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Europe’s $1 Trillion Energy Bill Only Marks Start of the Crisis
- High prices could last years and aid is becoming unaffordable
- Relief on global gas markets isn’t expected until 2026
Europe got hit by roughly $1 trillion from surging energy costs in the fallout of Russia’s war in Ukraine, and the deepest crisis in decades is only getting started.
After this winter, the region will have to refill gas reserves with little to no deliveries from Russia, intensifying competition for tankers of the fuel. Even with more facilities to import liquefied natural gas coming online, the market is expected to remain tight until 2026, when additional production capacity from the US to Qatar becomes available. That means no respite from high prices.
While governments were able to help companies and consumers absorb much of the blow with more than $700 billion in aid, according to the Brussels-based think tank Bruegel, a state of emergency could last for years. With interest rates rising and economies likely already in recession, the support that cushioned the blow for millions of households and businesses is looking increasingly unaffordable.
“Once you add everything up — bailouts, subsidies — it is a ridiculously large amount of money,” said Martin Devenish, a director at consultancy S-RM. “It’s going to be a lot harder for governments to manage this crisis next year.”
Government fiscal capacity is already stretched. About half of European Union member states have debt exceeding the bloc’s limit of 60% of gross domestic product.
The roughly $1 trillion, calculated by Bloomberg from market data, is a broad tally of more expensive energy for consumers and companies — some but not all of which was offset with aid packages. Bruegel has a similar estimate looking at demand and an increase in prices, which was published in a report this month by the International Monetary Fund.
A rush to fill storage last summer, despite near-record prices, has eased the supply squeeze for now, but freezing weather is giving Europe’s energy system its first real test this winter. Last week, Germany’s network regulator warned that not enough gas is being saved and two of five indicators, including consumption levels, have become critical.
With supply tight, businesses and consumers have been asked to reduce usage. The EU managed to curb gas demand by 50 billion cubic meters this year, but the region still faces a potential gap of 27 billion cubic meters in 2023, according to the International Energy Agency. That assumes Russian supplies drop to zero and Chinese LNG imports return to 2021 levels.
“Getting gas is an absolute necessity and we will likely see widespread European hoarding,” said Bjarne Schieldrop, chief commodities analyst at Swedish bank SEB AB, predicting a “seller’s market” for at least the next 12 months . “The race is on to fill EU natural gas inventories” before next winter.
The main source of pipeline gas from Russia to Western Europe was Nord Stream, which was damaged in an act of sabotage in September. The region is still receiving a small amount of Russian supplies through Ukraine, but heavy shelling of energy infrastructure by the Kremlin puts the route at risk. Without this gas line, refilling storage will be challenging.
To head off a shortage, the European Commission has set minimum targets for inventories. By Feb. 1, reservoirs should be at least 45% full to avoid depletion by the end of the heating season. If the winter is mild, the goal is to leave storage levels at 55% by then.
LNG imports into Europe are at record levels and new floating terminals are opening in Germany to receive the fuel. Government-backed buying has helped Europe attract cargoes away from China, but colder weather in Asia and a potentially strong economic recovery after Beijing eased Covid restrictions could make that more difficult.
Chinese gas imports are likely to be 7% higher in 2023 than this year, according to China National Offshore Oil Corp.’s Energy Economics Institute. The state-owned company has started securing LNG supplies for next year, putting it in direct competition with Europe for spare shipments. China’s historic drop in demand this year was equivalent to about 5% of global supply.
China isn’t Europe’s only problem. Other Asian countries are moving to procure more gas. Japan, the world’s top LNG importer this year, is even considering setting up a strategic reserve, with the government also looking to subsidize purchases.
European gas futures have averaged about €135 a megawatt-hour this year after peaking at €345 in July. If prices go back up to €210, import costs could reach 5% of GDP, according to Jamie Rush, chief European economist at Bloomberg Economics. That could tip the shallow recession being forecast into a deep downturn, and governments will likely have to scale back programs in response.
“The nature of the support will change from an urgent, all-encompassing approach to more targeted measures,” said Piet Christiansen, chief strategst at Danske Bank A/S. “The numbers will be smaller — but it will still be there through this transition.”
For the likes of Germany, which rely on affordable energy to make products from cars to chemicals, high costs mean losing competitiveness to the US and China. That puts pressure on Chancellor Olaf Scholz’s administration to maintain support for the economy.
“Given the potentially enormous political and social repercussions of the energy price explosion and the shock to the backbone of the German economy, it is important for the German government to step in,” said Isabella Weber, an economist at the University of Massachusetts Amherst, who’s known as the inventor of Germany’s gas price break.
The challenge is finding the balance between keeping factories running and homes heated in the near term while not choking off the incentives to invest in renewable power — widely seen as the most sustainable way out of the energy squeeze.
“The biggest task out of the crisis is to make the energy transition happen,” said Veronika Grimm, an economic adviser to the German government. “We have to massively expand renewables.”
Bloomberg - Are you a robot?
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What happend with the 400 billion deal between China, and Iran?
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Similar to CPEC with Pakistan (supposed to cover 45 - 60 billion USD long term) ....These are all "Memorandums of understanding" (MOU)
i.e worth the paper they are signed on for now.... and "lets see how it goes" etc. and essentially promissory + good vibes notes.
Different to actual committed investment (or even better - materialised investment but thats analysis of past to present rather than future).
This is my take on MOU in general:
Economy & Updates
I swear I was reading good news for the last few days, from Erdo's stable foreign policy in Ukraine-Russia war, to LHD Anadolu, Kizilelma, and finally mass production of the long-awaited Altay tank And yet, Erdo drops this bombshell ffs! Why on bloody earth is he decreasing the interest rates...
defencehub.live
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Yh I do agree with you that MOU is most of the time just a piece of paper. I just thought that a huge deal like that signified that the relations are extraordinary and that they have excellent ties. I guess the arab world offers more than the Persians. China siding with the gulf, and Iran with Russia.Similar to CPEC with Pakistan (supposed to cover 45 - 60 billion USD long term) ....These are all "Memorandums of understanding" (MOU)
i.e worth the paper they are signed on for now.... and "lets see how it goes" etc. and essentially promissory + good vibes notes.
Different to actual committed investment (or even better - materialised investment but thats analysis of past to present rather than future).
This is my take on MOU in general:
Economy & Updates
I swear I was reading good news for the last few days, from Erdo's stable foreign policy in Ukraine-Russia war, to LHD Anadolu, Kizilelma, and finally mass production of the long-awaited Altay tank And yet, Erdo drops this bombshell ffs! Why on bloody earth is he decreasing the interest rates...
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That deal is killing Iran industry. EVerything is cheap from China so the Iran companies can not compete against Chinese companies.
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The deal is mostly related to oil/gas industry aswell as industry, and transportation.
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A lot more of it will go through Indian refineries then and re-export from there.
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We should also get Russian oil for a good price. We should offer a price above 60$ something like 70$ and call it a day.
Gazprom President Alexey Miller announced that they have started the first work on the gas distribution center project that Russia wants to develop together with Turkey.
telegra.ph
Выступление Алексея Миллера на предновогоднем селекторном совещании
Уважаемые коллеги! Дорогие друзья! До начала 2023 года осталось буквально несколько дней. Но «Газпром» всегда на марше. Мы с вами – еще в 2022 году. И хотя осталась всего пара дней работы, нам предстоит еще очень многое сделать. Я хочу сразу отметить, что 2022 год, конечно же, выдался...
telegra.ph
China's natural gas production has overtaken Qatar. Qatar is the world's second largest LNG exporter.
Can the North Sea become Europe’s new economic powerhouse?
Picture a meccano set, but one made for gods. Blades as long as Big Ben is tall, rotors and tower sections the size of school buildings, shafts and generators so heavy they must be rotated every 20 minutes so as not to be crushed by their own weight: all these parts are strewn across an area the size of 150 football pitches. Clicked together, they form edifices rivalling the Eiffel Tower, except more useful—wind turbines to be planted somewhere in the North Sea.
Welcome to Esbjerg, the hub of Europe’s offshore-wind industry. Two-thirds of the turbines currently spinning off its coast, enough to power 40m European homes, were put together in the Danish port town of 72,000. And Esbjerg’s gods have only started tinkering. The city’s port operator plans to nearly triple capacity to handle wind projects by 2026. Local engineering firms that once catered chiefly to the fossil-fuel industry now supply the windpower industry instead. Meta has bought 212 hectares of farmland outside Esbjerg to build a renewables-powered data centre for its social networks. Out on the sea, cables that will ferry 30% of the international data traffic into Norway are being laid down. Esbjerg’s mayor has travelled as far as Vietnam and Washington, dc to share its success story.
With a dose of strategic thinking, and a bit of luck, a constellation of Esbjergs could combine and scale up into a new North Sea economy. This would help Europe achieve its ambitious climate goals and rebalance its energy sources away from countries ruled by tyrants such as Russia’s Vladimir Putin. Its newly minted corporate champions could offer Europe’s best, and perhaps last, chance to stay globally relevant. And it could alter the continent’s political and economic balance by creating an alternative to the sputtering Franco-German engine.
The North Sea has always been economically important. Bordered by six European countries—Belgium, Britain, Denmark, Germany, the Netherlands and Norway—it is where many important shipping routes intersect. Its strong tides, which sweep nutrients to its shallow seabed, are a boon for fishermen. In the 20th century oil and gas were discovered beneath the seabed. At their peak in the 1990s Britain and Norway, the two largest North Sea producers, together cranked out 6m barrels a day, half as much again as the United Arab Emirates does today. One Scottish field, Brent, lent its name to the global price benchmark. Now as that bounty runs out—and demand for what remains dwindles because of growing concerns about climate change—the turbulent body of water is finding lucrative new uses.
Spin doctrine
The biggest bet is on a resource of which the sea has an infinite amount—awful weather. With average wind speeds of ten metres per second, the basin is one of the gustiest in the world. The day your correspondent visited Esbjerg speeds were twice that, enough to push the wholesale price of electricity down to nearly zero. The North Sea floor is mostly soft, which makes it easier to affix turbines to the seabed (the floating kind have yet to be deployed at scale anywhere in the world). It is also typically no more than 90 metres deep, which allows wind farms to be placed farther away from the coast, where winds are more consistent. Ed Northam of Macquarie Group, an investment firm with stakes in 40% of all British offshore wind farms in operation, says his offshore turbines work at up to 60% of capacity, compared with the 30-40% that is typical onshore.In 2022 North Sea countries auctioned off 25 gigawatts (gw) in capacity, making it the busiest year by far. Nearly 30gw-worth of tenders have already been scheduled for the next three years. Yearly new connections are expected to grow from under 4gw today to more than 10gw by the late 2020s. At a meeting in Esbjerg in May the European Commission and four countries bordering the North Sea agreed to install 150gw of windpower by 2050, five times Europe’s and three times the world’s current total. In September this group and another five countries raised the number to 260gw, equivalent to 24,000 of today’s largest turbines.
This ambition is made possible by wind’s version of Moore’s law, which described the exponential rise in computing power. Three decades ago the world’s first offshore wind farm—Vindeby in Denmark, made up of 11 turbines—had a total capacity of five megawatts (mw). Today a single turbine can generate 14mw, and one farm may contain more than 100 of them. More robust cables and transformers at sea to convert windpower from alternating into direct current, which can travel over long distances without big losses, enable more electricity to be generated farther away.
The result is that several wind farms being installed now surpass 1gw in capacity, the typical output of a nuclear plant. The Dogger Bank wind farm, located between 130km and 200km off the British coast and due to start operating in the summer of 2023, will clock in at a record 3.6gw at full capacity in 2026. Economies of scale are driving down costs, making offshore wind competitive with other sources of power. In July Britain awarded contracts to five projects, including Dogger Bank, at a price of £37 ($44) per megawatt-hour—less than a sixth of the country’s wholesale electricity price in December.
The awful weather is not always a boon: its vagaries can also stress the grid. Helpfully, technology and falling costs are allowing windpower operators to combat the elements. One way to do this is with more interconnections, first between the farms and land—today most wind farms have one link to the shore, which is inefficient—then among the farms themselves. Half of the 3gw to be tendered by Norway will have the option to create links to more countries. Phil Sandy of National Grid, which runs Britain’s power infrastructure, predicts a future of complex undersea grids similar to that on land.
Another way to manage the variability of windpower is to use it to split water molecules to produce “green” fuels, such as hydrogen and ammonia. In May the European Commission and heavy-industry bosses pledged a ten-fold increase of eu manufacturing capacity for electrolysers, which do the splitting, by 2025. This would allow it to produce 10m tonnes of green fuels by 2030. The commission has also proposed a “hydrogen bank”, capitalised with €3bn ($3.2bn), to help finance the projects.
Investors are giddy. In August Copenhagen Infrastructure Partners (cip), a private-equity firm, said it had raised €3bn for a fund that will invest solely in hydrogen assets. A dozen projects have been announced in Europe; the three largest together amount to 20gw of green power. Topsoe, a Danish firm that provides technology for such ventures, says its orders add up to 86gw.
Eventually the North Sea’s power system could take the form of an archipelago of “energy islands” that host wind-farm repair staff, aggregate electricity and produce hydrogen in bulk, to be transported onshore by ship or pipeline. As many as ten such schemes are being considered, according to sintef, a research firm. North Sea Energy Island, an artificial atoll 100km off the Danish coast, is due to be tendered in 2023. It will serve as a hub for ten surrounding wind farms, with links to neighbouring countries.
One bidder, a joint venture between Orsted, a Danish offshore wind developer that is the world’s largest, and atp, a local $150bn pension fund, envisages a modular design, with components made onshore and assembled at sea. “We expect it to still be functional in 100 years’ time,” says Brendan Bradley of Arup, an engineering firm that is advising the bid. Thomas Dalsgaard of cip, which is part of a rival consortium, reckons that producing green fuels offshore will not only help reduce pressure on grids but also save money: hydrogen pipelines are one-fifth the cost of high-capacity power-transmission lines.
Grids unlocked
There is more to the new North Sea economy than the energy sector. For electricity and hydrogen will not be the only things to be coursing across the North Sea floor. So will carbon dioxide. Some industries, such as cement-making or chemicals, are hard or impossible to decarbonise. But their CO2 can be collected and pumped into depleted gasfields in the North Sea. Such carbon capture and storage (ccs) used to seem an unappealing way to fight climate change, because of its high cost and unpopularity among environmentalists, who worry it would prolong the life of fossil fuels. Now, as with wind, the costs are falling, political resistance easing and projects multiplying.One seeking approval in Rotterdam, called Porthos, would connect Europe’s biggest port via a pipeline to a compressor station, and then out to an empty offshore gasfield. Although a court recently delayed its start, the project has already received the green light from Dutch regulators. Once operational, it would take in about 2.5m tonnes of CO2 annually for 15 years, nearly 2% of Dutch carbon emissions. The port of Amsterdam is planning something similar. Farther north, near the Norwegian city of Bergen, Equinor, an energy company, and its partners have already finished drilling operations for a CO2 injection well as part of a project called Northern Lights. According to Guloren Turan of the Global ccs Institute, a think-tank, Europe now has more than 70 such facilities in various stages of development.
The last valuable product increasingly criss-crossing the North Sea is information. If you follow one of the newer transatlantic submarine data cables that land in Esbjerg, called Havfrue, and then turn right at a fork in the middle of the North Sea, you end up in Kristiansand, a city in southern Norway. It is the home of n01 Campus, the “world’s largest data-centre campus powered by 100% green energy”, according to its owner, Bulk Infrastructure. “We want to build a platform for sustainable digital services,” says Peder Naerbo, the firm’s founder.
North Sea countries are an excellent place to store and process data. Low electricity prices make for cheaper number-crunching, which is energy-intensive. A cold climate means data centres can be cooled just by circulating outside air instead of using costly cooling systems. The region boasts a highly skilled workforce, stable institutions and some of the world’s most enlightened data laws. Latency, the time it takes to move data in and out of the computing clouds, is becoming less of a problem as the technology improves, so digital workloads can be processed in ever more far-flung facilities. And data centres are hitting limits elsewhere in Europe. In 2021 Irish data centres and other digital uses consumed 17% of the country’s power. To prevent blackouts, EirGrid, a state-owned Irish utility, will no longer supply electricity to new server farms.
According to TeleGeography, a data provider, 13 new cables have been installed in the North Sea since 2020, compared with five in all of the 2010s. Data centres, too, are springing up, as big cloud providers vow to decarbonise their supply chains. Amazon Web Services (aws) and Microsoft Azure, the two largest cloud providers, have built server farms in the Nordics. Meta has its plot outside Esbjerg. Older industries are also moving more of their computing north. Mercedes-Benz and Volkswagen have computers sitting in former mines in Norway; these simulate wind-tunnel and crash tests for their cars. On average, estimates Altman Solon, a consultancy, demand for data centres in the Nordics will grow by 17% a year until the end of the decade.
Go north, old industrialist
More European economic activity could be drawn north. “Abundance of energy tends to attract industry,” says Nikolaus Wolf, an economic historian at Humboldt University in Berlin. That is what happened in the early 19th century, when abundant hydropower helped attract the cotton industry to Lancashire. Mr Wolf and Nicholas Crafts of the University of Warwick calculate that a 10% decline in Lancashire’s hydropower would have led to a 10% decline in textile employment by 1838 in key places.Energy is easier to distribute via grids and pipelines today than it was in the Industrial Revolution, and existing industrial centres across Europe exert their own pull. Transplanting cement-making kilns to North Sea shores would mean transporting limestone to them and cement back to customers, making the process uneconomical (and, until the advent of zero-emissions lorries, climate-unfriendly). Giant steam crackers, which split hydrocarbons into smaller molecules at chemical factories, will not be moving north soon, either: they are too big an investment, too integrated in existing supply chains, and already in the process of being electrified.
But Mr Wolf’s principle still holds for some industries—and may benefit other northerly locations not directly on the North Sea. In Narvik, farther north on the Norwegian Sea, Aker Horizons, a firm that invests in renewable energy, wants to establish a green industrial hub powered by offshore wind. In Boden, a Swedish town near the eastern coast of the Scandinavian Peninsula, h2 Green Steel is erecting a new steel mill, Europe’s first in half a century. The factory will run not on coal or natural gas but on green hydrogen, created in one of the world’s largest electrolysis plants using onshore wind and hydroelectric power.
Besides exporting steel, h2 Green Steel hopes to export its sponge iron, an intermediate product that has already taken in much of the energy needed in the steelmaking process. This would amount to splitting the steel industry in two, explains Henrik Henriksson, the firm’s chief executive. The energy-intensive bits of the process would migrate to where they can be done most efficiently: right next to the sources of renewable energy. The more labour- and knowledge-intensive parts could remain in Europe’s steelmaking heartlands like the Ruhr valley.
In Wilhelmshaven, a German city on the North Sea, Uniper, a state-owned energy company, has just completed Germany’s first terminal for imports of liquefied natural gas (lng), to replace some of the Russian gas no longer flowing through pipelines from Siberia. The firm is planning to erect crackers to produce hydrogen from ammonia next to the lng terminal. In another corner of the port, close to a decommissioned coal plant, Uniper will build its own hydrogen plant and provide plenty of space for energy-hungry businesses. “Wilhelmshaven will play an important role as the place where green energy comes onshore,” says Holger Kreetz, who is in charge of managing Uniper’s assets.
Other companies flocking north include manufacturers of electric-vehicle batteries, which also require lots of energy to make, and producers of wind turbines, which have suffered from recent supply-chain snarls. Vestas, the world’s biggest turbine-maker, is closing a factory in China and will open one in Poland, in part to be close to a new wind farm on the Baltic Sea.
As with all such shifts, some see problems. Renewable energy will be even cheaper elsewhere, warns Christer Tryggestad of McKinsey, another consultancy. Rather than investing in and around the North Sea, firms could move to sun-kissed places such as the Middle East or Spain. Not everyone is convinced that the eu can meet its ambitious goals to ramp up the production of offshore windpower. Vestas and its fellow turbine-makers are already complaining bitterly that permits for new wind parks can take a decade or more to secure. The offshore-wind-services firms warn that they may soon run out of people and machinery to keep customers happy.
The last obstacle comes from across the Atlantic. President Joe Biden’s Inflation Reduction Act includes $370bn in subsidies and tax credits for climate-friendly products and services, so long as they are made in America. The eu worries that the handouts will lure investors away from its shores. The bloc is looking into whether the law breaches international trade rules.
If these problems can be overcome, the new North Sea economy’s impact on the continent will be momentous. As Europe’s economic epicentre moves north, so will its political one, predicts Frank Peter of Agora Energiewende, a German think-tank. This could shift the balance of power within littoral countries. Coastal Bremen, one of Germany’s poorest states, could gain clout at the expense of rich but landlocked Bavaria. At the European level, France and Germany, whose industrial might underpinned the European Coal and Steel Community, the eu’s forebear, may lose some influence to a new bloc led by Denmark, the Netherlands and, outside the eu, Britain and Norway. The French and Bavarians may bristle at the idea of a de facto Windpower and Hydrogen Community centred on the North Sea. But it would give Europe as a whole a much-needed economic and geopolitical boost.
Can the North Sea become Europe’s new economic powerhouse?
The continent’s most turbulent body of water is finding fresh uses
