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ANALYSIS The Economist: Europe will be able to hold the lights



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The energy crisis is becoming a total war and Europe is taking steps to prepare the population for the torment that is expected this winter, writes The Economist. After already banning or proposing to ban Russian oil imports in the near future, the leaders of the G7 group, the world’s largest economy, said on June 28 that they would try more ways to cap the price of oil, as well as Russian gas.

The UK has already hinted that it will reform the energy market to limit the influence of natural gas on the cost of utilities to the population. Energy suppliers in France have already called on consumers to reduce energy consumption “immediately”.

One of the reasons for such measures is the desire to deprive Russia of the revenue it desperately needs to support the war in Ukraine. Another reason is the need to manage the critical energy situation that threatens Europe.

Just a month ago, avoiding the crisis seemed difficult, but possible. While America is increasing its exports of liquefied natural gas (LNG), its contribution to Europe’s total gas imports rose from 6% in September last year to 15% in May this year, while Russian gas in the European market fell from 40% to 24%.

The gas that Europe could not do without continued to flow through the Russian gas pipelines, although Moscow closed the valve that controls the flow of gas to Bulgaria, Finland and Poland, after these countries refused to pay in rubles. But they did not buy very large quantities. The reserves of the European continent were filling at an unprecedented rate.

The two incidents that made it impossible to avoid the energy crisis

And then two things happened. A Texas gas liquefaction plant shut down after catching fire on June 8. In just one week, the Russian giant Gazprom announced that the volume of gas that Europe is supplied by the Nord Stream 1 gas pipeline will decrease to 40% of normal capacity.

In total, the two incidents reduced Europe’s gas imports by 10%. There are not many other sources of supply. LNG terminals are already at full capacity. The gas pipelines in Algeria, Azerbaijan and Norway are also too small.

The resumption of gas extraction in the Dutch region of Groningen, which once provided Europe with as much gas as Nord Stream, but which was stopped because it caused more earthquakes, is a difficult political decision to make.

By the end of October, only two-thirds of the European Union’s gas storage capacity will be filled, given that the proposed target is four-fifths.

If Nord Stream stops, Europe will be left with 40% of its deposit capacity empty

More recently, there has been a danger that the Nord Stream gas pipeline, which has to go through a maintenance process in July, will not restart once the repairs are completed. If the fears come true, Europe will be left with 40% of its deposit capacity empty.

The question that arises in these circumstances is: Will Europe be able to warm up in winter? Last year, renewable energy installations ran into major problems due to drought and weak air currents.

The newest problem is the nuclear reactors in France that need maintenance and operate at less than half capacity, while a heat wave in the south of the country increases the volume of energy consumed by refrigerators.

The reference gas prices reached the average level of 197 euros per MWh-hour, while a year ago the average was 15 euros.

One of the ways in which Europe is dealing with energy imbalances is through trade. France, once the largest energy exporter in the region, has now bought electricity from neighboring countries.

Wholesale gas is now more sought after than ever in Germany and Eastern Europe due to reduced supply through Nord Stream, which will encourage the transfer of LNG from the UK and Spain.

The energy crisis could fracture European unity

But this will not increase total fuel and energy supplies. More worryingly, there are signs that, in the event of an even more severe crisis, European unity could break down. It was revealed on 29 June that one of the first steps the UK would take in the event of an energy emergency would be to cut off supplies to mainland Europe.

Under these conditions, EU states are in a hurry to find alternative sources. Germany has temporarily abandoned plans to close a fifth of its coal-fired power plants this year. Austria, the United Kingdom, France and the Netherlands have also said they will postpone the closure of such plants or reopen those they have already closed.

Some of Europe’s seven nuclear power plants, which should have been shut down by the end of next winter, could remain in operation for some time.

But even if all these measures are taken, gas will most likely continue to negatively affect electricity prices.

Energy consumption must be adapted to the new reality

If the gas supply continues to be difficult, consumption will have to adapt to the new reality. High prices could play a role, but streamlining could also be imposed on companies that consume a lot of gas and electricity, such as fertilizer, glass and steel producers.

How drastic these limitations will be and the possibility that they will affect the common population are dilemmas that depend on two unknowns: the temperatures the European continent will face in winter and how much LNG China will consume once it abandons the quarantines imposed. to combat the coronavirus pandemic.

Until now, Europe has been unlucky in the energy war with Russia. If he wants to keep the lights on until spring comes, something needs to change.