THE ENERGY crisis in Europe is growing worse day by day. The price of electricity is determined by the price of gas, a shortage of which is currently causing turmoil across the continent. As of September this year, natural gas prices in the spot market[1] increased six-fold compared to 2019[2]. In the same month, wholesale electricity costs rose by 50% in Germany[3]. In the United Kingdom, the cost is more than ten times the average cost of the last decade. High electricity bills have led to public unrest in some countries, such as Spain[4]. As winter approaches and Europeans start turning on their heaters, the crisis will only intensify. The current situation raises the question of whether the ongoing price fluctuations are temporary or whether they point to structural problems in the European energy market. 

Reasons behind the crisis

   While energy prices have gradually risen throughout the years in Europe, the recent spike is nothing short of unusual, leading to the following question: what is causing it? One of the reasons behind the crisis lies in the soaring energy demand in the aftermath of the COVID-19 economic recession. The restrictions and social distancing measures imposed during the pandemic have significantly reduced the energy demand, decreasing global natural gas consumption by 1.9%, according to the International Energy Agency (IEA). Now that the world is on the way to economic recovery, the World Bank estimated a 5.6% increase in energy demand in 2021, with the demand for natural gas expected to rebound by 3.6%. Moreover, demand for energy is likely to grow during the upcoming winter. As countries around the globe compete with one another to secure energy, the situation in Europe is unlikely to get better. 

   However, the skyrocketing prices cannot be blamed on the pandemic’s impact alone. Renewable energy production has decreased significantly in Europe, raising the price of energy overall. The Financial Times reported that wind strength in Northern Europe decreased by 15% so far this year due to less windy weather conditions. Moreover, after the Fukushima disaster in 2011, nuclear power in Europe was almost completely shut down. For example, Germany has closed 8 of its 17 nuclear reactors and plans to liquidate all of them by 2022, but the spike in energy prices might prompt a turnaround[5].

How is Russia involved?

   Europe’s excessive reliance on gas imports exacerbates the energy crisis. Eurostat reported that in 2019, the last pre-pandemic year, the European Union’s (EU) dependency rate on net imports was 61%, meaning that most member states were highly dependent on energy produced outside of their territories. In 2018, around 40% of imported gas came from Russia, making it Europe’s primary source of gas[6]. 

   Despite surging gas prices, Russia has not increased its pipeline gas shipments to the EU beyond its long-term contractual commitments, unlike in previous years. Things are made worse by the completion of Gazprom’s, a Russian state-owned energy company, Nord Stream 2 pipeline. Currently, Russia sends all gas to Europe via an existing pipeline that goes through Ukraine. However, the ongoing disputes regarding the cost of transit, debts, and unmet transit obligations between Russia and Ukraine have played a hand in Russia’s decision to construct Nord Stream 2. The new pipeline would transport gas directly to European countries through the Baltic Sea, solving many of the problems posed by Russia’s tense relations with Ukraine.

   However, Gazprom is still waiting for regulatory approval in Germany. This is because the EU has been trying to decrease its reliance on Russian gas with plans to fully transition to clean energy by 2050[7]. Some speculate that Russia is using the energy crisis to pressure the EU to speed up the approval of Nord Stream 2, thereby preventing the EU from weaning itself off Russian resources. This would increase Russia’s economic and political influence over the region[8]. 

   President Vladimir Putin insists that the crisis stems from the EU’s shortsighted policies. At the 2021 Valdai conference in Sochi, Putin said that the EU dropped most of its long-term contracts with Gazprom and decided to seek the spot market instead. With long-term contracts, traders can fix a predetermined price and manage their budget with more certainty. In the spot market, on the other hand, prices have inflated in value in recent months due to stock speculators[9]. Hence, Putin argues that the EU energy crisis is a self-inflicted one. According to him, European countries simply failed to secure sufficient volumes of gas in preparation for winter while chasing the spot market. He also stated that Gazprom fulfilled its contractual obligations by supplying gas to Europe at maximum levels and was ready to provide more if requested[10]. From Putin’s point of view, Russia is simply waiting for European countries to negotiate the price and pay for more gas. 

The future of energy markets

   European governments are starting to reevaluate their energy relations with Russia. Prime Minister of the Czech Republic, Andrej Babiš, asserted that not pursuing long-term contracts with Russia was a wrong decision. Hungary, despite being encouraged to diversify its supply resources, signed a 15-year contract with Gazprom in September this year. As a result, unlike other EU members, the country is not experiencing the energy supply issues that have plagued the continent. Babiš said to the European Commission, “Forget about ever becoming independent from Russia. That will never happen[11].” As long as gas remains the main energy source, Europe will still have to maintain and rely on a strategic partnership with Russia. 

   Another long-term consequence of the crisis is its effect on the EU’s plan to go green. European governments stress that the spike in gas prices reinforces the need to accelerate the transition. The EU claims that it should make renewables the cheapest option, creating an incentive for businesses to switch to low-carbon technologies and attract investors. However, some observers are pointing the finger at the EU’s climate action policies instead. According to VOA News, experts fear that EU citizens might be unwilling to sacrifice their short-term interests for a carbon-free future. Therefore, even if the EU focuses on its long-term goals to battle climate change, skyrocketing energy prices may lead consumers to think that the transition is too costly. 

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   Too preoccupied with long-term objectives, the European governments proved to be unequipped to deal with fluctuations in the energy supply. European policymakers need to develop more potent tools to manage the energy market. A balanced approach between transitioning to renewables and securing sufficient fossil fuels will be needed if a crisis like this is to be prevented in the future. 

[1] Spot market: A market for an immediate exchange of commodities 

[2] Foreign Policy

[3] DW News

[4] BBC

[5] DW News 

[6] Financial Times

[7] The European Commission 

[8] Euronews

[9] Stock speculators: Traders who make a profit on short-term price fluctuations 

[10] RIA News Agency 

[11] Politico