Blogs > European Gas Price Rise: Causes, Consequences, Recommended Practices, and Solutions
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European Gas Price Rise: Causes, Consequences, Recommended Practices, and Solutions

Garima Bharadwaj
Garima Bharadwaj

21st October 2022

Introduction

As Covid lockdowns were eased and economies stabilised, energy prices soared globally. At the same time, several locations for work, industry, and recreation all unexpectedly required more energy, placing unprecedented pressure on supplies. Following the Russian invasion of Ukraine in February of this year, prices rose once more. Since 40% of the gas used in the EU had previously come from Russia, European countries looked for ways to import less energy from that country. As a result, the cost of alternative fuels increased. Consequently, an energy crisis that could result in rolling blackouts, closed companies, and a severe recession is being battled in Europe. 

The main reason is that Russia has cut off the continent’s access to the inexpensive natural gas that was previously used to run companies, produce electricity, and heat houses. The result has been a desperate search by European governments for new resources and strategies to mitigate the effects as economic growth slows and electricity costs rise. This blog will address the reasons behind the increase in European gas prices as well as suggested actions and solutions.

European Gas Price Rise

Gas prices in Europe increased after Russia carried out its warning to further cut supply to the area, raising the possibility that there could be shortages throughout the winter. However, Russian gas shipments have decreased 89% from a year ago as a result of the Nord Stream 1 pipeline’s closure. As the Nord Stream 1 pipeline’s flows were reduced to just a quarter of their typical capacity on Wednesday, gas prices increased by as much as 13%.Russia used to provide 40% of the natural gas used in Europe and much more to Germany, where cheap energy was a significant economic driver.

There is still some Russian gas circulating in Europe via pipelines that traverse the Black Sea to Turkey and then EU member Bulgaria, one of which runs via Ukraine and into Slovakia. 

Even before the start of the Ukraine War, Russia began to reduce gas supplies last summer. As a result, gas prices rose significantly.

Fears that Russia would cut off supplies to Europe via Ukraine have driven up gas prices, adding to the chaos already brought on by damage to the Nord Stream pipelines beneath the Baltic Sea. Due to pending arbitration, the gas corporation Gazprom, which is under the control of the Kremlin, stated it might impose penalties on Ukraine’s Naftogaz.

The declaration followed the discovery of leaks on the two Nord Stream gas pipelines beneath the Baltic Sea close to the Danish island of Bornholm, which was thought to be the result of sabotage, though it is still unclear exactly who was responsible or why. After certain European nations responded to the start of the war by forbidding various transactions with Russian banks, companies, and individuals, Gazprom cut off a number of them. The reductions have resulted in skyrocketing natural gas prices, which have just broken records. Experts warn that due to Russia’s gradual reduction in supply since last summer, Europe needs to be prepared for no Russian gas this winter.

Causes and Effects of European Gas Crisis

Russia is a major supplier of coal and natural gas to Europe. In response to the recent war, the European Union banned Russian coal imports beginning in August 2022 and promised to cut Russian gas imports by two-thirds by the end of the year. It is possible to divert part of Russia’s coal to other nations, but doing so will be expensive because coal is heavy and expensive to transport. Due to a lack of transportation infrastructure, the redirection of natural gas is even more constrained; 70% of Russia’s exports to Europe are made via pipeline.

European energy traders are observing unfathomable price spikes due to this. The price of natural gas, which is used to produce power and heat, has increased by roughly ten times in the past year. Electricity costs, which are directly related to gas prices, are also significantly more than they used to be. The energy markets are in a constant ascent as Russia tightens the screws on gas flows. The Russian gas giant Gazprom announced this week that it would temporarily shut down a crucial pipeline to Germany at the end of August, which has further fueled market concerns. 

At this point in time, benchmark European natural gas prices touched a number of records. There may not be much of a difference between these wholesale costs and what consumers must pay on their monthly bills in some nations. A typical British household will pay approximately £3,500 a year for electricity and gas once the British electricity regulator resets an energy price cap. This is predicted to virtually quadruple the price. The increase is a result of rising gas and electricity prices.

When we talk about the effects caused due to the crisis, the belief that Europe would run out of fuel this winter is what is pushing up energy costs. Gas shipments from Russia to Germany and other nations have been reduced. Even before the upcoming three-day stoppage, Nord Stream 1, a crucial gasoline supply line to Germany, was barely operating at 20% of its potential. Due to these budget cuts, gas suppliers must purchase gas at more expensive spot rates that are more erratic than those outlined in longer-term Gazprom contracts. 

Gas and electricity rates are frequently linked together, which has made Europe’s problems worse. Despite the fact that there are many ways to produce electricity, including coal, nuclear, hydroelectric, wind, and solar energy, the price of natural gas has a significant impact on how much it costs to produce electricity because gas-burning generators are frequently paid to enter service when a power grid, like the one in Britain, requires more electricity. Iain Conn, a former chief executive of Centrica, a sizable British utility, claimed that natural gas is the primary factor currently influencing the price of electricity in Europe.

European Economical Impact

In every sector of the European economy, the impact of Gazprom’s decision, the Russia-Ukraine Conflict, and the ensuing increases in gas prices are becoming more and more obvious. The Bank of England boosted interest rates by the most since 1995 as inflation in the UK hit a 40-year high of 9.4%. The bank also issued a warning that a protracted recession would begin later this year and that inflation would reach 13% early the next year. According to some projections, it will rise to 15% by the beginning of 2023.

Consumer confidence in the Eurozone hit a new low in July, and numbers that will be announced on August 5 are predicted to show inflation at an all-time high of 8.7%. For the first time in ten years, the ECB (European Central Bank) increased interest rates at the end of July, which is likely to hasten the emerging trend of a decline in the availability of loans to families and businesses in the Eurozone. As the economic picture becomes bleeker, there are some worries that the ECB may have waited too long to take this action to combat inflation. Stagflation is more likely in the event of such a scenario.

How the European Crisis Impacts the Consumers?

The troubles of consumers are starting to be heard by European politicians as a result of the nine-fold increase in European gas prices over the past year. Only 4% of the gas the UK purchases comes from Russia, and as a result, consumers have seen their bills soar from £1,400 per year in October 2021 to £3,360 per year in October 2022, with a further increase to £4,200 per year predicted in January. Spain’s environment minister took pains to emphasise that the country’s 7% energy efficiency target will not interfere with people’s daily lives. 

The lack of spare capacity in the power grid may imperil any ambitions to hasten the switch from gas to electricity for household usage. The UK needs to expand its grid capacity, but developers have been warned that this process could take longer than ten years and won’t offer any quick fixes. The regulations requiring new homes to accommodate low-carbon technologies like heat pumps and an increase in electric vehicles, which will put more demand on grids across Europe, are not specific to the UK and are only likely to exacerbate this problem in the coming years.

Best Practices to Combat Gas Crisis in Europe

In response to mitigate the gas crisis , the EU declared a goal to cut gas use by 15% throughout the entire bloc. The strategy, which will be in effect until March 2023, includes reducing gas consumption now in order to release gas to increase storage in time for the winter. This reduction is initially optional, and the Member States are free to decide how to implement it. However, they are obligated to update the Commission every two months on the status of their energy savings strategy. However, the aim would become necessary if Russia decided to completely stop supplying gas to the EU. 

The EU’s 15% reduction plan focuses on industry, and firms are expected to be given consumption reduction goals. Manufacturers of essential commodities and plants that are challenging to restart after energy loss are exempt from this plan. Nevertheless, some EU members have already implemented national energy efficiency initiatives. These plans call for a variety of actions, such as turning off the lighting on historical monuments, turning off illuminated advertising, and setting the maximum and minimum temperatures for air conditioners at 19 to 27 degrees Celsius. This prohibits electric resources and air conditioning units, requiring stores with air conditioning to keep their doors closed, turning off city fountains, or requiring public swimming pools to only provide cold showers.

Along with its push for energy efficiency, the EU has started a global energy diplomacy initiative to locate new gas sources. It is implementing a “fragmented purchasing approach” in recognition that it cannot procure all the Russian gas that is now absent from a single provider. With this strategy, it has found itself looking for gas at some new and uncharted doors, including Nigeria, Algeria, and Kazakhstan, as well as going back to traditional sources, such as Saudi Arabia, Qatar, and Iraq.

In this challenging environment, there are five concrete measures or initiatives that European leaders are following in order to develop a more coordinated, EU-wide strategy to get ready for the upcoming winter amidst the gas crisis.

  • Creating auction mechanisms to encourage EU industrial gas consumers to lower demand: Industrial gas users can offer a portion of the gas they have contracted to buy as products to reduce demand in exchange for payment, which could result in efficiency gains and a competitive bidding process. Auction models have already been devised in Germany and put out in the Netherlands.
  • Limiting the consumption of gas in the electricity sector: To do this, it is necessary to temporarily boost coal and oil-fired generation while speeding up the deployment of low-carbon energy sources, including nuclear power where it is both technically possible and politically feasible.
  • Improve coordination between gas and electricity operators across Europe, especially with regard to peak-shaving techniques: This can lessen the effect of decreasing gas consumption on power systems. Strict cooperation in the management of thermal power plants at the national and European levels should be a part of it.
  • Establish cooling controls and standards to reduce domestic electricity demand: In order to set an example and inspire consumer behaviour changes, government and public buildings should lead the way in this.
  • Synchronise national and European emergency planning across the EU: This ought to include measures for supply restrictions and solidarity systems. The EU must work jointly to resolve the current problem.

If these kinds of measures are not put in place now, Europe will be in a very precarious situation and may have to deal with considerably more severe cuts and curtailments in the future.

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Conclusion

Presently, Europe must do everything in its power to lessen the possibility of significant gas rationing and shortages, particularly during the upcoming winter when its most vulnerable populations would find it hardest to live without it. It must continue with its transition to clean energy at the same time. The actions the European Commission will announce on this front later this week are something I'm interested in seeing. This winter may turn out to be an important test of European unity, one that the continent cannot afford to squander. Europe may be required to demonstrate the full power of its unity. Along with the aforementioned actions, European governments must also prepare the continent's citizens for potential future events. Previous energy crisis-related public awareness efforts were successful in lowering short-term energy demand by a number of percent. Every move matters. The same quantity of natural gas that is provided by the Nord Stream pipeline during the winter may be conserved throughout Europe by taking easy measures like lowering the thermostat a few degrees.


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