The gas crisis: How a growing renewables market could threaten the EU

Written by Staff Writer

In November 2016, the European commission opened a Commission of Inquiry into the state of the EU’s gas market. It concluded that Europe’s gas infrastructure was decaying and that there was insufficient predictability in supply and pricing.

The report recommended that gas needs to be more closely integrated and more supply and demand mechanisms put in place. But much of the report focused on the high costs and long supply contracts that small producers face.

While in practice small producers like Ukraine, Slovakia and others have succeeded in securing supply contracts of longer than 10 years — with binding open access to other countries — most medium and large firms face less risk and so do not include long-term contracts in their energy plans. The EU also currently lacks strong sanctions and binding commitments for energy firms that refuse to comply with gas security requirements.

The Commission report said a substantial part of current market risks were due to “the profligate investment of the past decade.”

Years of supply uncertainty saw power prices spike

By this, the EU meant a series of regulations from 2008 and 2015 to reduce supply volatility. A glut of gas in Europe was amplified by the fact that Russia’s own natural gas reserves were depleting faster than expected and increasing pressure was brought to bear on Moscow to build new pipeline capacity to Europe, including gas from the Caspian Basin.

There were also intractable political and geopolitical issues that were compounded by illegal pipeline siphoning — such as the theft of gas from Ukraine at the Bulgarian border. As these developments continued, several European countries suspended gas exports to Russia.

Cyprus became the site of a rare, well-publicized gas emergency in 2015. The country became a gas hub and allowed the EU to scale back deliveries to Ukraine. But the European Commission raised concerns that the emergency — caused by a stolen gas delivery to Romania and a gas leak that affected five countries including Poland and Greece — would threaten the stability of the EU gas network and make it less effective in balancing supply and demand.

Although these security concerns were not enough to stop the EU from establishing a legal framework for those conducting illegal siphoning activities, the industry’s drive to secure supply contracts extended to Europe, for example by developing production capacity in countries such as Kazakhstan, Algeria and East Africa.

Warmer winters across Europe will raise gas costs

All these developments have changed how the international oil and gas market works.

What began as a $100 a barrel oil price crash has deepened into a $60 to $70 a barrel price and another round of potentially devastating cost cuts for the energy industry has occurred — in particular for the largest global oil and gas majors.

These cuts have adversely affected energy firms outside the petrochemical industry, such as utilities and energy companies supplying the transportation industry.

Geopolitical developments were also making price discovery even more uncertain for the global oil and gas sector. We now see a market that is unprecedentedly oversupplied and a political environment in which Russia is attempting to regain its position as a dominating player in gas trading to restore regional strategic influence.

Meanwhile, renewables remain a small portion of the global market compared to the gas industry. Therefore, gas as a power generation and a growing supply of other cleaner fuels and technologies is making long-term price signals that appear to be minimal and impossible to predict increasingly relevant.

“End-use sectors are saying that the uncertainty around pricing is making it difficult to invest in future capacity, while as the years go by, further demand stimulation is required to ensure a reliable transition to a low carbon economy,” said Tim Jackson, managing director at ECN Capital, who was involved in gathering the data behind the ECN analysis.

Are we in the midst of another Europe-wide energy crisis?

In an environment that increasingly connects supply and demand, and where market signals need to be delivered more clearly to end-use consumers, the risk of future gas supply hiccups across Europe — as well as the potential that those growing renewable energy and nuclear fuel industries could spring up as cheaper alternatives to gas — increases the need for reform.

Gas accounts for 40% of all energy consumed in the EU, and around 70% of that comes from Russia, which often dictates the price of gas, which is the most important source of energy in Europe — significantly more than that of oil.

Even if things go back to normal, some gas companies are already forced to pay higher prices or risk adverse exposure if their links with Russia become untenable. This is the case for many smaller producers who rely on large amounts of Russian gas.

No doubt questions about Russia’s energy aggression and energy dominance across Europe will continue to be discussed by European leaders and by the wider business community. But the essential importance of securing Europe’s gas supply through smart procurement and effective regulation cannot be overstated, nor ignored.

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