Energy Report 2022
Wider context
Why are energy prices rising?
Energy supply is currently a subject of much discussion. The British Energy Security Strategy highlights, “From heating our homes to powering our factories, everything we do depends upon a reliable flow of affordable energy.”
Along with lockdown restrictions easing, the Russian invasion of Ukraine has caused global energy prices to rise steeply.
Costs for natural gas have soared as Russia has constrained supply to Europe. Gazprom blamed the “technical condition of the engine” of a turbine for a reduction in deliveries through the Nord Stream 1 pipeline to 20% of capacity from the end of July.
The pipeline was suspended for three days of pre-announced maintenance works from 31 August. However, the shutdown was extended indefinitely after a leak was detected.
Russia has blamed western sanctions for disrupting gas supplies, for instance, saying that manufacturer Siemens couldn’t perform repairs on Nord Stream 1 due to sanctions against Gazprom. However, the EU rejects these claims, accusing Russia of weaponising its gas exports.
Gas leaks were reported on Nord Stream 1 and 2 pipelines following reports of explosions. On 26 September, the pipelines experienced multiple large pressure drops to almost zero, attributed to multiple blasts in international waters which left three of four pipes inoperable.
Raising environmental fears, Denmark's Energy Agency estimate that the emissions from the gas leaks equate to approximately one-third of the country's annual greenhouse gas emissions.
Researchers at the German Environment Agency believe approximately 300,000 tonnes of methane will be released into the atmosphere from the leaks. For context, the International Energy Agency calculates annual global methane emissions to be around 570 million tonnes.
The explosions and resulting gas leaks also highlight the vulnerability of infrastructure. Norway has increased military and police patrols at oil and gas rigs and pipelines. It has nearly 9,000km of pipeline, and any interruption in supply would trigger an energy crisis and lead to an ecological disaster.
With 90% of the world’s internet traffic carried by undersea cables, there would be a widespread crisis affecting most aspects of modern life if those were severed.
Admiral Sir Ben Key, said to The Guardian, “There is a vulnerability around anything that sits on the seabed, whether that’s gas pipelines, whether that’s data cables that places an obligation on organisations like the Royal Navy – but not just us – to have a means of monitoring and providing security around it.”
High energy prices are impacting daily life. CF Fertilisers announced it had temporarily halted ammonia production at its Billingham factory due to increased natural gas and carbon prices. This also means it will not produce its by-product, carbon dioxide, widely used in the food and drink industry.
Make UK said the current crisis was leaving businesses facing stark choices. Approximately 13% of companies surveyed are cutting hours of operation or avoiding production during peak energy price periods, with 7% stopping output for more extended periods. It also found that 12% of those had already cut jobs.
Before government intervention, the UK domestic energy price cap was due to increase to £3,549 a year, with further increases forecast in 2023. With the “energy price guarantee”, a typical household’s energy bill will rise to £2,500 a year from 1 October — still a 26.8% increase from £1,971.
It is planned for the scheme to run between October 2022–October 2024, with businesses protected for an initial period of six months. Households not using mains gas and electricity will also receive equivalent help.
The Institute for Fiscal Studies (IFS) estimates that the policy “could easily cost over £100 billion in the next year alone, with more to come in the following year.” This is a huge intervention. For comparison, the Coronavirus Job Retention Scheme for furloughed employees had a gross cost of £70 billion, with support for the self-employed totalling a further £28 billion.
Estimates from the IFS indicate that the scale of support will mean that each £1 extra that households spend on energy will likely cost the taxpayer 75p over the next year.
Whilst the scheme provides much-needed breathing space, there is concern that there is less incentive to reduce energy use. Households will consume energy at 60% of its true economic cost, and businesses, charities and the public sector will be similarly supported.
Prices are high as Europe faces severe gas shortages. To balance the mismatch between supply and demand, some energy users will need to reduce their energy use. The IFS flags that if other European countries subsidise household or business use of energy, there could be a bidding war which raises the cost of support in all countries. There is also the danger of a situation where there is not enough energy for all — leading to rationing and increasing the risk of blackouts.
How is the EU responding to the challenges?
The EU took steps to respond to the crisis over the summer, by reducing energy demand and filling up gas storage ready for the winter, diversifying supply away from Russian fossil fuels and investing in renewables.
Agreement was reached at the end of July for member states to reduce their natural gas demand by 15%, between 1 August 2022 and 31 March 2023, compared to their average consumption in the past five years. The commitment was reached on a voluntary basis, although with some exceptions: for example, for member states not connected to other member states’ gas networks or whose electricity grids are not synchronised with the European electricity system and those heavily reliant on gas for electricity production.
Governments have introduced measures to cut energy use. In Germany, public institutions, such as museums, can be heated to no more than 19 degrees Celsius, and exterior lighting and illuminated advertising must be switched off by 10pm each night to conserve energy.
In Paris, the Eiffel Tower will go dark at 11:45pm instead of 1am to conserve power and send a message to citizens about the importance of reducing their energy use.
The Dutch government is encouraging its citizens to take shorter showers. According to Milieu Centraal, a government-affiliated research organisation, the average shower in the Netherlands last nine minutes. By reducing the time to under five minutes, a household could save 60 cubic meters a year of natural gas.
Although EU gas reserves have been built up to more than 80% of capacity ahead of the 1 November target, filling continues before the winter.
With high energy costs impacting production and worsening inflation, the European Commission proposed further measures to reduce demand and ease financial pressure amid concerns of an inevitable recession.
Ursula von der Leyen, European Commission president, unveiled a five-point proposal on 7 September:
Ursula von der Leyen, European Commission president, unveiled a five-point proposal on 7 September:
1. Saving electricity
Reduce electricity demand, but particularly target peak demands when costs are higher. A mandatory target will be proposed across member states.
2. Introducing a revenue cap for low-cost electricity producers
Channel unexpected profits made by producers of low-carbon energy sources to member states to support vulnerable households and companies. These particular companies are making low-cost electricity but benefitting from increased earnings due to high energy prices.
3. Implementing a “solidarity contribution” for fossil fuel companies
The same as for point two above, for increased profits of fossil fuel companies so that member states can support exposed parts of society, but also as a means to invest in clean, domestic energy sources such as renewables.
4. Supporting energy companies with market volatility
Facilitate liquidity support to energy companies by member states to help secure their trade capacity and stabilise future markets.
5. Imposing a price cap on Russian gas
Aim to lower the cost of gas by capping the price. This will cut Russia’s revenues which are financing its war with Ukraine.
The Centre for Research on Energy and Clean Air recently found that Russia earned €158 billion in revenue from fossil fuel exports in the first six months of the war (24 February to 24 August), with the EU importing 54% of this.
In response to the plans to cap Russian gas prices, Vladimir Putin said, “We will not supply gas, oil, coal, heating oil. We will not supply anything" if it went against Russia's interests.
EU member states that are large importers of gas from Russia, including Hungary, Slovakia and Austria, spoke out against a cap on Russian gas for fears of a complete suspension of gas flows, which would almost guarantee recession for their countries.
Other member states would prefer to introduce a price cap for all imported gas, to curb surging prices. However, there is concern that this could lead to the EU losing out to countries who are prepared to pay more for liquefied natural gas, as this is a highly competitive market.
On 30 September, agreement was reached to implement much of the five-point proposal. EU countries introduced a levy on fossil fuel companies' surplus profits made this year or next, an additional levy on excess revenues by low-cost power producers benefitting from increased electricity prices and a mandatory 5% cut in electricity use during peak price periods.
Discussions continue regarding the introduction of a gas price cap, although it seems unlikely, due to concerns about financing and shortages if countries cannot compete with buyers in a price-competitive global market.
How is climate change influencing the situation?
In April, the Intergovernmental Panel on Climate Change’s (IPCC) report found that carbon emissions from 2010–2019 have never been higher in human history, with scientists highlighting the urgency of action needed.
Responding to the report, António Guterres, UN Secretary-General, said the world would become uninhabitable unless governments reassess their energy policies. He also gave a stark reminder, “This is not fiction or exaggeration. It is what science tells us will result from our current energy policies. We are on a pathway to global warming of more than double the 1.5-degree (Celsius, or 2.7-degrees Fahrenheit) limit”, which was agreed upon in Paris in 2015.
In 2021, the International Energy Agency (IEA) said, “Nothing short of a total transformation of our energy infrastructure is required — a worldwide undertaking of unprecedented speed and scale” as the “energy that powers our daily lives produces three-quarters of global emissions”.
The IEA has called for decisive action so that by 2030:
- Annual electrical car sales increase from 3% to over 50%
- Production of low-carbon hydrogen expands from 450,000 tonnes to 40 million tonnes
- Clean electricity investment is boosted from $380 billion to $1.6 trillion.
It is, therefore, no wonder that over half of respondents to our energy survey said that clean/sustainable energy is the most important priority for the energy sector.
Climate change also impacts energy production, exacerbating the issues for alternative sources to meet demand.
Research from the European Commission’s Joint Research Centre showed that energy production from run-of-river plants until the beginning of July was lower than the 2015–2021 average for many European countries, including Italy (-5,039 GWh compared to the average), France (-3,930 GWh) and Portugal (-2,244 GWh). A decrease in hydropower reservoir levels also impacts countries such as Norway, Spain and Romania, amongst others.
The lack of water is reducing/suspending hydroelectric and thermoelectric power production operations across countries.
Highlighted in the report is that whilst, “drought mitigation strategies are of the utmost importance now, so is tackling the root cause of the problem: climate change and its disruption of the planet’s water cycle”. Efforts are also needed to adapt to changing weather patterns by climate-proofing energy supply and applying sustainable solutions in agriculture.
This ethos of tackling all parts of the problem is important for the energy crisis as a whole. Whilst governments are concerned with mitigating the impact of the situation, both long-term investment and solutions are needed to achieve carbon targets and ensure an affordable and secure flow of energy.
