The European energy price crisis of 2022 is on its way

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by Shaun Richards

Sometimes the things that happen are rather hard to believe but I have a theory that official bodies take quite some time to respond to changes in events. Or if you prefer they have an incredibly slow reaction function. An example of that was provided only yesterday.

From 1 January 2022, Dutch coal-fired power stations may not operate at more than 35 percent of their maximum production capacity. The Ministry of Economic Affairs and Climate (EZK) announced this on Wednesday. The amendment to the Coal Prohibition Act will in any case apply until the end of 2024, and in the short term will ensure that the three coal-fired power stations in the Netherlands will emit six to seven megatonnes of CO₂ less. ( nrc.nl news)

Yes in the middle of an energy crisis they have decided to restrict one of their sources of domestic energy with a decision that looks more fit to be in The Onion or The Babylon Bee. The article confirms my point here as we see rather than facing the issues of now they are looking backwards.

According to the ministry, this emission reduction will make an important contribution to the implementation of the Urgenda judgment of 2015.

This also caught my eye because governments look like they are going to be ending up compensating a lot of people before this winter is over.

The government will financially compensate the owners of the coal-fired power stations for their loss of income as a result of the amendment to the law.

Actually something along these lines took place at the end of last month.

The Onyx Power coal-fired power station on the Rotterdam Maasvlakte will close. This was announced by outgoing State Secretary Dilan Yesilgöz (Climate, VVD) in a press release on Tuesday . The owner will receive a subsidy of up to 212.5 million euros for the voluntary closure.

This is significant on a wider scale as the Netherlands has been able to export energy as other countries have come under pressure. It is slightly complex as it supplies the UK ( 0.8 GW right now) and most if not all of it is sent to France. So a way of easing stress across the interconnectors.

The turn of the year is especially significant in Europe for another reason as the Wall Street Journal pointed out yesterday.

One might expect that a country suffering a generational energy crunch would be trying everything possible to expand supply. Yet Germany is proceeding with the closure of three nuclear power plants—around half of the country’s nuclear power generation—by the end of the year.

Gas Supply

Moves such as the one above have meant that there is even more demand for gas or as the Rolling Stones put it.

But it’s all right now, in fact, it’s a gas
But it’s all right, I’m Jumpin’ Jack Flash
It’s a gas, gas, gas

European buyers have been scouring the world for more of it according to the Financial Times.

Ships carrying liquefied natural gas destined for Asia are changing tack mid-voyage to supply European consumers willing to pay a large premium, as prices across the region surge to new peaks……

They are outbidding other sources of demand.

According to data from Platts, the difference between European and Asian prices is currently the widest on record.
Spot LNG shipments to Europe were pricing at roughly $48.5 per million British thermal units compared versus $41/Mmbtu in Asia. During October and November prices in Asia had averaged $5/Mmbtu above those in Europe, the brokerage said.

Ships have even been turned around as a consequence of the bidding war that has been going on.

Minerva Chios, a US LNG tanker, was heading east near India on December 15 but has since turned round and was now on course for the Suez Canal, suggesting a delivery to Europe, Froley said.

Prices Soar

The Financial Times also looked at the consequences for the UK in terms of energy prices.

Like in continental Europe, UK gas prices have risen roughly 650 per cent since the start of the year, bankrupting more than two dozen domestic energy suppliers.

Futures contracts tied to the UK wholesale price are up 15 per cent at a record 429p a therm, an increase of 77 per cent this month and the equivalent of $320 a barrel of oil. Brent crude is currently trading at $72.41.

There is also an arbitrage between US gas prices and those in Europe which traders are looking to take advantage of.

Out of 76 U.S. LNG cargoes in transit, 10 tankers carrying a combined 1.6 million cubic meters of the heating and power plant fuel have declared destinations in Europe, shipping data compiled by Bloomberg shows. Another 20 tankers carrying an estimated 3.3 million cubic meters appear to be crossing the Atlantic Ocean and are on a path to the continent. Nearly one-third of the cargoes come from Cheniere Energy Inc.’s Sabine Pass LNG export terminal in Louisiana, the shipping data shows.  ( Bloomberg )

Good news for Louisiana and the US shale frackers and of course traders and shipping companies, much less good news for us in Europe. Perhaps our government’s will explain how it is environmentally sound to ship gas around the world using diesel rather than producing it ourselves, although that is mostly an issue for the UK and Netherlands who have chosen not to invest in new gas supplies.

As so often happens the Financial Times has managed to get it wrong. From November 2019.

Halt to UK fracking is a step to a greener future

Oh and could they have been more wrong about the gas supply situation?

Britain has already largely kicked its coal addiction, and has access to cheap gas from the US and other sources.

Anyway here was their view.

Growing determination to tackle climate change, and Britain’s adoption of net-zero emissions targets by 2050, mean fracking’s time has passed. Investment should instead go to development and widespread deployment of alternative, renewable energy sources.

Businesses are closing

See also  Officials At The UK Foreign Office Have Been Told To Be Ready To Move Into “Crisis Mode” At Very Short Notice!

There are issues for us as domestic energy consumers but if you are a business where you require lots of energy your economics have changed substantially. Bloomberg has reported this.

Nyrstar will place a zinc smelter in France on care and maintenance in the first week of January, while other plants in Belgium and the Netherlands will continue to operate at reduced capacity. Romanian smelter Alro said current prices are unsustainable, while in Montenegro, the KAP smelter may have its power cut off at year-end unless it agrees to pay its supplier substantially higher prices next year, according to local media.

Also there is this.

Eleven associations of European energy-intensive industries (from cement to steel and from fertilisers to paper mills) issue a joint-statement warning about “unbearably high energy prices” and production shutdowns ( @JavierBlas )

Comment

The situation looks grim for 2022 partly because in many places consumers are not paying the true price for their energy. For example in the UK domestic energy prices are because of the cap system now changed in October and April. Those just getting used to the October price rise can now expect one of at least treble that in April for example and I am being conservative about that.

The situation will ebb and flow with a combination of the wind and how cold it is in play. So for example prices have dipped in European energy markets by 20% this morning because the weather is milder with some wind as well as the new supply we have discussed. The problem is that even with 20% off these would have been records only a few short days ago.

So we can expect more inflation from this source in the early part of 2022 and this has now spread to markets for next winter and early 2023. Partly that is because government’s still seem to be reducing their reliable sources of energy and pushing for more renewables which are unreliable. But for now we can expect more inflation which will make us poorer and sadly some will go cold.

As to measures of inflation I will not go into the detail but simply point out that the RPI will record this phase more accurately that the CPIH measure that has been pushed in recent times. Yes that is another example of government failure as the one which has been attacked performs better than the one which has been officially promoted.

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