Russian Deputy PM names causes of the energy crisis in Europe

Alexander Novak, Russian Deputy Prime Minister

© APA | Alexander Novak, Russian Deputy Prime Minister

# 16 February 2022 14:50 (UTC +04:00)

Energy crises in different countries of the world have the same prerequisites associated with an increase in demand for fossil energy sources after the pandemic, against the backdrop of reduced funding for traditional energy, it was expressed by Deputy Prime Minister Alexander Novak in his article published in the Energy Policy magazine, APA-Economics reports.

In his opinion, Europe has become the epicenter of the energy crisis, where its own gas production has been falling for several years, and in recent years a bet has been made on the development of renewable energy sources (RES) – the sun and wind.

As a result, weak winds in the North Sea led to a significant decrease in electricity generation from wind farms in 2021. For example, in 2021 in Denmark, the volume of energy generation at wind farms was about 75% of the norm, and in September it was only 50%.

Some experts pointed out that the downward trend in wind speeds in the North Atlantic has been observed for 40 years and, in their opinion, it will continue. By 2100, wind speed will drop by 10%. Thus, the prospects for increasing wind generation remain uncertain, Novak notes.

Also, Europe’s policy on planning the supply of energy resources played a role. Europe’s transition from long-term gas contracts, which often contained a “take or pay” clause, towards market liberalization and exchange trading began with the adoption in 2009 of the so-called “third energy package”. The requirements of this law obligated to reserve part of the capacity of the gas transmission system for independent suppliers, which created obstacles for Gazprom to fulfill and increase contract volumes. And in the context of the growing role of exchange trading, the “speculative factor” has intensified, Novak believes.

During the period when gas prices began to rise due to natural factors, investors massively opened “long” positions in order to obtain speculative benefits from a further increase in quotations. Expecting a market reversal, other investors began to open “short” positions, but the continued trend forced them to close, which caused a sharp jump in prices by almost 30% per day (at a peak of about $ 2,000 per thousand cubic meters), the Deputy Prime Minister explains.

At the same time, Europe has relied on American liquefied natural gas (LNG), thus wanting to diversify imports. However, with higher gas prices in China, US LNG was sent to this premium market compared to Europe.