Hard choices loom for Europe as the gas crisis bites

Natural gas updates

The writer is professor of political economy at the University of Cambridge

With autumn having barely arrived, fears of a European gas crisis are palpable. Global gas prices are higher than they have been during any non-winter month since they were crashing down from their peak in June 2008. European countries have been hardest hit.

Natural gas import prices for the EU are up 440 per cent on a year ago. With gas still central to electricity generation in most European countries, the benchmark EU electricity contract hit a record this month. In the UK, several small British energy companies, which had banked upon the relatively low prices brought by the American shale gas boom as a permanent turn, have gone under.

If a gas crisis is coming Europe’s way, it has been long in the making. Since natural gas took off as an energy source in the 1960s, internal European supply has largely come from Norway, the Netherlands, and Britain. Most European countries have long needed to import a significant supply from outside Europe.

From the 1970s, the Soviet Union began to provide it. In the late 1990s, European dependency on Russian gas became a politically charged issue. From 2000, the EU nominally pursued a policy of energy diversification. When, in January 2009, Gazprom stopped all gas going through Ukraine for a few days, the costs of such high dependency on a single external source became terrifying for most south-eastern European countries.

Since the 2009 crisis, global gas markets have been transformed by the rise of American liquefied natural gas exports from shale. But between 2016 and 2020, the US exported more than twice as much gas to South Korea than to any European country. Germany, meanwhile, presently has no liquefied natural gas ports that could receive American exports. Seaborne liquefied natural gas imports are more expensive, and the lack of pipelines in Asia means Asian countries bid up prices.

Consequently, most of the EU remains materially dependent on Russian exports and geopolitically subject to President Vladimir Putin’s willingness to use gas supply as an instrument of power.

Any collective EU strategy around gas is circumscribed because while some states, like Germany, see little reason to change this dependency, others, like Poland and the Baltics, regard overall European gas dependency on Russia and the completion of the Nord Stream 2 pipeline — which will cut out Ukraine as a transit state for gas into northern Europe — as a threat to their security. 

This long-term external gas dependency interacts lethally with European commitments to decarbonise electricity and replace gas in heating. To achieve net zero carbon emissions by 2050, gas prices must rise and investment in the sector fall. But right now, gas is an indispensable energy source. It also emits considerably less carbon than coal. In the electricity sector as it is, they are alternatives.

The carbon price of using coal has driven up demand for gas. But now high gas prices are driving up demand for coal. If there were not serious intermittency problems with wind and solar and battery storage were further advanced, this would not matter. In reality, the absence of much wind in northern Europe this summer is consequential. In Britain, which enjoys the most propitious geographical conditions for wind power anywhere in Europe, nearly 60 per cent of electricity at times this month has come from gas.

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There are no solutions to this crisis, only politically nightmarish choices around hard realities that Putin can have Gazprom, Russia’s state-backed monopoly gas exporter, make still worse. Making such choices is what a serious energy transition always entailed.

The British government has claimed that the country’s vulnerability to the volatility in global gas markets validates its commitment to build a domestic renewables sector. But this supposes that battery technology yet to be realised could rapidly make wind and solar less intermittent energy sources for electricity and that heating powered by green hydrogen was imminent.

Energy consumption cannot be deferred until the future arrives. It can only occur at high prices or be rationed by the state. The first is what carbon pricing is supposed to encourage. But already some European governments have moved towards subsidising household energy costs or providing emergency credit to energy companies. The second looks too much like a return to the 1970s for European politicians to wish to contemplate. But it is where the logic of their tolerance for Russian dependency and green commitments leads.

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