As Winter Looms, Europe Faces Perfect Storm for Energy

November 29, 2021

We’re going to be on a rollercoaster as fossil fuels wind down globally, and renewable, clean energy ramps up. That was a lock even before Covid threw a tank-sized wrench in the works.
Fossil interests will work hard to blame bottlenecks and hiccups on the green transition, so I’ve been looking hard at the interlocking, interrelated forces that are going to make this winter..interesting.

Time:

Energy prices in Europe are repeatedly breaking records even before winter really kicks in, and one of the most damaging cost crunches in history is about to get worse as the temperature starts to drop. A super price spike in the U.K. last month forced some industrial companies to cut production and seek state aid, a harbinger for what could play out widely in Europe just as it contends with a resurgence of the coronavirus. For governments, it could mean tension with neighboring countries by moving to protect supplies. For households, it could mean being asked to use less energy or even plan for rolling blackouts.The trouble is that any fix is unlikely to come from the supply side any time soon, with exporters Russia piping only what it has to and Qatar saying it’s producing what it can. The energy industry is instead faced with relying on “demand destruction,” said Fabian Roenningen, an analyst at Rysted Energy.“We have seen it over the last couple of months already, and in many industries, it will most likely continue and even increase,” he said from Oslo. “It’s just not profitable to operate for a lot of the players in the current market conditions.”

The outlook adds to the sense of foreboding in Europe. The region is back at the epicenter of the pandemic again with Covid-19 cases surging and fears about a new variant identified in South Africa swirling the globe. Restrictions are being tightened in some countries, while household budgets are being squeezed by rampant inflation. On top of that, freezing weather could mean the lights going out. A return to lockdown like in Austria would help curb power demand, though few governments want to do that.

France, Europe’s second biggest economy, is particularly at risk. The possibility of a chill in January and February is causing concern for the nation’s grid operator. Availability at nuclear stations, the workhorse of the French power system, is low after the pandemic delayed the maintenance of some reactors, according to a report on Nov. 22.

Power prices there are the highest since 2012 as a cold blast creeps into France and is expected to take hold by Monday when workday demand starts to rise.

Llewellyn King in Forbes:

If Russia is to blame — which prima facie appears to be the case, as Europe gets fully half its natural gas from Russia — then the Europeans are to blame too. The gas buyers of Europe and their political masters bet that Russia needed their market more than they needed Russia’s gas.

It was a gamble and Europe lost. Russia won and has been cutting flows of gas into Europe, sometimes by two-thirds; then, capriciously, increasing them after the damage was done — increasing them to keep the markets see-sawing and prices and the future unsteady.

At the heart of that bad bet was the belief of many gas buyers that they could do better in the spot market than they could if bound to long-term, fixed contracts, some of them take-or-pay. Now the buyers who have long-term, fixed contracts are safe but worry if their suppliers will call force majeure and cut supplies.

International Energy Agency (IEA):

The historic plunge in global energy consumption in the early months of the Covid-19 crisis last year drove the prices of many fuels to their lowest levels in decades. But since then, they have rebounded strongly, mainly as a result of an exceptionally rapid global economic recovery (this year is on track for the fastest post-recession growth in 80 years), a cold and long winter in the Northern Hemisphere, and a weaker-than-expected increase in supply. 

Natural gas prices have seen the biggest increase, with European and Asian benchmark prices hitting an all-time record last week – around ten times their level a year ago. US month-ahead natural gas prices have more than tripled since October 2020 to reach their highest level since 2008. International coal prices are around five times their level a year ago, and coal power plants in China and India, the world’s two largest coal consumers, have very low stocks ahead of the winter season.

The strong increases in natural gas prices have prompted substantial switching to the use of coal rather than natural gas to generate electricity in key markets, including the United States, Europe and Asia. The increased use of coal is in turn is driving up CO2 emissions from electricity generation globally.

In terms of supply, both natural gas and coal have faced constraints. The Covid-19 lockdowns pushed some maintenance work from 2020 into 2021, which weighed on supply at a time when demand was recovering. The impact was particularly tangible in the UK and Norwegian areas of the North Sea Continental Shelf. In addition, unplanned outages at LNG liquefaction plants, upstream supply issues, unforeseen repair works, and project delays all further tightened the global gas market. The amount of global LNG supply affected by outages in the first nine months of 2021 was up by an estimated 27% compared with the average for the same period throughout 2015-2020 – with most of the outages unplanned. Russia’s Gazprom, while honouring its long-term supply contracts, reduced its exposure to short-term sales and has not replenished its own storage sites in Europe to the levels seen in previous years.

IEA again:

The steep rise in European gas prices has been driven by a combination of a strong recovery in demand and tighter-than-expected supply, as well as several weather-related factors. These include a particularly cold and long heating season in Europe last winter, and lower-than-usual availability of wind energy in recent weeks.

European prices also reflect broader global gas market dynamics. There were strong cold spells in East Asia and North America in the first quarter of 2021. They were followed by heatwaves in Asia and drought in various regions, including Brazil. All of these developments added to the upward trend in gas demand. In Asia, gas demand has remained strong throughout the year, primarily driven by China, but also by Japan and Korea. On the supply side, liquefied natural gas (LNG) production worldwide has been lower than expected due to a series of unplanned outages and delays across the globe and delayed maintenance from 2020.

“Recent increases in global natural gas prices are the result of multiple factors, and it is inaccurate and misleading to lay the responsibility at the door of the clean energy transition,” said IEA Executive Director Fatih Birol.

I’ll be interviewing an expert on Northern European wind later this week, Hannah Bloomfield at University of Bristol.

Hannah Bloomfield PhD in Energy Post EU:

So should we be worried about this period of low wind? In short, no. The key thing here is that we’re experiencing an extreme event. It may not be the traditional definition of extreme weather (like a large flood or a hurricane) but these periods, known in energy-meteorology as “wind-droughts”, are becoming critical to understand in order to operate power systems reliably.

Recent research I published with colleagues at the University of Reading highlighted the importance of accounting for the year-to-year variability in wind generation as we continue to invest in it, to make sure we are ready for these events when they do occur. Our team has also shown that periods of stagnant high atmospheric pressure over central Europe, which lead to prolonged low wind conditions, could become the most difficult challenge for power systems in future.

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