Can the energy crisis threaten the green transformation program?

Energy prices are soaring and approaching the point where this could have a real impact on the European and British economies as well as on the daily lives of ordinary people. But what will be the impact of this growth and what are the challenges?

About the Author

Ole Hansen, head of department of commodity market strategy, Saxo Bank. Djoined a group Saxo Bank in 2008. Focuses on providing strategies and analyzes of global commodity markets identified by foundations, market sentiment and technical development. Hansen is the author of the weekly update of the situation on the goods market and also provides customers with opinions on trading goods under the #SaxoStrats brand. He regularly cooperates with both television and printed media, including CNBC, Bloomberg, Reuters, Wall Street Journal, Financial Times and Telegraph.

Why are energy prices going up so much in Europe and the UK?

The last six months have been a perfect storm due to limited gas supplies, low levels of gas storage as a result of last year's very cold winter in Europe, and the summer period when the weather was not conducive to green energy production.

Generally speaking, the annual energy cycle is that in summer we work to fill our underground gas storage facilities so that we can use them in winter. Last winter was very cold, which means we used more stored energy than usual. It was followed by a summer with less than usual wind, solar and other green energy production, making it difficult for gas producers to generate enough energy to both power their systems and fill their storage facilities.

For example, in northern Europe, the wind force was lower than usual. The Danish company Ørsted, operating in the field of offshore wind energy, has just recorded one of the lowest levels of energy production on a quarterly basis in the last 22 years. Moreover, the European summer was very warm, which increased the energy consumption for cooling. At the same time, Russia, our main safety valve, when green energy production is insufficient, seems incapable or unlikely to increasing gas extraction.

So is the current increase in energy prices due to the lack of energy?

Yes, it is essentially an imbalance between supply and demand. On the one hand, we have global activity and economic growth increasing demand, but at the same time we have low supply coupled with less than usual energy production.

Why is the current situation described in the media as a crisis?

First of all, energy prices are about six times higher than a year ago and at least two or three times higher than the historical average for the same period of the year, so in my opinion "crisis" is an accurate description of the current situation.

Moreover, we will see soon secondary effects in industries that use the most energysuch as producers of cement, fertilizers or chemicals, who are in principle forced to reduce production. It is also a challenge for agriculture, as can be seen in the United Kingdom, for example, where farmers have a problem sending animals to slaughterhouses because it has become too expensive. This in turn leads to higher food prices, which then increases inflation, and so on. In the UK, this situation has forced the government to take action and subsidize the process.

Have any areas in Europe been particularly affected by this situation?

Overall, the areas with the least tax pressure were the hardest hit. This is because the higher the percentage of the electricity bill today is tax, the smaller the proportion of the price we are used to paying will be affected by price increases.

More specifically, it is important how our homes are heated. Unfortunately, this means that low-income households and older people will typically be most affected, as they tend to live in the oldest homes with the worst insulation and the oldest heating systems, or have the greatest heating needs that they cannot afford to meet. This is known as energy poverty.

Due to its geographic location, the UK is particularly hard hit, as there are no district heating networks and many homes are heated with the gas that has increased the most. Now they are bearing the severe consequences of this situation. At this point, as reported Financial Times, the average UK gas bill at current market prices could increase by around £ 550 per year. This is an increase of almost a third.

How is the European energy crisis affecting the rest of the world?

The crisis is increasing global competition for liquefied natural gas (LNG). The summers have been really hot, particularly in Asia and the United States, which means that these countries have used more energy for cooling than usual, and therefore - like in Europe - their inventory levels are lower than usual. For example, China has stated that it is uncertain whether it has enough gas to survive the winter, meaning it is willing to buy energy at higher prices, rather than using it already in stock. Therefore, while the supply crisis mainly affects Europe, global energy demand is likely to maintain the upward pressure on prices for at least this winter, which could lead to long-term inflation.

What does this mean for our energy bills?

Paying the bills will be more difficult. Individual purchasing power will decline as people have to spend the greater part of their hard-earned money paying the electricity bill, heating their home and fueling their car. Even in a country like my homeland - Denmark, where taxes are extremely high, the increase in electricity bills will be very noticeable. So there will be less money left for enjoyment.

Will the energy crisis affect the economy in another way?

Yes, purchasing power will also decline and all enjoyments will become more expensive. At least those that are in any way related to energy consumption.

Is the rise in energy prices a permanent or a short-term phenomenon?

I hope we don't have to get used to it. The point is, however, that in the process of the green energy transition, both the UK and Europe are becoming vulnerable to such events because we do not have a so-called baseload in the form of a solid and reliable energy source, and therefore we have to import it.

Can we therefore say that the cause of the energy crisis is the green energy transformation?

This is not the only reason, but let's face it and don't pretend it doesn't play a role. Because it plays. In the energy economy, the term "base load" is used, which is a constant minimum load on the energy system required to meet the basic needs of consumers. In the past, the base load was provided by conventional power plants such as coal and nuclear power plants. As part of the green energy transition, Europe, which has made the most progress in this regard, is shutting down conventional power plants and replacing them with renewable energy production. The problem, however, is that while it is easy to increase and decrease the amount of gas supplied to the plant, we are unable to determine what the wind power will be in two weeks' time and therefore it is very difficult to predict how much energy we can use. For example, in Great Britain there were days when the sun and wind generated up to 50% of the total energy demand. However, in recent days such production did not meet even half of this demand. This variability in energy supply is unbelievable.

Therefore, transforming towards a greener world is part of the cause, but it is not the only reason. The weather last year also contributed to the crisis, as did Russia, which failed to increase supplies because it claims it is unable to do so at present.

How can we create a sustainable and reliable base load and at the same time achieve a green transformation?

It all comes down to scaling green solutions. Sustainable, reliable and environmentally friendly baseload can be achieved by generating solar and wind power on an even larger scale, combined with a better network of interconnections that ensure flow and easy access between regions where too much and too little green energy is produced. In addition, there is the possibility of storing electricity in batteries and a next-generation nuclear power technology that research shows may prove to be safer than current technologies, while at the same time producing more energy from the same amount of uranium.

Is there any calculation of how much more expensive electricity can become in the process of green transformation?

I don't have any specific calculations, but until we manage to establish a reliable base load, theoretically energy will become more expensive because during periods when demand exceeds supply we have to run large backup generators to avoid massive power cuts, and that is not cheap. Nothing in this world is free, and the same is true of green transformation, but ultimately our goal is to ensure that our planet remains habitable.

How can we solve the energy crisis?

First of all, we need to do an examination of conscience: try to reduce our individual energy consumption and do our part instead of just talking about it. This would be a good start.

In addition, we must support our bright, well-educated army of young people who are interested in inventing the technology that we will use tomorrow. We are entering an exciting period because there is so much attention and so much support from governments to make our world more environmentally friendly while ensuring electricity stability.

A number of different things can happen: we can "get lucky" and the coming winter turns out to be mild and the weather conditions are ideal for renewable energies, reducing energy demand; Russia may decide to turn on the tap and bring more energy to Europe, which will increase supply; also there may be a situation where governments step in and control supply, thereby forcing a decline in demand. This will be done by ordering companies to cut production, as it would be political suicide to accept a power cut for residents in winter.

Who should take responsibility for solving this crisis?

Governments will have to do their part, which means that ultimately we will all have to pay our taxes for it. This cannot be avoided. However, the government needs to do more than subsidize energy and, at worst, control energy production for businesses. Governments must also look for future energy sources, such as nuclear energy, which is already being allocated billions by people like Bill Gates. In addition, we will all have to cooperate - we have to spend money on innovation and development, e.g. via investment.

Are we able to get through this crisis in a way that does not jeopardize the green transition?

I think we have to. There is such an enormous political will behind the green transformation that I do not see how we could limit it. It is an interesting debate, however, and last week it was discussed whether politicians fear power cuts more than climate change. However, even if the fight for climate is global and it could be argued that Europe's progress in this area will do little if the biggest polluters do not take similar action, it seems politically very difficult to curb the process.

Can we determine how much energy prices may rise?

Last week we saw some companies starting to cut production, which could be a sign that prices have become so high that it is more profitable to stop production than to increase production. However, if we do not observe such behavior on a global scale, and the winter turns out to be frosty, there will be no upper limit - growth will be parabolic until there is a very strong - most likely governmental - response in the form of reduced demand. Then you can talk about power cuts, but I sincerely hope that this will not happen. There are still several months until real winter comes; then it remains to be seen whether additional pressure should be put on Russia to open the tap.