Last year, Russia’s natural gas supplies threatened to cause a crisis in Europe, but that was successfully avoided. While the energy sector is witnessing the development of nuclear technologies, the need to overcome challenges related to renewable energy sources has become increasingly apparent.
There has been a renaissance in nuclear energy over the last year
Geopolitics, energy, and climate crises, and the development of new nuclear technologies have contributed to this. China and Russia account for 87% of new nuclear power plants built or commissioned since 2017.
China is a global leader in solar, wind, and electric car technologies. During the next 10-15 years, China intends to build 150 new nuclear power plants, making it a world leader in nuclear energy technology and construction.
The US is following suit by passing new legislation to promote nuclear energy. The Department of Energy recently stated that the United States should build 200 new nuclear power plants by 2050.
Eastern Europe is in a difficult situation, as it can no longer rely on Russian gas, and the use of coal is restricted by European Union (EU) emissions regulations. While renewable energy resources are an option, nuclear power is a safe bet. Sweden, for example, is considering the possibility of building new nuclear power plants, whereas polls in Norway show that the majority is in favour of nuclear power.
The dynamics of commodity prices are to be determined by China
Natural gas and coal prices in the EU have fallen by 40% since the beginning of the year. As of Q3 2022, the decline is 80% and 60%, respectively. Nevertheless, prices are twice as high as in 2018 and 2019.
Because the EU is heavily dependent upon global liquefied natural gas (LNG) and OPEC + is controlling the oil and coal markets, commodity prices will largely be determined by China. Today’s EU natural gas price of 40-50 EUR per MWh, a coal price of 130-140 USD per tonne, and a Brent crude oil price of 80-90 USD could be the new benchmarks. The main problem, however, will be energy security and environmental issues.
Gas stocks in the EU are close to their highest levels for this time of year. Demand for natural gas remains subdued even after the sharp drop in prices. The EU relies on large-scale LNG imports. Currently, competition with Asia for LNG cargoes is not particularly fierce, possibly due to the weak global economy.
Until the end of November, the EU has enough time and opportunity to prepare for the upcoming winter and replenish stocks to 90 percent of their capacity. The key question is rather how high the price will be. This will largely depend on economic activity in Asia.
Russia’s importance in the European gas market is dwindling
In the second half of 2022, Russian restrictions on natural gas supplies rocked Europe, threatening widespread economic problems. Russian natural gas exports have remained low since the middle of the third quarter of 2022, fluctuating between 10% and 20% of historical levels.
Due to the drop in demand and strong LNG imports, the price has fallen further. Thus, the EU has managed the energy crisis brilliantly, despite the loss of more than 1000 TWh of Russian natural gas.
Last winter was warmer than normal in Europe, which was important. However, this accounted for only 15% of the impact. 85% of the impact was caused by a drop in consumption due to high prices in Europe and North-East Asia, driven by high global LNG prices. The reduction in consumption in Asia resulted in a large amount of LNG cargoes reaching the European market and making up for the gas lost from Russian pipelines.
Currently, Russia has the capacity to deliver 215 TWh per year to China, 466 TWh per year to Turkey, and 1238 TWh per year to Europe (excluding Nord Stream infrastructure). A slight increase in capacity to China is possible, but not before 2026/2027. On the other hand, the much-discussed Power of Siberia2 (489 TWh/year) could come on stream in 2030 at the earliest. In the short term, most of the lost Russian gas will either remain underground or be transported by sea via the country’s 4 liquefaction terminals (366 TWh/year). Consequently, Russia’s importance in the European gas market is dwindling.
America’s LNG export has become Europe’s saviour
In the past, the EU and UK imported about 840 TWh of LNG per year, compared to the current 1,600 TWh (EU and UK gas consumption is about 5,000 TWh/year). LNG is a commodity with global reach and the highest bidder gets the cargo. Therefore, the EU price needs to be kept high to attract enough cargo to meet demand.
In the United States, there is an abundance of cheap natural gas, a small domestic market, and a weak pipeline infrastructure with its neighbouring countries. Therefore, US prices will remain low until 2025, when new infrastructure projects will come on stream. In the EU, natural gas still accounts for the marginal cost of energy.
The price of carbon emissions is another layer that makes up the wholesale price of electricity in the EU. In contrast, the wholesale price of US electricity does not include costs related to carbon emissions, which are the business conditions for natural gas exports from the US to the EU. The EU RePower Plan came into force on 1 March. It aims to generate EUR20 billion from emissions auctions to support the diversification of Russian energy by 2030.
We must think about supergrids
The supply of solar and wind energy is very volatile. This is not a problem as long as the installed capacity is below the total demand and there are other energy sources that can adapt to the changing renewable energy supply dynamically. However, electricity prices will drop sharply for certain hours when the supply of renewable energy sources becomes particularly high.
Even if this development dynamic has not yet reached a critical level, the risk is becoming increasingly clear. It can occur gradually at first, and then suddenly, as was the case in Germany in April 2020.
Large investments are required to ensure that price fluctuations do not harm renewable energy sources and investments. These problems can be addressed through large investments in supergrids, batteries, and complex regulatory systems.
One of the major risks is that these investments will not be made on the scale required. If so, a collapse of electricity prices under the weight of the surplus of renewable energy is possible.
In other words: If renewable sources produce a lot of energy and would normally make a profit, they will miss out. If these risks materialise on a large scale, market forces will accelerate investment in batteries, transmission, and regulatory systems. Conversely, further investments in solar and wind energy may stall until these issues are resolved.
Dainis Gašpuitis
economist at SEB
