The battle is still raging as we head into winter in Europe, with homes and businesses across the continent suffering from continued skyrocketing energy prices.
While many look to countries like Norway for solutions, it is actually liquefied natural gas (LNG) production in the US that is likely to determine future energy prices in Europe.
The ongoing war in Ukraine has opened up the weaponization of energy, something never seen before in Europe. Much of Europe’s energy supply, supporting its sustainability, is based, among other things, on cheap, secure supplies from Russia.
But the current political situation shows how security of supply has been sacrificed by relying on a global market model to supply ‘European factories’. The same goes for raw materials, food and other commodities, and security in general.
Drivers for record gas prices in Europe
Gas prices in Europe have risen in the past year to levels never seen before or even previously expected.
Gas prices in Europe are primarily determined by the Dutch Title Transfer Facility (TTF), a virtual market price facility for gas futures, physical and exchange trading roughly equivalent to the North American Henry Hub. .
TTF prices have generally been between €10 and €30/MW over the years. There have been occasional price increases, usually when gas flow from Russia is disrupted.
Prices rose last year as the volume of gas flowing through the Nord Stream I pipeline from Russia to Europe decreased. Due to its opening last year, Nord Stream II remained closed for export to Europe via Germany due to regulatory delays, political and legal hurdles.
As Russia prepares to invade Ukraine, gas flow to Europe is cut off. This led to a price increase in TTF, but also to a quadrupling of the average price.
The design of the European electricity market is ranked by merit, which means that at any demand, the price will be determined by the marginal cost of the most expensive electricity production method. In practice, this usually concerns natural gas-fired STK plants.
Since the price of electricity generated by gas-fired power plants largely depends on the price of the gas itself, we have a driver between the TTF price and the price of electricity in Europe. The price of electricity is mainly determined by the price of gas, as demand can generally be met by cheaper electricity generation methods such as wind, solar and hydro.
Nord Stream becomes irrelevant
Europe had already seen lower flow rates in 2021 at Nord Stream I, which normally supplies about 35% of Russia’s gas imports to Europe. The parties blamed each other for the outage and technical problems. Since the start of the Russian invasion of Ukraine, gas prices have risen to €350/MWh, with a semi-stable level of €100-150/MWh now considered the ‘new normal’. 350 price tag equates to consumer electricity prices at an unsustainable €650/MWh.
The problem was exacerbated by a drought in Europe in the summer of 2022, which reduced water availability for hydropower generation and use to cool nuclear and coal-fired power plants in Germany and France, for example.
But perhaps most relevantly, the explosions in the Baltic Sea rendered the North Stream I and 50% of the North Stream II pipelines useless, putting further pressure on Europe to find a permanent solution.
However, the North Stream II pipeline was never commissioned due to techno-political disputes. The Russian offer to open up the remaining North Stream II pipeline for supplies was not well received in Berlin and Brussels. Europe didn’t fall for it, and the policy of independence from Russian gas was forever cemented.
Tackling Europe’s dependence on energy imports
Following US action to increase shale gas production around 2005, the EU has become the largest energy importer in the world.
The European Commission has taken steps to address this problem. The REPowerEU plan aims at diversification into other energy suppliers and a change in energy carriers to help the EU become more self-sufficient.
Norway has increased its natural gas production by 8% and is now the largest piped gas exporter to the EU, but this is not enough.
Of course natural gas is not a permanent solution. Hydrogen is a bridge from fossil fuels to a future renewable energy based energy system. There are more patches on the natural gas bridge, but right now it’s a much needed patch.
Can US Gas Alleviate Europe’s Energy Crisis?
The EU is exploring further diversification and high-level talks have taken place with the US on offering more LNG to the EU.
LNG can be purchased on the world market, but is more expensive than piped gas and has a limited supply. Capacity would increase from about 400 billion cubic meters (BCM) per year to 500 BCM/year in 2023. Before the invasion of Ukraine, Russia supplied almost half of the EU’s 350 billion cubic meters/year imports.
LNG installations are complex and cannot be set up overnight. Usually it takes up to 10 years to build one. Once liquefied, LNG can be transported by ship and converted to gas in a regasification plant.
They are very easy to make. Germany is building such installations to meet increased LNG imports at a record pace. It is reported that the construction of a greenfield plant took only eight months. Integrated motor vessels can also be installed, and such vessels have been brought to Europe.
As the world’s third largest exporter of LNG after Australia and Qatar, the US is well positioned to become a long-term supplier to Europe. The US has huge reserves of shale gas and there has long been a large gap between production costs and market price in Europe, the gap is now huge.
With a market price in the US of €17/MW that would ensure momentum to develop more shale gas production and generate additional costs for cooling, transport and regasification, deliveries to Europe could be around €30/MW under ‘normal’ circumstances .
a higher price, but a more stable one
Depending on the carbon price, this would result in an electricity price of €100-150/MWh, higher than ‘before’, but much lower than the current volatile prices.
At this stage, it will be easier for consumers and businesses to deal with electricity prices, as Europe continues to develop renewable energy-based power generation systems, which will significantly reduce dependence on natural gas for good.
European gas prices have recently fallen as shops are full and member states take measures to reduce electricity consumption during peak hours. There has been talk of a ceiling price for gas of up to €180/MW, but no agreement has been reached. Gas prices are highly volatile, so a price cap can have unintended effects, both positive and negative.
Since importing LNG from the US would bring the electricity price below that level, it seems a viable intermediate solution for Europe. Of course, it also depends on the continued acceptance of shale gas and fracking in the United States. This is by no means guaranteed, as increasing shale gas production is not a sustainable practice, even if the supply position is secure.
The success of such a strategy for Europe depends on how quickly renewable energy sources can be scaled up to reduce dependence on gas and emissions associated with that practice. The momentum behind the Green Deal is gathering momentum.