Europe's energy crisis: A prime motivation for green energy transition

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  Quantumrun Foresight
• July 28, 2023

Insight highlights

Europe's failure to secure long-term contracts for liquefied natural gas (LNG) could lead to high costs in winter 2023 due to increased demand from China. In 2022, the European bloc imported 60 percent more LNG compared to 2021 to substitute for reduced Russian supplies, leading to a significant reliance on the more expensive spot market. This situation, triggered by the COVID-19 pandemic, is detrimental to developing nations, disrupts industries, and fosters inequality, pushing Europe to invest aggressively in renewable energy sources like offshore wind farms and hydrogen projects.

Europe's energy crisis context

Europe hasn't successfully secured enough long-term contracts for LNG as a substitute for the Russian pipeline supply, which could lead to high costs in winter 2023 due to a potential surge in Chinese demand that might drastically shrink the market. The 2022 winter was made manageable for the bloc by purchasing LNG as a substitute for the decreased Russian supplies, leading to an import of 121 million tonnes of the fuel in 2022, a rise of 60 percent compared to 2021, according to a Reuters analysis.

However, this approach had its drawbacks: Europe mainly relied on the spot market for purchases, where prices are significantly higher than those agreed upon in long-term contracts. According to the International Energy Agency (IEA), the expenses associated with LNG imports skyrocketed to approximately USD $190 billion in 2022, a more than threefold increase. 

Analysts have calculated that in 2022, Europe was responsible for over a third of the worldwide spot market transactions, a significant rise from about 13 percent in 2021. Without securing long-term contracts, Europe's vulnerability to the spot market could escalate to more than 50 percent in 2023. While the energy crisis is often associated with Russia’s invasion of Ukraine, it actually began during the COVID-19 pandemic. The global lockdowns led to a steep decline in energy demand, causing a collapse in wholesale prices, halting investment projects, and resulting in reduced production to prevent oversupply.

Disruptive impact

While the increase in natural gas prices significantly impacted European industries, it had catastrophic consequences for developing nations. Countries like India and Brazil couldn't afford sufficient natural gas to power their economies, leading to reduced imports. Bangladesh and Pakistan, with a combined population of nearly half a billion, have struggled to meet their industrial and power generation demands, resulting in blackouts. 

LNG suppliers have favored trading with wealthier nations offering higher prices, often redirecting shipments intended for poorer countries to Europe or not delivering them altogether, despite pre-existing contractual agreements. This inequality can end in a much lower quality of life for billions of people in emerging economies, disrupting their industries and slowing innovation and infrastructure development.

Meanwhile, Europe will likely continue to supplement its energy requirements by fast-tracking renewable energy developments. Nine countries, including the UK, France, and Germany, have already banded to establish a massive offshore wind farm in the North Sea. With the dual goals of lessening dependence on Russian gas and drastically cutting down the use of fossil fuels, the coalition plans to increase its collective wind energy capacity to 120 gigawatts (GW) by 2030, with a target of 300GW by 2050.

Hydrogen projects will also likely accelerate, with the European Union (EU) approving USD $5.2 billion in public funding in 2022. The IEA refers to hydrogen as a flexible energy medium due to its multitude of uses across various industries.

Implications of Europe's energy crisis

Wider implications of Europe's energy crisis may include: 

• Aggressive investments in renewable energy research and development to accelerate the transition to alternative energy sources, leading to more regional jobs and economic growth.
• An increasing competition for global technology talent as countries attempt to leverage artificial intelligence and machine learning to streamline energy production and lower costs.
• Increasing geopolitical tensions as developing economies continue to suffer from a lack of energy supply.
• More regulations and policies that favor renewable and sustainable energy production, including mandatory solar panel installations, heat pumps, and retrofitting old buildings.
• Increased cooperation among EU members to share the costs for pipelines and renewable energy projects.
• Higher electricity and heating costs among European consumers, as their respective countries struggle to provide enough energy.

Questions to consider

• If you live in Europe, how is your country coping with the energy crisis?
• What other ways can European governments encourage the transition to green energy?