How to support consumers without upending markets
We are assisting to the most serious European energy crisis since the 1970s, due to Russia’s squeeze on gas supplies after Moscow’s invasion of Ukraine in February. For this reason, European Union wants energy companies to join forces in order to gain a price-negotiating power against overseas exporters, while considering a greener industrial base.
The gas market
Over recent months, Russia has progressively restricted the deliveries of gas in order to squeeze the supply to EU countries. On 26 September, flows through the Nord Stream pipelines to Germany were completely stopped after severe damage by explosions that the European leaders have blamed on Russian sabotage.
During the European summit in Brussels, which began on 20 October, European Union leaders agreed to maximize their efforts to reduce energy demand, secure supplies and bring down prices. Debates were continued over how to intervene to relieve the pain of excessive bills for consumers without creating undesirable consequences, such as saddling governments with massive bills or encouraging more gas use by depressing its price through subsidies.
The augmentation of the tax burden is also caused by the digital marketplace TTF (the Title Transfer Facility, run by Dutch transmission company Gasunie Transport Services B.V.), which establishes the benchmark in energy contracts mostly based on speculation and lets gas in over 8000 miles of pipeline. It goes without saying that it affects economies far beyond the Dutch border, to the extent that it has become one of the three key markers in the global gas market (Wallace & Mackrael, 2022).
Concerning this, the commission published intervention proposals that include steps to encourage companies to pool their demand and buy gas together and rules for how gas could be shared across borders if some countries run short. European commission President Ursula von der Leyen said that the details of the measures would have been discussed by EU energy ministers at a meeting on 25 October (Mackrael & Michaels, 2022). The main results of this Council have been an Energy performance of buildings directive and the Gas package. The first one aims at having all zero-emission buildings by 2050. Buildings account for 40% of energy consumed, so better and more energy efficient buildings are likely to improve citizens' quality of life while bringing down their energy bills and alleviating energy poverty (Síkela, 2022). Then ministers held a policy debate on the gas package, which includes a proposal for a directive and a proposal for a regulation on common internal market rules for renewable and natural gases and for hydrogen. Ministers established that any actions taken must contribute to guaranteeing security of supply, lead to lower energy prices for families and businesses across the EU, while encouraging demand reductions and maintaining the integrity of the single market and working towards to the EU’s climate neutrality goal by 2050 (Transport, Telecommunications and Energy Council (Energy), 2022).
Is an emergency price cap a good idea?
Europe has always pushed suppliers to tie long-term supply deals to real-time gas prices like the Dutch benchmark, but now wholesale gas prices are five to seven times higher than in Asia, so EU leaders pushed discussions on whether to pursue an emergency limit on natural-gas prices, limiting temporarily volatility on energy markets and establishing a new trading benchmark. This proposal was among the most contentious topics at the summit: Italy, France and more than a dozen other countries called for a limit in order to help protect households and businesses, while Germany disagreed, because such a decision risked diverting supplies to other buyers and encouraging more consumption. In fact, some argue that the free market is the reason why we have 90% gas storage in the EU and so far avoided a much worse crisis, because high TTF prices only have helped attract liquified gas into Europe this year (Kalleklev, 2022). Furthermore, capping TTF prices might destroy its confidence, view the fact that the control over the market would be transferred to governments (Stern, 2022).
However, European officials claim that the loss of Russian gas have changed the market drastically, which implies that the TTF benchmark does not reflect the true market situation anymore. A common thought is that the cap could easily remove the incentive to reduce demand and would force governments to apportion gas, therefore such a cap should absolutely ensure that gas use doesn’t rise. Moreover, traders and energy executives are convinced that, even though the alternative benchmark might bring more transparency, it wouldn’t solve the shortage of supplies nor the lack of import terminals in Northern Europe. What is certain is that millions of people in central and eastern Europe cannot afford the higher gas and electricity prices caused by Russia’s invasion of Ukraine (Pop, EU's long road to capping energy prices, 2022).
Time for a green revolution, maybe
Apparently, European industrial companies are putting a brave face on it: they are implementing energy-saving measures and they are finding other costs to cut. While some are looking to coal and other fossil fuels to get them through the winter, others talk optimistically about the green revolution that the crisis is spurring. However, it is not that easy to cut the fuel out of many industrial processes, since roughly 60% of industrial gas consumption is used for high-temperature processes of 500°C and above, such as glassmaking, cement or ceramics (Hollinger, White, Speed, & Dunai, 2022). For this reason, some companies are turning to fossil fuels, in a potential obstacle for the EU’s green transition plans.
For lower temperature processes, there are more options to use renewable energy and heat pumps (Honoré, 2022). Nonetheless, even for them, alternatives are unusually scarce now. The summer’s drought has depleted hydropower capacity, while, for instance, France’s ageing nuclear reactors are unable to meet demand due to protracted shutdowns and maintenance issues. Consequently, there is a danger that governments will learn the wrong lesson from the crisis, putting near-term energy security first and leaving thinking about climate change for tomorrow (Bordoff, 2022). Still, there are some who believe the result of the crisis will be a tougher, greener industrial base. European energy officials themselves, like Mr. Vermeulen, insist that regressing on climate goals is not their aim (Reed & Krauss, 2022).
On the flipside, reduced energy consumption also means less industrial output and, in some cases, permanent shutdowns. Consumption fell by a quarter in October compared with the 2019-21 average for the month and much of the drop comes from companies cutting production or even closing. In Italy, gas consumption fell 24% in October, but other countries have had even bigger drops. Moreover, an increasing number of European businesses are looking at moving abroad, given that energy prices are much lower in the US and Asia. For this reason, Fredrik Persson, president of Business Europe, urged the energy ministers meeting on November 24 the back plans to tackle high prices including a mechanism to stop at the gas price driving up the electricity prices (Pop, 2022).
Hydrogen, a possible solution for heavy industry
The energy crisis caused by the war in Ukraine could wind up accelerating the shift to cleaner fuels, as natural gas prices have soared. In fact, even if natural gas prices in Europe slid in recent days to their lowest level since September 2021, as forecast for milder than normal climate curbed the outlook for demand and storage sites filled at full capacity, they are still much higher than two years ago, before the crunch began, so it is definitely too soon to declare victory and clean energy technologies that seemed too costly look nowadays more competitive (Climate and Resources Programme, Istituto Affari Internazionali, Rome, Italy, 2022).
A good example is provided by the Netherlands, a country where environmental concerns are a high priority, and where solar and wind power are growing fast. Furthermore, attention is currently shifting to hydrogen, a clean-burning fuel that businesses are betting will be used in large volumes to store energy and power heavy vehicles and heavy industry. Particularly, in Rotterdam is being built what is expected to be Europe’s largest electrolyser, a device that uses electric power to make hydrogen from water. It would produce “green” hydrogen, because the power would come from a giant wind farm off the coast. Someday this hydrogen could be delivered through the very same network of gas pipelines. Cas König, chief executive of Groningen Seaports, which runs the harbors at Eemshaven and nearby Delfzijl, is already expanding plans for importing hydrogen, which will be obviously needed in greater quantities than a small country like the Netherlands can produce domestically (Reed & Krauss, 2022).
Hydrogen has been declared as the fuel of the future for much of the past five decades, but critics have even suggested that its time may never come, as it remains expensive to produce and complicated to transport. Despite that, many governments and policymakers are now putting their faith in hydrogen to help them achieve net zero greenhouse gas emissions by 2050, believing the way it is produced and deployed the can be transformed through the above-mentioned electrolysers, which separate the water into its constituent elements thanks to substantial energy. In fact, ensuring that of the electrical power used in the separation is derived from renewable sources will be essential to adapting truly green hydrogen. The financial commitment required to achieve this is enormous, but there has been a dramatic change in the price of hydrogen and roughly $73bn has been committed globally to produce green hydrogen since the start of the conflict between the Ukraine and Russia. At the current prices, hydrogen derived from the clear power sources will be cheaper to produce in Europe than hydrogen from more polluting alternatives (Mbuk, 2022). However, a recent report on the behalf of 45 world leaders concluded that annual investments up to $130 billion would be needed in hydrogen by 2030 to avoid the catastrophic effects of climate change (Pfeifer, 2022).
Bibliography
Bordoff, J. (2022). Director of Columbia University’s Center on Global Energy Policy.
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Honoré, A. (2022). Deputy director of the gas research programme at the Oxford Institute for Energy Studies.
Kalleklev, Ø. (2022). Chief executive of Flex LNG Ltd.
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Síkela, J. (2022, October 25). Czech minister of industry and trade.
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