2022 leaves Europe in the energy crisis
In Slovenia, Vukadinka Marija Pavlin does not turn on radiators all the way even when the weather turns cold, and washes clothes and dishes at night when electricity is cheapest. Thanks to its extreme frugality in electricity consumption, it avoided the need to deal with the significant increase in energy prices.
Thousands of families across Europe are in the same shoes. Many struggle to save enough money to pay their energy bills or face the “eat or heat” dilemma. Businesses are teetering on the brink of bankruptcy due to high production costs driven primarily by high energy prices.
Europe has been badly affected by the sanctions it imposed on Russia after the outbreak of its conflict with Ukraine, leading to the ongoing energy crisis, with gas shortages and high energy prices. It is expected to last for some time.
Gas shortage, record prices
Europe is highly dependent on Russian gas supplies. In 2021, the member states of the European Union (EU) imported 155 billion cubic meters (bcm) of natural gas from Russia, which accounted for about 45% of the bloc’s gas imports and close to 40% of its total gas consumption. According to data released by the International Energy Agency (IEA).
Since then, Russia’s share of EU gas imports has dropped to less than 10%. As a result, Europe must look for alternative sources, including the purchase of expensive spot liquefied natural gas (LNG) from distant gas-exporting countries, such as the United States.
In an attempt to limit the use of natural gas, some European countries are burning more coal or extending the life of nuclear power plants. It pays for plans to end the use of coal, the most polluting energy source.
The shortage of gas forced the member states of the European Union to agree on a voluntary reduction of 15 percent of the demand for natural gas compared to the average consumption in the last five years between August 1, 2022 and March 31, 2023. A mandatory reduction of 5 percent in electricity consumption even during peak hours was agreed until March 2023.
Expensive gas imports, along with supply shortages, have pushed energy prices to record highs. The Dutch Title Transfer Facility (TTF) is Europe’s main benchmark for natural gas prices. TTF gas prices reached historic levels as early as August, climbing to more than 340 euros (US$362) per megawatt hour (MWh). Prices have since fallen but remain at a high level. Two years ago, the price of TTF was only about 14 euros per MWh.
In order to lower energy prices, after months of deliberation, the energy ministers of the European Union countries finally signed an agreement on a market correction mechanism for natural gas, also known as a gas price ceiling, at the beginning of this month.
According to the agreement, the mechanism will be activated when gas prices exceed €180 per MWh, with built-in safeguards for suspension and shutdown so as not to endanger the gas market. However, market analysts doubt that the gas price cap will actually lower costs for consumers or businesses.
Alongside the soaring gas and electricity prices, fuel prices are also soaring in Europe. Although gasoline and diesel prices have fallen slightly recently, they have hovered above more than €2 per liter in most European countries for most of 2022. Some European countries have had to provide huge subsidies to cap fuel prices.
Economy, households struggling
Shutdowns, layoffs or even bankruptcies are what some energy-intensive companies in Europe, such as glass manufacturers or chemical plants, are facing under the pain of the energy crisis.
The high gas and electricity prices led to high inflation, which in turn severely affected the European economy and the livelihood of its citizens. Although the EU’s annual inflation rate fell slightly in November from October, it remained at a double-digit level, at 11.1%.
As in previous months, the largest contribution to the high annual inflation rate came from energy, as companies and families find it increasingly difficult to meet costs.
Businesses in some industries are being forced to relocate or face bankruptcy, and some countries have injected liquidity into struggling companies. Many small business owners also face operational difficulties.
The European Commission in November predicted that the 27-nation European Union would slide into recession this winter.
European industry is losing its competitiveness and is turning to investors due to high energy prices, said Thomas Schaefer, CEO of the brand (CEO) of the German car manufacturer Volkswagen, at the end of November.
“Europe does not have price competitiveness in many areas. When it comes to the cost of electricity and gas in particular, we are losing more and more ground,” he said.
Therefore, the European Union announced a series of measures, such as a limit on gas prices, a “solidarity levy” on excess profits made by oil, gas, coal and refineries companies in 2022, and a limit on the income of electricity companies that produce energy. From the power of the wind, the sun and the nuclear.
Meanwhile, a growing number of families are facing energy poverty, with some having to choose between food and heating because they are unable to pay their high energy bills.
“A lot of households are already in a situation where they have no heat and less to eat, and I really wish politicians would understand that some household members are really in a difficult situation,” said Keith Baker, research fellow in fuel poverty. and energy policy at Glasgow Caledonian University in Scotland.
Energy prices will not begin to stabilize until the end of the conflict between Russia and Ukraine is in sight, Alessandro Marangoni, economist and director of Irex Monitor, an Italian think tank specializing in the energy sector, told Xinhua recently.
Europe is considering finding alternatives to Russian energy against the background of the conflict in Ukraine and the sanctions imposed on Russia. With consumers facing the highest energy prices on record, and with gas rationing and potential blackouts this winter, there are fears of an even worse crisis next year.
The European Union could face a shortage of almost 30 bcm of natural gas in 2023, according to a report recently released by the IEA. The agency predicted that the potential gap between the EU’s gas supply and demand could reach 7.6% of the total basic demand for natural gas of the European Union, estimated at 395 bcm for 2023.
The IEA warned that the unseasonably mild temperatures seen at the start of the European winter were not guaranteed to last, and Russian gas supplies could be further reduced. Meanwhile, global LNG supplies are expected to grow by just 20 bcm in 2023, far less than the expected decline in Russian pipeline supplies, according to the IEA.
The European Union’s economic commissioner, Paolo Gentiloni, said that if the conflict between Russia and Ukraine does not end by next winter, Europe’s energy woes will worsen dramatically.
European utilities are resilient but not immune to crises and will continue to be affected by headwinds in 2023, said ING’s chief economist Garven Heiminga.
Delivor Podic, president of the Croatian Gas Association, told Xinhua that 2023 would be a “very challenging” year if Russia further cuts supplies to Europe. The EU will have to refill its storage facilities, which “will not be easy”.
Podich warned that without government subsidies, already high energy prices for households and businesses would soar.
For Europe, the uncertainty and challenges ahead will continue to weigh on the continent’s economy as it tries to emerge from the energy crisis and record-breaking inflation, a double whammy wreaking economic havoc across the bloc.