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Markets


THE GREAT EUROPEAN ENERGY MARKET BAILOUT IS ONLY GETTING STARTED

 * Nations are realizing energy security can’t be left to markets
 * ‘Only the beginning of growing government intervention’

Photographer: Jason Alden/Bloomberg

By

Isis Almeida,

Vanessa Dezem, and

Francois De Beaupuy

+Follow
July 2, 2022 at 7:00 AM GMT


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Three decades ago, Europe decided to open up its energy markets to foster
competition, a move meant to bring lower prices for consumers across the
continent.

Fast forward to 2022, and bills have ballooned while once rock-solid utilities
are struggling to stay afloat. As a result, governments are realizing they can’t
leave energy security solely in the hands of markets. Berlin is in talks to bail
out Uniper SE, France is considering nationalizing Electricite de France SA,
while Britain has brought gas and electricity provider Bulb Energy Ltd. under
its control. 




“This is only the beginning of growing government intervention in markets,” said
Leslie Palti-Guzman, president of New York-based consultancy Gas Vista LLC.


An employee during safety checks at the Uniper SE Bierwang Natural Gas Storage
Facility in Muhldorf, Germany.
Photographer: Krisztian Bocsi/Bloomberg

The underlying causes for each rescue may vary, but each are rooted in a simple
truth: there just isn’t enough energy to go around anymore. Russia is severely
limiting supplies to Europe, French President Emmanuel Macron is grappling with
an aging fleet of nuclear reactors, and a lack of regulatory oversight meant
British gas and power providers sold cheap energy without considering the return
of a commodities supercyle that brought high prices.



And things could get worse still. Over the years, Europe became increasing
reliant on Russian gas, which President Vladimir Putin has now weaponized in
response to the global opposition to his invasion of neighboring Ukraine.
Gazprom PJSC is curbing exports through all major pipelines to Europe,
complicating continent’s efforts to store enough gas ahead of winter heating
season.



Gas prices in the Netherlands, a European benchmark, are already eight times
higher than normal, and electricity trading is signaling the crunch may last
into next year. Power for 2023 delivery is changing hands at prices six times
higher than the 5-year average in Germany, Europe’s biggest market. 

That’s driving up costs not just for consumers, but also for energy-intensive
industries, from steel furnaces to metal smelters to cement and chemical plants.

“There’s a limit to how long this situation can be sustained, the market won’t
balance itself out until 2024,” said Gergely Molnar, an energy analyst at the
International Energy Agency. “Until then, these financial tensions will be in
place.”



EXPLAINER: Europe’s Energy Crunch and Its Green Ambitions


A Liquid Natural Gas (LNG) terminal on the Maasvlakte in Rotterdam.
Photographer: Koen Van Weel/AFP/Getty Images

The looming bottlenecks and surging prices are prompting governments to step in.
Europe has ordered countries to replenish storage sites, and nations like
Austria and Germany are paying top dollar to stash gas away in their storage
sites.

The German government is handing out one-time payments to households this month
to soften the blow from energy bills that Economics Minister Robert Habeck has
called “bitter news” for consumers. France plans to double down on the 25
billion euros in spending and tax cuts it already earmarked to shield consumers
and businesses from surging energy costs.

Italy is set to spend almost 40 billion euros subsidizing energy bills for
consumers, while the UK put down some £37 billion ($44.7 billion) to ease the
impact on consumers. The nationalization of Bulb alone will cost consumers about
£2.2 billion.

In the Czech Republic, state-controlled utility CEZ is in talks with the
government about measures that could protect liquidity in extreme events, such
as the termination of natural-gas supplies from Russia. All told, some analysts
estimate the wide-ranging international support packages for consumers will
reach 100 billion euros in total aid. 



“That governments are increasingly having to bail out energy companies is a sign
of their failure to consider the impact of price shocks on their policies,” said
Kathryn Porter, a consultant who has worked for Centrica Plc and EDF Trading.
“This is a serious oversight which will add to the already high costs faced by
consumers.”


 
 


Beyond straight financial aid, Germany has beefed up its powers to stabilize
energy markets. A law passed in May gave the government the ability to seize
critical energy infrastructure in an emergency. Habeck has said such “dramatic”
powers were needed to counter Russia’s use of energy to retaliate against Europe
for sanctions over the war in Ukraine.

Measures already on the table include bailouts of utilities, price caps on gas
and liquefied natural gas, as well as subsidies to protect citizens’ purchasing
power.



A generation ago, European energy markets were dominated by monopolies that gave
consumers few choices. It was only in 1996 that the European Union decided to
gradually open up markets as government policies became more influenced by the
belief that more competition would strengthen security of supply, lower costs
and address energy poverty.

That projection didn’t exactly play out as planned. Over the years, Germany grew
increasingly dependent on Russian gas, further exacerbated by its decision to
close down all of its nuclear power plants. Britain was extremely lenient in its
permits to set up an energy supplier, leading to a chaotic market place that
resulted in more than 20 companies collapsing just in the past year. 

France remained heavily reliant on EDF, in which it already owns 84%, and is now
grappling with faulty reactors that are increasingly turning the country --
known for supplying its European neighbors with surplus nuclear electricity --
into a power importer. In Eastern Europe, many countries continue to depend on
gas from Russia, giving Putin’s leverage over some of the former Soviet bloc.


 
 

Europe is now paying a hefty price for its false sense of political security
following the end of the Cold War, which left it so dependent on intermittent
renewables generation and a Russian gas supply it thought it could trust.
Germany was forced to seize and rescue a former unit of Gazprom as it owned
about 20% of the country’s storage capacity and Wingas GmbH, a key supplier to
businesses.

Uniper is in dire straits, receiving only about 40% of its Russian gas orders, a
move that analysts estimate is costing the company about $30 million a day. As a
result, the company said on June 29 that it’s discussing a possible increase in
state-backed loans or even equity investments to secure liquidity.



Others may soon find themselves in similarly difficult positions. Energy trading
houses, for example, are also being forced to replace contracts with Russia,
often a costly unwinding of existing agreements.



“We fear a cascading effect in the industry,” said Timm Kehler, chairman at the
German gas industry lobby group Zukunft Gas. “The state should intervene to
support this.”

In France, EDF’s financial situation has continued to deteriorate even after the
government injected 2.7 billion euros in April as part of a 3.2 billion-euro
capital increase. Chief Executive Officer Jean-Bernard Levy is urging the
government to nationalize the company as soon as possible, according to a person
familiar with the discussions. 



A spokesperson at EDF declined to comment on a potential need for
nationalization, while saying the company requires “visibility to be able to
pursue its investment” for the country’s energy transition.

Governments are going as far as planning to tax energy companies on their
profits. Spain and Portugal put a cap on the price of gas used to make
electricity, and Britain considering decoupling power markets from the cost of
gas. During a meeting of the Group of Seven leaders in Germany last weekend,
Macron called the way electricity prices are set “absurd” and demanded reform of
the market.

“It may not quite come to nationalizations, but I wouldn’t rule out governments
taking significant stakes in some companies, especially if these prices continue
for another year or two,” said Jonathan Stern, a researcher at the Oxford
Institute for Energy Studies. 

— With assistance by Ania Nussbaum, Chiara Albanese, Peter Laca, Lenka
Ponikelska, and Todd Gillespie





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