Ukraine war, summer heat cause record gas, electricity prices in Europe
Originally published at Europe in Review on September, 2022
Natural gas prices have hit a record in Europe due to supply shortages caused by the war in Ukraine, while the costs of electricity climbed to unprecedented levels after a spike in demand for air conditioning amid summer heat waves. [Bloomberg 1] [Bloomberg 2].
Russian gas pipeline monopoly Gazprom suspended natural gas shipments to Europe on August 31 through the Nord Stream 1 pipeline for the second turbine maintenance halt in consecutive months, claiming three days of additional maintenance were required. [Bloomberg] The Russian announcement of the move had an immediate effect on natural gas prices, which reached record levels six days in a row in August. [S&P Global]. Gas shipments were scheduled to restart on September 2 but markets remained uncertain.
Klaus Muller, President of the German Bundesnetzagentur pipeline regulatory authority, subsequently announced that Germany had filled its natural gas storage tanks to 80 percent capacity and was on schedule to reach its 95 percent capacity goal by winter, assuming the stoppage of Nord Stream 1 flow was temporary. [S&P Global] However, there is a significant chance that Russia may choose not to allow Gazprom to restart the gas flow, whether in reaction to changing battlefield dynamics in Ukraine deemed to be caused by Western arms shipments, or by prior design.
Natural gas prices reached a record EUR 236 per megawatt hour at the Dutch Title Transfer Facility (TTF), equivalent to EUR 410 per barrel of oil, while German power prices reached approximately EUR 500 per megawatt hour. [Oilprice.com]
Inflation, driven by increasing natural gas prices, drove the euro below parity with the dollar for the second consecutive month. [WSJ]
Three crises
French and German electricity year-ahead futures prices rose 70 percentin one week and reached new highs across Europe, exceeding EUR 1,130 per megawatt hour in France and EUR 995 in Germany on August 26. [Bloomberg] This record price, equivalent to over EUR 1,600 per barrel of oil, is a result of three simultaneous energy crises.
Europe is suffering from the worst drought in 500 years and has endured an unprecedented heat wave which reduced hydropower reservoirs while vastly increasing the demand for electricity to support air conditioning. [CNBC] [See separate story in this Europe Monthly]
Over half of French nuclear reactors are currently offline for maintenance, meaning that France – which usually produces surplus energy that can supplement the continent – is unable to satisfy its own needs and must import energy. Meanwhile, Russian natural gas shipments are being reduced to Europe to penalise European support for Ukraine and for sanctions on Russia.
Additionally, Hungary, Slovakia and the Czech Republic experienced a temporary interruption of oil supplies from the southern portion of the Druzhba pipeline, one of the two main pipelines supplying oil to Europe through Ukraine, from August 4 through 10. [Reuters] The Ukrainian UkrTransNafta company stopped oil shipments after a Western bank refused to process Russian payments, citing European sanctions on Russia. [Ukranews] The matter was resolved when Hungarian oil company MOL, supported by payments from other oil companies, agreed to pay the transit fees. [Euractiv]
Belgian Prime Minister Alexander De Croo said that Europe should expect ten years of difficult winters and power shortages based upon current EU decisions to end Russian gas imports. [Bloomberg] Belgium in July signed a deal with France’s Engie to extend the operation of its nuclear power plants for a decade. [Euractiv]
German U-turn
German officials confirmed that the government in Berlin now planned to keep its last three operational nuclear power plants open beyond the end of the year, and to restart coal plants, in a reversal of Chancellor Olaf Scholz and the Green Party’s pre-Ukraine war plans to end nuclear power in Germany in 2022. [WSJ]
German power company RWE confirmed it would be reopening three coal plants in October at the request of the government, even as it announced a 30 percent increase in spending on renewable energy projects in 2023 to reduce future dependency on fossil fuels. [Transition Economist]
Long-term European policy initiatives to diversify away from fossil fuels also continued as Chancellor Scholz visited Norway and Canada in August. Norway supplies Europe with hydropower as well as natural gas. Comments by Scholz in Oslo focused on support for Norwegian hydropower. In Canada, discussion focused on automakers Volkswagen and Mercedes Benz securing battery materials, lithium, nickel and cobalt, and on a new agreement to provide hydrogen to displace natural gas in Germany starting from 2025. [Reuters][Bloomberg].
Talks in Norway focused on water, and Norwegian requirements to maintain hydropower output following a heat wave in Europe reducing reservoir levels. [Reuters] Norway provides power to Germany through the Nordlink cable, as well as to Sweden, Denmark and the Netherlands.
Meanwhile, short term crises continued unabated. Zaporizhzhia, the largest nuclear power plant in Europe, had to be shut down when the last transmission line connecting the plant to the Ukrainian energy grid temporarily ceased functioning after being damaged by fire, causing local blackouts in the country before power could be restored the following day. [Washington Post] [WSJ] An International Atomic Energy Agency team entered the plant to attempt to ameliorate the situation. Only one of the plant’s six reactors is currently operational. While nuclear catastrophe may be avoided, the resultant significant reduction in the capacity of the Ukrainian energy grid, now synchronised with Europe’s, may further strain continental energy supplies.
The coming months will bring increased stresses on the European energy system. A complete gas interruption from Russia is possible, which would bring rolling blackouts in multiple countries. Meanwhile, the current weather-induced strain on electricity grids is hampering preparations for the winter across the continent.
(rw/pk)