EU is deep in energy crisis. Is there a way out?

Europe in particular is experiencing a difficult situation in the current global energy crisis.

EU has seen an unprecedented rise in energy prices with benchmark European natural gas prices sharply climbing by nearly 400% in 2021. [i] As of January 2022, energy costs in EU are 54% higher than 2020 levels. [ii] This winter, households and businesses in EU are struggling to cope with high energy prices to keep premises warm and run day-to-day operations.

What led to this steep rise in energy prices?

During the initial months of the COVID-19 Pandemic in 2020, demand for energy drastically reduced as many economies and businesses closed temporarily. Oil & gas and other fossil fuel industries reacted to decreased energy demand by curtailing production.

As the world learned to live with COVID, the global economy rebounded unexpectedly in the first half of 2021 which led to an increase in demand for energy. The fossil fuel industry had not experienced such an increase in market demand and had low reserves. 

While there was substantial ramp up in production, demand-supply gap continues to be there. The sudden surge in energy demand led to a globally disrupted supply chain and shortage of energy. As a result of energy shortage, energy prices have increased globally.

Why has EU in particular suffered during this crisis?

To answer this question, it is important to understand the unique circumstance the Eurozone has found itself in when the global crisis began.

China was the first to experience the energy crisis in 2021. China has traditionally relied on coal mines for its energy production and consumption. As global demand for Chinese goods increased due to global economy rebound, the country’s energy supply could not meet its own unexpected energy demand. To mitigate this energy shortage, China decided to shift towards importing liquefied natural gas (LNG). EU has been increasingly dependent on LNG for its energy needs having increased its LNG imports by 165% in 2019 as compared to 2015 levels.[iii] The rise in LNG demand from China was not expected by world gas traders. Much of the LNG which is usually supplied to Europe was now being supplied to China and other Asian regions instead. EU’s demand for pipeline based natural gas increased drastically as a result. Natural gas suppliers however could not meet EU’s newly increased gas demand at a short notice due to low reserves and planned maintenance in the oil & gas industry which was previously postponed because of the COVID-19 pandemic.[iv]

Fossil-fuel based energy sources account for nearly 70% of EU’s energy consumption mix despite the region’s ambitious green transition plan to phase out non-renewable energy production in favour of renewable energy. [v] As EU phased out and divested from its own fossil fuel and nuclear energy production facilities in the past decade, it has been slow in increasing its renewable energy share. Thus, it finds itself still heavily dependent on importing fossil fuel energy sources such as oil & gas from the global energy market. The EU also experienced an unusual problem of milder wind speeds in 2021 which led to decreased electricity generation from windmills in the region. In a combination of global circumstances and unusual incidents, the dynamics of global energy market changed and EU failed to secure energy.

As a short term goal to mitigate this crisis, the EU is considering to restart its closed coal and nuclear plants. However, doing so will have a further detrimental effect on climate change and progress made thus far to reduce GHG emissions.

The crisis reveals two key underlying issues:

 

1.     The world is still heavily dependent on fossil fuel energy and EU is no exception. EU in particular is dependent on the global fossil fuel supply chain.

2.     Climate change remains an unavoidable threat and lingers at the core of this crisis. Further usage of non-renewable resources for energy production will cause setbacks in Europe’s (and the World’s) ambitions of becoming carbon neutral.

If only Europe had a higher renewable energy share, the region may not have faced such a difficult situation. The region would not have had to depend on the global energy supply chain and face a setback in its climate change goals.

What should the EU do to avoid another energy crisis in the future?

Renewable energy is key to EU’s energy independence and climate change goals. While the EU has been a global leader in formulating ambitious decarbonization plans, decarbonization efforts have proved to be too slow. Elisabetta Cornago, research fellow in EU Energy and Climate Policy at the Centre for European Reform in Brussels, states that “in the long term, decarbonizing the energy sector is the best strategy for Europe to durably reduce its energy prices and improve its energy security.” [vi]

Renewable energy will not only make the EU more energy independent, but also drastically reduce energy prices due to its cost effectiveness. Renewables have a significantly lower cost than fossil fuel energy sources.[vii] Building and operating renewable energy plants cost less than running gas or coal plants.[viii]

There are several options available for generating renewable energy such as hydropower, solar, biomass and wind.

To avoid another energy crisis, the EU should work towards increasing its renewable energy share. It should do so aggressively with a sense of urgency, resetting its renewable energy targets.

EU’s renewable energy share is at only 22.1%.[ix] Horizon Pulp & Paper has a renewable energy share of 80%.

Renewable energy is key to Europe’s immediate future. Let us get there together as soon as possible.

 

 

References:

[i] Energy crisis: Will a green transition throw the global economy into recession? | Business Beyond. 2021. DW News. https://www.youtube.com/watch?v=n0GT-oZD8nc

[ii] Morison, R., & Gillepsie, T. (2022, January 5). European Energy Bills to Rise 54% from 2020 Level, BofA says. Bloomberg. https://www.bloomberg.com/news/articles/2022-01-05/european-energy-bills-to-rise-54-from-2020-level-bofa-says

[iii] European Commission, Directorate-General for Energy, EU energy in figures : statistical pocketbook 2021, Publications Office, 2021, https://data.europa.eu/doi/10.2833/975418

[iv] Energy crisis: Will a green transition throw the global economy into recession? | Business Beyond. 2021. DW News. https://www.youtube.com/watch?v=n0GT-oZD8nc

[v] European Commission, Directorate-General for Energy, EU energy in figures : statistical pocketbook 2021, Publications Office, 2021, https://data.europa.eu/doi/10.2833/975418

[vi] Dempsey, J. (2021, October 28). Judy Asks: Is Europe’s Energy Crisis Self-Inflicted? Carnegie Europe; Carnegie Europe. https://carnegieeurope.eu/strategiceurope/85668

[vii] Masterson, V. (2021, July 5). “Renewables” power ahead to become the world’s cheapest source of energy in 2020. World Economic Forum. https://www.weforum.org/agenda/2021/07/renewables-cheapest-energy-source/

[viii] Mathis, W. (2021, June 23). Building New Renewables Is Cheaper Than Burning Fossil Fuel. Bloomberg Green; Bloomberg. https://www.bloomberg.com/news/articles/2021-06-23/building-new-renewables-cheaper-than-running-fossil-fuel-plants

[ix] (2022, January). Renewable energy statistics. Eurostat; European Commission. https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Renewable_energy_statistics

 

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