In addition to the heavy pressure on the pocket of consumers, these sharp and large revaluations are also a big problem for industry, especially energy-intensive sectors, as a result of which fears of a recession in the EU are intensifying in the coming months.
With explosive increases in the cost of natural gas and electricity Europe has been facing in recent days, with energy accuracy soaring to record highs in barometer markets before the summer is even over and as concerns of an extremely difficult winter intensify.
The developments of the last few days confirm the need for a collective European response to energy price hikes, given the risk of a significant increase in the cost of living in the Old Continent in the next period, while inflation in the European Union already reached 9.8% in July.
The natural gas supply price at the TTF node in Holland, which is a reference point for pricing across Europe, closed on Monday at 276.7 euros per megawatt hour, while during the day it had exceeded 294 euros.
This means that the cost of natural gas has increased approximately tenfold in just one year – on August 24, 2021 it was 27.6 euros – while it is more than 14 times higher than the average of the previous decade.
Equally worrying was yesterday’s picture in key electricity pricing markets.
In Germany, electricity orders for next year exceeded 700 euros per megawatt hour intra-session for the first time, while in France the corresponding contracts closed at 801 euros.
In addition to the heavy pressure on the pocket of consumers, these sharp and large revaluations are also a big problem for industry, especially energy-intensive sectors, as a result of which fears of a recession in the EU are intensifying in the coming months.
The perfect storm
Panic in energy markets followed in its wake surprise announcement by Russia’s Gazprom that it has scheduled three days of maintenance work on the Nord Stream 1 natural gas pipeline from August 31. Moscow has already curtailed the flow of gas to Europe via Nord Stream, citing technical difficulties caused by European sanctions imposed on the Russian economy over the invasion of Ukraine.
There is even strong concern that at some point Moscow will completely cut off the flows, at a time when the EU is unprepared to face the consequences ahead of winter.
The decline in Russian exports, which in previous years accounted for around 40% of natural gas imports from the EU, is combined with a series of factors that in practice constitute a perfect storm for a united Europe.
The European Union seeks to replace much of its imports from Russia with liquefied natural gas cargoes, but the quantities of LNG not committed through pre-existing contracts are limited. This forces the Old Continent to compete with major Asian markets that also import gas such as China, Japan and South Korea, driving up prices.
At the same time, this year Europe cannot rely on France’s fleet of nuclear units, which have been under-functioning for months due to necessary maintenance work that in many cases had been postponed due to the pandemic. As a result, France, which traditionally exports electricity, relies on gas imports, exacerbating the problem. Indicatively, according to the latest official data from the state company EDF, until June the electricity production from nuclear plants in France was reduced by 15% compared to 2021, which translates to 27.6 terawatt hours.
In addition, the prolonged heatwave which affected extensive areas of the Old Continent this year caused a large drop in the level of major rivers that are neurological floating axes for the transport of goods. This has affected, among other things, the transportation of coal cargoes, which many European economies are turning to in an emergency to fill the gap caused by the high cost and limited availability of natural gas.
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