By Patricia Baruffi
The European continent has experienced a sharp hike in energy prices since the second half of 2021 due to a number of market, geographic and political factors. The situation was further aggravated by Russia’s invasion of Ukraine since February 2022 and subsequent unilateral suspension of gas supply to several European Union (EU) countries, deepening uncertainty and pushing prices to an unprecedented level.
The primary cause of the energy crisis in the continent is the post-COVID-19 economic recovery, whereas power generators that had been shut down during the pandemic could not ramp up in time to meet the greater consumption. Extreme climatic conditions, including heatwaves, also increased the demand and added pressure on electricity generation, while another reason concerns the recent scarcity of alternative energy sources for natural gas, including nuclear and hydropower electricity generation, partly linked to climate conditions, partly to EU policies towards green energy.
Furthermore, the Russian invasion of Ukraine, combined to a certain degree with decades of questionable policy decisions by some EU countries’ leaders, and the continent’s dependency on Russian oil and gas, prompted Vladimir Putin to weaponise its oil and gas resources in retaliation for a number of sanctions imposed on Russia, including on its energy industry.
European officials now recognise that Russia is an unreliable supplier but the damage has been done. The Nord Stream 1 pipeline, the largest natural gas pipeline from Russia to Europe and operational for more than ten years, supplies the EU with between 40-45 percent of its natural gas, with Germany being the largest importer, followed by Italy and the Netherlands.
As a result of the pipeline’s shutdown by Russian authorities, initially citing technical issues but later making clear in retaliation for Western sanctions, EU member states were compelled to stock up on gas, through pipelines and liquefied (LNG) imports, in order to fill their underground storage capacity to at least 80 percent by 1 October. With most EU members now having met this goal one month ahead of schedule, natural gas prices have sharply fallen and are projected to continue falling.
On 5 August 2022, the EU member states agreed to reduce the overall gas demand by 15 percent in the period between August 2022 and March 2023 to reduce the risk of shortages during the winter. Norway is also providing more gas to the continent, while the United States (US) and Canada have increased deliveries of LNG, at the same time that new deliveries are planned from Israel and Egypt and a memorandum of understanding for increasing gas deliveries was signed with Azerbaijan. At the domestic level, and with winter just around the corner, governments are also taking measures to mitigate both the increase in energy prices and its economic impact.
It is still uncertain how the crisis will play out in the next couple of months and how Russia’s next steps will influence the scenario. The weather itself remains a key variable; the European Centre for Medium-Range Weather Forecasts projects a slightly warmer winter than usual for the continent.
Yet, EU leaders believe that the pre-war situation with abundant and cheap fossil fuels will not be coming back and that the best way out is to accelerate the green energy transition in order to create energy sovereignty in Europe.
Patricia Baruffi is a Netherlands-based analyst covering the EMEA region. Claudia Gualdi contributed to this article.