Why Europe is facing soaring energy bills
Europe’s energy bills are skyrocketing for several reasons, including sub-par Russian gas supplies
LONDON, UK – European households face much higher energy bills this year and beyond due to a global spike in wholesale electricity and gas prices, with consumer groups warning that most vulnerable in the region could be affected by fuel poverty.
Why the high prices?
Energy companies pay a wholesale price to buy gas and electricity, which they then resell to consumers. As in any market, this can go up or down, depending on supply and demand.
Prices generally rise in response to increased demand for heating and lighting in the winter, and fall in the summer.
But prices have soared due to low levels of gas storage, high carbon prices in the European Union, dwindling liquefied natural gas deliveries due to increased demand from Asia, supplies in Russian gas below normal and infrastructure breakdowns.
At the same time, a cold winter has boosted demand and since the beginning of the year, the threat of Western sanctions against Russia, the leading European supplier of natural gas, has raised fears of supply disruptions.
European benchmark gas prices at TTF’s Dutch hub rose 330% last year, while German and French benchmark contracts more than doubled.
How long could this last?
Europe’s winter heating season runs from October to the end of March, but wholesale prices are not expected to drop significantly for the rest of this year, despite some suppliers’ promises of more gas.
Many gas market analysts expect prices to remain high for the next two years or more.
The new Nord Stream 2 undersea gas pipeline between Russia and Germany – which is expected to receive German regulatory clearance later this year – could help lower prices, although the US State Department has said the project would not move forward if Russia invaded Ukraine.
Norway, Europe’s second largest supplier, is delivering natural gas at full capacity and cannot replace missing supplies from Russia, its prime minister has said.
Qatar, one of the world’s top exporters of natural gas, said it would not be able to unilaterally replace Europe’s energy needs in the event of a shortage due to the Russia-Ukraine crisis.
Why are retail prices rising?
Many energy providers pass on higher wholesale costs to consumers through their retail tariffs. In Great Britain, for example, on a bi-energy bill (electricity and gas), the wholesale price can represent 40% of the total.
Suppliers can buy energy on the wholesale market on the day of delivery, a day in advance and up to months or seasons in advance, trying to predict when prices will be lower and how much to buy to cover the needs of their customers.
If suppliers do not buy enough energy, they may have to buy more at a price that could be higher, depending on market movements.
Can anyone intervene?
The European Union is reviewing contingency plans for gas supply disruptions, though countries’ storage and infrastructure should guard against major shocks.
In October, the European Commission outlined measures national governments can take and said Brussels would consider longer-term options to deal with price shocks.
Governments have announced measures such as subsidies, removal of environmental levies or value added tax from invoices and price caps.
Britain, which relies heavily on gas for heating, in 2019 introduced a price cap on the most widely used energy tariffs in a bid to end what former Prime Minister Theresa May called a “scam “.
However, UK energy regulator Ofgem will increase this cap by a further 54% from April. In response, the government introduced support measures, including a £200 rebate on all household energy bills from October, repayable over five years.
What can consumers do?
Due to a deregulated market, Britain had a relatively wide choice of energy suppliers, but high wholesale prices led to the collapse of more than 25 of them recently.
Consumers are generally encouraged to switch providers or to a cheaper rate. However, consumer groups in Britain now say the standard variable fares, subject to the price cap, are among the cheapest available.
Regulators such as Britain’s Ofgem are urging consumers to contact their energy supplier if they are having trouble paying their bills.
Measures such as better insulation, energy efficient lighting and smart meters are also advisable, but may require upfront costs. Reducing energy consumption is much easier during the summer months. – Rappler.com