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Europe’s energy crisis is fueled by record heat, war in Ukraine and dependence on Russia for oil and gas

This week’s Global Grid conversation looks at a rough winter ahead for much of Europe — and how the continent is preparing.

The continent has depended on oil and natural gas from Russia for years; while there have been pledges to wean the European Union off that dependency, that clearly hasn’t happened fast enough.

Meanwhile, the impact has been felt in higher prices for gas and electricity, and high anxiety over the prospects for a cold winter in Europe — and the prospect that Russian President Vladimir Putin may use the lever of energy as a weapon. On Wednesday, the continent got another reminder of the power of that lever, as Russia shut down the Nord Stream pipeline that sends Russian gas to Germany. It was only a three-day shutdown, the Russians said — for maintenance and repair — but such interruptions serve as reminders of the Kremlin’s leverage. Meanwhile there is this uncomfortable truth: Since the war began, while the EU has sanctioned Russia in many ways, it has continued to send Moscow billions of dollars in payments for all that oil and gas. And, of course, every one of those dollars can be used by the Kremlin to prosecute its war against Ukraine.

How severe is the crisis in Europe? What is being done to ward off a worst-case scenario for the coming winter? How well prepared — or not — is the continent for what may lie ahead? And is the crisis changing political and public thinking about support for Ukraine?

Grid hosted a Twitter Spaces conversation Tuesday to get at these questions — with Grid Global Editor Tom Nagorski, Deputy Global Editor Nikhil Kumar and Rachel Ziemba, adjunct senior fellow in the Energy, Economics and Security program at the Center for a New American Security.

This conversation has been edited for length and clarity.

Rachel Ziemba: I think it’s bad. As you highlight, there have been other energy crises and shocks. I think one of the things that complicates this is that you’ve had, as typically happens with crises, a perfect storm here.

Not only shortages of natural gas going back as far as last year, when, arguably, Putin and other Russian entities were trying to soften up Europe at the same time that they were amassing troops on the border. You’ve also had a very hot summer, you’ve had very dry conditions that have undermined hydropower, you have had heat that has undermined solar capacity and output. A number of things happening at the same time.

What I think we’re really seeing now is both high power costs and heating costs, or cooling costs, right now, with this uncertainty about what is going to happen in the winter.

We’re already seeing, for example, Nord Stream down for maintenance after lower supplies, and we’re seeing a dynamic where, assuming the war continues, the winter could be bad.

I think this is also coming at a time when the global economy has had this disjointed recovery from the pandemic, with supply chain vulnerabilities still in place. The magnitudes of price increases that we’re seeing on the energy side in Europe are pretty unprecedented. And they, of course, will affect different countries in different ways. Germany has already seen industry shut down. But across the board this is major. Of course, in richer economies in Europe, there are more tools to cushion than in some other geographies.

Nikhil Kumar: Yes, they’re preparing. In fact, better than many people expected, inside Germany and beyond. Before the war, about 55 percent of their gas imports used to come directly from Russia — that came down to about 30 percent over the summer. But about half of all German homes rely on gas for their heating. There are dependencies across German industry, which has become used to cheap costs and easily available gas.

To deal with the reduction in supply, places like Germany are already preparing for further cuts and for a possible complete shutdown. Germany has been doing things like shutting down lights and public monuments in Berlin, where about 200 public monuments are now not lit up at night. There are measures across industry — Deutsche Bank, for example, said that all their offices across Germany will no longer get hot water in the washrooms. At many public leisure centers, the only showers you can have are cold showers because hot water is not available.

They’ve been taking all these steps to reduce consumption, which has come down.

But one of the effects of these very high energy prices is also that consumption has been coming down. That means Germany is now in a much better position heading into winter than it was just a few months ago.

They’ve also really worked hard to increase the levels of gas that they have in storage. This is part of an EU-wide goal that’s already been met. The European Union wanted to get its gas storage facilities 80 percent full, and they’re already there. Germany’s even further ahead.

All of that is happening, but there are lots of moving parts, as we pointed out in our reporting. It all depends on what happens in the next few weeks and months and also how bad the winter is.

Gas tends to have higher seasonal demand in the winter not only because of greater use and power generation, but also because it’s used as a heating fuel. Typically, the summer and into the fall is when storage refills, and then it’s available to be used in the winter as well as the ongoing incremental supply that’s coming through pipelines.

It’s a good thing that the storage is here. There are measures that are being taken. The challenge is that, even though you could look at it from one perspective and say Europe is a bit more prepared, there’s two problems. One is that gas storage is not evenly distributed. There are countries, Germany included, that tend to have a higher share of storage. Places like Finland, for example, have almost no storage; the United Kingdom, for example, has almost no storage. These are choices that were made in the past that mean that even if in aggregate as a region, there is more storage, some countries are more exposed.

The other challenge is happening specifically in Germany and in the Low Countries, and it’s that this lower consumption means that high power intensive sectors, whether it’s fertilizer producers or a whole range of manufacturing industries, are looking at the costs and are consuming less, which means output is falling.

You want people to be able to keep the lights on and the like, but the degree of crisis — I hesitate to keep using that word — also has put an even greater impetus around thinking about what are the drivers of competitiveness. Some of these smaller, medium and larger companies already faced challenges from Asian competitors. Some of them had really settled in that way. There’s a whole different set of short-term crisis responses, but also longer-term economic reshaping that people are only just starting to grapple with. Those effects will be felt beyond Europe, as well as within it.

Hungary, which has long been closer to Moscow than many of its peers, signed a new contract to increase the amount of natural gas that they’re buying. There are different stories within the geography.

Ultimately, we’ve seen this shutdown of Nord Stream. We’ve also seen, even before that, lower volumes coming through it. Paradoxically, for quite some time during the context of the war, there’s been more natural gas flowing in the pipeline through Ukraine, which Russia wanted to avoid.

My sense is that the more that Putin continues to use these weapons, it really has very damaging medium- and long-term implications for Russia. Some of the additional supplies that are coming online that don’t come to market in the next year, but will over the next coming years, will really reinforce a desire to move away from Russian supplies.

It’s really hard to talk about medium- and long-term impacts when you’re thinking about what the next several months and years might bring, but I do think those are factors. That suggests that he’s unlikely to keep things offline for an extended period. But never say never.

August was the most expensive month for power in Europe, postwar, on record. There were some figures Wednesday from a firm that trades on the London market which had percentage figures for how power prices had risen over just the last month in different countries; in Germany and the U.K., 48 percent and 53 percent increases. It was about 20 percent for both France and Italy. And that, of course, has begun to affect what people are actually paying when they get their bills.

That’s raised concerns in the U.K., for instance, where there is a mechanism to keep energy prices low for consumers. That cap has been raised. There are some serious concerns about people just not being able to pay what they end up seeing on their bill at the end of the year.

So it’s absolutely true, it’s not just the directly dependent countries like Germany that are affected. Consumers far beyond are facing very high prices for heating their homes. Again, so much depends on how bad the winter is, and so if it’s particularly bad, then this could be a real problem for consumers everywhere, not just in Germany.

On the nuclear side, Germany is deciding to revive some of the plants they were planning to shut. I think we might see that in some other countries as well, or more time put on the clock for nuclear plants.

And as we head into the winter, we might start to see — which is not great from the climate perspective — some jurisdictions using heating oil. Some of that depends on how tight the oil markets are. We’ve seen some dynamics as we’ve gone into August where the market looks oversupplied. There are questions of what’s happening vis-à-vis Iran.

We’re also starting to see a real doubling down and developing of new battery technology, very important for saving excess power that might be generated from renewable fuels. We’re not there yet, but there’s a lot more money going into it, not only here in the U.S., but especially in Europe. People are really trying to think about how to balance the security issues of competition with China, on batteries and other technologies, with a need to really move up the value chain.

Of course, the caveat here is when we talk about higher energy prices, we can see that impact on the global markets, but it hasn’t hit all consumers yet. Many people in Germany don’t get their energy bill before the end of the year. In the U.K., people will only start seeing this come through the mail in the next few months. So we’ll have to wait and see what happens then. But so far, it’s holding pretty solid support for Ukraine.

But there is this concern. There was a poll in Germany not too long after that other one which asked people about their views of the government. There, you saw some dissatisfaction which came from things like high inflation and prices and so on.

So the question really is, what happens later in the year, when these prices continue rising as many people expect them to, and you see more effect on people on the ground. And then how does that play out? That’s a big question mark, but so far, support is holding pretty firm.

It could’ve been worse. But one of the challenges here is how to also continue to invest, making sure we can keep capacity and output even in times of extreme heat. Setting new expectations of where your thermostat should be which I think here in the U.S., we’re behind the curve on.

On the political side of things, the willingness of Russia to use these tactics and tools have really been a wake-up call for European leaders who should’ve known better and other leaders around the world as well. I find it hard to believe we could go back to any kind of business as usual, any reliance on supply chains from Russia. And that has its own risk to the global economy and the global political system.

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