Learning from Europe’s Energy Crunch

January 18, 2022

Fatih Birol is Executive Director of the International Energy Agency. The crunch he is talking about here is the one I saw coming and described in the Yale Climate Connections video above.

Fatih Birol in LinkedIn:

Today, Europe finds itself at the heart of an international energy storm driven by turmoil in natural gas markets. Understanding the causes of this crisis – which is having serious repercussions for governments, businesses and households – and drawing the right lessons from it is essential for the transition to more sustainable, secure and affordable energy supplies in the future.

In recent weeks and months, natural gas and electricity prices have spiked to record highs – most notably in Europe and some major Asian markets – causing potentially significant economic impacts. These include multiple negative effects on power companies, other businesses and industrial sectors, and consumers – in some cases, resulting in government interventions to limit the damage. These effects are likely to have a lasting impact beyond the market tensions we are seeing this winter in the Northern Hemisphere. The increases in energy prices have also contributed to broader price inflation that is affecting many economies worldwide.

Unfortunately, we are once again seeing claims that volatility in gas and electricity markets is the result of the clean energy transition. These assertions are misleading to say the least. This is not a renewables or a clean energy crisis; this is a natural gas market crisis. It is important to work from a sound evidence base on the causes of the current market turbulence. As we showed in our recent World Energy Outlook 2021, well managed clean energy transitions can help reduce energy market volatility and its impacts on businesses and consumers. The underlying causes of today’s crisis lie elsewhere.

At the IEA, we focus on what the data tells us. When we do so, we see that a range of issues affecting the natural gas sector – including last year’s exceptionally rapid global economic rebound, outages and maintenance of key gas infrastructure, and a lack of sufficient supply from Russia – are driving broader energy market turbulence in Europe.

While liquefied natural gas (LNG) shipments are providing some additional supply to European gas markets, their timeliness is limited by longer transportation times than for pipelines. Underground storage remains the principal source of short-term flexibility for gas markets in Europe. However, lower than average inventory levels (around 50% full as of early January, compared with an average of nearly 70% over the past decade) create further security of supply concerns, especially in the event of late winter cold spells. This is why uncertainty over prices and supply remains high in early January, with most of the heating season still to come.

We see strong elements of ‘artificial tightness’ in European gas markets, which appears to be due to the behaviour of Russia’s state-controlled gas supplier. Unlike other pipeline suppliers – such as Algeria, Azerbaijan and Norway – Russia has reduced its exports to Europe by 25% in the fourth quarter of 2021 compared with the same period in 2020 – and by 22% compared with its 2019 levels. And this is despite the exceptionally high market prices for natural gas that we have seen in recent months.

Against today’s low baseline, we estimate that Russia could increase deliveries to Europe by at least one-third, or over 3 billion cubic metres per month. This equates to almost 10% of the European Union’s average monthly gas consumption – and would be the equivalent of a new LNG tanker delivering a full cargo of natural gas to Europe every day. Together with the current high level of LNG inflow, this would provide significant relief to European gas markets.

The natural gas market turmoil has spilled over into European electricity markets, which typically rely on gas as a marginal fuel and are therefore affected when it experiences high prices and volatility. This has been exacerbated by lower than average hydropower output and lower nuclear output highlighting the need for adequate investment in sources of baseload supply and flexibility.

Higher carbon prices have also played a role in pushing up electricity prices, but this needs to be kept in context. We estimate that the effect on European electricity prices of the sharp spike in natural gas prices is nearly eight times bigger than the effect of the increase in carbon prices.

Although wind power was unusually below average during the European summer, wind and solar PV provided valuable contributions to meeting European electricity demand in the fourth quarter of 2021. Wind power generation increased by 3% and solar by 20% compared with the same period a year earlier.

While today’s market fluctuations cannot be traced back to climate policies, that does not mean that the road to net zero emissions will be smooth. As the IEA has been repeatedly warning for years – including in our recent World Energy Outlook 2021 – there is a looming risk of further market turbulence if we fail to address the current fundamental imbalance in energy investment. The world has not been investing enough to meet its future energy needs – and that remains the case today. Clean energy investment is gradually picking up, but remains far short of what is required to meet rising demand for energy services in a sustainable way. It would need to triple by 2030 to get the world on track for a pathway consistent with limiting global warming to 1.5 °C.

Much stronger investment in low-carbon energy technologies including renewables, energy efficiency and nuclear power is the way out of this impasse. But this needs to happen quickly or global energy markets will face a turbulent and volatile period ahead. Energy efficiency is a particularly powerful tool for governments, businesses and consumers to reduce their exposure to fuel market volatility and enhance resilience.

The interdependence between gas and electricity security is not going to disappear anytime soon. Gas is expected to retain a major role as a source of flexibility and back-up for many years to come, especially in economies – such as Europe – that have large seasonal variations in demand.

In Europe, governments should make natural gas storage part of their security of supply risk assessments, at both a national and regional level, including risks linked to the control of storage by entities from non-EU countries. And regulations should be improved to ensure that storage levels are adequate to cover end-user needs, with mandatory minimum storage obligations assigned to all commercial operators with gas retail portfolios. In addition, provisions on transparency and congestion management can help to ensure optimal utilisation of available storage capacity.

On a global level, scaling up domestically sourced low-carbon energy supplies provides an opportunity to bring down emissions while at the same time tackling energy security issues related to fossil fuel imports and market volatility. However, potential energy security vulnerabilities do not disappear in a renewables-rich and more electrified energy system. Policy makers need to pay close attention to new clean energy supply chains, in particular the geographical concentration of many critical minerals – such as lithium, cobalt and rare earth elements – that are crucial components of many clean energy technologies.

In my view, today’s situation underlines the fact that energy systems face significant risks if they rely too much on one supplier for a key element. Today, it is natural gas; tomorrow, it could be something else, such as lithium. This is why I’m urging governments to act now to tackle today’s energy security challenges and those of the future.

2 Responses to “Learning from Europe’s Energy Crunch”

  1. neilrieck Says:

    You would think that the latest announcements from Germany and Denmark regarding early shutdown of their nuclear reactors would make them rethink that decision. I have cobbled together a few facts about nuclear here: https://neilrieck.net/docs/nuclear_energy_introduction.html

    • rhymeswithgoalie Says:

      While I groaned at the early shutdown of functioning plants, that does nothing to mitigate the cost and complexity of siting, funding, designing, and constructing new nuclear power plants.

      For all of the “scare factor” of The China Syndrome, the part of that rings true to me is the very believably human short-cutting of the construction process (in that case duplicates of weld X-rays provided by the “inspectors”). It’s a big problem in industrial-grade construction, whether driven by cost containment, eye-rolling at the perceived anal-retentive designers, sub-contracting to poorly-vetted companies, or poor ongoing training regimens.

      As for past failures, I don’t like blaming “poorly trained” workers any more than “pilot error” when the problem is poor human interface design (image-Google “complex cockpit layout”). This is also found to be a common basis of “human-caused” catastrophic errors on drilling rigs, chemical plants, etc.

      Doing nuclear power plants takes time and high levels of expertise.

      Apart from hydroelectric dams’ potential from catastrophic failure, other forms of renewable energy (solar, wind, storage) are much more resilient and/or less damaging in the face of human stupidity, venality or laziness, and cheaper and faster to put up.


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