For the past year, as the threat of Russia invading Ukraine turned to reality, Europe has been thrown into an energy crisis the likes of which it has not faced in decades.
The rapid reduction of supplies of cheap Russian gas has left the European Union scrambling to secure alternative sources of energy, pushing up costs to households and industry alike.
But while there is cautious optimism that Europe can avoid gas rationing as winter approaches, the crisis poses deeper questions about the region’s future as it contemplates the prospect of higher long-term energy costs.
“The days of €20 per megawatt hour are gone – and probably forever,” says Christian Egenhofer, associate senior research fellow at the Brussels Space Centre for European Policy Studies and senior associate at the European University Institute in Florence. "Europe got addicted to this cheap gas, and it didn’t have a plan for what to do if the price ever went up.”
A decision to press ahead with joint borrowing would bring member states closer together.
Henri Patricot, European Oil and Gas Analyst, UBS Global Research, says that the current crisis has accelerated the region’s transition, with oil and gas companies using cash flow from elevated prices of fossil fuels to ramp up investments in wind and solar energy at the expense of reduced capital expenditure in oil and gas.
“There’s a clear acceleration of the transition towards renewables,” he says. “But when it comes to the nature and the shape of that transition, I think we could see some changes.”
Chief among them, he argues, could be greater support for nuclear energy over the coming years as member states look for ways to complement investments in renewable energy with less natural gas in the mix.
France’s embrace of nuclear power – producing roughly 70 per cent of the country’s electricity requirements – lies at the core of its contrasting fortunes with Germany during the crisis. UBS expects the country to escape recession this winter, while the German economy, with its greater reliance on gas and much larger manufacturing sector, is likely to contract over the coming quarters.
“If you look within the eurozone, you have countries being very differently affected – and to very different extents,” says Felix Huefner, European Economist, UBS Global Research. “There’s a real question about whether or not the energy crisis will bring Europe closer together.”
One source of contention is the size of Germany’s fiscal support packages – including the latest €200bn to fund a gas price brake – to shield business and consumers from spikes in energy prices. Overall, UBS Global Research estimates the German fiscal support to be roughly double the average size that was put in place in other large member states, relative to GDP.
But while that has raised eyebrows, Huefner says that it has also created a potential space to discuss joint-borrowing initiatives to help EU countries with higher indebtedness cover the costs of breaking away from Russian oil and gas. The EU has estimated that additional investments totalling €210bn will be needed until 2027 to phase out Russian fossil fuel. “A decision to press ahead with joint borrowing would bring member states closer together,” observes Huefner.
We’re going to be in a stagflation scenario for quite some time.
The other big question about Europe’s energy crisis is how the likelihood of permanently higher prices of gas and electricity will impact the region’s industrial and manufacturing base. Higher prices are already prompting energy-intensive companies in Europe to reduce output and, in some cases, to shift production.
The extent of that geographical relocation, which has already seen companies move to Scandinavia and, in particular, the US and China, poses a concern for Europe’s manufacturing prowess, which, among other things, currently boasts about 50 per cent of the world’s production of chemicals.
Longer term, says Egenhofer, the acceleration of Europe’s transition to renewable energy could see high-energy-usage companies relocate to areas that will provide ample electricity from wind generation. “For 200 years industry has followed wherever investment in energy was,” he reflects. “And now the energy is in the North Sea, the Black Sea and in the Baltic.”
Taken together, the fall-out from Europe’s energy crisis will leave the region independent of Russian energy, and its market infrastructure and supply sources will be more diverse and better integrated. Renewable energy is set to become a much larger share of Europe’s total energy consumption leaving the region with a smaller CO2 footprint.
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