Europe faces a winter energy crisis that has been brewing for years

Through Anna Shiryaevskaya, Rachel Morison and Isis Almeida to 09/19/2021

MOSCOW (Bloomberg) – Europe braces for a harsh winter as a years-long energy crisis leaves the continent to rely on the vagaries of the weather.

Faced with soaring gas and electricity prices, countries from the UK to Germany will have to rely on mild temperatures to get through the heating season. Europe is running out of gas and coal and if the wind doesn’t blow, the worst-case scenario could happen: widespread blackouts that force businesses and factories to shut down.

The unprecedented energy crisis has been brewing for years, with Europe becoming increasingly dependent on intermittent energy sources such as wind and solar, while investments in fossil fuels have declined. Environmental policy has also prompted some countries to shut down their coal and nuclear power plants, reducing the number of power plants that could be used as relief in times of scarcity.

“It could get very ugly if we don’t act quickly to try to fill every inch of storage,” said Marco Alvera, CEO of Italian energy infrastructure company Snam SpA. “You can survive a week without electricity, but you cannot survive without gas. “

Demand for energy is increasing from the United States to Europe and Asia as economies recover from the global pandemic, boosting industrial activity and fueling concerns about inflation. Prices are so high in Europe that two major fertilizer producers have announced they are closing factories or cutting production in the region.

And it’s not just businesses. Governments are also concerned about the blow to households already facing higher costs of everything from food to transportation. As electricity and gas prices break records day after day, Spain, Italy, Greece and France are stepping in to protect consumers from inflation.

“It will be expensive for consumers, it will be expensive for heavy energy users,” said Dermot Nolan, former chief executive of UK energy regulator Ofgem, in an interview with Bloomberg TV. “The prices for electricity and gas are going to be higher in the home than everyone would like and they are going to be higher than they have been for about 12 years.”

Gas prices in Europe have more than tripled this year, with the main Russian supplier limiting the additional deliveries the continent needs to fill its depleted storage sites after a cold winter last year. Alternative supplies have been difficult to source, with North Sea fields undergoing heavy maintenance after delays induced by the pandemic, and Asia recovering shipments of liquefied natural gas to meet growing demand there. .

Low stocks of coal

Rising gas prices have pushed up the cost of producing electricity while renewables have faltered. Low wind speeds have forced European utilities to burn expensive coal, depleting stocks of the dirtiest fossil fuels. Energy policy has also played a role, with the cost of pollution in the European Union rising by more than 80% this year.

“The gas supply is insufficient, the coal supply is insufficient and renewables are not working very well, so now we are in this crazy situation,” said Dale Hazelton, thermal coal manager at Wood Mackenzie Ltd. “The coal companies just don’t have the supplies available, they can’t get the equipment, the builders are supported and they don’t really want to invest.

European gas stocks are at their lowest level in over a decade for this time of year. Gazprom PJSC CEO Alexey Miller said Europe would enter winter in about a month without fully replenishing its buffer stocks. The Russian gas giant has lobbied to start its controversial Nord Stream 2 pipeline.

Europe now needs good weather. While forecasters say temperatures are unlikely to drop below normal next month, expectations can always change. Similar weather forecasts failed to materialize last year, resulting in freezing temperatures that sent LNG prices in Asia to a record high in January.

“It could happen again,” said Ogan Kose, chief executive of Accenture. “If we end up having a very cold winter in Asia as well as in Europe, then we could end up seeing a ridiculous surge in gas prices.”

In 2018, a deep freeze that became known as the Beast from the East took energy traders by surprise. This year, it is also possible that a weather model of La Nina will develop again. While the phenomenon can bring hot weather to Europe, it tends to bring down temperatures in Asia.

The US Climate Prediction Center has said there is a 66% chance that a La Nina model will return from November through January. This could exacerbate the fight for LNG shipments as buyers from Japan to India start to panic over fears of competition with Europe.

“Unfortunately the weather is working, when it’s cold it’s cold: it’s cold for the US, it’s cold for Europe and then it’s cold for Asia,” said Alvera de Snam, who bet on hydrogen as a future for green. energy markets.

Europe will have to reduce demand if the winter is cold, Goldman Sachs Group Inc. said, predicting the region will face blackouts. There are already signs of stress, with CF Industries Holdings Inc. closing two fertilizer factories in the UK and Yara International ASA will have reduced its ammonia production capacity by 40% by next week.

The closures also risk impacting the food supply chain, which uses a byproduct of fertilizer production in everything from meat processing to beer. The sugar and starch industries are also affected, the French Tereos SCA and Roquette Frères SA warning against higher energy costs.

And it does not stop there. Europe’s largest copper producer, Aurubis AG, said rising prices would continue to squeeze margins for the rest of the year. Even chemicals giant BASF SE, which produces most of its electricity, said it had not been able to completely rule out the impact of record electricity prices.

Supplies are unlikely to improve significantly anytime soon. Russia is itself facing an energy crisis and Gazprom is directing its additional production towards national stocks. Prices could remain high even if Europe ends up with a mild winter, said Fabian Ronningen, analyst at energy consultant Rystad Energy AS.

“With natural gas prices already reaching record highs in Europe ahead of the surge in winter demand, prices could rise even more in the coming months,” said Stacey Morris, research director at index provider Alerian in Dallas. “There is a potential that it could get worse.”