As winter’s cold touch spreads across Europe, there is an uneasiness about how the frigid temperatures will be weathered as gas prices creep ever higher. The source of uncertainty for Europe’s gas consumers is broad; the traditional push and pull of Russian-EU energy geopolitics is alive and well, Covid demand and supply contractions have created imbalances throughout the value chain, while the global production levels of oil and gas remain constrained by OPEC+ and the surging market prices.

As always, there is sufficient blame to apportion to each actor and the nature of the market itself. Realistically, this is unchartered territory in the Age of the Energy Transition where traditional energy giants are beginning to lose their grip over global energy markets and the inconsistency of European renewable supplies have again been opened to question.

While many countries flounder and search for solutions – we look at one country, albeit a small one, that has weathered the storm through long-term fixed-price contracts.

For the time being, natural gas is a necessity for Europeans to heat their homes and workplaces – yet the market is not playing ball, just as the Texans experienced with the collapse of ERCOT earlier in the year. No doubt, these troubles will spur both arguments for greater renewable expansion and for slower fossil fuel divestments – in the end big questions remain toward how Europe’s relationship with natural gas will develop as concern as the Energy Transition progresses.

Changing landscape of Europe’s gas supply

The struggle facing European states’ gas supply has been brewing for several years, following the continental decision to shift away from ‘oil indexing’ and toward a liberalized, flexible market price. Europe had alleviated price fluctuations by pegging the price of gas to the global oil price, a reasonable approach that could not take advantage of lower price points but could maintain price stability for consumers.

At the start of the last decade, the US shale production growth saw prices tumble and cheap gas was thought to be a long-term option that would maintain price competition with their biggest gas competitor, Russia.

Several concerns arise with Europe’s move to a liberalised market place, most notably, that there is far greater exposure to price fluctuations and secondly, that consumers are now bearing the brunt of energy price increases – up 300% in 2021. Across the channel in the United Kingdom, regulatory price caps have tempered the rising energy prices (up 250% in 2021), albeit with the consequence of collapsing over 20 energy providers.

Enter the Russians, the unpredictable force-feeding much of the gas supply to Europe. The liberalisation of the European gas markets led to significant investments to develop natural gas and LNG import infrastructures to Europe – including the much-anticipated Nordstream2. Initially expected to assist the gas scarcity and temper price spikes, this eventuality has been thrown into doubt with a ‘procedural and not political’ move by Germany to withhold certification. German laws demand that Nordstream2 must operate as a German subsidiary.

Putin expanded Russia’s gas exports to ease the growing gas crisis faced by their southerly European neighbours. The gas price spiked to $30 MMBtu before settling at $22 MMBtu on the Dutch TTF toward the end of November as Gazprom was slow to provide their promised additional supply. With Europe’s storage facilities beginning to refill their capacity, there appears to be a degree to stabilisation for the time being. One clear beneficiary has been Russia and Gazprom, who are now enjoying record profits of $7.8 billion for the quarter off the back of elevated European gas prices.

Nordstream2 was expected to begin delivery of an annual volume of 55 billion m³ of natural gas to Europe, as it stands there has been no advancement on the certification and the scarcity may continue into 2022. If it does, new German Chancellor Olaf Scholz will have a difficult task to balance rising energy prices a Social Democratic mandate that intends to move Germany away from fossil fuel consumption.

UK Energy Provision Proving Poor

Britain’s dream of taking back control from Europe has not eased their energy woes – a price cap on costs to consumers has seen the end of 20 energy providers who could not reconcile the price differences. The root causes of UK’s crisis can be placed at the feet of a global price shock, yet it is a flawed structural policy framework that has undermined any ability to mitigate disaster.

Over 6 million consumers were hit by the rapid collapse of 19 energy providers in quick succession, soon followed by the largest collapse of Bulb Energy who had enjoyed a market share of 5-6%, roughly 1.7 million customers.

The combination of inflexible price caps, the demands of gas-fired power stations and an ‘astro-turfed’ energy market that had the illusion of competition ensured an energy crisis was inevitable, sooner or later.  A ‘race to the bottom’ in which providers could not offer competitive prices without exposing themselves to the risk of rising prices, especially in light of regulatory price caps, led to a £400 difference per customer for the year – losses that were too great to underwrite.

With UK gas consumers experiencing 250% increases in their electricity prices since January, energy insecurity coupled with the volatility of harsh and unpredictable winter weather patterns could led to a frigid winter for the British poor. This week a number of communities have been without power in near-freezing temperatures because of these cuts.

Malta – A port in the storm

Malta may not be the largest or most influential country in Europe, nor does their demand create significant market shifts – however their approach can rightfully be said to have protected their citizenry from the energy impacts of their continental neighbours.

The island off the southern coast of Italy has largely protected itself and consumers from price shocks through a seven-year price hedging agreement that cost the state €9.40/unit – which while usually above market rates, has allowed for a consistent supply without significant price shifts as the EU LNG spot price traded upwards of €16/unit.

Malta’s government has sought to inject €200 million into Enermalta (the national utility) to insulate Maltese consumers from price increases. It may seem a costly exercise but in comparison to the £3.2 billion expected cost to the UK and over €30 billion cost to EU states – it is beginning to look like a smart bet to avoid market speculation in favour of consumer protections.

A cold or costly winter?

The European gas markets are in a vulnerable state, beholden to market and natural forces out of their control. While the European objective is to shift away from fossil fuels, the reality is that such intentions may fall short of practical necessity of using gas-power to combat frigid winter temperatures and unpredictable weather patterns. If the renewable sector cannot provide ample support for home electricity supplies, and if divestments in fossil fuel projects continue to be restricted – then gas prices will continue to rise to the detriment of EU consumers.

Potential remedies for rising gas prices, such as Malta’s long-term hedging contracts, are not seen as a viable option due to the barriers they place on renewable energy trading. The expectation is that for future energy supplies to be flexible and anticipate market shocks, they need to be open to traders. If the bet on renewable generation, including green hydrogen, does not pay off in the coming years or is insufficient to compete against Russian gas, then European consumers could face many more of these costly winters.

For the UK, there is a chance to reimagine their energy markets following their exit from the EU. Current government oversight of the energy markets does carry great confidence among consumers; however, the continuation of licensing North Sea blocks may alleviate future constraints on supply.

How the EU and the UK will look to adapt to these issues will be closely watched. This is simply Round 1 of the Covid-Climate energy crunch – weathering this storm is the focus right now, but soon European states will be shrewd to look at innovative policy and market approaches to counter these threats.