Energy prices in Europe skyrocket amid switch to renewable resources

Soaring natural gas prices have shaken Britain and the rest of Europe, leading to spikes in electricity prices that raise utility bills for consumers, putting pressure on energy providers and disrupt industries.

The aftermath of the turmoil unfolds every day, as factories close, ministers gather with business leaders to find solutions, and idle coal-fired power plants are brought into service to provide more electricity.

The crisis turned geopolitical on Wednesday as US Energy Secretary Jennifer M. Granholm appeared to target Russia, Europe’s largest gas supplier. The United States and its allies, she said, “must be prepared to continue to stand up when there are players who can manipulate the offer to take advantage of it.”

There are suspicions that Moscow is using the gas markets to pressure Europe to sign a giant new gas pipeline to Germany called Nord Stream 2. For years, Nord Stream 2 has been a lightning rod in US-Russian relations, although President Biden has agreed to drop objections to the project.

Ms Granholm said that “we are united with our European allies to make sure you get an adequate and affordable gas supply” this winter.

The International Energy Agency, the Paris-based watchdog, also called on Russia on Tuesday to increase its gas supplies to Europe, saying it would be “an opportunity for Russia to underline its credentials in as a reliable supplier in the European market “.

Gazprom, the Russian gas company, did not immediately respond to recent criticisms. Earlier, a spokesperson said: “Our mission is to fulfill contractual obligations to our customers, not to ‘reduce the concerns’ of an abstract market.”

A number of factors are at play in the energy rush, which appears to be most acute in Britain. Among other things, it shows that the transition from emissions-producing fossil fuels like coal and natural gas to renewable sources like wind and solar, while necessary to tackle climate change, remains a work in progress. vulnerable to problems.

“The great thing this made me realize is that we still have a huge way to go,” said Cathy McClay, director of trade at Sembcorp Energy UK, an electricity supplier.

Here is an overview of the main factors behind the energy price crisis.

Suppressed demand after the pandemic has pushed up natural gas prices around the world. Deliveries of liquefied natural gas, transported by ship to markets such as China, South Korea and Brazil, have increased, driven by higher prices there, resulting in lower deliveries to the northwest of the ‘Europe.

The weather also played a role. The low temperatures of late last winter in Europe boosted the demand for gas for furnaces at a time of year when suppliers typically fill storage tanks; this leaves the region potentially vulnerable if the coming months are cold. In this case, demand would rapidly reduce supplies, further raising prices and threatening to shut down energy-intensive industries such as steel and fertilizer manufacturers. These concerns have already pushed up the prices of natural gas.

Russia, Europe’s main gas supplier, has increased supplies, but not as much as the IEA and some analysts believe.

In Britain, whose markets closely mirror those of the continent, gas prices are about five times higher than a year ago, at around $ 25 per million British thermal units, after rising by around a quarter over the past week.

“These are insane levels compared to what we’re used to,” said Mark Devine, a trader at Sembcorp. The rising cost of natural gas is passed on to electricity bills, as gas-fired power plants are the largest source of electricity in Britain and much of the rest of Europe. High carbon taxes are also fueling electricity prices, analysts say.

“The main driver behind high electricity prices right now is the high price of gas,” said Glenn Rickson, energy analysis manager for Europe, the Middle East and the Africa at S&P Global Platts, a market research firm.

Britain is pursuing increasingly ambitious emission reduction targets to tackle climate change. This policy has reduced carbon emissions, but sources like wind and solar can vary.

Polluting coal generators are shut down and aging nuclear power plants are gradually being shut down.

The UK government has also allowed companies to shut down gas storage facilities in recent years, leaving Britain little room in the event of a supply disruption or unexpected surge in demand. Analysts say the country is relying on Europe for gas storage, but that could be a risky strategy after Brexit.

These trends have left Britain’s energy system exposed in recent weeks.

During the first half of September, low wind speeds caused a sharp drop in turbine output, while a large number of gas-fired power plants were inactive for maintenance reasons.

“We are currently in a transition system,” said Rajiv Gogna, partner at LCP, a consultancy firm. When the wind slows down, the capacity of the system is tested.

National Grid, the operator of Britain’s electricity grid, has turned to back-up power producers, companies with idle coal or gas power plants that can be turned on in the event of a shortage. But these operators “knew that most of them, if not all, would be needed and therefore could get away with a hefty premium,” Gogna wrote in a blog post.

The grid, he said, paid about 150 million pounds ($ 205 million) over two weeks this month for this back-up electricity; typically he pays around £ 20million a week.

Britain also relies on the ability to import electricity via submarine cables from the continent. But a fire on September 15 at a National Grid facility cut a cable providing electricity from France for six months.

Electricity prices were skyrocketing even before the fire. As firefighters battled the blaze, prices briefly touched £ 2,500 per megawatt hour, a wholesale measure – around 70 times the average price in 2020.

“Six or seven things went wrong at the same time,” said Edgar Goddard, a former National Grid executive who is now a consultant at EPNC, a company that advises on electricity issues.

Britain’s energy regulatory agency Ofgem has already raised the cap on standard energy tariffs for millions of consumers by around 12%, citing higher prices for natural gas.

For many households, the peak couldn’t come at a worse time: Headline inflation is on the rise in Britain, and the government has started cutting some of its financial support around the time of the pandemic, including including its leave program and low income support known as universal credit.

Some of the dozens of small electricity and natural gas suppliers, who buy energy in bulk and then offer low-cost contracts to consumers, are caught off guard by the price hikes and start to shut down. which can lead to less competition. .

Analysts say many of them cannot afford to cover their commitments to provide low-cost energy, while government-imposed caps prevent them from raising prices to recoup losses.

The UK government also agreed to pay the operating costs of a fertilizer plant that had been closed due to high natural gas prices, causing carbon dioxide shortages for various industries and raising fears of food shortages.

Winter is generally a stress test for energy systems. More power plants in Britain will be brought back into service and more gas could hit the market, especially from Norway, which recently said it would increase production. However, demand will also increase sharply.

Frigid weather, weak winds in Europe or other issues could lead to “higher and more volatile prices in the market, significant opportunities for traders and higher bills for consumers,” Gogna said.

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