Is Europe in an energy crisis, with gas prices expected to skyrocket at least until 2026? Here are the adverse factors to consider.
The energy crisis in Europe was the nightmare of 2022: but is everything really solved? The answer may not be so encouraging for the old continent, as there are many uncertain dynamics that may lead to spikes in gas prices and unexpected fuel shortages in the coming years.
Some studies predict that the threat will persist until 2026 due to unpredictable fluctuations in energy supply costs. Indeed, despite long-term uncertainty, it is now almost certain that next winter will have enough reserves to avoid traumatic shocks.
The trend of gas price reduction in Amsterdam, the EU’s benchmark, continues, albeit with conflicting signals. Gas futures in Europe fell below €24 per megawatt-hour in early June, to a two-year low, after a 30% drop in May. However, they recently increased to €27 per megawatt hour.
There is, however, no comparison to last August’s historical peak of 340 €/MWh, when Russia almost stopped all European exports as retaliation for the sanctions imposed on Moscow for its war of aggression in Ukraine.
We are living through an epochal change in the energy sector, globally and in Europe. With blackouts avoided, there are however reasons to believe that until 2026 the old continent is at high risk of energy crisis.
Europe: energy crisis until 2026? How is it possible
Futures for December 2023 trade about 8% off December 2024, according to ICE Endex data. This is a reversal from January and one to watch according to experts.
Indeed, the shift indicates that Europe is relatively well prepared for the upcoming hot season, following a mild winter that allowed it to build up stockpiles with an influx of liquefied natural gas. However, the coming years are more uncertain as the region adjusts to an energy supply revolution, with little help from the former Russian supplier.
Winter next year “looks riskier”, said Nick Campbell, director of Inspired Energy. “It will be too early to benefit from additional LNG flows from the US - scheduled to come on stream in 2026 - and the climate cannot stay mild forever. A cold winter this year could reduce storage balances before next summer”, said the analyst.
Furthermore, a gas transit deal between Moscow and Kyiv is due to expire in December 2024. This adds risks to the remaining gas flows from Russia to Europe passing through Ukraine, according to James Waddell, head of European gas at Energy Aspects Ltd. The latest round of negotiations between the two parties took place at the last minute. An agreement was reached a few days before the expiry of the previous one.
Higher gas prices would hamper Europe’s efforts to fight inflation. Soaring costs last year dampened industrial activity and reduced fuel demand, which may never return to previous levels. Traders are also keeping tabs on China’s economic recovery, which competes with the region for LNG deliveries.
Europe may still meet storage targets, relying on increased flows from North Africa and competing for LNG with Asia, according to Kateryna Filippenko, director of global gas research at Wood Mackenzie Ltd. “But any further supply disruption or abnormally cold weather can be a serious risk”, she said.
The market is expected to remain tight and vulnerable to price spikes until 2026, when massive upcoming export facilities in Qatar and the US are expected to start shipping fuel.
“After this and the next two winters, things should improve, depending on whether or not there is a lag on global liquefaction capacity”, Helge Haugane, senior vice president of Equinor ASA’s marketing, said early in May.
Gas prices in Europe: is the worst really over?
Gas prices fluctuation will be the norm in the coming months and years, as explained by Kristian Ruby, general secretary of Eurelectric, the EU energy industry association in an interview with Euroactiv.
Part of the blame goes to the energy transition. Large seasonal price fluctuations will become frequent as Europe moves forward with larger shares of renewable electricity, according to experts.
“What we experience now is what we can expect to see in a high renewable energy system”,” Ruby said. “When weather conditions are favorable, there will be severe downward pressure on prices”, he noted, saying that high rainfall in Finland, for example, had a major impact on the country’s hydroelectric capacity and contributed to the downward pressure on prices.
“It’s too early to relax. We could have a cold winter and adverse weather conditions”, which could push prices up again, he then warned, underlining that the future EU energy system will need much more storage capacity, between technologies and times, to match supply and demand on a seasonal basis.
Georg Zachmann, of the Bruegel economic think tank in Brussels, agrees that Europe is in a better position than last year, saying rising quantities of nuclear and solar energy paint a generally positive trend for next winter.
“But the challenge becomes increasingly difficult now that the European energy system will be very different in summer and winter”, he explained. As for gas, storage levels in Europe were already full in November last year and there is currently no additional storage capacity available, according to Zachmann. Additionally, solar generation in January is only about 10-20% of what occurs during the summer months, he added, saying that building more solar panels brings only limited benefits to meeting winter demand.
“Thus, summer-winter spreads could become much more pronounced, which will hopefully soon incentivize more structural solutions, such as the commercialization of seasonal storage or a change in seasonal demand”, Zachmann explained.
With growing shares of renewable energy in the energy mix, dealing with seasonal price swings will be a crucial challenge for Europe, making the issue one of the central policy debates in Brussels to avoid another energy crisis.
Original article published on Money.it Italy 2023-06-08 11:37:59. Original title: Perché l’Europa rischia una lunga crisi energetica (fino al 2026)
