Could the energy crisis derail the green transformation agenda?
The energy crisis in Europe and the UK is increasing in impact and focus. But what are the ups and downs and how may it impact the long-term financial focus on e.g. the green energy transition? Ole Hansen, Head of Commodity Strategy at Saxo Bank, explains the crisis, its impact and what is important for investors to be aware of.
The past six months have been the perfect storm with low gas supplies, low gas storage levels due to a very cold winter in Europe last year and with a summer where the weather didn’t support the production of green energy. Ole Hansen : “E.g. In Northern Europe, the wind hasn't blown as much as we’d normally see. The Danish offshore wind company, Ørsted, just reported one of the lowest energy production in a quarter for the last 22 years. Also, the European summer has been really warm, increasing the usage of energy for coolers. Finally, Russia, our main safety valve when green energy doesn’t produce, seems unable or unwilling to increase their gas output.”
Energy prices are currently trading around six times higher than a year ago and at least two or three times higher than the historical average for this time of year. “Adding to that, we are going to see second level effects for industries that are heavy energy consumers like e.g. cement, fertilizers and chemicals producers, which are basically forced to cut production, says Ole Hansen. “It is also a challenge for the agriculture sector, which is evident e.g. in the UK, where farmers have had a hard time to send their livestock to slaughterhouses because it’s become too expensive. This, in turn, leads to an increase food prices, which leads to increased inflation and so on. In the UK, this has forced the government to step in and subsidise the process.”
Energy poverty in Europe
In Europe, the areas with the lowest tax pressure are getting hit the worst. Ole Hansen : “This is because the higher a percentage of your current electricity bill that is taxed today, the smaller a part of the price you are used to paying will be affected by the increased prices.”
More concretely, It is relevant to see how houses are being heated. Usually, low income households as well as the elderly will be hit the hardest, as they tend to live in the oldest houses with the worst insulation as well as the oldest heating systems or have the greatest need for heating, which they cannot afford. This is referred to as energy poverty. “Geographically, the UK in particular is being hit hard,” according to Ole Hansen, “Because they do not have district heating and a lot of their houses are heated by gas, which has seen the greatest price increase. Right now, an average gas bill in the UK, according to the Financial Times, at current market prices, could go up by around £550 on an annual basis. That's an increase of nearly one third.”
Longer-lasting inflation
On a global scale, the crisis is increasing the competition for liquified natural gas (LNG). The summer has been really hot, especially Asia as well as in the US, which has meant that they have burned more energy for cooling systems than usual. As a result, storage levels in Asia are lower than normal. Ole Hansen : “China has stated that it is unsure whether it has enough gas stored to get through winter, meaning that it is also out willingly buying energy at elevated prices instead of using already-stored supplies. So while the supply crisis is primarily a European one, the global energy demand is likely to keep an upwards price pressure at least over the coming winter, which could very well lead to longer-lasting inflation.”
Green solutions should be scaled up
During this period of green energy transformation , the UK and Europe are vulnerable to events like this because these countries do not have a so-called baseload of energy from a steady and reliable energy source and thus need to import it. Ole Hansen : “In the past the that baseload was provided by conventional power plants such as coal and nuclear plants. With the green energy transformation, Europe, which is the most advanced in the transformation, is shutting down its conventional power plants as they are being replaced with renewable energy production. It is easy to turn up and down for how much gas you pour into your power plant. But we do not know what the wind is going to be doing in two weeks’ time and therefore it is very difficult for us to predict how much energy we can use.“
How do we create a sustainable and reliable baseload and at the same time go green? Ole Hansen : “It all comes down to scaling our green solutions. A sustainable, reliable and environmentally friendly baseload can be achieved by rolling out sun and wind power generation on an even greater scale, combined with a better network of interconnectors ensuring the flow and easy access between regions with too much and too little green energy production. Apart from that, the ability to store electricity in batteries and next-generation nuclear power technology, which, according to research, may prove to be safer than current technologies, while producing more power with the same amount of uranium.”
Winter is coming
Ole Hansen sees several possible outcomes of the current energy crisis. “Either we can “get lucky” and get a mild winter with great weather for renewables, which will decrease the demand for energy, Russia can decide to turn on the valve and provide Europe with more energy, which will increase the supply, or we can see governments go in and control the supply and thereby forcing the demand to decrease. This will be done by asking companies to scale down production, as it would be political suicide to accept blackouts for your population during winter. Governing bodies also need to look towards future energy sources. We need to funnel money through to innovation and development, e.g. through investing.”
In any case, we have to get through this crisis without bringing the green transformation into question, says Ole Hansen : “There’s so much political will behind the green transformation that I cannot see how we can scale that back.”
How high can energy prices go? “Last week, some companies began to curtail production, which could be a sign that prices have become so high that it is more valuable to shut down production than to increase it,” says Ole Hansen. “But if we do not see that behaviour across, and we end up with a cold winter, then the sky is the limit – then it will be parabolic until we get a very strong – probably governmental – response in terms of slashing demand. Then we could be talking about blackouts, but I sincerely hope we're not getting anywhere near that situation. We still have a few months left before winter really kicks in and then we can see if there should be any additional pressure on Russia to turn up the tabs.”
