Europe is facing a major energy crisis this winter that will test the continent’s power supply systems to the limit. The EU has been rushing through a plan to reach zero-emissions by 2050, but as a result it has decommissioned too much generating capacity and left itself exposed to Russia’s threat to cut off gas supplies.
On top of the gas shortage, some really bad luck has created a perfect storm. Germany’s poorly timed decision to shut down its coal-fired and nuclear power plants, France and the UK’s problems with their NPPs, and a scorching hot summer reducing water levels in hydropower reservoirs have all contributed to reducing Europe’s ability to generate electricity this winter.
As the cold weather approaches, Europe has probably stored enough gas to get through a mild winter, but the European power system is in a delicate balance ,with many countries relying on a few big producers for power exports, creating vulnerabilities. If one big supplier like Germany runs out of fuel then there is a very real risk that the resulting black- and brown-outs could ripple across the Continent.
“Europe’s energy system faces unprecedented physical and institutional stress. The policy response so far has been excessively nationally focused and could undermine the goals of calming energy markets over the next 18 months and achieving ambitious decarbonisation targets,” The Bruegel think-tank said in a paper that also looked at the consequences for Europe’s Green Deal goals.
Not enough wiggle room
Europe had a total installed generating capacity of 970 GW at the end of 2021 that could produce a total of 3,628 TWh of power if it was working at full capacity. The actual output was 5% lower, as the stations were run at 95% of capacity over the year – the year when Russia first started squeezing gas supplies and caused an energy crisis-lite.
Finland is in the final testing phase of a new 1.7-GW NPP that should come online in 2023 that will reduce its own deficit from 21 TWh to 9.5TWh. That will allow Norway and Sweden to export an extra 10 TWh to the rest of Europe – water levels at Norway’s gigantic hydropower water reservoirs permitting.
The difference between what Europe generates and what it consumes is not large, but the problem with the power sector is supply and demand for power have to exactly match each other. If they don’t, in what is called a “frequency incident,” then the power stations are shut down, otherwise the equipment can be badly damaged.
Some countries are net exporters and some net importers, but the deficit between the two is very unevenly distributed. The biggest importer of power in Europe is Italy, which imported 31 TWh in 2021 and is expected to import 30 TWh this year. It is followed by Hungary's 8.7 TWh imports, rising to 9.1 TWh this year. The problem child in the family is Austria, which imported 3 TWh in 2021, but that figure will leap to 8.1TWh this year, according to Swiss power company Burggraben and European network of transmission system operators for electricity (ENTSO-E).
Together these three countries will need to import a total of 47.3 TWh of power in 2022, which is a lot more than the net 1.8 TWh the EU imported last year as a whole. It is also well beyond the 27 TWh that Norway and Sweden exported to Europe as a whole.
Proximity also plays a role as electricity doesn’t travel well over long distances so being close to the generator of power is important increasing the reliance on the Scandinavian exporters.
To make matters worse despite the growing tensions with Russia, German is taking coal-fired and nuclear power stations offline. Germany has shuttered its six NPP that that have a capacity of 4GW and produce 35TWh of power as well as another 14GW (122TWh) of coal-fired stations, although Berlin recently said it will keep one reactor and 8GW (61TWh) of coal-fired power as a reserve.
In 2021 German was a net exporter of power selling 23 TWh, However, if it goes through with the plan to close all the NPP and coal-fired plants it would need to import 130 TWh, or 69 TWh if it used all its reserve. Altogether Austria, Hungary, Italy, and Germany would need to collectively import some 100 TWh of power, according to bne IntelliNews calculations.
While the overall European power system is almost balanced between demand and supply, this group highlight are some very large discrepancies within Europe at a regional level. This shortfall normally would be covered internally within the EU, plus some imports and investment into new capacity that is ongoing, but this year the Russian-induced gas crisis will push the EU power system to the edge of what it can cope with as there is so little redundancy in the system.
With these problems Germany was the first to go to “warning” status on the EU’s three tier energy crisis system, as the impact of removing even a small amount of the power generation mix produced by Russian gas could have a big impact.
The European Commission has also been working to head off disaster and in May published its updated REPowerEU Plan in which it had already incorporated an increase in coal power (+105 TWh) and falling gas power (-240 TWh) without derailing EU climate objectives.
At the same time as 22% of Europe’s power is produced by gas-fired power plants, the EC plan to reduce gas consumption by 15% could in theory reduce power needs by 120TWh, according to bne IntelliNews calculations. That would solve the problem.
However, whereas European Commission President Ursula von der Leyen initially called for the reduction to be EU-wide and mandatory, after stiff resistance from members on the periphery of Europe, especially Spain, Portugal and Greece, the plan was massively watered down to be voluntary with calve outs and exemptions for 17 out of the 27 members.
With Europe’s power system so finely balanced, a perfect storm has developed. Europe’s drive to invest into alternative clean energy solutions while decommissioning emission dirty generators has resulted in a profound energy supply-demand imbalance. That has been exacerbated by the stronger than expected bounce back of global energy demand after the peak COVID-19 crisis, as well as some really poor policy decision and neglect of energy security.
Italy closed its NPPs in the 1990s and never replaced the lost capacity. That has left it as one of the biggest importers of power in Europe. Its grid doesn’t have enough capacity to cover its own domestic demand. The power stations it does have are heavily reliant on Russian gas as the government never bothered to diversify its supply of fuel and it never invested into renewables. Despite its long coastline, Italy doesn’t have even 1MW of offshore wind generators.
Austria has invested into hydropower, but this year’s long hot summer has seriously reduced their ability generate power and the country’s generating capacity is not enough to meet the domestic load demand. Austria became dependent on neighbour Germany to supply it with its missing power.
That would not be a problem but in 2020 Germany abandoned its six nuclear reactors taking 4GW of power off the grid, which is equivalent to 32TWh of power, or around 4.5% of the 700TWh that is traded in Europe every year, according to European network of transmission system operators for electricity (ENTSO-E).
Germany has been a net exporter of power, but the remake of its power sector will make it a net importer of power by 2023. The German shortage is a problem for Germany, but it is an even bigger problem for Italy, Austria and Luxembourg that have all become dependent on German power exports to cover their own deficits.
Germany has decided to keep two of its six reactors on standby as a reserve and despite the talk to restarting its 16 coal fired plants only one or two can be used as the rest are either “too old” or lack fuel – coal used to be imported from Russian but the ban on imports went into effect on August 10 and has been highly effective.
Germany had been planning to use natural gas to plug the hole but now that is suddenly not an option it will be left with a deficit in power and has no way to replace it if gas supplies run too low. That will cause blackouts not only in Germany, but in several countries in the heart of Europe.
“Fact is that 20 year of German Energiewende systematically reduced its dispatchable (frequency reliable) electricity output options to the point where natural gas has to save the day - which we struggle to get,” said Alexander Stahel, a power and commodities expert, in a thread on twitter.
Hungary, like Austria, has invested heavily into gas-fired power plants and is even more dependent Russian gas to run them as it produces little of its own gas. The government in Budapest has been reluctant to join any of the energy sanctions on Russia as the economy minister says the economy simply “won’t function” without Russian energy supplies.
In Estonia, this week the state-owned energy company Eesti Energia said it was unable to produce enough electricity to meet its own domestic demand during peak consumption hours. It said this was not a big problem as long as Estonia remains connected to the Nordic electricity market where the security of supply is still guaranteed. However, this leaves the country more vulnerable to the conditions of the electricity market, such as fluctuating prices, which are out of its control.
Corrosion problems have pushed France to shut down many of its nuclear power plants, increasing the need for gas in power generation.
“France is the champion of nuclear power. It's fleet of 57 reactors should be capable to deliver 450TWh pa (62 GW installed). But it does not,” says Stahel. “Our forecast is for 59% utilisation or 315TWh based on EDF's guidance.”
NPP usually run at around 95% utilisation, but this years reduction has taken another massive 135TWh of power out of Europe’s generating capacity. France’s will go from exporting more than 19% of the electricity it produced in July 2021 to importing 12% of its electricity needs in July 2022.
Slovakia has also invested in nuclear power and recently completed a third reactor at the Mochovce power plant, making it self sufficient in energy.
Belgium is one of the European countries that has invested in renewables and has a fleet of offshore wind turbines, but it still heavily dependent on its nuclear power stations half of which are approaching the end of their working lives and will soon need to be replaced.
Norway is a major exporter of hydropower, but this summer was so hot that water levels in reservoirs fell so far that it has reduced its ability to generate hydropower. The same heat as also stymied the use of coal fired power stations as the depth of rivers fell so much that coal barges could only be half loaded else they would be unable to navigate canals.
Not enough gas
The shortage of generating capacity makes Europe’s power sector dependent on Russian gas. In Germany’s case, although only 15% of generating capacity depends on gas fired power stations with the bulk relying on renewables, it is that 15% that provides the flexible surplus power in times of peak demand.
Without it the system breaks down just when power is most needed. This leads to a so-called “frequency incident” when the balance between generation and demand for power must be coordinated and kept in a very tight corridor. If this balance is lost, then the system shuts down to avoid damaging the equipment. An entire system spanning over 20 countries has been built up to maintain this balance – one that Ukraine joined the day before the war with Russia started. Renewables are not suitable for maintain this balance as they are not reliable.
The clash with Russia has already affected the reliability of the European power system as the number of frequency incidents has been growing in the last two years. There were 33 hours of frequency incidents in 2020 which grew to 54 hours in 2021.
“Well, in 2021 alone the European Grid had two major incidents, classified as “Scale 2” incidents, for which final reports had to be prepared by an expert panel at ENTSO-E,” says Stahel. “The problem is that the Continental grid is increasingly incapable to match load with generation.”
Too many countries are relying on the import of power to cover their shortfalls. There is simply not enough generating capacity in Europe to provide power security to the continent. Cutting off Russian gas to just a few countries could have power outrage consequences that will ripple out across the continent.
Even before it invaded Ukraine on February 24, Russia was manipulating European natural gas markets. It substantially reduced exports after summer 2021 and did not refill Gazprom-owned storage sites in the EU. Since spring 2022, Russia has used its remaining supplies as leverage to push individual countries to relax sanctions on financial transactions and technology. By the beginning of July 2022, Russia was sending one-third of previously anticipated volumes, leading to a more than tenfold increase in EU gas prices.
Germany is a key piece in the jigsaw and replacing the 32TWh of nuclear power is turning into a major headache.
“As almost all fuels are affected, short-term fuel-switching supply elasticities are close to being exhausted. For example, EU coal-fired power generation increased only from 82TWh in the second quarter of 2021 to 95TWh in the second quarter of 2022 because available capacities were limited and coal prices tripled. Instead, demand reductions – both actual and anticipated – now play an outsized role in clearing the market,” says Bruegel.
Expanding the coal fired power output in all of the EU produced only an extra 13TWh of power -- only a third of the missing German nuclear output.
The alternative of reducing demand is not working either as government’s decision to rush into offering subsidies for soaring gasa bills is actually working against efforts to tackle the crisis.
Despite soaring gas costs, thanks to both the regulation of prices on most national markets and the subsidies governments are already paying, prices were up ten-fold but demand fell only 7% in the first half of this year. The demand elasticity in the gas business is very low indeed. As governments are very reluctant to make consumers pay for political reasons, reducing gas demand by using marketing mechanisms is almost impossible so Europe burns more gas than it should.
“While it is essential to continue targeted supports for vulnerable households, the overall result has been that governments have burned money in a race to consume more gas,” says Bruegel. Italy has not reduced its demand at all, which lead to substantial amounts of gas transiting Austria to meet this demand. If Italy had cut demand by only 3% then its tanks would be 80% full now, not the current 63%, Bruegel concludes.
The European gas market is a complex system that is nevertheless quite efficient at dispatching gas across the continent. But since
Gazprom cut off supplies to Europe via Nord Stream 1 pipeline indefinitely at the start of September the European gas transport system is stretched to breaking point.
Bruegel says the system faces four major coordination problems: refilling of storage; gas use reductions; new supply; and ensuring continued gas flow to where it is most needed.
“All four areas require national government intervention, with coordination failures leading to a less secure, sustainable and affordable system,” says Bruegel, which it goes on to say is not happening.
One of the biggest changes in the last year is LNG has gone from being a top-up supply of gas to keep the system running smoothly and as a buffer to external shocks to one of the key sources of fuel and that has sent its price through the roof.
“Prior to the crisis, Belgium imported moderate volumes of LNG, steady volumes of gas from the Netherlands and Russian gas via Germany in winter months to meet peak demand. Trade with the United Kingdom fluctuated depending on demand. As the crisis has developed, Belgium has increased its LNG imports to maximum capacity and has boosted pipeline imports from the UK. As a result Belgium has become a significant net exporter to Germany, a vital aid as Russian gas flows are cut,” says Bruegel.
Prices and money
The power system is already in crisis. Faced with the prospect of freezing homes as the first snows fall, most European governments have focused on their own populations and thrown money at the problem rather than cut demand. Hundreds of billions of euros worth relief packages have already been spent and more will follow if prices continue to climb. The efforts so far run the risk of fragmenting Europe’s power market and could lead to massive over-investment into redundant generating capacity that will also undermine the investments into new renewable capacity which is the long-term solution to the current crisis.
“Subsidising energy consumption instead of demand reduction has been a common and misguided approach. Governments run the risk that energy consumption subsidies become unsustainable, eroding trust in energy markets, slowing action in sanctioning Russia and increasing the cost of the net-zero transition,” says Bruegel.
Even before the blackouts arrive, the wild swings in prices have already wreaked havoc on the power business. The European power market is highly coordinated but the business of buying and selling electricity – essential so that generating capacity and demand remain matched every hour of the day – remains a local business and exposes smaller traders to big losses. Since September 2021, nearly 30 UK energy suppliers have filed for bankruptcy. Bankruptcies elsewhere include Bohemia Energy, the largest alternative supplier to state-owned CEZ in Czechia, which filed for bankruptcy in October 2021, while multiple energy providers have said they will withdraw from the French market, with Planet Oui activating an accelerated safeguard procedure in January 2022.
It’s also costing a lot of extra money. The volatility in the market has pushed up the margin requirements for traders. Normally contracts on supply are signed well in advance of delivery dates to ensure demand and supply can be matched. Central counterparties (CCPs) that facilitate these trades demand a percentage of the contract as a down payment, but that share has risen to 80% of the contract price creating a liquidity problem that sends up costs for everyone. If the volatility gets worse then banks may stop providing the credits to cover these charges which would create a liquidity crisis that could spill over into the banking sector, says Bruegel.
Several large utility players have already got into trouble. The German government is preparing to bail out its major utility company, Uniper, with a rescue package worth €15bn; the Élysée has announced a €10bn package to finalise the nationalisation of Electricité de France (EDF); and in early July CEZ, Czechia’s biggest utility, signed a credit agreement with the country’s finance ministry for up to €3bn, providing liquidity to the company.
In the face of spiking energy prices governments have been throwing money at the problem to protect consumers too. When prices began to rise in the summer of 2021 as Gazprom squeezed supplies of gas European governments rushed out subsidies, but in the meantime that spending has become structural and enormous. Since September 2021, governmental interventions have spanned between 0.1 and 3.6% of GDP and come to a total of around €230bn in the first half of this year. That number is set to as much as double before the end of this year. The value of gas and electricity traded in the EU has jumped from about 1% of GDP in 2020 to over 10% of GDP based on August 2022 price levels, according to Bruegel.
At some point the cost of fuels like LNG and the subsidies governments are dolling out to their population become unsustainable: it become cheaper to shut down half your economy than it does to pay for gas and your citizen’s power bills.