About three decades ago, most European governments opened up their energy markets in an effort to boost competition and lower prices for consumers across the continent. At the time, European energy markets were dominated by monopolies that gave consumers few choices. However, at the turn of the millennium, the European Union decided to gradually open up its energy markets, based on the belief that more competition would enhance security of supply, reduce costs and tackle energy poverty. Over the past decade, the urgent need to reduce carbon emissions has gradually reshaped the global energy order, but many governments have largely adopted a hands-off approach. Fast forward to now, and Europe and other countries around the world are in a deep energy crisis with energy supplies tighter than they have been in decades and consumer prices soaring, a situation exacerbated by slowing economic growth and the threat of full-blown recession. Gas prices in the Netherlands, the top European benchmark, are already 8 times higher than normal, while capacity for delivery in 2023 is changing hands at prices 6 times higher than the 5-year average in Germany, the largest market of Europe, raising costs for consumers and energy-intensive industries, including steel furnaces, smelters, cement and chemicals. Europe has been hit particularly hard because it is so dependent on Russian gas, which President Vladimir Putin is now weaponizing in response to Western sanctions and a global outcry against the invasion. Gazprom PJSC has declared force majeure on at least three European gas buyers, and even the return of gas flows through Nord Stream 1 is expected to do little to help the continent store enough gas ahead of the winter season. Crisis of Germany No country exemplifies this situation better than Germany, Europe’s largest economy. Germany is in dire straits after essentially backing itself into a corner with its energy policies. For decades, successive governments in Berlin have pursued a policy of maximizing the country’s dependence on Russian oil and gas, and have almost completely abandoned nuclear power, with the last two operating reactors closing in 2022. As a result, Germany has become dependent largely from natural gas, which accounts for 25% of the country’s total primary energy consumption. Although Germany has significant natural gas supplies of its own that could be tapped through fracking, Berlin has banned the technology, meaning it must import 97% of its natural gas mainly from Russia, the Netherlands and Norway . It is therefore not surprising that Germany has just announced its first trade deficit since 1991. As a devastating energy crisis unfolds, Germany has announced that it will join the ranks of nations reversing their climate goals by increasing their use of coal, which overtook wind to become the largest input for global electricity generation in 2021. Indeed, the Germany is left with little choice but to burn lignite in its power plants – one of the dirtiest fossil fuels mined in vast open pit mines that litter the German countryside. The European Commission has already given its go-ahead to countries that are replacing Russian gas with coal and producing higher emissions as a result. Meanwhile, France is grappling with faulty reactors that have turned the former clean energy exporter into an importer. Europe is now paying a heavy price for its post-Cold War false sense of political security, which left it too dependent on Russian gas supplies and intermittent renewable energy production. Government bailouts Suddenly, Europe and the governments of the world are waking up to the folly of leaving energy security solely in the hands of the markets. Western governments now recognize the need to play a more expansive role in everything from building fossil fuel infrastructure to determining where private companies can buy and sell to limiting emissions through carbon pricing, subsidies, mandates and standards. In addition to economic nationalism and deglobalization, experts have predicted that the coming energy order will be defined by government intervention in the energy sector on a scale not seen in recent memory. However, the situation is even more extreme in Europe, where governments have begun to nationalize energy assets in an attempt to save their collapsing energy sector. According to Bloomberg, Germany is currently in talks to rescue struggling gas giant Uniper SE. Britain has completed a £1.7bn government bailout of failed gas and electricity supplier Bulb Energy Ltd, while France is considering nationalizing Electricite de France SA. European governments are also stepping in with other measures to cushion the blow to the consumer. Berlin is issuing lump sum payments to households this month to protect them from what Finance Minister Robert Habeck called “bitter news”. the UK government has put in around £37 billion ($44.7 billion) to ease the impact on consumers, while France plans to double €25 billion in spending and tax cuts. Meanwhile, in the Czech Republic, the government is looking at ways it can compensate the state-controlled utility CEZ in the event of extreme events, such as the termination of gas supplies from Russia. In total, Bloomberg reported that the broad international support packages for consumers will likely reach 100 billion euros. “That governments are increasingly being forced to bail out energy companies is a sign of their failure to consider the impact of price shocks on their policies. This is a serious oversight that will add to the already high costs consumers face,” Catherine Porter, a consultant who has worked for Centrica Plc and EDF Trading, told Bloomberg. Beyond immediate financial aid and bailouts, looming supply constraints and rising prices have prompted governments to intervene in other ways. For example, many European governments have ordered utilities to replenish storage, while countries such as Austria and Germany pay higher prices to refill storage. The ongoing energy transformation in Europe is reminiscent of the 1970s when excessive government interventions in energy markets repeatedly exacerbated energy crises. However, energy experts believe that appropriate limited and tailored measures can be taken to address specific market failures to mitigate many energy security risks and help manage the biggest geopolitical challenge energy markets have faced in recent years. decades. By Alex Kimani for Oilprice.com More top reads from Oilprice.com
