Europe: An impending energy crisis and its economic fallouts

CWA # 903

2023: The World This Year

Europe: An impending energy crisis and its economic fallouts

Padmashree Anandhan
29 January 2023

Photo Source: Goldman Sachs

TWTW#200, 29 January 2023, Vol. 5, No. 4

Europe: An impending energy crisis and its economic fallouts

Europe’s energy consumption mix has been dominated by natural gas, oil and coal for decades and only in recent years, the debate over the use of non-renewable energies and climate goals has sparked. Since Russia began to cut down its oil and gas supplies as a counter to the sanctions imposed by the West, Europe has been pushed into an energy crisis.
In 2021, the total gas delivered by Russia to the EU was 140 billion cubic metres (bcm), which halved down to 60 bcm in 2022. Although Europe was able to cope the shortage through the emergency mobilised funds of EUR 330 billion, bring control on demand by 10 per cent (50 bcm) and alternate supplies from Africa and Middle-East. In the long term, Europe’s energy future without Russian gas and oil seems bleak. Due to the crisis, energy prices turned vulnerable, pressuring gas-intensive sectors to re-direct their operational methods resulting in an add-on liability to the economy.

Forecast for 2023
First, coal, nuclear and hydro power use is likely to supersede renewable sources. In Europe’s energy mix, the usage of renewable has become a point of contest. Natural gas, oil, and coal have become the most consumed forms of energy. The Nordic countries, Denmark, Iceland, Norway, and Sweden, seem to rely more on therenewable especially hydropower. To meet the 2023 crisis, the Nordic plan to expand their hydro generation projects, Germany and Belgium retain their nuclear plants, and France and Finland are ahead to construct new plants, transition towards renewable energies and climate goals are about to take a backseat. According to the IEA report, hydro generation is predicted to recover to a five-year average which would benefit in keeping the electricity supply up by 45 terawatt-hours (TWh). Whereas nuclear generation is predicted to increase by two per cent in 2023.

Second, the household and manufacturing sector shortage will affect the economic recovery. Agreements with Algeria and Azerbaijan did help Europe in a minimal way to be an alternate for the Russian supplies, but still underrepresented the massive gas imports of Europe. At the industrial level, some of the oil and gas-intensive sectors such as manufacturing, fertilizers, chemicals, steel, and ceramics have faced critical challenges in maintaining production and have been forced to cut down profits. Those companies already have alternate sources such as biomethane, coal power and renewable have managed to sustain without huge cost-cuts, but the household sector took the most. The increased demand resulted in hike in prices, narrowing the affordability and reducing consumption. At the household level, subsidies and a slight reduction in demand can benefit only for a shorter time. Europe will need to fasten its internal production, mobilise investments into smart technology and find better alternatives to boost its energy storage. This is to ensure the energy crisis does not become a hitch to economic recovery.

Third, the domestic, regional and international energy generation efforts will realize by 2024, however 2023 will remain troublesome. The energy strategy of Europe to reduce the use of non-renewable energies is redirected to plan towards meeting the energy scarcity and increasing its production. In 2022, Nordic to eastern European countries have proposed new investments to build pipelines, and energy infrastructure to circumvent the shortage by improving the energy supply chain within Europe. Norway, Turkey, France, Belgium, and the Netherlands have become the forefront regional players in facilitating pipeline deals with Greece, Germany and other eastern European countries to replace the Russian energy supply gap. A major role has also been played by private companies such as Equinor and RWE in installations and production. Some of the promising projects being the Greece-Bulgaria pipeline, Bulgaria-Turkey pipeline, Norway’s extensive operation in the North Sea, and Germany-Norway hydrogen pipeline. At the regional level, the Renewable Energy Sources Act (RES Act), European Gas Demand Reduction Plan and Offshore Wind Energy Act are expected to materialize in 2023. There are also other efforts such as Fit for 55 package, the REPowerEU plan and a new storage regulation adopted in 2022 which does not seem promising for 2023. The mobilised funds so far come to EUR 330 billion, but to meet the crisis, Europe is estimated to have additional EUR 100 billion, can be possible only in two years through “lower gas import bills.” Therefore the speed of reforms being adopted and the time of realisation can be immaterial to Europe in 2023. At the international level, the US, Africa and Middle-East seem to be promising alternative for Europe, but the rising energy prices in the US, is a high-risk for Europe’s economy and the reduced exporting capacities despite the potential in Cameroon, Equatorial Guinea and the DRC limits the energy imports of Europe.
Rampant action taken by Europe in 2022 to increase internal energy generation does not promise results for 2023. Comparing the industries and households, the rising energy prices would cost industries and would burden the income of households.

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