UK, Germany Face Energy Squeeze

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Natural gas prices in Europe are soaring. Consumers across the continent are feeling the pain with no relief in sight. What happened?

A perfect storm of factors has contributed to rising prices. Global energy demand is on the rise as the global economy emerges from Covid-19 related shutdowns. The thirst from Asian markets for liquefied natural gas (LNG) imports can’t be quenched, diverting much-needed shipments from Europe. And to top it all off, the wind simply hasn’t blown, resulting in an unanticipated decline in the production of power from Europe’s wind fleet. In the UK, the drop-off in wind has become particularly sharp, dropping from 25% to 7% of the country’s power supply.

Last week’s fire at a key power substation on the English Channel further exacerbated the UK’s energy supply woes. The resulting damage from the fire shut down a vital underground electric transmission link from France until at least October 13th according to National Grid PLC.

“We have never seen prices like this,” says Ira Joseph, the global head of generating fuels and electricity pricing at S&P Global. “We expected some sort of recovery after COVID because prices were so extremely low last year, but this is really extreme stuff.”

Businesses across Britain are suffering under the burden of increased energy costs. For example, U.S. fertilizer maker C.F. Industries closed two of its U.K. plants, blaming high natural gas prices. There’s no word yet on when the plants will reopen. Several steelmakers have also halted production during the day when power prices are at their peak. In addition, four British retail electricity and gas providers have collapsed due to the high prices.

“At a time that manufacturers are meant to be coming out of the Covid downturn after a significant period of low production and slashed order books, companies are now struggling to cope with unprecedented energy costs which risk putting the brakes on any recovery,” says Verity Davidge, manufacturing trade group Make U.K.’s director of policy. British Prime Minister Boris Johnson’s led government is currently considering offering government-backed loans to limit the fallout.

Germany, Europe’s largest economy, isn’t faring much better. Energy prices have risen considerably since the onset of the Covid-19 pandemic and industry leaders only expect the trend to continue. Der Mittelstand, an advocacy group for Germany’s largely family-owned midsize companies, warns that energy prices, already the highest in Europe, threaten many of its midsize industrial companies.

What does this mean for the U.S.? As we wrote last month, gas prices have been on the rise here at home. But while benchmark U.S. natural-gas prices have edged up near their highest levels since 2014, prices are still lower than those found in Europe. High natural gas prices will translate to higher electricity bills since natural gas supplies 40% of U.S. electricity and will most likely only increase with the scheduled retirement of more of the U.S. coal fleet. In addition, seasonal stockpiling is at 7.1% below the five-year average, which could lead to shortages and even higher prices this winter. 

The U.S. is now exporting record amounts of liquified natural gas (LNG), prompting domestic-based energy consumers to express concern. In a recent letter to the U.S. Department of Energy, the Industrial Energy Consumers of America asked Energy Secretary Granholm “…to take immediate action under the Natural Gas Act (NGA) to prevent a supply crisis and price spikes for consumers this winter.” Unfortunately, lowering U.S. exports could cause an even bigger energy squeeze for Western Europe.

There are no easy answers for fixing Western Europe’s short-term energy supply dilemma. However, for the sake of affordability and reliability in the long-term, the region’s energy portfolio must include stable sources of energy in addition to the ever-expanding sources of intermittent wind power. For the good of consumers and the economy, policymakers must keep an eye on reliability.