Russia’s invasion of Ukraine and the ensuing global energy crisis stimulate a profound transformation of the global energy system.
Around three decades ago, most European governments opened up their energy markets in a bid to foster competition and lower prices for consumers across the continent. At the time, European energy markets were dominated by monopolies that left consumers with little choice. However, at the turn of the millennium, the European Union decided to gradually open its energy markets, convinced that greater competition would strengthen security of supply, reduce costs and solve energy poverty. Over the past decade, the urgent need Cutting carbon emissions has gradually reshaped the global energy order, but many governments have mostly taken a hands-off approach.
Fast forward to today, and Europe and other countries around the world find themselves in a deep energy crisis with tighter energy supplies than they have been in decades and consumer prices which are soaring, a situation made worse by slowing economic growth and the threat of a blown recession. Gas prices in the Netherlands, the main European benchmark, are already 8 times higher than normal, while electricity for delivery in 2023 changes hands at prices 6 times higher than the 5-year average in Germany, Europe’s largest market, driving up costs for consumers and energy-intensive industries, including steel furnaces, metal foundries, cement works and chemical plants.
Europe has been particularly hard hit because it is so dependent on Russian gas, which President Vladimir Putin is now arming in response to Western sanctions and a global outcry against the invasion. Gazprom PJSC declared a case of force majeure on at least three European gas buyers, and even the return of gas flows via Nord Stream 1 should do little to help the continent store enough gas ahead of the winter season.
The German crisis
No country illustrates this better than Germany, Europe’s largest economy. Germany is in dire straits after effectively cornering itself with its energy policies. For decades, successive governments in Berlin have pursued a policy of maximizing the country’s dependence on Russian oil and gas, and nuclear energy almost completely abandoned, with the last two operational reactors due to be shut down in 2022. As a result, Germany has become heavily dependent on natural gas, which accounts for 25% of the country’s total primary energy consumption. Although Germany itself has large reserves of natural gas accessible by hydraulic fracturing, Berlin has banned this technology, which means that it must import 97% of its gas mainly from Russia, the Netherlands and Norway. It is therefore not surprising that Germany has just recorded its first trade deficit since 1991.
As a catastrophic energy crisis unfolds, Germany has announced it will join the bandwagon of nations backing away from their climate targets by increase your coal consumption, which has overtaken wind to become the main input for the world’s electricity generation in 2021. Indeed, Germany has no choice but to burn lignite in its power plants – one of the dirtiest fossil fuels and mined in vast surface mines that litter the German countryside. The European Commission has already given its absolution to countries replacing Russian gas with coal and thus producing higher emissions.
Meanwhile, France is struggling with defective reactors which transformed the former net exporter of electricity into an importer.
Europe is now paying a heavy price for its false sense of political security after the Cold War, which made it overly dependent on Russian gas supplies and intermittent renewable energy generation.
Suddenly, Europe and the governments of the world are realizing the folly of leaving energy security solely in the hands of the markets. Western governments now recognize the need to play a more expansive role in everything from building fossil fuel infrastructure to determining where private companies can buy and sell energy to limiting emissions through carbon pricing, subsidies, mandates and standards. In addition to economic nationalism and de-globalization, experts have predicted that the coming energy order will be defined by government intervention in the energy sector on a scale not seen in recent memory.
However, the situation is even more extreme in Europe, where governments have begun to nationalize energy assets in an effort to save their imploding energy sector.
According to Bloomberg, Germany is currently engaged in talks to bail out the struggling gas giant Uniper SE; Britain has completed Government bailout of £1.7bn from a failing gas and electricity supplier Bulb Energy Ltd as France plans to nationalize Electricity of France SA.
European governments are also stepping in with other measures to soften the blow to the consumer. Berlin is making one-off payments to households this month to shield them from what Economy Minister Robert Habeck called “bitter news”; the British government has shelled out some £37 billion ($44.7 billion) to mitigate the impact on consumers, while France plans to double the €25 billion in spending and tax cuts.
Meanwhile, in the Czech Republic, the government is looking for ways to compensate state-controlled utilities CEZ in the event of extreme events, such as the interruption of natural gas supplies from Russia.
Overall, Bloomberg reported that large international support packages for consumers are likely to reach 100 billion euros.
“The fact that governments are increasingly forced to bail out energy companies is a sign of their inability to take into account the impact of price shocks on their policies. This is a serious oversight that will add to the already high costs faced by consumers,” Catherine Portera consultant who worked for Centrica Plc and EDF Tradingtold Bloomberg.
Beyond direct financial aid and bailouts, supply bottlenecks and soaring prices have prompted governments to intervene in other ways. For example, several European governments have ordered utilities to replenish storage sites, while countries like Austria and Germany have paid increased tariffs to refill their storage sites.
The ongoing energy transformation in Europe is reminiscent of the 1970s, when excessive government intervention in energy markets repeatedly exacerbated energy crises. However, energy experts believe that appropriately limited and tailored actions can be taken to address specific market failures to mitigate many energy security risks and help manage the greater geopolitical challenge facing energy markets. energy have been facing for decades.
By Alex Kimani for Oilprice.com
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