The EU’s energy crisis will be instructive and destructive

The EU’s energy crisis will be instructive and destructive

18-10-2022 | 投資觀點

Winter is coming but a smorgasbord of positive natural and man-made interventions means the EU will likely avoid blackouts.

  • Farahnaz  Pashaei Kamali
    Pashaei Kamali
    Cluster Head - Energy & Utilities
  • Philipp  Kehrein
    Sustainable Investing Analyst

Speed read

  • Weather and geography along with power mix and reserve capacity are critical factors
  • High energy and input prices will accelerate business disruption and creative destruction
  • Crisis a change catalyzer for energy policies, company capex and household purchases

With gas supplies tight and electricity prices high, Europe is at the sharp end of the energy crisis. However, a warm winter will help to avoid blackouts and extreme rationing in the coming months. So far, Europe has secured LNG imports from diversified suppliers and hopes to further reduce demand via a mix of voluntary and mandatory consumption for industry and households across member states. Measures are working; reserves are building. EU gas imports from Russia have gone from 40% to less than 10% in less than a year. Meanwhile, winter reserves for the bloc as a whole are back up to a reassuring 90% – a two- to three-month surplus at the beginning of October.1

Figure 1 European LNG imports

European LNG imports are appreciably higher in 2022 versus the recent past (2019-2021).

Source: Bloomberg NEF

Figure 2 European gas storage levels

Gas reserves are rising and approaching maximum capacity.

Note: GY us gas year which begins in October. GY22 is from October 1, 2022 to September 30, 2023.

In our view, consumption cuts should be permanent to ensure energy security in the mid term. A prolonged war is predicted which means a hard wean off Russian supplies will force Europe into the arms of a tight and volatile short-term spot market for fueling needs. That means Europe’s own energy bill will remain high through 2023 and likely 2024 as new reserves, devoid of Russian inputs, are built.

Increased infrastructure buildout of renewable generation, storage capacity and distribution will take time, and while Europe waits, LNG imports must fill the gap. Short-term relief for small enterprises and lower-income households (already stressed from high inflation and rising interest rates) is coming. So far, the EU has earmarked 300 billion in relief funds, and member states have launched their own mix of price caps, subsidies and funding facilities.

But though government intervention is needed to buffer consumers and diminish recession risks, it could also intensify gas shortages if not executed correctly. High prices work to reduce consumption but capping prices will reduce this effect as some member states have experienced in recent months.2 An EU-wide price cap is still under discussion and distorted price signals are chief among concerns.

We believe the EU should favor the discriminating Dutch approach, where prices are capped to a point after which consumers pay the full market price. This would blunt the impact of high energy prices for households while also blunting excess consumption. Moreover, barring a harsh winter in North Asia, we believe China’s access to abundant Russian gas as well as domestic economic slowdown will reduce global competition and keep gas supplies flowing towards Europe.

China’s access to abundant Russian gas as well as domestic economic slowdown will reduce global competition and keep gas supplies flowing towards Europe.

A factor mash-up

Energy discipline has replaced fiscal prudence as the new EU mantra, but not all states face the same constraints and the impact will be uneven across member states. Natural geography, national fuel mix, regional temperatures, and storage capacity differences will heavily influence winter’s wrath for member states.

Cold snaps in the north may necessitate higher gas demand, while warmer climes in the south may ease energy pressures. Strong winds can replace gas for sea-facing Germany and the UK but won’t help land-locked Eastern states such as Bulgaria, Slovakia and Hungary, all heavily dependent on piped Russian gas. Meanwhile, France’s energy solvency depends on nuclear power coming back online. Finland and Sweden have near-zero gas storage capacity but have ample hydropower from waterways and biomass from forests. Despite early rhetoric and wrangling, energy sharing agreements will emerge, further reducing shortage risks for individual members.

Low risk of blackouts, high risk of bankruptcies

Though blackouts will likely be averted, bankruptcies may not. As with countries, the energy price impact will also be uneven across sectors and companies and energy-intensive companies are bearing the brunt of the hit. Earnings for energy intensive sectors such as utilities, metal processing and chemicals will be hit first, with second round effects in food, hospitality and transport.

Too big to fail utilities are leaning on government support, while bigger companies with large cash buffers have reduced output. Chemical and base metal producers are switching to lower-priced coal for energy and shutting down unprofitable production.

The ability to pass costs onto customers has largely shielded companies with high-margin sectors or premium products. Low-margin, hyper-competitive industries such as aviation, food and retail services, where raising customer prices means losing market share, will be squeezed even thinner. Some have cleverly shifted costs to consumers unaware. Paper and pulp producers – also among the top energy intensive industries – are making toilet paper sheets shorter and narrower while food-related companies – hit indirectly by higher fertilizer and commodity prices – are reducing serving sizes.

Destructive waves are reverberating across supply chains. From glass and aluminum to sugar and ammonia, industrial production curbs are tightening raw material supplies and stoking additional inflation in products further downstream.

Though companies are adapting, closures are inevitable, especially in small and medium-sized operations that lack scale and cash. In Germany, per end of August, insolvency and closures were up 26% compared to a year earlier.3 Furthermore, Eurozone growth is expected to shrink in the last half of the year and continue to fall in 2023, as high inflation, high costs and low consumer spending reduce earnings.


Never waste a good crisis

A period of creative destruction has begun hastened by energy scarcity and explosive volatility. Those that relied on inefficient, inflexible legacy infrastructure run on legacy fuels will find it increasingly difficult to survive as unforeseen crises and risks emerge. Moreover, the energy intensity of upstream extraction and refining of resources has meant energy scarcity is threatening input scarcity across raw, refined and finished materials.

A period of creative destruction has begun hastened by energy scarcity and explosive volatility.

First the good news. Renewable power procurement was already increasing in 2021 and energy insecurity of firms should support more growth in the mid- to long term. Meanwhile, capex investments in technologies that are energy-, input-, and process efficient should also accelerate as industries and households adapt to scarcity as the new normal. EU mandates on rooftop solar and energy-efficient heat pumps will accelerate these trends. Moreover, upstream and downstream forces along with earmarked EU funding will push investments in dynamically connected smart grids that allow households, communities, companies and member states to efficiently use and share energy.

The bad news is that energy, input and investments costs will remain high, so energy consumption must remain disciplined. However, crisis is often the catalyst of change. Governments, consumers and companies shouldn’t let this one go to waste.

1 Reuters website as of 11. October 2022. https://graphics.reuters.com/UKRAINE-CRISIS/EUROPE-GAS/zdvxozxzopx/
2 Bruegel, European natural gas demand tracker as of 5. October 2022. https://www.bruegel.org/dataset/european-natural-gas-demand-tracker
3 Reuters, Germany energy price shock triggers insolvency wave. September 20, 2022.

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