Europe’s Energy Crisis – Why is there an Energy Crisis?

Price caps on Russian gas, an additional profit tax for energy producers, and mandatory targets to cut power peaks in electricity use. These are some of the proposals that the European Commission has worked on.

The highly current energy crisis with high electricity prices, as a result, makes visible many issues that countries must make decisions about to succeed in the transition to the energy needs of the future.

Why are energy prices rising?

The price of natural gas has risen to record levels. It has also pushed up oil and coal prices – and electricity prices – to very high levels. Commodity markets are often characterized by large cyclical fluctuations. When prices are low, investment in production capacity decreases (and vice versa). Last year, for example, natural gas prices were at their lowest levels in 13-14 years.

When the production capacity in the short term is unable to meet a rapidly rising demand, “bull rushes” often occur in prices. The fact that the winter of 2020-2021 was unusually cold – and the summer of 2021 unusually warm – has also contributed to the fact that stocks of, for example, coal and gas are far below normal levels in the USA, Europe, China and Russia, among others.

Are lack of production capacity and weather the only explanations?

Prices are driven by several different forces that are now working together. Global demand for energy has increased at a faster rate than expected as the world opens up almost simultaneously after the pandemic. Withheld capacity investments in, for example, renewable green energy – and insufficient infrastructure to transfer energy between countries and regions – have added to the prevailing imbalance in the energy market according to

In addition, there are elements of geopolitics and tactics; countries such as Russia seem to be deliberately holding back gas exports to, for example, the EU. For a country like the UK, even Brexit has created a serious shortage of truck drivers. The uncertainty surrounding how cold the winter of 2021-2022 will be for the northern hemisphere also means that speculative forces gain a foothold, which raises energy prices even further.

Putin and the Russian natural gas, what do they mean for the energy crisis?

Putin’s and Russia’s actions have great significance for the electricity prices we will see in the future, as a large part of the fossil natural gas used in Europe comes from Russia. Along with weather factors such as last year’s reduced winds and longer dry spells, we will see higher gas prices going forward.

The increased demand for electricity increases prices in Europe and southern Sweden. The pandemic also created problems as investments in the gas industry decreased, which means that it takes longer for the gas industry to scale up to meet the increased needs.

Price increases for emission allowances drive up electricity prices

Another factor affecting the energy market right now is the European Emissions Trading Agreement. When the price of gas increases, many suppliers look for cheaper alternatives, such as coal. Because coal emits more carbon dioxide, the price of emission rights increases, which in turn drives up electricity prices.

The energy crisis shows the vulnerability of the European energy system as it is dependent on the natural gas supply. By changing this dependence and at the same time driving the development of alternative energy sources together with energy efficiency, we can change our system.

We need to prepare and adapt so that we are not dependent on natural gas in the same way as today. It is about both technological development and political decisions about how prepared we are to be dependent on the outside world.

The crisis makes visible many of the issues that we should learn more about and make decisions about in order for us to succeed in the transition. The total energy demand will not necessarily increase, but almost all scenarios point to an increase in electricity demand as a consequence of electrification.

How have we ended up in a situation where we have to reduce gas consumption?

A serious energy crisis threatens to hit Europe due to the ongoing war in Ukraine.

The reason is that before the war, several European countries, including Germany, Austria, Hungary, and Italy, became dependent on Russian energy.

Some EU countries have already noticed that the Russian state-owned gas company Gazprom has tightened the gas supply, and in some places also stopped it completely.

Gazprom has explained the outages because of technical problems, but there are fears in Europe that they are Russia’s way of pressuring the EU.

Apart from a few interruptions, gas deliveries have continued through the Nord Stream 1 pipeline. The fear was, however, that Gazprom would choose to cut off the gas supply altogether, something that proved to be true soon after.

Since Russia has done so, and especially if the winter on top of everything becomes cold, EU countries will find themselves in great difficulty.

In order to prevent a severe energy crisis, the EU, therefore, wants the member states to replenish their gas reserves.

Why are decisions made at the EU level?

The gas networks of the European countries are interconnected.

Countries that depend on gas from Russia need the support of other member states if Russia stops the gas supply.

The Netherlands, for example, has already offered to help Germany in case the neighboring country’s natural gas threatens to run out completely during the winter.

Countries that are not as dependent on Russian energy in turn need to have sufficient gas reserves to be able to supply gas to the countries that are in more urgent need of it in times of crisis.

If the gas reserves are not sufficient, it may happen that some member states need to reduce their own production to help the neighboring countries.

It is about the common good of the EU countries. It is feared that the gas crisis could lead to the whole of Europe sinking into a deep recession if we do not prepare with joint efforts.

Which countries are particularly vulnerable?

Particularly dependent on Russian gas are the Czech Republic, Slovakia, Germany, Austria, Hungary and Italy.

Hungary’s authoritarian Prime Minister Viktor Orban has reached an agreement on continued gas supplies from Russia – until further notice.

But it is primarily Germany that is in the spotlight because gas is so crucial to the country’s economy.

Germany is also symbolically important. The country sought to deepen its energy cooperation with Russia right up until the country launched the large-scale war of aggression in Ukraine.

In Germany, they have already started savings campaigns for energy and natural gas. Both private households and industry are encouraged to start saving on gas on their own initiative. In addition, they want to reduce, for example, street lighting.

Some EU countries, such as Ireland and Malta, have not imported gas from Russia at all.

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