a trial subscription click here.