Europe’s tab to tackle the energy crisis has taken on the scale of the EU’s response to the Covid-19 pandemic. And more help may be needed.
The bill for securing energy supplies and cushioning consumers from price spikes reached €768 billion by the end of January, according to a report by the Brussels-based think tank Bruegel. That’s a more than €60 billion increase since the agency’s last assessment in November as the region’s consumers are still struggling with energy bills after they spiked last year.
In comparison, the European Union’s Covid recovery fund is now worth about €800 billion, though that doesn't include the cost of government support programs at the height of the pandemic. It leaves countries with limited room for further fiscal maneuver amid rising interest rates and high debt levels following two back-to-back crises.
Europe has managed to avoid shortages and blackouts in the first full winter after Russia’s invasion of Ukraine precipitated an energy crisis that drove prices to record highs and hammered economies around the region. In response, governments announced support packages to shield households from surging bills, made liquidity available for companies and bailed out utilities.
The crisis has since eased as a mild winter, demand curbs and strong imports of liquefied natural gas have kept stockpiles far fuller-than-normal. Benchmark gas futures are trading near the lowest level in 17 months, and power prices have also declined from their peaks.
But warning signs continue to linger. Gas futures contracts are showing that prices are likely to move higher through the rest of the year, hitting a higher-than-usual €60 a megawatt-hour in December. That would keep the pressure on countries, and discipline on curbing demand could be key.
The European Commission plans to consult with member states over whether to extend beyond March the emergency measures to reduce gas demand that were put in place at the height of the crisis.
Then there’s the issue of supply. LNG imports, which have been the backbone of Europe’s plan to replace the lost Russian volumes, may become more scarce, and more expensive as buyers in Asia enter the market again. China has ended its restrictive Covid lockdowns, and a boost in consumption could divert cargoes away from Europe.
“It will be a tug-of-war for the marginal cargo,” Oystein Kalleklev, chief executive of shipowner Flex LNG Ltd., said Tuesday. “We do see more shift of flow into Asia and, of course, the prices of LNG in Europe and Asia will to some extent decide where the cargoes will be flowing.”
There are few long-term contracts to deliver LNG to Europe, leaving the region competing with Asia for spot cargoes. Analysts now widely agree that the EU will end this winter with stockpiles almost double the levels of last year, helping avoid any shortages and making it easier to replenish them for the next heating season.
How aggressively the region fills up the reserves will also determine price levels in the summer. An as-fast-as-possible approach could drive prices higher in the spring, making it difficult for governments to wind down their support programs.
Ongoing investment needs to replace Russia gas, and accelerate the green transition, mean “utilities will be reluctant to significantly cut retail tariffs to households and small businesses, possibly undermining a recovery in consumer confidence and/or requiring ongoing government support for retail bills,” analysts at Eurasia Group wrote in a Jan. 30 report.