The wholesale price of natural gas has reached record levels in the UK, France, Spain, Germany and Italy. Household and business bills are already skyrocketing, and could go even higher as colder weather sets in and more fuel is needed for power and heating systems.
“We have seen huge price increases,” said Dimitri Vergne, head of the energy team at the European Consumers’ Organization. “It is worrying as winter approaches, when gas consumption is bound to increase.”
A complex web of factors is at play. A cold spring has depleted natural gas stocks. Restocking has been difficult, thanks to an unexpected surge in demand as the economy rebounds from Covid-19 and a growing appetite for liquefied natural gas (LNG) in China. Russia is also providing less natural gas to the market than before the pandemic.
“At the moment, it is not profitable to produce ammonia in Europe,” said Yara CEO Svein Tore Holsether, noting that it costs $ 900 to produce a metric ton which sells for only $ 600. The company will temporarily rely on factories located in other parts of the world to supply its customers.
The fallout could weigh on the European economy, while exacerbating inflation fears at a delicate time in the pandemic recovery.
“To the extent that people worry about the higher cost of energy, they may be inclined to cut back on spending,” said Jessica Hinds, economist for Europe at Capital Economics.
What is happening
The jump in natural gas prices can be attributed to a cold spring. Cold weather through April and early May forced a drop in natural gas inventories during a period when demand generally slows.
“We started this whole gas storage process… six weeks later than we normally would,” said Tom Marzec-Manser, natural gas analyst at market intelligence firm ICIS.
But the problems don’t end there. China has also outbid Europe for LNG, which is preferred as a cleaner alternative to coal as the country tries to make its economy greener.
As a result, the price of electricity for overnight delivery in France jumped 149% between early August and September 15, according to data from CIHI. In Germany, prices jumped 119%.
And in Britain, which operates a just-in-time market and doesn’t have the same storage capacity as mainland Europe, costs have jumped 298%. Delayed maintenance work, as well as a fire that cut a power cable that carries electricity from France, have increased the pressure.
“Although Russia is producing production at very high levels, there is still concern that it may not be able to produce enough to meet the very high European demand,” said Graham Freedman, analyst at Wood Mackenzie. “It is feared that there is not enough gas in [Gazprom’s] storage to spend the winter. “
Marzec-Manser said it was difficult to determine exactly what was going on in Russia. There have been some production issues over the summer and the country is also experiencing higher domestic demand, he said. There are also theories that Moscow intentionally provides less than it could. encourage Germany to speed up its approval process for the controversial Nord Stream 2 pipeline, which will transport natural gas directly from Russia to the European Union.
Norway, which supplies around 20% of the natural gas consumed in Europe, is trying to close the gap. Equinor, the national energy company, announced this week that it will increase its exports from October. But in the short term, experts warn that price pressure is unlikely to ease.
Britain most at risk
Political leaders are trying to allay fears that the public may go without electricity or heat as the temperature drops.
“We do not expect supply emergencies to occur this winter,” UK business secretary Kwasi Kwarteng told parliament on Monday. “There is absolutely no question (…) that the lights go out or that people cannot heat their homes.”
But it is increasingly clear that the crisis will be costly, and could weigh on the region’s economy while the effects of Covid-19 are still being felt.
The situation is particularly acute in the UK, where seven small energy suppliers including Avro Energy, which supplied around 580,000 customers, have gone bankrupt in recent weeks as their costs have skyrocketed. Dozens more are on the brink.
“I don’t see people freezing,” said Michael Grubb, professor of energy and climate change at University College London. “I see unenviable choices, between many companies going bankrupt and paying the bill.”
The Confederation of British Industry, a lobby group for UK business, said on Wednesday that “significant” price increases were affecting both businesses and consumers.
“It is essential that vulnerable customers and the major energy-consuming businesses, which underpin the UK’s critical supply chains, are well supported throughout the winter,” said Matthew Fell, Managing Director for Policy , in a press release.
Lots of walks on the weather. Henning Gloystein, director of the energy, climate and resources practice at Eurasia Group, believes that if the coming months are particularly cold, there could be additional pressure on certain industries to reduce the consumption of natural gas in order to prioritize the supply of households.
“If it’s cold this winter, [supplies] could get very tight, “he said.” Politically it’s really toxic. “
CO2 prices paid by the UK food industry, for example, will rise despite the temporary subsidy given to CF Industries. It remains to be seen how well this spreads from the chain to the supermarket shelves.
“At the moment, it certainly looks likely that we will see higher inflation in the near term,” said Hinds of Capital Economics. “And that’s probably going to happen next year.”
She predicted that a previous estimate of headline inflation of 3.5% for Europe in the final months of 2021 could reach 4%.
“Gas prices could push inflation higher [the] 2% [target] longer, ”Bank of America analysts said in a recent note to clients.
Hanna Ziady and Anna Cooban contributed reporting.
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