A record-high increase in natural gas prices in Europe is raising concerns that consumers will be hit hard by high energy bills this winter as global demand for fuel rises.
While the crisis is global, Europe has been hit by several aggravating factors that could make the crisis more acute.
Here’s a quick guide to Europe’s natural gas crisis. For a longer guide click here.
Why are natural gas prices rising?
Natural gas prices have been surging in Europe as demand increases globally. While this is happening with most commodities, it’s been a larger problem with natural gas.
It’s due to a global economic rebound as countries lift COVID-19 restrictions and fully reopen their economies. Markets are now competing as demand rises after the shock of the pandemic.
There is also competition for natural gas after long winters in Europe and East Asia with buyers now pushing the prices up.
“You’re finding yourself in an area where demand has rebounded and on the other side, supply is more constrained,” said Thierry Bros, an energy expert and professor at Sciences Po Paris.
So what is going on in Europe?
“Europe is seeing a perfect storm in its natural gas market,” explains Simone Tagliapietra, a senior fellow at the Brussels-based economic think-tank Bruegel, due to a combination of factors on both the supply and demand sides.
Demand has increased for several reasons, experts say, including that Europe had a colder winter so people were heating their homes for longer than usual.
That coupled with a phasing out of coal and a bad year for wind production has driven up the need for natural gas.
There are also several issues on the supply side: including less maintenance of oil and gas fields during the COVID-19 crisis and less investment.
Plus, Europe is decreasing their domestic production of natural gas. Europe’s top domestic producer of natural gas, the Netherlands, began phasing out their main gas field Groningen in 2018.
The percentage of working gas in storage is now at 74% in Europe, compared to this time last year when it was at 94%, according to data from Gas Infrastructure Europe.
“The big concern in the market is that the level of the storage of gas in Europe is lower than usual at this point of the year. We are not prepared, well prepared to navigate the winter season, which is the heating system. Right. So that is the concern that is driving up prices,” said Tagliapietra.
What is Russia’s role in the current crisis?
There have been concerns that Russia could be using the crisis to lobby for the newly completed Nord Stream 2 pipeline to come online by not sending more natural gas for Europe’s storage.
Russia was the largest exporter of natural gas to the European Union in 2019 and 2020, representing more than 40% of EU imports.
The International Energy Agency (IEA) said that Russian exports to the EU were down from their 2019 levels and that “Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season”.
Forty members of the European Parliament recently called on the Commission to launch an investigation into whether Gazprom was withholding natural gas to push approval of the Nord Stream 2 pipeline.
A Kremlin spokesman said in mid-September that the commissioning of the new pipeline would “substantially balance” the price of natural gas in Europe, further increasing suspicions that Russia could be withholding gas on purpose.
But some experts say Gazprom is not in a breach of contract and also has to respect the 40 per cent market share in Europe to keep the system competitive.
Is this related to the Green transition?
While a poor year for wind production has contributed to the crisis as well as less investment in fossil fuels, many argue that adding more renewables to the energy mix must be part of the way out.
“The problem is that we would not have this situation if at this point in time we were to have way more renewables into the system. Renewables…basically diminish the role of fossil fuels and…shields the market from the supply, from the price shock in fossil fuels, ” said Tagliapietra.
“The long term response to the current situation in Europe must be to speed up the deployment of renewable energy sources, but also of energy efficiency solutions, which are very important not to diminish the demand for heating in residential or in our houses,” he added.
But many have said that demand will have to adjust during this transition period to more renewables as well.
“If we want to put more intermittency in the system, which is renewable wind and solar, then we need to have more capacity mechanism with gas-fired power plants available or a storage capacity which we are lacking on the technological basis. Otherwise, we will have those blackouts coming off in Europe,” said Bros at Sciences Po.
“It’s not because we wanted to phase out fossil (fuels) too quickly. It’s because demand hasn’t been adjusted to this,” he added.
How could it impact consumers?
Consumers who do not have a fixed-price contract on heating and electricity are likely to see increases in their energy bills.
Natural gas not only represents a fifth of Europe’s electricity but is also used for heating and cooking. In 2018, it was around 45% of the energy used for heating homes in the bloc.
In Germany and Spain, prices in September were three or four times the averages seen in 2019 and 2020, the IEA said.
Many countries are trying to help consumers amid the rising prices, with France unveiling a series of measures including an “energy check” to help people pay their increasing bills.
Spain said they would cut an energy tax to drive down costs for people while Italy also is cutting taxes.
But many organisations are concerned that more people may have to choose between paying for heating and feeding their families this winter.
A 2019 EU-wide survey found that 6.9 per cent of people in EU member states were unable to keep their homes adequately warm.
