EUROPEAN ENERGY APOCALYPSE

FT - AUGUST 12 2022 - European governments continue to search for ways of weaning themselves off Russian power before huge increases in energy bills hit households over the next few months.

The latest push came with German chancellor Olaf Scholtz’s backing for a new gas pipeline linking Spain and Portugal to central Europe via France. The proposal, backed today by Madrid and Lisbon, could be ready within nine months, according to Spanish energy and environment minister Teresa Ribera.

In the meantime, according to Portuguese prime minister António Costa, the port of Sines on his country’s south-west coast could be used as a hub to ship liquefied natural gas into Europe. LNG is becoming increasingly important as Russian gas dwindles, but Europe faces strong competition from Asia to lock in supplies for the winter months.

The EU has identified the lack of alternative pipelines as a key obstacle in beefing up the bloc’s energy infrastructure. Berlin is already under serious pressure after Russia cut flows through Nord Stream 1, the key connector with Europe, which is currently running at just 20 per cent capacity. German households are bracing for a surge in heating bills this winter as the shortfall pushes up prices and complicates the country’s efforts to fill its gas storage facilities.

A range of government measures to tackle the surge in energy prices are in operation across Europe, from price caps to tax cuts, windfall taxes and subsidies.

Low rainfall is also complicating matters. Norway this week said it would curb electricity exports to Europe if water levels for its hydropower plants remained low, denting hopes it could come to its neighbours’ rescue. And in Germany, low levels on the Rhine are adding to business worries: inland waterways may only account for about 6 per cent of German transport volumes but are used to ship 30 per cent of coal, crude oil and natural gas.

In the UK, forecasts for household energy bills continue to escalate, fuelling a deepening cost of living crisis. The latest, from consultancy Auxilione, suggests the average could top £5,000 next year, following a steep rise in wholesale gas prices.

Ministers are meeting power company chiefs to discuss possible remedies, while also drawing up plans to combat the threat of outages this winter. On the positive side, a common front against Russia’s energy squeeze has improved fractious relations between the UK and the EU.

The IMF last week suggested European countries pass on increased energy costs to consumers to encourage energy saving and the shift to greener power, albeit with targeted help for poorer households that are disproportionately affected by the increases.

Meanwhile, the International Energy Agency said western sanctions had only had a “limited impact” on Russian oil output. Although exports have fallen to Europe, the US, Japan and Korea, the routing of flows to countries such as India, China and Turkey has mitigated the country’s losses.

The IEA also lifted forecasts for oil demand thanks to its increased use for power generation in Europe and the Middle East as gas becomes too expensive.

Amid the gloom there are some crumbs of comfort for consumers. US petrol prices have dipped below $4 a gallon for the first time since Russia’s invasion of Ukraine. The trend is also being replicated in Europe, reports our Energy Source newsletter: EU drivers are paying 9 per cent less than in June and British drivers 8 per cent.

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