Natural gas prices have been skyrocketing in Europe. The prices increased more than 250 percent year-to-date to around 74 euros per megawatt-hour. It had reached a record peak last week at 79 euros per megawatt-hour.

But as gas prices increase, one unfortunate outcome may be the slowdown of Europe’s green climate agenda.

Why is there is a gas crisis in Europe?

The increase in gas prices is a result of a conflux of events triggered by the COVID-19 pandemic and its aftereffects. According to the International Energy Agency (IEA), the sudden economic rebound from the pandemic has drastically upped the demand for natural gases and fuels. At the same time, a particularly cold winter and under-capacity operations for natural gas shipping and extraction left stores almost empty across Europe.

High demand and low supply started stressing the prices of natural gas at the beginning of the year, with the gap spiking further price increases as the year went on. Supplies from Russia were hit by poor infrastructure and supplies from Asia slackened due to high demand in the region.

Many lawmakers, experts and officials from Europe and the US have also blamed Russia for exacerbating the situation in order to have more leverage for its Nord Stream 2 deal, the $11-billion project that would bring gas from Russia to Germany and other countries across the Baltic Sea. It is a contentious geopolitical issue, with the US, Ukraine and other central European countries strongly against the deal and the growing Russian influence in Europe.

Who is going to be affected?

Apart from energy companies and end consumers, sectors and industries that rely on natural gas are left particularly vulnerable. British energy companies, especially, have been hard hit by the price increase and are possibly staring at collapse if there is no support or change in the situation.

According to industry body OGUK, wholesale energy prices have surged, with a 70 percent rise since August alone. “OGUK predicts that UK North Sea output will roughly halve by 2027 unless new fields are opened, making the UK even more reliant on imports,” Will Webster, the organisation’s energy policy manager, told CNBC via email.

With prices increasing, many energy companies are having to take in losses that most cannot sustain over longer periods of time. Energy companies are also unable to raise prices on their fuel due to caps from the government.

“(Companies are) caught between this rapture of the rising energy price wholesale market and the default tariff cap, and depending on who you believe, this is anywhere up to 200 pounds, 250 pounds

Not good for climate agenda

With many governments stepping in to subsidise or support energy prices, renewable energy has been hit as well. Governments in Spain, France and Greece have introduced measures or are planning to introduce measures that would limit the profit that energy companies make at this point.

“Soaring energy prices have hit economies across Europe, and if Madrid’s actions are imitated elsewhere as governments prioritise cheap energy over the green transition, the EU’s credibility in advancing global climate action could take a hit,” Henning Gloystein, Director of Energy at the consultancy firm Eurasia Group, said in a note

“If wealthy countries in the EU are seen subsidising energy for households that is in part supplied by fossil fuels, then the EU can hardly tell poorer countries to stop subsidising household fuel consumption supplied by fossil fuels,” Gloystein added.

The price increase has also been blamed on the European Union’s climate policies, which many fear may affect public support for a transition to greener energy. While many individuals favour the transition and action against global warming, only a fraction of them would be willing to foot a higher bill for the same.

Other experts have highlighted that the current situation would not have come to pass if Europe had already started to transition away from natural gas and fossil fuel five years ago.

When will the surge end?

The surge in prices is expected to continue into the winter, when residents across Europe will be confronted by a larger utility bill due to the price surge.

“Gas prices could remain high until the end of the winter heating season, given low levels of natural gas in European storage facilities,” Fitch analysts wrote in a note.

If there are severe cold spells across large regions in Europe, the supply of natural gas may face further stress that may spark more jumps in prices. The situation is expected to be resolved only by late 2022, when supply slowly starts to catch up with demand and Asia is able to send more gas to Europe.

(Edited by : Shoma Bhattacharjee)

First Published:Sept 23, 2021 7:21 PM IST