Soaring energy costs in Europe spark winter fears

Governments scrambling to find ways to limit costs to consumers

Scant natural gas reserves have propelled wholesale prices of gas and electricity skywards across Europe, and fears are growing the increases will be passed on to consumers in their utility bills.

The scarcity of resources could even lead to possible shortages in the event of a cold winter.

In the UK many people will see their gas and electricity bills increase next month after the nation’s energy regulator approved a 12 per cent price increase for those without contracts that lock in rates. Officials in Italy said that prices will increase 40 per cent for the quarter that will be billed in October.

And in Germany, retail electricity prices have already hit a record 30.4 cents per kilowatt hour, up 5.7 per cent from a year ago, according to comparison site Verivox.

That amounts to €1,064 ($1,252) a year for a typical household. And prices could go higher still because it can take months for wholesale prices to be reflected in residential bills.

Madrid resident Nieves Leal has already seen her electricity bill increase from an average of €90-€100 ($106-$118) every two months two years ago to €158 ($187) in June, according to her latest invoice.

News of all-time high wholesale prices and the political debate around them has her worried since average prices have already risen 35 per cent over the past year.

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Even if I made twice what I make, I don’t think any family can afford these abusive prices
Nieves Leal, resident of Madrid

Ms Leal, 63, earns €500 ($590) a month cleaning houses part-time. She and her daughter who lives with her have stopped buying clothes, downgraded their electricity contract to the bare minimum to power appliances, and cook, do laundry and iron only after 2pm or on weekends, when rates are lower.

“It’s shameful but I have no other choice,” she said. “Even if I made twice what I make, I don’t think any family can afford these abusive prices.”

How Europe is combating the energy rises

There are several causes for the price increases, energy analysts say, including tight supplies of natural gas used to generate electricity, higher costs for permits to emit carbon dioxide as part of Europe’s fight against climate change, and reduced supply from wind in some cases. Natural gas prices are lower in the US, which produces its own, while Europe must rely on imports.

To mitigate the increases, Spain’s Socialist-led government has scrapped a 7 per cent tax on power generation that was being passed on to consumers, cut a separate energy tariff on consumers to 0.5 per cent from 5.1 per cent, and imposed a windfall tax on utilities. Italy is using money from the emissions permits to lower bills. France is sending a €100 “energy cheque” to those already getting support to pay their utility bill.

Italy’s ecological transition minister, Roberto Cingolani, said the government is taking steps to mitigate costs from “international circumstances” and “to ensure that the transition towards more sustainable energy does not penalise families”.

Analysts at S&P Global Platts say electricity prices have risen because of strong demand from places such as data centres and electric cars, but above all because of the increase in the price of natural gas used in generating plants.

Utility companies’ exposure to natural gas prices has increased as emissions-heavy coal plants have been retired, while utilities face higher costs for carbon allowances required by the European Union’s emissions trading system, which is aimed at reducing emissions of greenhouse gases.

Natural gas prices have soared to a record above €72 per megawatt hour on Europe’s TTF marketplace. Factors pushing up prices are strong demand in Asia and a move away from linking prices to the price of crude oil that exposes Europe more to market fluctuations.

Nord Stream 2 to be fast-tracked?

One question mark is the recently completed Nord Stream 2 pipeline that would bring gas from Russia’s Gazprom to Western Europe. German and EU regulators can take months to complete regulatory approval.

But “given the tightness of the EU gas market and the prevailing high prices, we expect that decisions will not take the full allotted time”, said Trevor Sikorski at UniCredit Bank.

The tight gas market could bite even more sharply if there is an unusually cold winter. That is because European distributors did not refill reserves depleted last winter as they typically have done in summer months.

In March 2018, when the late freeze known as “the beast from the east” hit Europe, industrial users in the UK got notices there was a risk of interruption, although it did not come to that.

Could Europe run out of gas?

“The short answer is, yes, this is a real risk,” said James Huckstepp, manager for EMEA gas analytics at S&P Global Platts.

“Storage stocks are at record lows and there isn’t currently any spare supply capacity that is exportable anywhere in the world.”

The longer answer, he said, is that it’s “hard to predict how it will play out”, given that Europe has never run out of gas in two decades under the current distribution system.

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The one thing we cannot afford is for the social side to be opposed to the climate side
Frans Timmerman, EU

Even if the most dire scenarios do not become reality, drastic increases in energy spending will hurt the poorest households. Energy poverty – the share of people who say they can not afford to keep their homes adequately warm – is 30 per cent in Bulgaria, 18 per cent in Greece and 11 per cent in Italy.

The European Union’s climate chief said this week that the 27-nation bloc should ensure that the most vulnerable people will not pay the heaviest price of the transition to greener power, and pledged measures guaranteeing equal burden-sharing across society.

“The one thing we cannot afford is for the social side to be opposed to the climate side. I see this threat very clearly now that we have a discussion about the price hike in the energy sector,” said Frans Timmermans, the European Commission vice president in charge of climate issues.

Updated: September 16th 2021, 4:24 PM
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