NIAS Europe Monitor

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NIAS Europe Monitor
Europe's Energy Crisis and Gazprom 

  Harini Madhusudhan

Europe's hasty transition from traditional forms of baseload power sources, such as gas, coal, or nuclear, to renewable sources has pushed the governments to move away from long-term purchase agreements with the suppliers.

In October 2021, Europe experienced a surge in natural gas prices, seen as the world's greatest energy crisis since the 1970s. The past year has seen disruptions in energy supply chains and the supply of semiconductors, cars, metals, and even food during the pandemic. The cost is now six times higher than last year in Europe and four times higher than the past spring. With the prices continuing to increase and the crisis unlikely to abate before the spring, as a last-ditch effort, the European governments are seen scrambling to issue subsidies and cut taxes to protect their citizens from inflation. 

What caused the energy crisis? Will the crisis prolong? What are the sources of energy supply to Europe? This commentary tries to answer the above question, with a particular reference to the role of Gazprom.

Europe's Energy Crisis: A brief note
Natural gas represents a fifth of Europe's electricity consumption and is primarily used for cooking and heating. An immediate reason for the unprecedented surge is the global increase in demand for natural gas, as countries restart their economies after the lockdowns. The East Asian and European markets are primarily affected and are competing as the demand rises after the pandemic shock. The competition is intense due to the long winters in Europe and East Asia, which has led to the buyers pushing the prices up. Necessarily, unchecked issues on both the demand and supply side coupled with the attempts to phase out coal increased usage of heaters due to the long winter, and the bad output of the wind production have all been causal factors that led to the crisis. 

Europe has been working towards decreasing its domestic production of natural gas. According to the data from Gas Infrastructure Europe, the percentage of working gas storage in 2020 was 94 percent. This has been reduced to 74 percent by October 2021. With winter around the corner, the rising costs would cause a lot of homes/consumers who have not chosen fixed-price contracts to choose between feeding their families or keeping warm too. Based on an EU-wide survey from 2019, 6.9 percent of people could not keep their homes adequately warm. 

The largest exporter of natural gas to the European Union in 2019 and 2020 was Russia, representing up to 40 percent of imports to the European Union. Russia has been accused of market manipulation by using the situation in Europe to squeeze the supply of gas to Europe. 

Due to other factors in China and East Asia, there was a forced reduction in coal production which caused shortages in electricity production, which spiraled into shortages in global supply chains. In the case of LNG producers, notably American spot market producers directed all their supplies to the demands in East Asia. Consequently, Europe lost its standard spot market supplies of LNG while the spot prices skyrocketed by about twenty times. 

A confluence of three significant factors lead to the energy crisis in Europe: A confluence of three significant factors lead to the energy crisis in Europe: rebounding domestic demand, and supply imbalance; the impact of global economic factors on the Chinese, US, and Russian suppliers; and the inconsistencies of the Green transition in Europe coupled by the Euro-area inflation. 

Green Transition in Europe 
As a part of their action against climate change, many countries in Europe have begun to take measures to reduce their reliance on non-renewable sources of energy. This is largely seen as the 'Green Transition,' and Europe has been trying to phase out fossil fuels and build a renewable energy capacity in the last couple of years. Given that various factors have caused the exceptionally high prices in Europe, the transitionary shock of Europe's Green Plan would be one of the long-term factors of the price rise in Europe's energy crisis. 

Following are considered as a primary reason by energy experts in Europe. The region's hasty transition from traditional forms of baseload power sources, such as gas, coal, or nuclear, to renewable sources has pushed the governments to move away from long-term purchase agreements with the suppliers. The carbon neutrality plans have introduced environmental taxes on some of these products, coupled with the short-term pricing models that have made the utility of these forms of energy more costly for the consumers. The consumers are left with the only option of seeking alternative and cheaper fuel sources- here is where the exporters from Qatar and Russia cash in. 

Gazprom and the Europe Energy Crisis 
Gazprom increased the price of its products in 2021. As the supplier for close to half of the quantity of natural gas imported by Europe, it revealed that their priority would be to shore up its inventories, signaling that there would be an impact on the volumes it could ship to Europe. According to estimates of the company's investors, Gazprom has increased its price guidance for exports to Europe and Turkey from $295 to $330 per 1000 cubic meters. European experts say that the Kremlin has skillfully exploited the energy crisis in Europe, but Putin on-record has dismissed the claims of withholding supplies for profits. Moreover, the problem in Europe is also mainly about the storage of Natural Gas. 

A statement from the Kremlin spokesperson in mid-September said the commissioning of the new pipeline would 'substantially balance,' the prices of natural gas in Europe. This raises suspicions if the Russian side would take up such a measure to add pressure on the European Commission to further their interests with the Nord Stream 2. Because they are the largest suppliers, Gazprom is made to be the centre of the dispute and are expected to take additional measures to ease the price pain. 

To conclude, though Gazprom has legally fulfilled its demands for the market, it would not be possible to increase supplies unless there are binding contracts to manage the additional supplies, which necessarily shows that the spot-market model is a problem in this equation. Switching back to long-term contracts could be a viable solution to address the current situation. However, signs of bad implementation would have to be addressed to ensure the burden does not fall on the consumers or have an irreversible impact on the collective economy. Europe has been a success story for its Green plans. This would stand as an example to the countries attempting to transition into renewable energy markets hastily. 

About the author
Harini Madhusudan is a doctoral scholar with the School of Conflict and Security Studies, NIAS.  

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