Cold reality of energy missteps sets in

Soaring gas prices long time in the making with Europe's shortsighted approach

In the autumn of 2021, gas and electricity prices hit record highs in Europe as supplies dwindled and demand boomed. With the new year settling in, and Europeans freezing in a bitter winter, there are no signs that relief from hefty bills is on the way.

Wholesale European gas prices soared more than 800 percent last year, the Financial Times reported.

Demand for gas has spiked for several reasons, including the colder winter in Europe.

Slower production of renewable energy, such as wind power, combined with a shortage of natural gas and nuclear power outages, has contributed to the jump in gas prices.

Also, as major economies slowly recover from the effects of the pandemic, the need for energy has shot up across continental Europe and the United Kingdom.

On Dec 21, the website OilPrice reported that the price on the Dutch TTF hub, a European benchmark for natural gas prices, jumped 10 percent to a record high of 165 euros ($187) per megawatt-hour after gas supplies into Germany at the Mallnow compressor station plunged to zero. The report said flows had been diverted eastward to Poland.

Adding to the pressures, Russia has been sending less natural gas to Europe, with some analysts saying it is restricting supplies for political reasons in order to push European governments to approve the Nord Stream 2 gas pipeline. Critics fear the newly built pipeline will give Moscow too much leverage over the continent.

Moscow has denied any maneuvering, with Russian President Vladimir Putin saying that his country is not to blame for Europe's gas crisis.

Samir Dani, a professor of management operations at Keele University in Staffordshire, Britain, said Russia has had its own gas production problems.

"Russia itself also faced problems because of very harsh winters; they have depleted a lot of their gas resources, and, due to the pandemic, they also faced maintenance issues. So they haven't been able to ramp up production and supply," Dani told China Daily.

Russia provides around 5 percent of the UK's gas but is the majority provider of the resource for the rest of Europe.

In Britain, domestic gas production accounts for 40 to 43 percent of the country's total supply, with the remainder imported from countries such as Norway and the Netherlands.

The Netherlands, Europe's top domestic producer of natural gas, started phasing out its main gas field at Groningen in 2018, a move that has added to the supply problems.

According to data from Gas Infrastructure Europe, an association representing European gas infrastructure operators, the percentage of available gas in storage is around 74 percent in Europe, compared with 94 percent this time last year.

Gayle Allard, a professor of economics at IE University in Madrid, Spain, said the European Union could have acted sooner to cushion the impact of reduced supplies.

"Supplies could have been diversified. … The EU leaned harder on natural gas in its transition toward renewable energies," Allard said. "Infrastructure for US gas could have been prepared. Not investing earlier and more heavily in renewables was another mistake."

Financial difficulties

As wholesale energy prices soared, many energy companies in Britain have faced financial difficulties, with some collapsing under the pressures.

So far, about 30 energy companies in the UK have gone bust. Zog Energy, Orbit Energy, Entice Energy and Bulb are just some of the suppliers that have folded in the past three months, affecting millions of customers.

Dani said another factor contributing to the supply woes is a move by the UK government to open up the country's gas market, with smaller players coming in. These operators relied on the spot market for gas, but locked in customers by offering long-term prices.

"As soon as the spot prices go up, most of these smaller suppliers are faced with tremendous losses. They just cannot cope with it, and that is why a lot of energy firms are folding," Dani said.

In October, Taofeeq Ibn-Mohammed, assistant professor and head of sustainability research at the University of Warwick, told China Daily: "A short-term solution is for the government to offer support to energy companies to avoid their complete collapse. This will include intervention options such as subsidies and capping of energy prices and profits to shield the consumer from the bigger impact of the crisis."

A lack of large-scale gas storage facilities in Britain has added to the problem, following the closure of a plant operated by Centrica in 2017 when it was deemed unsafe.

"The UK has also reduced its gas storage capacity for winter requirements across the country to only five days, down from 15 days previously," Dani said. "So that can cause a big problem during winter and now as the winter is setting in, there is going to be a huge issue in terms of how we are going to manage the supply of gas for the country during a global shortage."

As fossil fuels－including the most polluting of them, coal－are gradually phased out, many economies will look toward natural gas as a transition toward green alternatives such as the output from wind turbines and solar panels.

"The EU is the region of the world that is most committed to the transition and moving fastest toward renewables. Natural gas is the bridge in that transition. But of course, the EU is not the only region transitioning," Allard said. "China and India also are demanding massive volumes of natural gas to replace coal, and if they were more committed to the emissions targets that the world needs to stop climate change, they would demand more. Unfortunately, renewables like wind and solar do not yet produce enough to meet the continent's energy needs."

Allard warns that the crisis is worsening. She suggests relief could come from the United States, which has immense supplies of natural gas. However, Asian demand is pushing up prices and the northern hemisphere is in the grip of winter.

The skyrocketing gas prices have prompted some experts to call for a more balanced approach when it comes to phasing out unclean energy sources such as coal and gas.

"When we talk about transitioning to a net-zero carbon economy, we must realize that the process takes time and the infrastructure to facilitate the transition must be in place before abandoning current energy systems and networks," Ibn-Mohammed said. "The level of integration of renewable energy technology with the electrical grid is still quite low."

Issues such as poor output from renewable energy sources and a lack of wind power supplied to energy grids must be taken into account, he said.

"This poses specific challenges to the electrical grid operator, thus necessitating the need for alternative energy sources when demand outstrips supply," Ibn-Mohammed said.

Ibn-Mohammed stresses the need for "a decisive and fundamental structural change to the dynamics of how we live if we were to truly attain a net-zero carbon and resilient economy".

"Individuals and the government must take responsibility as well," he said. "The government will have to look for ways to improve the resilience of our supply chains through the implementation of intelligent decentralization of the economy, thus reducing the reliance on one country or another through globalization, whose overall weakness has been exposed in the wake of the supply chain disruptions during the COVID-19 pandemic."

The Carbon Tracker, a not-for-profit think tank researching the impact of climate change on financial markets, said the protracted gas crisis was largely sparked by an overdependence on gas from within Europe in the wake of a rapid exit from coal that was accompanied by an inadequate shift to renewable sources.

Jonathan Sims, a senior analyst at Carbon Tracker, said: "Volatility within the natural gas market is nothing new, however. The political sensitivities surrounding the market have brought frequent price swings in recent years amid fears that supply may be reduced at any time.

"Although these movements may not have been to the extent that we have seen this year before, extreme volatility and exposure to commodity price movements is something that impacts gas generation, but not renewables."

Green transition

Sims said a key advantage of transitioning to a greater use of renewables over fossil fuels is the opportunity for countries to become self-sufficient with energy supplies and reduce dependence on fuel imports.

The Carbon Tracker, headquartered in the UK, wants to see governments accelerate the adoption of wind and solar farms to steadily decrease exposure to volatile global commodity markets.

Before the green transition can reach 100 percent, Sim notes, there is a need to prioritize the displacement of fossil fuels as quickly as possible.

"It will be difficult to achieve a 100 percent renewables electricity system, but rather than focusing on the final 10 percent of this ambition, we should currently be focusing on achieving the initial 90 percent share for renewables and go from there," Sims said.

According to a Carbon Tracker report titled Foot off the Gas, released in early 2021, a clean-energy portfolio of low carbon technologies－encompassing onshore wind, utility-scale solar photovoltaics, battery storage, energy efficiency, and demand-response elements－can provide the same grid services as gas-fired power stations.

Furthermore, in the UK and Italy, where the initial research for these reports was focused, this clean energy portfolio is already more cost-competitive than the new combined-cycle gas turbine plants that both of these countries are planning, the Carbon Tracker said.

Commenting in September on the natural gas crisis, Fatih Birol, executive director of the International Energy Agency, said the "increases in global natural gas prices are the result of multiple factors, and it is inaccurate and misleading to lay the responsibility at the door of the clean-energy transition".

The IEA, which works with countries to shape sustainable energy policies, said the soaring gas prices led electricity providers in several European markets to switch to coal for power generation. This is a trend that would have been more pronounced if it had not been for the increase in the price of carbon emission allowances on the European market.

Birol adds that the crisis is "a reminder to governments, especially as we seek to accelerate clean energy transitions, of the importance of secure and affordable energy supplies, particularly for the most vulnerable people in our societies".

He added: "Well-managed clean energy transitions are a solution to the issues that we are seeing in gas and electricity markets today, not the cause of them."

The IEA notes that gas remains an important tool for balancing electricity markets in many regions.

As clean-energy transitions advance on a path toward net-zero emissions, global gas demand will start to decline, but it will remain an important component of electricity security. The IEA said that this is especially the case in countries with large seasonal variations in electricity demand.

In 2015, many nations pledged to limit global warming to well below 2 C, preferably to 1.5 C, compared with preindustrial levels, as part of the Paris Agreement.

Last year, the European Commission, the executive arm of the EU, set a collective goal of reaching net-zero emissions for the region by 2050.

"Net zero means an end to not only unabated coal plant use but also gas, and policymakers' attentions are consequently now turning toward how this pollution source can also be tackled," Sims said. "Gas has played a valuable role during the early stages of this transition, in allowing us to push ahead with phasing out power-sector coal use, but we are approaching a point now where the rate of decline in power sector emissions from this switching process is slowing."

Sims said there is a need now to look at alternative ways to remove the remaining share of emissions from this sector over the next 15-20 years.

Possible obstacles

But ultimately switching from the use of one fossil fuel to another is very unlikely to be a long-term strategy for decarbonization and policymakers in Europe are beginning to acknowledge this realization, he said.

The road to phasing out fossil fuels in favor of sustainable energy comes with obstacles in the form of whether there will be sufficient levels of both investment and capacity from renewable sources.

Experts say resolution of the issues rests more on policy than economic or technical questions.

"The economics are pretty clear－new renewables are already cheaper investments than existing gas capacity, while renewables with storage costs will also become cost-competitive by 2030," Sims said.

Regulatory processes, however, can be extremely lengthy, he added, citing Italy, where the average process can last as long as seven years.

"The country has been delivering an average deployment rate for renewables of less than 1 gigawatt a year in recent years as a consequence, whereas they really need to be building something like 7 gigawatts annually to meet their national climate goals," Sims said.

"And this then seems to have a knock-on effect where policymakers and developers revert back to looking at large-scale new-build gas projects because they believe it's easier to build one large unit than 10 smaller wind or solar farms."

In the UK, regulatory changes over recent years to the rules governing onshore wind projects have slowed growth in some areas. That technology has been excluded for a period from eligibility for government subsidies, Sims said, under a program called Contracts for Difference.

"That has changed for this year, however, and onshore wind projects are back as eligible for Contracts for Difference funding, so we are seeing some of these barriers now being removed as policymakers wake up to the reality of the scale of work that needs to be done if their legally binding climate targets are to be achievable," he said.

Recently, the UK government relaxed planning rules governing the development of large battery storage projects, and Sims said it's these sorts of regulatory changes for developers that will help in the long run to accelerate deployment rates closer to the required levels.

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