It’s been a fierce race against time for European nations,
looking to fill up their gas storage ahead of winter.
New deals were brokered, old gas facilities re-opened,
and measures to control consumption imposed, all in the wake of Russia’s invasion of Ukraine.
Their efforts and a mild start to the winter have paid off.
More than 95% of the EU’s gas storage was filled by mid-November.
That's above the 80% target the European Commission set back in March.
That's easing price pressures on consumers, but Europe’s energy crisis is far from over.
Come March 1st, 2023, the European utilities will have to
start refilling their inventories again, to prepare for next winter.
Henning Gloystein is the Director of Energy, Climate & Resources
at political risk consultancy Eurasia Group.
And they'll have to do that probably without Russian gas.
And that means price pressure will be high.
There has been a lot of apprehension around this winter,
but leaders and energy experts say it's next winter they’re most worried about.
There are a few reasons for this.
For starters, Russian gas will no longer make up the bulk of Europe’s energy imports.
You only have to go as far back as 2021 to see how reliant the EU had become on Russian energy.
It was the EU’s largest provider of oil, coal and crucially natural gas,
which makes up the biggest part of Europe’s energy mix.
European nations were buying gas from Russia at normal levels
at the start of 2022, but that came to an end after Russia invaded Ukraine.
Moscow drastically reduced supplies to Europe, and the EU revealed plans to
wean itself off Russian energy, claiming the commodity had been “weaponized.”
It's unlikely that the EU and Russia will restore their links any time soon,
meaning governments will have to rely on energy from other parts of the world to heat their homes.
One option European governments were excited about was liquefied natural gas.
While Russia provided a decent portion of the EU’s LNG in 2021,
so did countries like Qatar, Nigeria, the United States and Algeria.
But Europe is facing fierce competition.
China was the world’s top buyer of LNG in 2021.
In 2022, however, China began consuming less energy as the
country’s strict zero-Covid policy slowed down the economy.
The head of the International Energy Agency has warned that a rebound in China’s economy
will push up demand for LNG, and that supply is going to struggle to keep up.
When we look at the IEA analysis next year,
only a very small amount of new, additional LNG will come to markets.
Global LNG supply is expected to increase by 20 billion cubic meters in 2023.
That may sound like a lot but consider the fact that an estimated
60 billion cubic meters of Russian natural gas was imported into the EU in 2022.
And it’s not like that 20 billion cubic meters goes straight to Europe.
Much of the new supply has already been contracted to China,
with the country expected to capture over 85% of it to cope with post-lockdown growth.
China was busy signing new LNG contracts in 2021, and it’s been widely reported that Chinese
importers have been asked by the government to stop reselling supplies to Europe and Asia.
If Chinese LNG imports recover to 2021 levels and Russian supplies of natural gas completely shut down,
Europe could face a supply-demand gap of 30 billion cubic meters during the summer.
That’s half of the total gas needed to fill storage levels to 95% ahead of next winter.
This is going to cost huge sums of money.
Energy companies, so utilities, will have to import LNG at huge costs.
At the same time, their retail tariffs are kind of capped, so they're going to make
a loss that will increase the need for government bailouts of the energy sector.
Governments are still having to help small businesses and households with
their energy bills, that's going to cost hundreds of billions of euros.
Since September 2021, nearly 600 billion euros has been set aside
across EU countries to help defend consumers from rising energy costs.
I caught up with economist Marco Valli to better understand how this will play out
throughout the rest of Europe’s economy.
The question here though, is how much more can governments spend on the energy crisis?
Surely this can't be good for the economy, surely this can't be good for inflation.
Governments should be ready and stand ready to continue to
support the most vulnerable part of the population.
Households can purchase less goods and less services, once they're paying their bills,
and they're paying more expensive electricity and gas prices.
Along with the rising cost of energy,
governments are tackling record inflation and an economic slowdown.
This impacts consumers and business's ability to
spend and in turn would reduce the amount of money raised from tax.
As a result, the government's capacity to provide financial support would be limited.
Fiscal policy will have to become more targeted, meaning that there will be less
and less money to be spent for broader schemes of support because I suspect that the money to
provide the relief and shielding everyone from the energy shock is just simply not there.
It's not going to be an easy year, let’s say?
No, no, absolutely, for sure.
But there is one bright spot. Some European policymakers
have used the energy crisis to fast-track their green plans.
Some analysts are optimistic this could actually pay off in the medium-term.
We are actually positive, cautiously optimistic that come 2024-2025, there might be the famous
green dividend available, because a lot of companies and households will have invested
into improved energy efficiency, and that will give them an economic and competitive advantage.
But between now and then it's going to be really painful, and that’s going to hurt
companies, households and governments.