Ukraine Crisis Impact on European Power Markets
We began writing this article before the Ukraine / Russia War broke out. Power shortfalls, already evident in Europe after a cold winter, have metastasized into an all-out crisis, with shortages of electricity, fertilizer, and fuels cascading across the continent. Cross-border sanctions and the decoupling of the Russian energy and materials industry are currently casting a pall over the region.
Unfortunately for Europe, this crisis looks as though it will worsen before it improves. Europe’s major developed economies depend heavily on imported natural gas to provide baseload and swing power production to supplement the heavy concentration of renewable generation.
At the time of this writing, European countries are bracing for the severance of energy supply from Russia, an event that promises to cripple some of the world’s largest economies.
Europe’s Main Sources of Power
As of 2019, the European Union’s (EU) power supply has been a composition of EU-produced energy (39%) and imported energy (61%). EU produced energy is derived from five primary sources: petroleum (36%), natural gas (22%), renewable energy (15%), nuclear energy (13%), and fossil fuels (13%). The use of these energy sources varies based on location within Europe.
The primary energy product imported into the EU is petroleum, with the majority of supply being from Russia. Russia imports 27% of the EU’s crude oil, followed by Iraq accounting for 9%, Nigeria and Saudi Arabia at 8%, and Kazakhstan and Norway at 7%. Similarly, natural gas follows the trend, with Russia importing 41%, Norway 16%, Algeria 8%, and Qatar 5%. Russia also dominates the import of coal, supplying 47%. The United States contributes 18% and Australia 14%, with both countries producing on a much smaller scale. With this mass amount of supply, it is apparent that the EU has a high dependency rate for its power.
Power Shortfalls in European Countries
Although there have not been any shortages or recent power outages in Europe, the price of natural gas remains high. We recently discussed the probability of continual market increases for gas in our article, A Primer on the European Crisis, which we have seen transpire. Winter for Europe ended up being a little warmer than expected, allowing for some relief; however, as shown below, gas prices remained higher than they have historically been.
EU Natural Gas Graph
Effects of the Current Russia-Ukraine War
Due to the current conflict between Russia and Ukraine, the already elevated energy prices have only steepened their climb. On March 7, natural gas prices reached a new all-time high of €345 per megawatt-hour, the equivalent of $376. As the day progressed, the price dropped to €190. This was drastic compared to the decade before 2021 when the average prices were steadily between €15 and €25. Pricing is not the only concerning piece of this.
Currently, natural gas is transported from Russia through Ukraine to supply Europe with energy. There is genuine concern that Russia will cut these imports off as the war intensifies. Also, President Biden recently banned Russian crude oil imports, which could roil international crude oil markets at home and abroad. Although this will directly affect household spending, it will also major affect businesses, threatening considerable economic disruption.
The Response to the Current Russia-Ukraine War
We can only expect higher prices and inflation in the future as Europe plans to eliminate Russian gas imports by two-thirds within the coming year. As a response to Putin, the members of the EU have gathered to discuss strategies for doing this. Many highly support these actions as a response to Russia; however, there is a certainty that the economy will be massively impacted, causing some to doubt.
Since the EU’s response is to limit the use of Russian gas instead of doing away with it altogether, countries will probably be fighting over the scarce supply. Because of this, the nations will have to be individually strategic in surviving the cutbacks if decisions are made among the EU as a whole. Germany is already heavily aware of this and has voiced its concerns. Before the EU gathering, German Chancellor Olaf Scholz said the EU needs Russian gas. “Supplying Europe with energy for heat generation, mobility, electricity supply, and industry cannot be secured in any other way.”
Vice-Chancellor of Germany, Robert Habeck gave a separate press conference where he stressed the economic damage that would result if the imports from Russia stopped immediately, saying it would lead to “mass unemployment, poverty, people who can’t heat their homes, (and) people who run out of petrol.” While he mentioned that the country plans to become independent of the imports eventually, he expressed that an immediate and complete change would be massively problematic.
The French government is anticipating the continual price increase and is preparing to ensure their current measures remain in place. In 2021 when prices began to increase, France decided to freeze natural gas prices and limit electricity price increases to provide relief and keep the economy stable. Despite the predicted high prices, the government has committed to this through 2022.
Overall, the EU largely depends on energy exports, mainly from Russia. Although prices were already steeply rising in 2021 due to systemic shortages and weather, it can be expected that the Russian-Ukraine war will only exacerbate this. Economic changes will occur with the proposed plan of eliminating two-thirds of Russian imports to the EU.
Andrew Schaper is a professional engineer and principal of Schaper Energy Consulting. His practice focuses on advisory in oil and gas, sustainable energy and carbon strategies.