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Javier Blas

The New European Energy Normal Remains Rather Painful

Gas prices are down from their peak, but still elevated. European companies face a long-term loss of competitiveness.

Power remains expensive in Europe.

Power remains expensive in Europe.

Photographer: Krisztian Bocsi/Bloomberg

After the convulsions of 2022, the European gas market appears to have entered into a new phase. There are two ways to describe the current environment: The glass half-full view sees prices down 85% from their peak, the half-empty one says they are double their pre-crisis levels. Both are true — to reconcile them, I’m calling it “the new European energy normal.”

In that new normal, European gas changes hands at €45 ($48) to €50 per megawatt hour. For many policymakers, who witnessed prices spiking to about €350 in August and feared blackouts and freezing homes, it’s a cause of celebration. The crisis is over, so the thinking goes from Brussels to London. Europe won, Vladimir Putin lost. I wish it was that simple.

For businesses, which paid an average of €20 for their gas between 2010 and 2020, it’s more complicated. For most, current prices are still painful, although they can probably weather them with some additional belt tightening. For the region’s energy-intensive industries, such as chemical companies and glass manufacturers, prices remain catastrophically elevated.

It’s a similar story in power markets. UK short-term electricity prices appear to have settled at just under £150 ($180) per megawatt hour. That’s a fraction of the £550 seen in August and December last year, but triple the 2010-2020 average of just £45.  

Facing what now looks like a long-term, and perhaps permanent, increase in costs, companies are raising prices to protect margins. The process started last year, but it’s gaining traction in 2023 as companies typically reprice at the start of the year. That, in turn, is boosting inflation in Europe, particularly for services and manufacturers, confounding expectations of a rapid decline. Even food prices are rising as some greenhouses unable to afford to heat closed for the winter, prompting shortages and higher costs. The European Central Bank and the Bank of England are in a corner: despite economic growth that can be described as anemic at best, the market is anticipating further interest-rate hikes.  

BASF SE, the German chemical mammoth, summarized the situation last week when it announced job cuts and plant closures. “Europe’s competitiveness is increasingly suffering,” said BASF boss Martin Brudermüller. “High energy prices are now putting an additional burden on profitability and competitiveness.”

How sustainable is the new European energy normal?

First the good news. Europe has weathered the winter far better than I had feared despite lacking most of the usual Russian supply. The region reduced gas consumption significantly. It was also able to import lots of liquefied natural gas from friendly nations like the US and Qatar, facing no real competition buying as much LNG as it needed thanks to muted demand from China. The combination meant that Europe withdrew less gas from storage than in previous winters, allowing prices to decline from the extreme levels of last summer.

With four weeks until winter ends, European gas storage tanks are 61% full, the highest ever for this time of the season. Unless the weather turns unusually cold, Europe will emerge from the winter with its gas reserves at least half full, far higher than the 20% to 30% feared. Excluding 2020, when demand was muted by the impact of the Covid-19 lockdowns, Europe has never had so much at the end of winter — the previous high was 47% in 2014.

Now the bad news. Europe will struggle to repeat the feat next winter. A lot of the demand saving — and, therefore, of the ensuing price decline — was due to luck (warm weather), economic damage (industries paring production, including of food products), and a willingness to ignore the climate crisis (switching to coal from gas). Greg Molnar, a gas analyst at the International Energy Agency, estimates that 80% of the gas savings last year were due to those non-structural factors. In particular, “our very first estimates show that milder weather accounted for about one-third of the demand decline seen in 2022,” he says. Only 20% of the gas saving was due to energy efficiency and behavior change. LNG was plentiful because China, dragged down by draconian lockdowns, wasn’t buying. That’s unlikely to happen this year and into 2024.

The new energy backdrop means much lower energy costs than at the peak of the crisis in 2022. But prices are likely to stay higher for longer when compared to the pre-crisis levels, meaning European companies face a long-term loss of competitiveness and the region faces more entrenched inflation. That’s nothing to celebrate.