1. How did the crisis arise?
Europe’s vulnerability has been laid bare by a chain of unexpected events: after an exceptionally cold and long winter in 2020-2021, the post-pandemic recovery has led to an increase in energy demand. This coincided with weather conditions creating unusually low wind speeds that reduced wind turbine output, all at a time when natural gas was scarce. As a result, electricity prices more than tripled in the second half of 2021. Then, in February 2022, the Russian military campaign triggered sanctions against Moscow. Putin retaliated by militarizing natural gas flows to his neighbors. It began to turn the screw by restricting flows in April. By late July, the prospect of a complete collapse of Russian supplies was becoming increasingly likely.
2. Why is Russia such an important factor?
Russia is one of the biggest gas exporters in the world and Europe remains its biggest customer. As coal and nuclear plants around the bloc have been shut down in recent years, Germany and some other countries have become more dependent on giant pipelines carrying gas from Siberia. For many years, EU officials have spoken of the need to become less dependent on Russian supplies, but as both sides benefited and gas delivered by pipeline was often cheaper (and cleaner) than other energy sources, little action has been taken. The EU depended on gas for around a quarter of its energy, with Russia accounting for more than a third of that supply in 2021, up from 26% in 2001. When the conflict in Ukraine broke out, it was suddenly untenable for Europe to continue spending up to $1 billion a day on coal, gas and oil imported from Russia – since he was funding the war machine.
3. How has Europe reacted?
As the United States and other allies embargoed Russian energy, European policymakers raced to find alternative sources of supply. They staged a multilevel retreat that began with a ban on Russian coal. Then they struggled for weeks trying to come up with a plan to phase out Russian oil in 2022 and cut gas imports by two-thirds. This is difficult because some refineries and chemical plants in the eastern part of the bloc are captive customers, receiving their raw materials via pipelines from Russia. In July, EU countries reached an agreement to reduce their overall gas consumption by up to 15%. The plan is to walk a tightrope between preserving the energy supply for residential users and mitigating the risk of lasting damage to vital industries. Heat waves in July and August boosted electricity demand as consumers and businesses turned up their air conditioners, making those energy savings more difficult to realize.
4. How are utilities avoiding shortages for now?
The use of hard coal and lignite to generate electricity in the EU increased by 15% in the first half of 2022 compared to the previous year, thanks to the revival of decommissioned power plants. Efforts to bring more liquefied natural gas by ship, which costs about four times as much as the Russian pipeline, have been constrained by limited global infrastructure and supplies. There has been talk of delaying the exit from nuclear power in Germany and other countries, a stable source of electricity with virtually no emissions. The approach was initially rejected but gained popularity as the crisis intensified, with Germany’s environment minister signaling she was willing to consider extending the life of a plant beyond of its planned closure by the end of the year.
5. How is the crisis affecting the European economy?
Industrial manufacturing was affected because energy prices rose faster than in other regions. In August, Dutch benchmark gas futures were more than six times more expensive than those in the United States and about a third more expensive than in Asia. Chemicals giant BASF SE planned to cut production of ammonia, of which the gas is an essential raw material. In the UK, CF Industries Holdings Inc. said it was permanently closing a fertilizer plant. Steel producers and aluminum smelters have cut production because electricity and gas prices at least four times higher than historical standards have made them uncompetitive in world markets. German officials have urged citizens to reduce their energy use and warned of possible natural gas rationing, shaking businesses from automakers to cement makers. It also became too expensive to light Germany’s presidential palace in Berlin, while the city of Hanover reduced hot water in showers at local gymnasiums and swimming pools. As the war dragged on, more and more economists predicted that the energy crisis would shrink Europe’s economy, tipping it into a recession.
6. How are consumers affected?
The energy crisis is causing Europe’s fastest inflation in decades, pushing the so-called “cost of living crisis” to the top of the political agenda. At the end of May, the UK announced a £15 billion aid package for households, while France approved a €20 billion anti-inflation package for housing in early August. Other nations, from Italy to Sweden, also compensated its citizens. Although these are presented as temporary measures, the break with Russia means that Europe will face higher energy costs for the foreseeable future. And with the phasing out of renewable energy subsidies, energy prices will also have to cover the cost of green investments.
7. What about Europe’s green ambitions?
In the short term, the return to dirtier fuels seems like bad news for the climate. Further, the crisis has made European governments more determined to ditch Russian gas, and fossil fuels in general, and accelerate the adoption of cleaner technologies. They have stuck to the EU’s flagship climate policy, the Green Deal, which includes a massive package of laws aimed at achieving the goal of zeroing greenhouse gas emissions by mid-century. . The 27 EU countries got around a fifth of their total energy from renewables in 2020 and had planned to double that share to 40% by 2030. As a result of the war in Ukraine, the objective was raised to 45%. Germany, which depended on Russia for most of its oil, natural gas and coal, has advanced its goal of 100% renewable energy by more than a decade to 2035. is a daunting challenge because wind and solar farms take years to plan and build. .
• A Bloomberg editorial on why Europe’s emergency energy plans don’t seem ambitious enough.
• Bloomberg Opinion’s Javier Blas sheds light on European industries at risk of closure, from aluminum to chicken farming.
• David Fickling breaks down Russia’s gas exports to Europe.
• Related QuickTakes on the EU Green Deal, how Europe became dependent on Putin for gas and the EU’s plans for a border carbon tax.
• A data visualization of how Russia’s war in Ukraine is stifling the world’s supply of natural resources.
• More information on Europe’s wartime mission to ditch Russian oil and gas.
More stories like this are available at bloomberg.com