European energy price surge hits households

All across Europe, electricity bills for households and businesses have been rising dramatically. They have increased steadily throughout 2021, but in September, the upward surge has been dramatic. This month alone, wholesale power prices in Germany have risen by almost 50%.

Prices are hitting record highs as a combination of factors buffets Europe's energy sector. The main cause is a global gas shortage — the price of natural gas has quadrupled in Europe since the start of the year.

The situation appears to be getting worse, and many governments are now fearful of blackouts and fuel poverty ahead of an inevitable jump in demand throughout the winter.

In the United Kingdom, the country's largest energy companies have requested an emergency bailout package from the government. Five smaller suppliers have already gone out of business over the last month, unable to pay for energy they had already committed to supplying to businesses. Others fear they could go to the wall in the coming days and weeks.

In Spain, the government has already passed emergency legislation to reduce the soaring price of energy bills for consumers by redirecting profits from energy companies. Italy is expected to unveil a €4.5-billion ($5.28-billion) support package for households this week, while France has already introduced subsidies for millions of low-income households adversely hit by price hikes.

Why is this happening?

According to Verivox, a website which compares energy prices, prices in Germany have risen by an average of 12.6% in September and October. Verivox said such an increase is equal to €188 ($220) a year in extra heating costs for a family home.

But why is this happening? Europe gets its energy from various sources, with natural gas accounting for around 20% of that supply. Individual countries are more reliant on it than others; Germany, for example, uses it to heat around half of households.

The gas squeeze has largely been prompted by the weather. The last European winter was unusually cold, depleting stocks of stored natural gas. Normally this would be replenished during the spring and summer in preparation for the next winter, but one of the coldest Aprils in two decades further hit stock.

Then there is the Russian question. Russia's gas exporting monopoly Gazprom, which provides around a third of all Europe's natural gas, has this year steadfastly refused to increase supply in "spot markets," where natural gas is bought as the need arises, often to fill a short-term need — as opposed to longer-term contracts planned well in advance.

The reasons are a source of intrigue and debate. Russia has its own increased storage needs to meet, but some commentators have speculated that Russia has held back supplies to put pressure on the European Union to fully embrace the Nord Stream 2 pipeline.

Last week, Dmitry Peskov, spokesman for Russian President Vladimir Putin, said the new Baltic Sea pipeline would "significantly balance price parameters for natural gas in Europe."

Any alternatives?

Other factors have combined to exacerbate the problem. An unusually hot Asian summer led to an increase in demand for air conditioning and, as a result, electricity. That further hit natural gas supplies.

There have also been issues with the alternatives. Demand for liquefied natural gas (LNG) has been rising fast around the world, particularly in Asia due to rapid economic and population growth. That has hit supply to Europe, with a significant drop in imports in 2021 compared with 2020.

Coal is another alternative, but the price is also now routinely at record highs, partly due to the gas crisis but also because of the bloc's increasingly strict climate change policies. The EU's carbon market is experiencing an unprecedented price boom. The EU's emissions trading system (ETS) sees the owners trade "carbon credits," which allow them to emit carbon dioxide at a cost dictated by the market. The price has been hitting new records all year, a trend that is likely to continue.

Climate policies, rightly or wrongly, in the firing line

The EU's 2030 and 2050 climate goals have seen the bloc set ambitious targets for the amount of renewable energy it uses relative to other sources. In 2019, renewable energy represented 19.7% of energy consumed in the EU. The target for 2030 is 32%.

But renewable energy sources have also been hit recently. Wind energy has been Germany's top producer of electricity in recent years, but its share of the electric grid dropped from 29% to 22% in the first half of 2021. That, too, was driven by the weather and the unusually still conditions at wind farms.

As a result of this and the rise in the carbon price, Europe's energy price crisis has led to accusations that the bloc's climate change policies are to blame, the charge being that the transition to a climate-neutral future is too expensive for consumers.

In the European Parliament last week, during a debate on the European Commission's "Fit for 55" climate legislation proposals, several European lawmakers spoke of anger expressed by citizens at how climate change policies were affecting energy prices.

However, Frans Timmermans, the European Commission vice president in charge of climate issues, has rejected the charge, saying the gas shortage was the primary reason for the energy crisis and that increasing costs strengthened the argument for speeding up the transition to renewable sources.

Winter is coming

The overall picture is very complex. but for consumers all across Europe, it's quite simple: Their heating and electricity costs a lot more. The scenario governments are desperate to avoid ahead of the winter is blackouts, for consumers and businesses alike.

A mild winter would obviously solve a lot of problems, as would an improvement in wind conditions. Likewise, were Russia to increase gas supply — either through existing pipelines or through the as-of-yet unapproved Nord Stream 2 — then prices would likely come down.

If that does not happen, and if this European winter is as cold as the last, the energy crisis could become a defining one for the EU. Businesses and citizens are already starting to feel the chill.