Europe’s Energy Crunch Threatens Recovery as Prices Hit Records

(Bloomberg) -- This year’s energy crunch is threatening to derail Europe’s economic recovery as gas and electricity costs soar to fresh records.

Prices surged more than 20% on Tuesday after Russia curbed gas flows to Europe and France, usually a power exporter, was forced to boost electricity imports and burn oil to keep the lights on. Higher costs have forced some companies to shut down or curb output, while inflation in the euro zone climbed to an all-time high last month.

The energy crunch is deepening just as the coronavirus omicron variety spreads across Europe, darkening the region’s economic outlook. Costs are also adding to supply-chain snarls that have upended industries from car makers to wind turbine manufacturers. Food producers are also feeling the pinch, with the cost of energy-intensive fertilizers surging.

“It’s not only the cost of energy that’s a problem right now, we have all these supply-chain issues,” said Anne-Sophie Corbeau, a research scholar at the Center on Global Energy Policy at Columbia University. “Eating and heating are very important things. Right now, a lot of people might have problems with heating, but you might have problems with eating because fruit and vegetables are expensive. Everything is becoming quite expensive.”

Gas futures surged as much as 28% as Russian gas flows into Germany via a key route dropped to zero, and were instead moving eastward to Poland, according to network operator Gascade. This is likely to continue on Wednesday. 

German power for next year jumped as much 25%, while the French contract gained 26% as nuclear outages bite, forcing six oil-fired units to be turned on in France on Tuesday morning, according to a filing with Entsoe. Thin trading due to the holiday season also contributed to the gains.

Electricite de France SA said last week it would halt four reactors accounting for 10% of the nation’s nuclear capacity, straining power grids already coping with freezing weather. About 30% of France’s nuclear capacity will be offline at the beginning of January, and to make matters worse, Germany is closing 50% of its reactors before the end of the year. 

The power shortages means Europe needs to burn more gas just as Russia has signaled its supply will remain capped next month. Lower supplies into Germany will force Europe to keep withdrawing gas at high rates from its already depleted storages, risking a prolonged deficit of the fuel well into next winter.

“These exciting times will continue for a bit longer and will probably not end before the winter ends,” said Hans van Cleef, a senior energy economist at ABN Amro. “Depending on how much inventories will be left by then, the price effects of current shortages could last even much longer.”

The energy crunch is so severe that Trafigura’s Nyrstar will pause production at its zinc smelter in France in the first week of January because of rising electricity prices. Norwegian fertilizer producer Yara International, which curbed output earlier this year, said it would continue to monitor the situation closely and curtail production where necessary, while Romanian fertilizer company Azomures temporarily stopped production due to higher gas prices.

“I’m worried about one thing: the cost of fertilizer products,” Corbeau said. “This is going to bite us eventually in terms of the cost of food and this isn’t going to have an impact on Europe, this is going to have an impact in a lot of countries.” 

The French government has asked EDF to restart some nuclear reactors earlier than planned. Ecology Minister Barbara Pompili said this weekend that in addition to the early reactor restarts, the country had contracts with some companies in which they agreed to cut production during peak demand hours in exchange for payments from the government.

Freezing temperatures spreading across the continent this week also aren’t helping, and Europe’s vast network of renewable sources just can’t keep up. German wind output plunged to as low as 1,231 megawatts on Tuesday, the lowest since Nov. 16.

Benchmark European gas prices traded in the Netherlands closed at an all-time high of 180.27 euros a megawatt-hour. German power for next year settled at 315.99 euros a megawatt-hour.

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