Øystein Noreng, Oslo - Jan 25,2022

Europe has been struck by unusually serious energy price hikes, caused not by oil market turbulence, but by misconceived European energy policies. As is often the case, Russia gets the blame. The International Energy Agency’s Fatih Birol and Nato head Jens Stoltenberg have both accused Russia of holding back gas supplies in order to “cynically manipulate” Europe’s energy markets. Oxford Institute for Energy Studies’ (OIES) founder Jonathan Stern, in contrast, blames EU and UK mismanagement for Europe’s energy crisis. Russian gas deliveries to Europe are down by perhaps one-third and inventories of Russian gas in Europe are dwindling, but the fact is also that Russia has kept contractual commitments, albeit no more. This suggests Stern is right.

The EU has for years proclaimed its intention to liberalize the gas and electricity markets, dropping long-term, oil-indexed contracts in favor of spot transactions. Its vision was to reduce imports, develop renewable energy and promote competition to provide EU consumers with clean, affordable and secure energy. More recently, the EU has declared the aim of net-zero emissions by 2050, meaning it would need no long-term gas contracts.

Until 2020, this policy was a success. LNG did provide the EU with rising supplies at lower prices. Even as Russian sellers declared that, without contracts, they had no obligation to provide gas to Europe, the EU remained comfortable.

Early in 2022, the actual situation is sharply different from that image. The preferred market for LNG is Asia. Solar and wind reliance have not worked out as expected. Europe has a major energy deficit and the world's most expensive energy, with low security of supply. Carbon emissions have decreased, but at the expense of output, employment and income.

Europe has been hit by an electricity price crisis caused by failing politicians, not failing supply. The EU aims to be the world's environmental policy beacon, but risks becoming the world's economic rear light. In theory, the EU energy policies' aims are honorable. In practice, each is difficult to reach and the combination more difficult still.

It is misleading to say the EU has a well-functioning energy market. What it has is a bargaining game about energy between the EU Commission, large member countries, and energy industries and major companies. The bargaining produces compromises that may be respected — or not. Business interests have a stronger voice than trade unions or consumers. Power, primarily German power, decides in the end.

Center of Crisis Germany, UK

Europe's electricity crisis is particularly serious in the UK and Germany, two countries with among the world's highest electricity prices. In Germany, politicians have decided to shut down both coal-fired power and nuclear power. This year, Germany will shut down nuclear power plants without a replacement at hand.

The alternatives are wind and gas-fired power, but a new gas pipeline from Russia, NordStream 2, has so far not gone into operation due to legal and political obstacles. The country has the money to cover the shortage by importing electricity, without regard to the effect on European electricity prices.

In both countries, it is not uncommon for wind power plants to earn more when they’re switched off — thanks to public compensation for grid-related closure — than from normal operations. The low utilization rate for wind power suggests overinvestment. Combined with scarce power generation in low-wind conditions, this is driving up electricity prices across Europe, in accordance with the goal of ensuring that power goes where prices are highest.

In principle, cross-border exchange of electricity should be beneficial for consumers. Competition can moderate prices. Diversity of manufacturers can secure supplies. In practice, however, the reality of the past year has been a far from perfect market. politics, not market forces, are halting nuclear power in Germany, but not in France or the UK — or halting gas-fired power in France and the UK but not in Germany. The costly chaos is set to continue.

Few governments have spent more to fund the shift to green energy. Nevertheless, a survey in March 2021 indicated that German households paid on average the highest electricity prices of 147 countries covered.

Yet Germany persists in refusing to consider deferring the nuclear phaseout or granting temporary permission for Nord Stream 2 to operate, turning instead to imported electricity. German stubbornness or lack of flexibility is, indeed, remarkable.

In the UK, government shutdown of a large gas storage facility is a major reason for gas shortages and soaring electricity prices. Having first replaced coal with nuclear, gas and wind power, the next step in the UK plan is to phase out gas, beginning with closure of the country's largest gas storage facility. When the wind has slowed down, the country was hit by unusually high electricity prices.

France, Relatively Resolute

In France, the government has been more resolute. It has stepped up the pace of nuclear development after a long pause. As a short-term measure, France has imposed a ceiling on electricity and gas prices and obliged the power companies to service the home market first. The cost will be covered by the government and state-owned power company EDF. The French resolve could be a model for the EU, but Germany and the UK appear unwilling.

Today's European energy price crisis has its basis not in resource scarcity, but in human misjudgments. In earlier times, the energy sector was dominated by engineers whose main goal was to ensure reliable and affordable supply. In recent times, the main goal has shifted from consumer welfare to producers' earnings. The consideration of safe and affordable energy is pushed to the background. Politicians have made matters worse.

The big question is to what extent energy policy will contribute to driving the EU apart and slowing or even reversing liberalization of the power sector, as well as the “green shift.”

In the meantime, the new gas pipeline connecting Russia to Germany remains idle. Accusations that Russia is holding back gas supplies in order to “cynically manipulate” Europe’s energy markets suppose that Russia has noncontractual obligations to deliver gas on EU terms.

The accusation ignores earlier criticism that Nord Stream2 was redundant and intended as a political tool to dominate Europe. The implication is that Russia is evil, whether proposing a new gas pipeline, financing and completing it, or insisting on its own terms.

Russia has invested large sums in a new pipeline in order to make money, not trouble. It has a new client, China, for natural gas from areas in Western Siberia that currently serve Europe. Russia does deserve criticism on human rights. Making up irrational accusations will weaken those without getting to the real core of Europe’s energy policy shortcomings.

Øystein Noreng is professor emeritus in Petroleum Economics and Management at BI Norwegian Business School in Oslo, Norway.


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