Europe's energy crisis: A switch back to coal is on the cards

UK among nations facing a ‘bleak winter’ with consumers at risk of being unable to heat their homes

European utility providers are preparing to switch to alternative energy sources to meet demand, including carbon-rich coal, as gas supply problems continue, analysts have said.

If energy providers are forced to compete for the limited amount of gas supply, prices will continue to soar with costs "inevitably" passed down to consumers.

“The long and short of it is that, unless there is a mild winter or an ease in demand, the EU utilities will have to look to alternative energy sources to meet the demand," said Slava Kiryushin, global head of energy at DWF, an international provider of legal and business services.

"While most may read 'alternative energy sources' as "renewables", the energy market may have an alternative definition: coal.”

While upping coal production will not be welcomed by many as Europe looks to lower its carbon emissions to meet climate change targets, it is a far more economic source of fuel, Mr Kiryushin said.

"It remains to be seen how the European utilities will balance the rise in carbon emissions and consumer sentiment against the unavailability or unaffordability of power from less carbon-intensive sources."

European coal lined up for delivery next year rose to its highest level since 2008 on Friday, on strong demand from power stations and low stockpiles.

Coal for Amsterdam, Rotterdam and Antwerp gained 2.6 per cent to $137 a tonne, as soaring natural gas costs are continuing to push European utilities toward coal-fired generation.

Coal will not entirely solve Europe's energy woes

However, coal does not entirely solve the continent’s energy crisis as exports of the commodity from Australia, South Africa and Colombia remain hampered by the pandemic and supply chain challenges, compounding the effect of low Russian supply.

“Stock levels across Europe are low and as on the gas market, coal supply from Russia has fallen lately,” trading group Energi Danmark said.

The European Commission is developing a “toolbox” of initiatives to help the economic bloc tackle surging energy prices.

However, several countries are already applying national measures to protect consumers from a sharp rise in bills with Spain, Italy, Greece and France rolling out action such as subsidies and price caps in a bid to shield consumers from rising costs.

On Friday, Iberdrola’s chief executive Ignacio Galan said the situation would normalise in five to six months, however, benchmark gas prices have more than tripled this year.

With Europe’s energy crisis dragging on, margins for next year are also starting to favour coal-fired power, spurring utilities to restock.

With power generation from renewables not able to "meet the peak demand that a cold winter could create", Mr Kiryshin said it would be "near impossible" to create sufficient additional generation in such limited time.

"The next three to four months may lead to unexpected consequences for all industries with a particular hit being taken by those that are energy intensive," he said.

UK also turns to coal-fired power stations

Britain has also been forced to run coal-fired power stations to secure energy supplies, electricity generation company Drax said.

The country is particularly exposed to Europe's energy crisis due to its reliance on natural gas to generate electricity with the price of European gas futures more than doubling since May.

"These facilities have fulfilled a critical role in keeping the lights on at a time when the energy system is under considerable pressure," Drax said.

Drax, which owns the nation's biggest facility in Yorkshire in northern England, had planned to switch from coal to biomass this year to help tackle climate change.

The group could now extend the use of coal, chief executive Will Gardiner said.

"We're very aware that the country might have a significant problem and if there's something Drax can do we will absolutely think about doing that," he said.

Any delay could complicate Britain's plans to scrap coal-powered electricity generation by October 2024, as Prime Minister Boris Johnson's government seeks to reduce Britain's carbon emissions to net zero by 2050.

Wholesale gas prices fall as Norway increases flows

There was some respite for gas suppliers on Friday with British and European wholesale gas prices falling for a third straight day as Norwegian gas flows increased, alleviating some concerns over tight supplies this winter.

Norwegian flows to Europe stood at nearly 318 million cubic metres on Friday morning, up from 289 mcm on Thursday, Refinitiv data showed.

"On the short end of the curve, increased supply from Norway and some very windy autumn weather in Germany has limited the need for gas, but the low storage levels and the ongoing concerns about Russia and the Nord Stream 2 pipeline continue to cause some uncertainty. Nonetheless, the market appears to fall further early Friday," said analysts at Energi Danmark in a morning note.

From October 1, commercial flows will start on the 724-kilometre North Sea Link, the world’s longest sub-sea power cable, connecting British and Nordic power markets for the first time.

Supply will initially be limited to about half of its 1,400-megawatt capacity, with plans to gradually increase to full output by the start of next year.

For Norway, the timing is less of a boon, with a dry summer causing a huge deficit in its traditionally plentiful hydropower resources. Low reservoirs at home will limit producers’ ability to export power to Britain. and mainland Europe to slightly more than a third of maximum capacity this winter, said Olav Johan Botnen, a senior analyst at Volue Insight.

“Almost all of that export will go to the UK this winter, as we expect prices there to be higher than in the rest of Europe,” he said.

Norway is already connected by sub-sea cables to Germany, the Netherlands and Denmark, however, tempted by high power prices in Europe this summer, Norwegian hydro producers exported more electricity than usual, while less rain than normal curbed inflows to reservoirs. That left the Nordic region with a 22 terrawatt-hour deficit, Volue Insight data showed.

Even with reduced capacity, the interconnector can still help the UK tackle the extreme prices with recent tests on the cable indicating it can alleviate or exacerbate the pricing situation, depending on the direction of test flows.

Britain faces bleak winter

However, Britain will face a "tough winter" if temperatures are colder than normal, Mr Gardiner said.

His comments echo the words of analysts as well as Britain’s Business Secretary Kwasi Kwarteng who also predicted a "very difficult winter" for many people in Britain because of surging fuel prices.

Stock markets flashed red on Friday as the energy crisis coupled with soaring inflation and supply chain problems indicated the difficult times ahead for consumers, who face a higher cost of living through the colder months.

The regionwide STOXX 600 index slipped 0.78 per cent on Friday after a three-day run of gains, while Britain's FTSE 100 also weakened as more gas companies looked likely to go bust and UK energy suppliers warned that some consumers would struggle to afford to heat their homes.

“Persistent and rising inflation would suggest that central banks have to act soon to get the situation under control, which means interest rate hikes sooner rather than later. There is a bleak winter ahead given pressure on energy prices, supply chain problems and a sharp hike in the cost of living,” said Russ Mould, investment director at AJ Bell.

“All these factors threaten economic growth, so central banks have a fine line to tread – raise rates too quickly and the economy could falter, but don’t act and risk inflation racing away."

With utility companies who had not already bought their gas now being forced to pay more for it than they promised to sell it for, six UK energy suppliers serving about 1.5 million households have gone out of business this month.

Energy companies' pleas for help from the UK government fell “on deaf ears", said Peter McGirr, the boss of collapsed firm Green Energy.

The company was among the suppliers to go out of business in September with its founder and chief executive now warning that "a majority" of the 40 energy companies he has spoken to in recent days are likely to collapse without further Government support.

UK energy supplier Symbio stopped accepting new customers on Friday citing “technical issues” following Igloo, Ampower, Utilita and Neo Energy, who have all decided to stop taking new customers.

The crisis is also hitting linked companies, such as auto-switching service Flipper, which automatically changed customers to the cheapest deal on the market and was forced to close on Thursday.

Alan Thomas, UK chief executive at Simply Business, says the rising gas prices and energy bills will ultimately affect all small business owners who are already struggling to recover from the economic fallout from Covid-19.

With SMEs already losing "an eye-watering" £126.6bn ($173.18bn) as a result of the pandemic – equating to more than £22,500 each, said Mr Thomas, whose company is one of the UK’s largest providers of small business insurance, the prospect of further financial challenges will be a blow.

“We’ve already seen the impact of rising gas prices on larger firms – with the food and drink industry suffering in particular. Small businesses are also set to feel the consequences, and reduced levels of cash-flow and liquidity will only make things worse for many,” he said.

“Why is this important? The UK’s six million SMEs account for 99 per cent of all businesses and contribute trillions of pounds to the UK economy. Put simply, the UK’s recovery depends on small businesses bouncing back.”

Updated: October 7th 2021, 1:43 PM
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