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Tuesday, October 19, 2021

Explained: Why are gas and electricity prices rising in Europe?

The governments of several countries in the continent are now contemplating aid to help tide the people through the winter season, when the demand is high.

By: Explained Desk | New Delhi |
Updated: September 22, 2021 10:49:00 am
Storage tanks are seen at the Dragon Liquefied Natural Gas (LNG) facility at Waterston, Milford Haven, Pembrokeshire, Wales, Britain, September 20, 2021 | Reuters

Power prices in Europe have skyrocketed in recent months. The global increase in the prices of wholesale gas and power prices means that these higher prices will trickle down to retail consumers in Europe, who are likely to face inflated energy bills in the upcoming winter months. High cost of energy could also mean higher levels of inflation than already forecast.

In response to the rising prices, the governments of several countries in the continent are now contemplating aid to help tide the people through the winter season, when people use more energy to heat their homes and switch on lights earlier in the day.

What is causing energy prices in Europe to rise?

The price and cost of energy is dynamic, and like most commodities of the world, it depends on the pull and push of demand and supply, the competition in the market and taxation among other factors. Other factors could include the energy mix used in a particular country, the amount of energy that is imported, the geopolitical conditions and environmental protection costs.

The European Commission’s (EC) fourth report on energy prices and costs (the report is published every two years), which came out in October 2020 notes that wholesale prices of energy rose in recent years before they began to fall in 2019 due to economic slowdown and surplus supply. Prices went further down in 2020, as a result of the Covid-19 pandemic, which triggered travel restrictions globally and locally.

As per the EC, for household consumers living in countries part of the European Union (EU), prices were highest for consumers in Germany in the second half of 2020, followed by those living in Denmark and Belgium.

On the other hand, consumers living in Bulgaria, Hungary and Estonia paid the lowest prices during this time period. In fact, a household consumer in Germany was paying about three times the price for the same amount of electricity consumed as a person in Bulgaria was paying for it in the latter half of 2020.

So what has changed now?

Equinor, which is one of Europe’s largest gas suppliers, noted in its September gas market update that gas prices have increased due to a strong LNG demand from Asian countries, low European stocks and rising carbon prices. These factors are expected to maintain the high gas prices during the winter season of 2021-2022.

Significantly, the update notes that Europe is entering the winter season with storage at 70-75 per cent of its full capacity, which is below the 5-year average. Add to this the uncertainty about supply from Russia, mainly from the Nord Stream 2 pipeline, which is under construction at the moment and is valued at around $11 billion. The 1,200 km pipeline will run from Ust-Luga in Russia to Greifswald in Germany, and will carry 55 billion cubic metres of gas per year.

The under-construction pipeline will run along the already-completed Nord Stream 1 system, and the two together will supply an aggregate of 110 billion cubic metres of gas to Germany per year.

As of now, European countries rely on Russia for 40 per cent of their gas needs. In August, the Russian-state owned Gazprom announced that it would be reducing its supply of natural gas to Europe because of a fire in a Siberian gas processing plant.

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