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The Financial Express

How is Europe handling energy crisis during this winter

| Updated: January 21, 2023 20:48:35


How is Europe handling energy crisis during this winter

The whole world has been carefully monitoring how European nations are trying to overcome the different dimensions related to their current energy crisis. Since the beginning of 2022 and the emergence of the Ukraine conflict, the challenges have intensified. It has exacerbated supply issues and also led to the cost of imported natural gas spiralling upward. In response, governments across Europe have been trying out diverse set of measures to shield citizens from the worst effects of surging prices while keeping their economies afloat. But worker strikes and burgeoning street demonstrations in multiple cities have demonstrated that the pain created by the continuing energy crisis is real and affecting millions of people.

Several options are being taken on-- tax breaks, reduced electricity use and desperate efforts to discover alternate sources of gas as the cold, dark days of winter are setting in. Climate variability is also adding fuel to the fire.

Some of the European countries according to energy analysts have been taking the right measures but despite concerted efforts are facing one challenge after another. In this context references are being made to France, Spain, Germany, Italy and Greece. The electronic media has reported that of these countries, France and Spain appear to have curbed inflation arising out of the energy crisis through more acceptable formats. It also appears that Italy, Germany and Greece are leading in long-term preparations to secure their energy needs while the United Kingdom is still struggling to find least common denominators.

One needs to understand that Russia had been accounting for nearly half of Europe's total natural gas imports in 2021. This aspect appears to have enhanced the vulnerability factor among European nations. Strategic energy analysts have pointed out in this regard that Poland, Finland and Slovakia were almost fully dependent on Russia for their natural gas because of their geographical proximity to its supply pipelines. Germany, Europe's largest economy, has also been reliant on Russia and was importing half of its natural gas requirement from that country in 2021. The vast German chemical industry, which employs more than 300,000 people, was using natural gas as a raw material.

In addition, it needs to be noted that among European countries, according to analyst S. Jha, there are some nations that have traditionally had a higher share of natural gas in their total energy mix: Italy (40 percent), the Netherlands (37 percent), Hungary (33 percent) and Croatia (30 percent). Though they depended on Russia to different degrees, they have all witnessed sharp inflation as gas prices have soared to record levels.

It also needs to be mentioned that Europe as a whole has been moving towards liquefied natural gas (LNG) to reduce its dependence on Russian gas, which was mostly delivered through pipelines. This reliance dynamic was reflected particularly in observations made by analysts that between January and September 2022 the European Union imported more LNG than it had ever bought in an entire year.

Within this trend according to Maartje Wijffelaars, Italy, among European countries, was particularly "proactive in finding LNG supplies".  He has also drawn attention to the fact that Italy apparently started looking for alternate gas supplies from Azerbaijan, Algeria and Egypt soon after the conflict broke out in Ukraine. This was so because Algeria - a major gas exporter - sits just across the Mediterranean Sea and this helped in coming to this Italian decision.

The energy analyst has also added that some countries including Spain, France and Italy have also had the advantage of a head-start in the form of existing fixed LNG terminals compared with other European countries like Germany that have traditionally relied more on pipeline gas. Analyst Jha has in this context also noted that along with the UK, these countries appear to have the highest LNG import capacity in the region. Many others are however now turning to floating terminals, which take less time to set up than permanent ones on land.

Germany appears to have taken the lead in such an initiative and has recently finished building the first of five planned floating LNG terminals. After they are ready, Germany will have one of Europe's highest import capacities. Greece is also planning five floating LNG terminals, which could make it a nucleus for southeastern European countries.

However, despite some ambitious steps being taken, it appears unlikely that enhanced LNG supplies from countries such as Qatar, Australia and the United States might not be possible very soon. Energy experts are saying that it could possibly take more than a year for the new projects to come online. This has led Ben Cahill, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies to remark "Until then there will continue to be an upward pressure on energy prices."

It may be mentioned here that already, in recent months, the Euro zone has witnessed the sharpest rise in inflation since its inception, and approximately 70 per cent of that inflation in September was due to energy prices. Such inflation and soaring cost of living has been leading to worker protest and disturbances not only in Europe but also in Britain. The world has noticed the unrest that is taking place in Britain and how Royal Mail workers protested at Parliament Square in London on December 9, 2022.

Some interesting steps have also been taken in anticipation by some European countries, particularly France. Their Administration after careful scrutiny and discussion decided to freeze household gas prices at October 2021 levels. They have also capped the electricity price increase in 2022 at 4 per cent over the previous year. They have also recently announced limiting power and gas price increase to 15 per cent during 2023. These steps have subsequently been explained by the French authorities as necessary measures to stop doubling of household bills. Apparently, any subsidy required in this regard will be borne by the French public operator.

One needs to realise that France has been taking innovative measures for some time. In the recent past it adopted means for relying less on Russian gas (7.6 per cent of total gas imports) than many other European nations. This was possible because of their heavy dependence on nuclear power. They have also taken necessary steps to improve maintenance of their nuclear power plants in view of their energy experts realising that their country was moving towards an energy shortage scenario. In addition, France's price caps on gas and electricity has allowed it to keep its inflation the lowest across the EU over the past 12 months.

Within the European Union, after France, Spain stands out as another proactive nation in trying to apply measures for shielding citizens from inflation through a host of tax reduction measures and a cap on the gas tariff.

The aforesaid pre-emptive efforts on the part of France and Spain have raised many observations among other European countries as to whether their governments are thinking of necessary courses of action with the savings already undertaken to tide over a possible crisis. Many are pointing out that since September 2021 - when natural gas supply bottlenecks began in the months leading up to the war - many of them have been keeping aside funds to deal with the crisis. They have also been adding to this pooled money as oil and gas prices soared because of the Ukraine conflict. They are now expecting immediate results.

It may be noted here that Germany accounts for 264 billion Euros (US Dollar 281 billion) - or nearly half - of the total 600 billion Euros (US Dollar 638 billion) earmarked for the energy crisis by EU countries, according to Brussels-based think-tank Bruegel. Germany's potential relief measures account for 7.4 per cent of the country's Gross Domestic Product (GDP). It is followed by Lithuania (6.6 per cent), Greece (5.7 per cent), the Netherlands (5.3 per cent), and Croatia (4.2 per cent).

But while France and Spain are capping prices and giving discounts on fuel prices to cushion citizens from high costs, others - including Germany - have been focusing most on providing direct financial support to vulnerable populations. Some are also implementing measures such as duty cuts on motor oils and windfall taxes on energy companies. In Austria, for example, households have received a one-time discount on their energy bills, with the most vulnerable receiving double of that figure.

Analyst Wiffelaars has interestingly pointed out that "Germany's emphasis on boosting household and business incomes has ironically contributed to an increase in demand and higher inflation. By contrast, France and   Spain have taken direct measures to curb inflation by controlling electricity prices". This anomaly appears to have persuaded Germany to take the step of subsidising power bills for consumers from 2023. This is being done to reduce inflation.

All these measures taken by European countries are being watched by the UK but they seem to hesitate to take such action. This is not helping their population. Their inflation rate of 11.1 per cent in October was the highest in 40 years. Unlike Germany, it has set aside resources equivalent to only 97 billion Euros (US Dollar 103 billion) to deal with the energy crunch - just 3.5 per cent of its GDP. Britain has also rolled back earlier plans to freeze energy prices for two years, instead limiting that period to six months until March 2023.

Europe realises now that they have to diversify their portfolios as much as possible so that they are not making themselves dependent on one country. One also needs to point out that Europe understands that their movement forward in the coming months has to be inclusive.

 

Muhammad Zamir, a former Ambassador, is an analyst specialised in foreign affairs, right to information and good governance.

[email protected]

 

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