NIAS Europe Monitor

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NIAS Europe Monitor
Europe's Energy Crisis: It could get worse. Five reasons why

  Chetna Vinay Bhora

The United Kingdom, France, Spain, Germany, and Italy have seen higher natural gas wholesale prices than at any other time in recent history. Household and business bills are on the rise, and they could soar even further.

Climate change and a low supply of petroleum and LNG have led to the unprecedented surge of energy prices in Europe. They are pushing the mixed responses from across Europe. 

Millions in Europe might not be able to use their heaters this winter as the gas and fuel prices continue to surge. The United Kingdom, France, Spain, Germany, and Italy have seen higher natural gas wholesale prices than at any other time in recent history. Household and business bills are on the rise, and they could soar even further.

First, the weather patterns and power generation in Europe. Heatwaves have dried up the water bodies for the generation of hydroelectricity, scarce winds have made it hard for the windmills to generate power, and freezing winters that last longer than usual have made it impossible for the solar cells to function. Unprecedented weather conditions have depleted renewable sources of energy. The above has forced the region to buy natural gas and fossil fuels. This has created a scarcity of green energy, as only a few countries in the region are capable of green energy production.  

Second, reorientation of the energy sector and Emissions Trading System (ETS). There have been several climate change conventions and protests that have negatively affected the industry. One of the main tools for reducing greenhouse gas emissions that cause climate change is the ETS, one of the EU's climate and energy policies. It covers about 40 percent of the EU's greenhouse gas emissions. By 2030, the policy is expected to play a pivotal role in reducing greenhouse gas emissions by 55 percent, resulting in net-zero emissions by 2050. According to some analysts at Refinitiv, carbon prices should be at least twice as high as current levels to shift to renewables and clean energy. 

The EU's Climate Chief, Franz Timmermans, stated early this year that carbon prices must rise significantly for the bloc to reach its emission goals. Additionally, he requested that policymakers stay out of the carbon market, warning that it would tarnish the scheme's credibility. So, the countries are buying natural gas and fossil fuels to mitigate the crisis. 

Third, the Border Tax adjustment scheme. The ETS has a loophole called carbon leakage, allowing businesses to transfer production and emissions elsewhere since it is expensive to pollute Europe. There is an anticipation that the Union might propose reforms to resolve it by implementing the Carbon Border Adjustment mechanism in 2023. Imports would be subject to domestic carbon pricing, which will level the playing field on carbon emissions. 

Fourth, different responses from different countries in Europe to the same problem. The Netherlands, one of the top gas producers in the region, began terminating its main gas field in Groningen in 2018. The volume of working gas in storage has dropped from 94 percent in 2020 to 74 percent this year. The slow pacing of the transition will enable new policies to replace outdated ones and reinstate climate policy. Spain and Portugal have tripled the prices since mid-2021, standing at 175 Euros per megawatt-hour. The price has soared to a staggering 183.84 Euros per megawatt-hour in the UK - the most expensive rate in Europe. Spain is pushing a "policy menu" for the EU to respond to price surges more quickly. In Greece, consumers have been promised subsidies. Poland has some of the highest energy prices due to its heavy coal dependence, as the country faces both hikes in gas prices and increasing CO2 permit prices under the EU's emissions trading scheme. Italy pumped roughly 1.2 billion euros into its energy system over the summer to reduce energy bills. However, it is now thinking of reforming the billing system to boost renewable energy costs. A consumer support program worth 4.5 billion Euros is expected to be announced soon by Italian officials. France has announced to pay one-time payments of 100 Euro to 5.8 million households who struggle with energy bills. 

In Germany, wholesale power prices have spiked by 50 percent, but suppliers have capped prices to ensure sudden price surges do not hit consumers. 

Fifth, the role of Russia. In 2019-20 Russia was the largest supplier of natural gas to the European Union. In recent months, a team of 40 members of the European Parliament was asked to investigate if Gazprom was hoarding natural gas to get approvals for the Nord Stream 2 pipeline. But some experts argue that Gazprom is not violating the contract as it has to uphold the 40 percent market share in Europe to keep the market competitive. 

To conclude, extreme weather conditions have flustered the energy demand. Repositioning of the market and its competition also has burdened the civilians as they are the ones who have to pay the price. According to the IPCC report, humans have caused unusual climatic conditions that are irreversible, therefore to expect quick transitions into a sustainable world is repugnant. Slow and steady-paced recovery plans and smooth transitions into the green forms of energy will help rebound the economy. The ETS has failed to gauge climate change, falling short on what is necessary to prevent a catastrophic climate breakdown. 2021 has experienced record-high prices of carbon in the futures market leading to an uneven commodities market. The introduction of the border adjustment might benefit various companies in the long term; on the contrary, it might elevate the tensions between EU members and their trading partners.

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