Ian Bond , Elisabetta Cornago , Zach Meyers – Centre for European Reform
Europeans’ skyrocketing energy bills are not primarily Russia’s fault, though it is capitalising on Europe’s vulnerability. The EU’s decarbonisation strategy provides the best long-term guarantee of stable energy prices.
After a scorching summer, Europe may face a chilly winter, courtesy of spikes in energy prices. After hitting a low in June 2020, with lockdowns crushing demand for energy, the wholesale natural gas price in Europe had increased more than ten-fold by October 2021, reaching an all-time high. Asia is experiencing similar price hikes. Gas prices have, in turn, pushed electricity prices higher. Should Europeans blame global gas supply and demand fluctuations, sabre-rattling by Putin, or Europe’s ambitious climate action plan?
Much is due to an unfortunate combination of economic and environmental factors. Many countries are reopening after COVID-19 restrictions, which has increased global energy demand, and Europe and Asia are competing to buy gas. Maintenance work on gas infrastructure in Norway has limited Europe’s supplies. And a cold winter and spring followed by a hot summer meant more demand than usual for energy for heating and air-conditioning. Lack of wind in northern Europe over the summer led to higher demand for coal and gas to fill the shortfall in wind-powered electricity generation.
Russia – Europe’s largest provider of natural gas – has its own problems. A fire at a Russian processing plant in August cut gas production and exports to Europe. With winter approaching, the Russian government has prioritised meeting domestic demand and replenishing storage. It has fulfilled existing long-term contracts to supply European customers, but (unlike previous years) it has not increased supplies to Europe to meet uncontracted immediate demand for gas (known as the ‘spot market’). However, the International Energy Agency believes Russia could do more, because it still has capacity to boost gas exports to Europe by about 15 per cent.
Russia’s decision not to raise supply to meet the spike in demand has contributed to higher prices, although the impact is difficult to quantify. European spot gas prices have increased rapidly since June, when it became clear Russia would not increase supply as expected: but those prices had already more than doubled between January and June, so arguably this was just the continuation of a pre-existing trend. Furthermore, when Gazprom indicated on October 28th that it would begin refilling European storage facilities, prices on the largest EU gas trading hub, the TTF, decreased by only 6 per cent – far less than prices have risen over 2021. Finally, Chart 1 also suggests that Russian supply constraints are not the most important contributor to gas price increases. It shows that UK gas prices have increased far more than prices on the TTF. Yet the UK imports only 5 per cent of its gas from Russia, far less than the EU does.