Europe is experiencing an unprecedented energy crisis.
European countries have been investing in renewable energy sources for decades, as evidenced by the advancement of the European Green Deal. This deal centers on the goal of becoming the first climate neutral continent by 2050, with many countries well underway toward that objective. The share of energy attributable to renewable sources in Europe has increased from 9.6% to 19.7% between the years 2004 and 2019. Furthermore, there are tangible goals to reach a 20% share by 2020 and 32% by 2030. However, today these sources are beginning to destabilize the power market, because they are intermittent and unpredictable compared with traditional forms of electricity production.
Recently, European energy suppliers have been unable to meet the demand from European member states for several years. The European Union has identified imported natural gas as a solution for power generation, but there are problems with this approach.
Europe’s Power Structure
In order to understand why there is an energy crisis in Europe, it’s important to look at recent news events and the history of electricity production on the continent. In 2014, European energy supplies proved inadequate during a cold winter, which led Germany’s Chancellor Angela Merkel to state: “We need more security of supply when it comes to the ability of Europe’s domestic market.” It was not until 2015 however, that European countries began to take action when it became clear that European energy providers would not be able to meet the demand for natural gas in 2016. The European Union has been attempting to address this issue by importing more natural gas from other regions. These imports have supplied the majority of natural gas for Europe, totaling 61% of the continent’s resources in 2019. However, they have faced many challenges with this plan.
First of all, there is a limited supply of liquefied natural gas available to the continent. European countries have been importing more gas in the last few decades, but there are still questions about European energy supplier’s ability to provide sufficient amounts of natural gas, especially with the cold spring the continent just experienced. Already, their natural gas storage level is 16% lower than the five-year average, which could create a serious problem as the winter months approach.
Another issue is that liquefied natural gas (LNG) infrastructures take time and money to develop into a viable solution in a given region. European countries would need a lot of advance notice if they wanted to import large quantities of natural gas to resolve current deficits.
Historically, Europe derived significant supplies of natural gas from areas like the North Sea which today are depleting and unable to meet demand. Now natural gas for generation and heating needs must be delivered over land or through undersea pipelines from Russia, a country which has historically has been a lead supplier of natural gas, providing 41% of the inventory to the EU. Most recently, the supply to the continent has seemingly been restricted, which many speculate to be a response to Germany’s slow approval process of new regulations for Nord Stream 2, a pipeline that would double the gas exports from Russia to Europe. European countries are struggling to find replacement sources for the dwindling supply.
The natural gas market in Europe has been very volatile over the past several years and will likely continue to be unstable due to competition from other areas like Asia, where inbound shipments of liquefied natural gas have been growing. Due to the high demand and China’s particularly strong presence in the market, import prices have risen by 441.3% from last year, as shown by the chart below. In particular, the price for next-day power delivery between August and September jumped by 149% in France and 119% in Germany. As the bidding war continues to grow, market price is likely to follow suit.
Meanwhile, Germany has been actively eschewing nuclear power, which normally serves as reliable baseload power source in neighboring countries (e.g. France). Germany began phasing out nuclear power after the Fukushima incident in 2011, which has increased European reliance on other sources of power generation. Germany has nuclear reactors, but will likely rely on European neighbors like France and Poland for baseload power, which only exacerbates the energy crisis.
In summary, several key factors contribute to European countries’ problems with energy supply: overbuilding of wind energy generation, mothballing of nuclear plants in Germany, reliance on natural gas as a backup fuel, limited availability and infrastructure for large imports of LNG, competition for LNG cargoes with Asia, and a general lack of overarching European energy policy.
Effects of the European Energy Crisis in the United States
So what will this mean for the United States? Unfortunately, Europe’s position has already directly affected the pricing of natural gas here in the U.S., with prices spiking for both domestic sales and LNG cargoes. Within the last three years, the correlation of our market with the global market has increased from 50% to 95%, so we should expect the European gas market to continue impacting the U.S. There have been measures taken in an effort to remediate the growing crisis, which include The International Energy Agency’s call to Moscow to supply more gas to Europe and price cap discussions by the governments of Spain, Greece, Italy, Germany and Britain. With these possible plays and the pending approval and opening of Nord Stream 2, there is a likelihood that the market could balance in the near future, providing relief across the globe.
While the energy crisis in Europe is not new, it has been worsening due to the lack of domestic natural gas supply and volatility of renewable generation sources. The European Union has been trying to find ways to diversify its energy sources, but the focus has been driven by climate policies and not focused on grid resilience. In order to meet future demand for power generation from European countries, as well as try to establish reliable baseload sources of electricity, European countries will need secure access to natural gas supplies in the short term and to revive nuclear power as an option to meet the needs of the population.
Andrew Schaper is a professional engineer and principal of Schaper Energy Consulting. His practice focuses on advisory in oil and gas, sustainable energy and carbon strategies.