Europe Scrambles for Energy Alternatives as Gas Prices Skyrocket

The fear that there will be energy shortages and rationing across the continent coming into winter has driven coal-fired power plants out of retirement, and new terminals to be built to support the influx of liquefied natural gas (LNG) coming in from the U.S.

Cutting Russian dependence

Once Europe’s largest provider of natural gas, Russia is reducing the output through the key Nord Stream Pipeline 1 run by state-owned gas company Gazprom, blaming turbine issues. Last week the capacity through the line was cut in half again, down to just 20% of its usual volume, which some officials see as retaliation for recent sanctions placed on the country for its conflict with Ukraine.

On the back of the announcement from Gazprom, the latest measure to reduce reliance on Russian supply is an agreement between the Energy Ministers in the EU to reduce their overall gas needs from August through to March 2023 by 15%. Countries are to voluntarily ration their usage, potentially impacting households and businesses, or it may become a mandatory requirement if the situation becomes more urgent.

The outlook becomes more dire if there are any delays in delivery of L.N.G from the U.S, if the weather impacts the production of gas out of Norway, or if the winter is exceedingly cold and energy requirements are higher than usual.

Unforeseen circumstances aside, there is some comfort to be taken by the fact that Europe’s stored gas is at a reasonable level, at close to 70% of capacity, or slightly more than the same time last year, with salt caverns and other facilities looking to be filled towards the end of the year in case Russia fully closes off supplies.

Despite this, the price of gas is soaring as European gas futures on the Dutch TTF exchange hit close to 200 euros a megawatt-hour, nearly ten times what it was just a year ago, and it’s causing governments to push for alternatives as some businesses consider closing their factories which could see thousands lose their jobs as a result.

Something has to give.

Natural Gas September 2022 CFD – Source: ActivTrader platform

On the hunt for alternative fuel sources

Energy deals are currently being struck all over the world from countries such as Kazakhstan, Saudi Arabia, Nigeria, and Iraq to cover potential shortages, and the results seem to be on track with demand so far, but none of them are perfect.

The greatest contributor to filling the gas void from Russia has come in the form of liquefied natural gas, which has to be chilled to -259 degrees Fahrenheit and condensed into a liquid before it can be transported via large cargo ships, primarily out of Texas shale fields in the United States. This has pushed prices to rise faster this year in the U.S on a percentage basis than diesel, crude or gasoline, at $9 per million British thermal units last week, or more than double that of last year’s prices.

According to the Natural Resources Defence Council (NRDC) though, the process of chilling, shipping, and regasifying LNG is far more carbon-intensive than the alternative room temperature gas via pipeline, so this doesn’t fit well with the carbon emission goals of many countries worldwide.

The other prevailing consideration for LNP, is that Europe is in an uncomfortable bidding war with Asia, as China, South Korea, and Japan are usually the largest consumers of the commodity, and aren’t accustomed to having to pay such high prices.

Some countries are looking to coal as their backup, either revamping their older plants or pushing back their planned closures. Germany and Romania are two such countries, with the former being particularly at risk as it currently doesn’t have a terminal to receive LNP. Although they’re rushing to get installations built, it may not be in time for winter.

The European Commission back in May gave the all-clear for the EU to use additional coal to cover shortfalls for as long as the next decade, which it says will not impact carbon reduction targets for the long term, even considering the high impact of burning coal.

At the same time, the EU also pledged to increase the use of wind and solar options to reduce the reliance on Russian gas, with officials saying it can take years to attain permits and then get these projects built, so there needs to be changes in laws to speed up the process.

A greater use of nuclear energy is also on the cards for some countries that already have reactors in operation, like France, Spain, and Belgium, among others, as these facilities don’t often run at full capacity. The downside to this is that Russia provides around 35% of the enriched uranium required for the plants to operate, new plants take around a decade to build and come online, and there is always a level of nervousness surrounding safety.

In an interview with Deutsche Welle (DW) recently, the European Energy Commissioner Kadri Simson, assured the public that despite the difficulties that may lie ahead, there was still reason for hopefulness. “For households, it is important to know that they are protected consumers,” she said. “So, even under the worst case scenario, when we will lose some LNG shipments because of global competition and if there will be an extremely cold winter with long cold spells, we will take care of households.”