1. How did the crisis come about?
Europe’s vulnerability was laid bare by an unexpected chain of events: After an unusually cold and long winter in 2020-2021, the post-pandemic recovery led to higher demand for energy. That coincided with weather patterns creating unusually low wind speeds that cut output from wind turbines, all at a time when natural gas was in short supply. As a result, electricity prices more than tripled in the second half of 2021. Then in February 2022, Russia’s military campaign triggered sanctions against Moscow. Putin hit back by weaponizing natural gas flows to his neighbors. He began to turn the screws by restricting flows in April. By the end of July, the prospect of a complete collapse of Russian supplies was looking increasingly likely.
2. Why is Russia such a big factor?
Russia is one of the world’s biggest exporters of gas and Europe is still its biggest customer. As coal and nuclear plants around the bloc were shuttered in recent years, Germany and some other countries became more dependent on the giant pipelines carrying gas from Siberia. For many years, EU officials talked about the need to become less reliant on Russian supplies, but since both sides benefited, and gas delivered by pipeline was often cheaper (and cleaner) than other energy sources, little action was taken. The EU relied on gas for about 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 erupted, it was suddenly untenable for Europe to continue spending as much as $1 billion a day on coal, gas and oil imported from Russia –– since it was funding the war machine.
3. How did Europe respond?
As the US and other allies went ahead with an embargo of Russian energy, EU policymakers rushed to find alternative supplies. They hashed out a tiered retreat that began with a ban on Russian coal. Then they wrestled for weeks to try to develop a plan to phase out Russian oil in 2022 and reduce imports of gas by two-thirds. It’s difficult as some refineries and chemical plants in the eastern part of the bloc are captive customers, receiving their feedstocks via pipelines from Russia. In July, EU nations reached an agreement to cut their overall gas use by as much as 15%. The plan involves walking a tightrope between preserving energy supplies for residential users while mitigating the risk of lasting damage to vital industries. Heat waves in July and August boosted demand for power as consumers and businesses turned up their air conditioners, making those energy savings harder to achieve.
4. How are utilities avoiding shortages for now?
Use of hard coal and lignite to generate power in the EU rose 15% in the first half of 2022 from a year earlier as decommissioned plants were revived. A push to bring in more liquefied natural gas by ship, which costs about four times more than Russian pipeline gas, was constrained by infrastructure and limited global supplies. There was talk of delaying the phase-out of nuclear power in Germany and other countries, a source of stable electricity virtually free of emissions. The approach was initially rejected, but gained appeal as the crisis escalated, with Germany’s environment minister signalling she was willing to consider extending the life of one plant beyond its planned closure by the end of the year.
5. How is the crisis affecting Europe’s economy?
Industrial manufacturing has taken a hit because energy prices rose faster than in other regions. By August, benchmark Dutch gas futures were more than six times more expensive than those in the US and about a third pricier than in Asia. Chemicals giant BASF SE planned to cut production of ammonia, for which gas is a key feedstock. In the UK, CF Industries Holdings Inc. said it was closing a fertilizer plant permanently. Steel producers and aluminum smelters cut output because power and gas prices at least four times higher than historical norms made them uncompetitive on world markets. German officials asked citizens to curb energy use and warned about possible rationing of natural gas, rattling companies from car manufacturers to cement makers. It also got too expensive to light Germany’s presidential palace in Berlin, while the city of Hanover was dialing down the hot water in showers at local gyms and pools. As the war dragged on, more economists predicted the energy crisis would c ause Europe’s economy to shrink, tipping it into a recession.
6. How are consumers affected?
The energy crunch is driving Europe’s fastest inflation in decades, pushing what’s known as the “cost-of-living crisis” to the top of the political agenda. The UK in late May announced a £15 billion aid package for households, while France in Early August approved a 20 billion-euro anti-inflation package for homes. Other nations from Italy to Sweden also compensated its citizens. While these are presented as temporary measures, the rupture with Russia means Europe faces higher energy costs for the foreseeable future. And with subsidies for renewables being phased out, energy prices will also need to cover the cost of green investments.
7. What about Europe’s green ambitions?
In the short term, the dash back to dirtier fuels looks like bad news for the climate. Further out, the crisis has made European governments more determined to ditch Russian gas, and fossil fuels in general, and accelerate adoption of cleaner technologies. They’ ve stuck with the EU’s flagship climate emissions policy, the Green Deal, which includes a massive package of laws to meet a target of zeroing-out greenhouse gas by mid-century. The 27 countries in the EU got about a fifth of their total energy from renewables in 2020 and had planned to double that share to 40% by 2030. In the wake of the war in Ukraine, the target was raised to 45%. Germany, which relied on Russia for the bulk of its oil, natural gas and coal, brought forward its goal of 100% renewable power by more than a decade to 2035. That’s an ambitious challenge since wind and solar farms take years to plan and build.
• A Bloomberg editorial on why Europe’s emergency energy plans don’t look ambitious enough.
• Bloomberg Opinion’s Javier Blas highlights the European industries under threat of closure, from aluminum to chicken farming.
• David Fickling breaks down Russia’s gas exports to Europe.
• Related QuickTakes on the EU’s Green Deal, how Europe became dependent on Putin for gas and the EU’s plans for a carbon border levy.
• A data vizualization on how Russia’s war in Ukraine is choking the world’s supply of natural resources.
• More on Europe’s wartime mission to ditch Russian oil and gas.
More stories like this are available on bloomberg.com