New European energy crisis?

New European energy crisis?

Transshipment of Russian gas to Europe via Turkey hit a new all-time high this week as gas storage in EU tanks is running down faster than any time in the last five years.

Is Europe facing a new energy crisis? Well, yes and no. The energy system is under pressure thanks to the combination of a cold winter, reductions in supply thanks to the end of Ukraine transit gas and rising competition with Asia that is hoarding gas in anticipation of Trump tariffs.

That has already sent prices up to around $680 per thousand cubic metres – about three-times higher than normal.

It’s not at “perfect storm” levels, but these are the new long-term problems that the EU will have to deal with as a result of the massive changes that have happened to Europe’s energy security equation. The fundamental problem is that energy used to be plentiful and cheap when the EU was hooked up to the Russian pipelines, but now it is cut off that makes LNG the key component and as this remains a young industry there is simply not enough LNG in the world to satisfy both the EU and Asia, the main consumer.

This is a real conundrum. Just how bad things have become is evidenced by the talk that has appeared of restarting gas deliveries via Nord Stream, one strand of which is still operational and could be turned on tomorrow. That strand is still full of “technical gas” and could deliver 25bcm of gas a year – exactly the missing amount missing after Ukraine took 15bcm off the market in January and the excess 10bcm that will be burned this season due to the cold weather.

A quick aside: personally, I think that it is inevitable Russian gas deliveries will resume as Europe’s energy equation simply doesn’t add up without it. Moreover, the accelerating climate makes the resumption of Russian deliveries essential as the alternative – using more coal – is simply not an option.

Currently, the policy goal is to end Russian gas imports entirely (they are actually rising) but this is misguided; it’s just Brussels lashing out after being slapped in the face by the Ukraine invasion. The point of reducing Russian gas imports was the end the dependency on Russian energy and so break its leverage over Europe. But you don’t need to reduce imports to zero to achieve that. You only need to reduce them to the point where you can replace Russian gas with, say, LNG if the Kremlin tries to pull that lever. Currently that is about 15% of the mix, which is actually where we are already, down from the 35-40% pre-war. Turning on Russian gas and replacing the expensive LNG imports with cheap piped gas would go a very long way towards solving a lot of Europe’s economic problems. And the potential 25bcm of Nord Stream gas is actually exactly the right amount to make this new equation work. Just politically, it’s an absolute dog to sell.

Of course, everyone is scrambling to close the gap with things like renewables and nuclear, but that takes time and a lot of money. In the meantime, governments have been forced to re-open shuttered coal-fired power plants, screwing up any chance we had of staying under 2C temperature rises and condemning the world to an ecological disaster in the coming decades. But that is a separate problem.

And these high energy prices come on top of the fundamental loss of competitiveness Europe is suffering from, detailed in the Draghi report. There is no way that Europe can solve this problem if it’s paying two- to three-times more for power than everyone else.

And as we have reported, renewables passed a critical mass in the last two years as they have become by far the cheapest way to power your country, so all the emerging markets are throwing themselves into going green. Uzbekistan just enthusiastically increased its mix target to 50%, up from the 25% it reluctantly adopted under pressure from the EBRD at the start of its transition. Germany is planning to burn more coal to get to March without freezing.

More LNG is in the works from both the US and Qatar, but both want long-term off take deals to make the required investments, which Europe remains reluctant to sign. It is assumed that within the coming years it can wean itself of gas completely as part of the REPowerEU initiative, but the question remains of how to get from here to there?

Bottom line is it’s going to be very hard. There are going to be a lot of fudges. And the climate goals will be sacrificed in the meantime, which for me is a total disaster and indicative of the short-term thinking that dominates the capitalist system. I keep coming back to China, which to my mind, as far as energy is concerned anyway, is the only grown up in the room. It remains well within its carbon budget allotted by the Paris Agreement and is hands down the global leader in the production and use of renewables. Two out of three solar panels in use today are in China and this power is essentially free once the fixed costs are counted out. How is Europe going to compete with that?

Still, does it really matter? There is a new paper out in Nature this week arguing that not only have we missed the 1.5C Paris target – last year all 12 months were over 1.5C pre-industrial average – but the upper limit of 2C is also dead. The scientists are talking about a global population reduction that will run into the billions as a result of the changes to agriculture and inhabitability of large swathes of land so there will be plenty of room and resources left for the survivors.

How bad will it get? It’s easy to doomsay, and you can comfort yourself by arguing “no one really knows”, but given the cataclysmic possible worst case scenarios, surely it should be a question of “hope for the best, but plan for the worst.” That clearly means a global effort. Stop the war in Ukraine. End the arguments with China. Pay for the green transition in the Developing World. And put the global on a war-time-like crisis footing to deal with these problems. Of course, it’s not going to happen. Instead we have “drill, baby, drill” running the show.