Natural gas and electricity prices in Europe are expected to remain extremely high until at least 2025 as the energy crisis mounts amid supply concerns.
The impacts of the energy crisis first started one year ago, caused by the global economic recovery post-COVID-19 and gas supply and demand imbalances.
The price of futures contracts per megawatt-hour in Europe, trading on the Dutch-based virtual natural gas trading point (TTF), rose from the level of €30 at the beginning of September 2021 to €87 on Feb. 23, one day before Russia started the war in Ukraine.
The price saw a gigantic increase when gas traded at €346 per megawatt-hour last week, marking a 1,000% rise over one year.
As natural gas accounts for almost a quarter of Europe's electricity generation, high gas prices have been reflected in the share of natural gas in Europe's electricity generation.
August was the most expensive month ever for power in Europe on the back of surging gas prices, prompting European policymakers to consider market intervention to safeguard individual consumers and businesses, according to recent research by consultancy Rystad Energy.
"The energy crisis was partly caused by the global economic recovery after the pandemic due to gas supply and demand issues but even before the war started Russian actions were partially responsible for the increase in European Union (EU) gas prices," Sarah Brown, a senior energy and climate analyst at London-based think tank Ember, told Anadolu Agency.
Brown further explained that Russian energy giant Gazprom strategically did not fill up gas storage facilities that it operated in the EU nor did Russia increase flows through pipelines into the EU when gas demand increased.
Ana Maria Jaller-Makarewicz, an energy analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), said in addition to gas supply disruptions from Russia, market uncertainties, low gas storage levels and extreme weather conditions caused an increase in energy demand, along with the emergence of problems in nuclear power generation.
These factors, combined with the impacts of the war, have led to increases in natural gas prices.
Brown noted that the TTF benchmark prices for July-December 2021 averaged €70 per megawatt-hour compared with €11 per megawatt-hour for the same period in 2020.
"Prices peaked on Dec. 23 at €183 per megawatt-hour. So that huge uplift in the prices was not due to the war. However, the war exacerbated the gas crisis and prices rose again to a high of €216 per megawatt-hour in March," Brown said.
She added that there has been a persistent surge in prices throughout July and August to new highs predominantly due to reduced flows to 20% through the Nord Stream 1 gas pipeline and the threat of Russian gas being entirely cut off.
TTF prices averaged €136 per megawatt-hour from March to August this year, showing a 370% increase from the €29 per megawatt-hour level over the same period last year.
"European gas prices are expected to remain above €100 per megawatt-hour until at least 2025. This will keep electricity prices high so long as gas continues to set the power prices across Europe," Brown said.
Jaller-Makarewicz also echoed that prices could stay extremely high for the next 1-2 years. She predicted a slight reduction but said prices would remain high for another five years.
She based this prediction on the long-term unsustainability of Gazprom’s stance on halting gas flows via the Nord Stream 1.
"Gas prices will hit their peak after two years and eventually will start coming down but will keep fluctuating in the coming years," she said.
Gazprom announced last week that natural gas shipments from the Nord Stream 1 pipeline to Europe have been halted indefinitely.
- Solution lies in faster clean transition
Analysts argue that renewables offer a solution to the energy crisis provided countries stick together to achieve ambitious clean energy transition targets and offer concrete solutions to reduce gas demand.
"Europe's key energy policy mistake over the last decade has been to depend on imported fossil gas as a bridging fuel instead of enabling the more rapid deployment of cheaper, cleaner homegrown renewables," Brown said.
She asserted that lessons have been learned with the EU and member states now taking urgent steps forward in cleaning up their electricity supply.
"The war and energy crisis have acted as catalysts for a much faster transition to renewables. We can see this in policies such as the REPowerEU plan increasing the renewable energy target to 45% and doubling the EU's solar PV capacity by 2025. Now, these goals must be adopted and implemented at the national level across the EU," Brown urged.
In the REPowerEU plan, the European Commission proposes an increase in the EU's 2030 target for renewables from the current 40% to 45% to bring online over 320 gigawatts of solar PV newly installed by 2025 and almost 600 gigawatts by 2030.
This capacity is estimated to displace the consumption of 9 billion cubic meters of natural gas annually by 2027.
"Securing clean power by 2035 across Europe is crucial to bring down electricity bills, improve energy security and reduce emissions. Temporary emergency measures being taken now to secure energy supply must not, and will not, derail the EU's climate commitments," Brown said, noting that EU countries are taking steps to reduce total gas consumption by 15% over the next seven months.
She said the effort to reduce fossil fuel demand will continue well beyond this winter.
Jaller-Makarewicz noted that energy transition goals are at risk due to increases in coal power production and LNG imports.
"REPowerEU plan has indicated ambitious targets to handle the energy crisis, but issues could arise when countries do not stick together. Also, there is a risk that countries will focus on solving the energy supply issues by increasing gas infrastructure and do not put great effort into reducing gas consumption before winter months," she said.
Thus, Jaller-Makarewicz urged governments to now offer concrete and concise solutions to reduce or replace gas and power consumption.
She touted the option of deploying a massive program to install heat pumps to replace gas boilers used for cooking and heating at homes.
By Nuran Erkul Kaya
Anadolu Agency
energy@aa.com.tr