Here’s What’s Behind Europe’s Rising Energy Prices

Rising natural gas prices have rattled the UK and the rest of Europe, causing spikes in electricity prices, raising bills for consumers, putting pressure on energy suppliers and upsetting industries.

The consequences of turmoil come daily as factories close, ministers meet with business leaders to find solutions, and idle coal-burning plants are put into service to provide more power.

The crisis turned geopolitical on Wednesday, when US energy secretary Jennifer Granholm targeted Russia, Europe’s largest gas supplier. The United States and its allies “must be prepared to continue to stand up when there are players who can manipulate supply to benefit themselves,” he said.

there are doubts He said Moscow is using gas markets to pressure Europe to sign a giant new pipeline to Germany called Nord Stream 2. Objections to the project.

“We are with our European allies to ensure you have an adequate and affordable gas supply,” Ms Granholm said this winter.

The Paris-based watchdog International Energy Agency also urged Russia on Tuesday to increase gas supplies to Europe. An opportunity for Russia to underline its identity as a reliable supplier to the European market.”

Russian gas company Gazprom did not immediately respond to recent criticism. A spokesperson previously said: “Our mission is not to ‘reduce the concerns’ of an intangible market, but to fulfill our contractual obligations to our customers.”

A number of factors are at play in what appears to be the most violent energy struggle in the UK. It shows, among other things, that the shift from fossil fuels, which cause emissions like coal and natural gas, to renewable sources like wind and solar, although necessary to combat climate change, is vulnerable to disruption.

“The biggest thing that made me realize is that we still have a long way to go,” said Cathy McClay, commercial director at Sembcorp Energy UK, a power provider.

Here’s a look at the key factors behind the energy price squeeze.

Natural gas prices are rising.

Subdued demand post-pandemic has boosted natural gas prices globally. Shipments of liquefied natural gas to markets such as China, South Korea and Brazil have increased as higher prices there have drawn, resulting in fewer deliveries to northwest Europe.

Weather also played a role. Low temperatures at the end of last winter in Europe increased gas demand for furnaces at a time when suppliers often filled storage tanks; this leaves the area potentially vulnerable if the coming months are cold. In this case, demand will drag down supply rapidly, drive prices higher and threaten the closure of energy-intensive industries such as steel and fertilizer manufacturers. These concerns have already made natural gas prices skyrocket.

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

In Britain, whose markets closely mirror those of the continent, gas prices rose by nearly a quarter last week, at around $25 per million British thermal units, nearly five times higher than they were a year ago.

“These are insane levels compared to the levels we’re used to,” said Mark Devine, a trader at Sembcorp. The rising cost of natural gas is reflected in electricity bills as gas-fired power stations are the single largest source of electricity in the UK and most of the rest of Europe. Analysts say higher carbon taxes are also driving up energy prices.

“High gas prices are the main driver behind high electricity prices right now,” said Glenn Rickson, head of energy analytics for Europe, Middle East and Africa at S&P Global Platts, a market research firm.

Britain’s climate goals are partly to blame.

The UK is pursuing increasingly ambitious targets to reduce emissions to combat climate change. This policy has reduced carbon emissions, but resources such as wind and solar are subject to change.

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

The British government has also allowed companies to close gas storage facilities in recent years, leaving the UK with little margin in case of supply disruptions or unexpected increases in demand. Analysts say the country is turning its back on Europe for gas storage, but that could be a risky strategy after Brexit.

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

In the first half of September, low wind speeds meant the turbines’ output fell sharply, while at the same time many gas-fired plants were idle for maintenance.

“We are currently in a transitional system,” said Rajiv Gogna, partner at LCP, a consulting firm. The capacity of the system is tested when the wind slows down.

UK power grid operator National Grid is turning to standby power generators, companies with idle coal or gas-fired power plants that can be commissioned in a shortage. But these operators “knew that most, if not all, would be required, so they could avoid paying a substantial premium,” Mr. Gogna wrote in a blog.

The grid paid around £150m ($205m) for this backup electricity for two weeks this month; typically it pays around £20m a week.

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

Electricity prices were rising even before the fire. Prices briefly touched £2,500 per megawatt-hour as firefighters fought the fire, which is a wholesale measure – about 70 times the average price in 2020.

“Six or seven things went wrong at once,” said Edgar Goddard, a former director of National Grid and a consultant at EPNC, who now advises on electrical issues.

The price hike couldn’t have come at a worse time.

Britain’s energy regulator Ofgem has already raised the ceiling on standard energy rates for millions of consumers by around 12 percent, citing higher natural gas prices.

For many households, the spike could not come at a worse time: general inflation is rising in the UK and the government has begun to cut back on some of its pandemic financial support, including the leave program and low wage support. People who come in what is known as universal credit.

Some of the dozens of smaller electricity and gas suppliers that buy energy in bulk and then offer low-cost contracts to consumers are understaffed by the jump in prices and are starting to go out of business, potentially leading to less competition.

Analysts say many cannot afford to keep their low-cost energy supply commitments, while government-imposed ceilings prevent them from raising prices to offset losses.

The British government also agreed to pay the operating costs of a fertilizer plant that was shut down due to high gas prices. cause a shortage of carbon dioxide for various industries and raising fears of food shortages.

Will the situation get worse?

Winter is often a stress test for energy systems. More production facilities will be reopened in the UK and more gas could come to the market, especially from Norway, which has recently said it will increase production. But demand will also increase sharply.

Mr Gogna said cold weather, low winds across Europe or other problems could lead to “higher and volatile prices in the market, significant opportunities for traders and increased bills for consumers”.