The energy crisis in Europe

The energy crisis in Europe

The prices of energy in Europe are rising. In Spain, France, Italy, families are expected to experience sharply increases in their energy bills, potentially pushing millions into energy poverty. The critical situation is embedded in a partial economic recovery after months of limited activity for many European citizens. These rises of energy represent a crushing environment, especially with winter getting close and possible higher needs of heating.

Where does the electricity come from?

The electricity that we consume comes from different primary energy sources that include fossil energy fuels (gas, oil, coal), nuclear and renewables (hydro, wind, solar). Primary energy sources are energy products that are present in a usable form from natural sources.

In 2019, approximately 21% of the final European energy consumption is electricity. About this electricity, 39% was produced by power stations burning fossil fuels, 25% from renewable energy sources and 26% of the electricity consumed came from nuclear power plants.  Still, 4 out of 5 of the first most populated countries (Germany, Italy. Spain, Poland) have a very carbonised electric production. The representation of fossil fuels such as crude oil, natural gas and coal as sources is noticeable. In Europe, as in the rest of the world, fossil fuels are the most important source of electricity production. In Member States with important renewables used to generate electricity, the fossil fuels adjust their production to balance electricity supply and demand. At the EU level, electricity production is in a process of decarbonisation.

The share of electricity produced by wind turbines, hydropower plants, biofuels and solar power is increasing. In certain countries such as Austria, Croatia, Denmark, Luxembourg, and Sweden, a consequent share of the electricity production is from renewable sources. But it is specific to each country’s geographical terrain and remains a minority, e.g. the geographical peculiarities allow Austria to produce around 60% of its electricity from hydro power plants and for Denmark, around 55% from wind energy. Electricity production does not represent the overhaul of the Member State’s energy consumption. These sources of energy are intermittent, producing too much or too little at any given time and are at the mercy of the climate hazards. Some aspects are to be taken into account about renewables, such as the land use that is consequent. The life-cycle global warming emissions are more impacting, such as the materials extraction, materials transportation, on-site construction and assembly, and dismantlement.

A discernible nuclear power plant source for producing electricity can be seen for seven to ten EU Member States. This source of energy brings a stable electricity production. The main cons of nuclear energy are the following. Uranium 235 is not renewable, high upfront costs as numerous levels of safety are required, nuclear waste is a complicated issue that often involves political and societal concerns and the potential malfunctions that can be catastrophic, even if they are extremely rare and happen with precise external situations. On the plus side, it can be mentioned that, except for building nuclear power plants, no carbon dioxide is released into the atmosphere, but mostly water vapor. Comparing the solar and wind power plants to the nuclear power plants electric production, the latter occupies far less space per MW produced. This source of energy produces high levels of energy compared to most power sources and provinces a constant production, making them great providers of baseload electricity.

What influences the price of energy in the EU?

Different supply and demand conditions influence the energy price in Europe. This includes the geopolitical situation, the different national energy mix, the import diversification, the network costs, the environmental protection costs, the weather conditions, the levels of subsidies and taxation. Global energy demand has increased drastically. 

The prices of natural gas are four times higher in late October 2021 than it was in spring 2021.

The evolution of the gas prices directly affects the evolution of the electric ones. As it can be seen, the trends of the evolution of the electric prices are similar for the following EU Member States.

Published by Bruna Alves, October 2021

Global gas market dynamics influence European ones. During the first trimester of 2021, gas demands went up due to unexpected extreme climate events. Cold episodes in East Asia and North America happened such as the Winter Storm Ur, heatwaves in Asia and drought in several regions, including Brazil. A persistent important Asian demand, essentially led by China, Japan and Korea, lasted throughout the year. Additionally, global demand for gas rose as economic recovery is picking up from the COVID-19 crisis.

On the supply side, the worldwide liquefied natural gas production was beneath expected production, explained by a series of outages and delays and delayed maintenance from 2020. This can be observed as the lower-than-expected gas volumes coming from Russia to Europe. Very limited extra capacity has been offered by Gazprom to alleviate pressure on the EU gas market. In many EU countries, natural gas is a main element of energy and more precisely of electricity production; in fact, natural gas represents approximately a quarter of the EU’s overall energy consumption. Hence, an elevation on gas prices directly impacts electricity prices. Regional weather conditions tackled down renewable energy productions with low water and wind over summer. If the energy production is low in Europe, it comes from abroad, but to what extent?

Are the EU imports dependent?

European gas production declined tremendously in the last 20 years, from 233.5 billion cubic meters in 1998 to 47.8 in 2020; a fall in production of approximately 80%. Production in Europe faced its peak since the turn of the century for the most part because reverses have been depleted or have become too expensive to exploit. To face the mostly steady gas consumption in Europe and facing the massive fall of internal gas production, the EU relies most of its consumption on imports.

Natural gas production in the European Union from 1998 to 2020 (in billion cubic meters). Published by N.Sönnichsen, August 26, 2021

Natural gas consumption in the European Union from 1998 to 2020 (in billion cubic meters). Published by N.Sönnichsen, August 26, 2021

Similar trends can be observed for coal about production falling together with consumption, but the latter one has a slighter tendency.

Europe imports most of its crude oil, natural gas and solid fossil fuel from abroad. Russia is the main EU supplier of crude oil, natural gas and solid fossil fuels. Moreover, it can be stated that the EU concentrates mostly of its imports on few external partners. In 2019, around three quarters of the EU’s imports of natural gas were from Russia (41%), Norway (16%), Algeria (8%) and Qatar (5%), which places Europe as the biggest importer of natural gas in the world. Similar dependency can be verified for crude oil and solid fossil fuels. In total, nearly 90% of EU natural gas was imported.

The dependency rate can be used to illustrate the degree to which an economy relies upon imports to meet its energy needs. It is calculated by the share of net imports (imports minus exports) in gross inland energy consumption (which means the sum of energy produced and net imports). As it can be perceived, the EU dependency rate on energy imports grew from 2000 to 56% to 61% in 2019.

How to reduce the dependency rate?

A way of diluting negative aspects of import dependency and improving its energy security is for the European Union to have consequent and important enough storages of fossil fuel. These storage facilities play a role in security of supply but also in price stability. Fluctuations in the consumption are then absorbed, especially during consumption peaks in winter. Nevertheless, the natural gas storage facilities of Europe during the first nine months of 2021 was 20% lower than the same period of last year. Indeed, occupancy rate fell from 95% to 74,6%, according to Gas Infrastructure Europe. The weather conditions of the harsh winter and hotter summer, that decreased electricity production from hydroelectric power plants due to dryness explained partly why gas storages depleted compared to last year.

As mentioned earlier, natural gas is approximately 25% of the EU’s overall energy consumption; the power generation sector represents around 26% of its use, industry 23% and the rest is for residential and services sectors (predominantly for heating buildings).  Natural gas can be transformed into liquified natural gas (LNG) that is in a liquid form to facilitate its transport and storage. Gas is then cooled at around – 162ºC and cleaned of its impurities. LNG occupies around 600 times less volume than gas at standard atmospheric pressure, hence LNG can be shipped over long distances and do not have to go through pipelines. Before being used, LNG is re-gasified and distributed through gas networks. LNG is calculated as being a different source of fossil fuel than natural gas and can be a way to diversify the energy sources of supply. This process is dependent on several factors such as the cost of liquefaction and transport or the overhaul of NG supply and demand balance.

To improve its energy security system, the EU must complete its internal gas market both in terms of its infrastructure to grant access to all Member States to LNG, and to send the right price signals to direct efficient LNG investments where they are needed. The EU must also manage its storage facilities more efficiently through cross-border use and regional action and emergency plans.

In response to the spike in energy prices in Europe, the EC published a toolbox for action and support, in order to help industries and consumers. Short- and medium-term actions are planned.

In the short term, Member States can allow temporary deferrals of bill payments to avoid consumers any disconnection for the energy grid. In addition, they can subside citizens that are financially the most at risk of not being able to pay their energy bills. These social payments can be financed by EU emissions trading systems (ETS) revenues.

EU ETS are part of a broader EU policy neutral impact on climate change by 2050 and the biggest worldwide carbon market. The carbon trading system allows buying and selling permits and credits to licence the permit holder to emit carbon dioxide. The “cap and trade” model is used for carbon dioxide transactions. A general legal limit on emission is set (the cap) over a period of time, and a specific number of permits is granted to the GHG emitters. To reduce, over time, the GHG emissions, this limit is reduced over the years. Each permit is equivalent to one tonne of carbon dioxide equivalent (CO2e).

Each polluter holds a certain number of permits allowing a certain amount of CO2e per year. If an installation emits more than its permits allow (installation 2), then it must buy, usually by auction, permits to other installations that do not pollute as much as they are allowed to (installation 1).

Hence, different incentives are present. Producers must put a price on their emissions and are pushed to reduce them to the bare minimum to avoid costs. Producers monitor and report their CO2 emissions. Moreover, investments can take place in new technologies that produce less GHG emissions.

A simplified explanation of how the EU ETS works

As in all policies, flaws are present and one of them is the fact that the energy-intensive industries are the main beneficiaries of the ETS scheme as they are allocated with allowances for free, that constitute 43% of all allowances circulating in the EU.

Furthermore, a minimum consumption per household or inhabitant can be defined and direct support granted to assure it. Financial help to industries that are aligned with EU state aid rules. The EC designed a programme to enhance cooperation and monitoring of the energy market, avoiding anti-competitive behaviour and supporting transparency and flexibility on energy matters at the international level.

In the medium term, increases in investments in renewables and energy efficiency, improving energy storage capacity, exploring a potentially voluntarily joint gas procurement by Member States, setting up cross-border regional gas risk groups to assess risks and to empower consumers to easily switch suppliers and produce their own electricity.

In France, the principal components of the electricity market are the electricity producers, the transmission system operators that manage the power grid that is unique, the electric power distributor that delivers electricity to the final consumers and the energy suppliers that take care of the commercialisation of electricity.

Historically, France had two suppliers (EDF and Engie) that produced and sold its own electricity, that still in 2021 produced around 95% of the national electric power. From the 1990s, under European directives, the market was opened up to competition in different sectors to create a common European energy market. In fact, the energy monopoly was perceived as contrary to the principle of market opening and competition. In July 2007, private individuals saw its number of electricity suppliers explode to reach more than forty of them, and could decide between historical and alternative suppliers. Hence, some of them are independent, decentralised electricity producers and “complement” electricity production by supervising mostly renewable plants or in specific cases natural gas facilities. Thus, among these new suppliers, if many can be considered as producers, their production is minimal, most of them base their offers on energy bought in bulk.

Regulated tariffs are set by the French public authorities and solely sold by EDF for the electricity and Engie for the gas. Consequently, these regulated tariffs guarantee a certain price stability and are not vulnerable to important price variations; prices remain influenced by costs of production, transport etc. Independent suppliers buy from these two historical entities electricity quotas that they propose to the market under their own contracts. The alternative suppliers propose a diversity of contracts to final consumers that can be cheaper than the ones proposed by EDF and Engie. Once these quotas are depleted, they buy their energy to the European market that is dependent on demand and supply, and at the mercy of the fluctuations of market prices.

Since Law Nome of December 2010 (Loi Nome nº 2010-1488 du 7 décembre 2010), EDF must yield an amount of its production to alternative suppliers. This imposed competition undermined the French monopoly on the electricity market but yet distributed decarbonised energy at a price protected from too pronounced variations. These decisions had the potential effects of fragilizing final consumers in case of important price fluctuations on the market, as it is happening in 2021.

In response to the salient rise of regulated tariffs of electricity and gas, by repercussions, the French government decided to freeze the regulated tariffs of gas over the October 2021 levels. As gas prices influence electricity prices, the French government assured that the electricity regulated tariffs will not rise by the end of the year 2021, until a rise of 4% January 2022. An exceptional financial aid will be granted to 5,8 million French citizens that are already receiving the energy support.

The electricity crisis is part of a more global energy crisis that touches the whole world. Regional but also international factors are at stake. At the regional level, a peak of consumption of gas has been present during the beginning of 2021 as well as during summer. Energy Market liberalisation in Europe has weakened energetically resilient Member States that have to face arbitrary competition. The rush to renewables, without pragmatic concerns about the limit they impose about their utilisation and the power they produce, brought the EU to more energetic uncertainty as being the victim of the weather’s goodwill. Worldwide fossil fuel reserves have reached or are reaching their peak of production. European energy production reached its peak at the turn of the century. European energy consumption is mostly steady. Import dependency is increasing, common cross-border regional actions and infrastructures to answer any critical situation are lacking, hamstring European energy security.

Hence, the gross available energy Europe is getting every year is decreasing, physically speaking impeding any return to any pronounced long term economic growth. The issue is about the volume of energy received, much less about the price paid to get it. The import dependency experienced by the European Union, and the lack of effective measures proposed by politicians, mostly because they do not have any significant pillar to leverage any pro-European decisions on producing countries, cripple the economy. Power is out of their hands.

Drastic energy sobriety is the major answer to the worldwide depletion of fossil fuels, upon which the entire production system is based upon. Physical barriers to energy use are imposing themselves.  

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