The 10 keys to understanding why electricity and gas are rising without brake in Europe

The reactivation of the world economy, after its paralysis due to the pandemic, has stressed the markets, pushing prices up.

An electricity bill in a file image.

The record rise in natural gas prices in Europe it has set off all the alarms in Spain. Consumers, from industrials to households, are being hit hard by this winter’s high energy bills and some experts say the worst is yet to come as global demand for fuels increases.

Why is the gas rising?

Natural gas prices have risen in Europe as global demand has increased. While this is happening with most commodities, it has been a bigger problem with natural gas.

It is due to a global economic rebound as countries lift Covid-19 restrictions and fully reopen their economies. Europe and asia prices are pushing because winter is coming in the Northern Hemisphere and storage is below what is necessary. Its Investors are in a race to pick winners and losers.

Why is there no stored gas?

The demand has increased for several reasons. This year 2021, Europe has had a colder winter, so people heated their homes for longer than usual.

That, coupled with the phasing out of coal and a bad year for wind production, has increased the need for natural gas.

On the supply side, there has been less maintenance in the oil and gas fields during the health crisis and less investment. Europe is reducing its domestic natural gas production. Europe’s leading national natural gas producer, the Netherlands, began phasing out its main gas field, Groningen, in 2018.

Why is the price of electricity going up?

Wholesale electricity markets across Europe are experiencing unprecedented escalation. The marginalist system, which works for everyone equally, sets the final price of electricity with the most expensive technology, which at the moment is gas.

For every euro that the price rises of gas in international markets, goes up two euros for electricity in the wholesale market ”, says Minister Ribera. A report of the Bank of Spain published in August attributed algae half the rise of the price of light.

What is the role of the European CO2 market?

Another factor in the rise in the price of electricity is the influence of the cost of the European market for CO2 emissions, which has tripled in just one year, from 20 euros / Tn to the current 60 euros / Tn. The emitting power plants (gas and coal) must incorporate this cost in their production and transfer it to the final prices in their offer in the pool.

The hardening of the European Union’s climate targets is behind this rise, but also speculation. Mutual funds are doing their August because they see it as a sure value that is always going to rise.

According to Bloomberg BNEF, a fund of BNP Paribas Asset Management, the Energy Transition exemplifies what is happening in the ETS EU. Some of its operations in the European CO2 market have allowed it to obtain profits of more than 100%.

What is the role of Russia in this crisis?

There have been concerns that Russia could be using the crisis to push for the Nord Stream 2 gas pipeline, which links the recently completed country of Vladimir Putin and Germany, to go online by not sending more natural gas for storage from Europe.

Russia was the largest natural gas exporter to the European Union in 2019 and 2020, accounting for more than 40% of the EU’s imports. The tension was lowered precisely a few days ago, when it was announced the final opening of the gas pipeline on November 8.

What about the green transition?

This context of energy crisis would not exist if at this moment there were much more renewable capacity installed and connected to the electricity system. Renewable energies diminish the role of fossil fuels and protect the supply market from the impact of fossil fuel prices, but today they are not enough to influence in this way.

The long-term response to the current situation in Europe must be to accelerate the deployment of renewable energy sources, but also energy efficiency solutions, which are very important in order not to decrease the demand for heating in the residential or industrial segment.

Coal has been drastically reduced, replaced by gas. At the same time, two other sources of energy, wind and water, have had unusually low production, less unexpected wind, and low rainfall in areas like Norway.

Why is oil rising?

Like gas, global demand for crude oil has increased in 2021, causing prices to rise sharply. But unlike this sector, not so organized under the control of the petro-nations, the reason for the sharp increase in international oil prices is the supply restrictions maintained by the nations of the OPEC + grouping.

Due to the pandemic, these oil-producing economies continue with slow increases in production leading to an increase in oil and gas prices.

Currently, there is a gas shortage in Europe and Asia, which has driven demand for oil for power generation.

How long will it last?

Experts expect this situation to stabilize and prices will return to a more moderate path starting in the spring of next year. However, no one predicts that it will not happen again.

Increased demand for electricity combined with fuel price volatility means that the world could be in an unstable period for a few decades. The consequences will likely range from periods of energy-driven inflation, exacerbating income inequalities, to the looming threat of power outages and loss of economic growth and production.

Is there a crisis in raw materials?

An increase in the prices of crude oil and gas means an increase in the cost of production and transportation of various goods.

Around the world, raw material prices, operating costs and transportation are skyrocketing. The Prices of many commodities have risen by as much as 300-400%.

The price of steel, which directly impacts the industry, has more than tripled in less than a year. There seems to be no limit. And beyond prices, the very availability of certain materials, equipment, spare parts, containers and even electricity remains highly uncertain for months.

What can the consumer do?

The light through the clouds, the rise in gas and fuel represents a fearsome combination for the pockets of Spanish consumers. The OCU, the Organization of Consumers and Users, applauds the Government’s measures to reduce VAT from 21% to 10%, the reduction of the Electricity Tax from 5.1% to 0.5% and the suspension of the IVPEE (tax to electricity generation) of 7%.

Despite this, in 2021, domestic consumers will have an extra cost of up to 854 euros per year. And the increase may be greater, because these increases affect the price of many products and services, which the consumer indirectly pays again.

There are not many options to tighten your belt. One is to seek energy efficiency and savings at home, but in the case of SMEs and industries, it involves reducing production hours as is already happening and, therefore, lower income and profitability.