Europe’s gas prices have broken a new record. How high can they go?

There isn’t any stopping Europe’s fuel payments.

On Wednesday, future fuel costs on the Title Switch Facility (TTF), the continent’s main buying and selling hub, reached €292 per megawatt-hour, a stratospheric determine in comparison with the €27 set a 12 months in the past.

The brand new all-time excessive follows a stunning announcement by Gazprom, Russia’s state-controlled power large, who final week stated it could quickly shut down Nord Stream 1 — which pipes fuel from Russia to Germany — for a three-day upkeep operation, carried out alongside Siemens.

Gazprom argues the pipeline should be checked for cracks, dents, leaks and different potential glitches. 

European politicians have repeatedly accused the corporate of weaponising power flows and exploiting technical questions as an excuse for piling stress on nations at Vladimir Putin’s will.

“Upon the completion of upkeep operations, supplied that no malfunctions are recognized, fuel transmission might be resumed on the price of 33 million cubic metres per day,” Gazprom stated.

The speed barely represents 20% of the pipeline’s capability to hold as much as 167 million cubic metres each day. The dwindling flows have compelled Germany, Nord Stream’s foremost recipient, to set off the second part of its power emergency plan and bail out Uniper, an importer of wholesale Russian fuel.

However even earlier than Gazprom took the sudden resolution, fuel costs throughout Europe had begun a brand new regular rise. By late July, the earlier document excessive achieved in early March, shortly after Russia launched the invasion of Ukraine, was shattered.

Up to now, August has seen a seemingly unstoppable rise in fuel costs, bringing the continent dangerously near the €300 per megawatt-hour barrier. 

A warmer-than-usual summer season and a subsequent improve in air con use have additionally fuelled the upward pattern, along with a extreme drought that has shrunk hydropower and restricted exercise in nuclear crops.

On the similar time, governments are dashing to replenish their fuel storage forward of the winter season, as fears of widespread discontent develop by the day. The procuring spree has inevitably swollen costs, with capitals keen to foot the costly invoice.

“The subsequent 5 to 10 winters might be tough,” Belgian Prime Minister Alexander De Croo has warned.

Whereas storage performs a key function within the safety of provides, it’s removed from being a panacea for the EU’s a number of power woes: the bloc has a capability to retailer over 100 billion cubic metres (bcm) of fuel – 1 / 4 of its annual 400 bcm consumption.

Aware of those shortcomings, member states have already established a plan to voluntarily cut back fuel demand by 15% earlier than subsequent spring. The unprecedented effort is supposed to cushion the influence of a complete cut-off of Russian flows, a drastic state of affairs that has in latest months gone from distant to doubtless.

As fuel costs proceed to climb, a urgent query emerges: simply how excessive can they go?

“In concept, there isn’t any restrict. The market, because it all the time does, is factoring within the worst circumstances, the worst interpretation,” Jonathan Stern, a analysis fellow on the Oxford Institute for Power Research, instructed Euronews.

“If Nord Stream 1 would not resume flows after the three-day upkeep, there isn’t any option to say how unhealthy costs can go. A minimum of, till we see how chilly winter is – that is most likely when costs will peak.”

‘Severely provide constrained’

Hypothesis is an inherent a part of Europe’s power market.

The system is as we speak liberalised and responds to the elemental dynamics of provide and demand. In the course of the worst months of the pandemic, when financial exercise just about floor to a halt, future fuel costs on the TTF fell under the €10 per megawatt-hour, main producers to very large losses.

This was not all the time the case: earlier than the 2000s, most fuel contracts have been primarily based on a long-term perspective and linked to the value of one other essential fossil gasoline: oil. The indexation provided certainty and stability however proved too inflexible and synthetic to take care of the challenges of the brand new millennium.

The market steadily moved to shorter contracts primarily based on real-time financial developments, which resulted in decrease and extra aggressive costs for each trade and customers. This flexibility was deemed important to spice up transparency and accommodate the inexperienced transition.

The swap, nevertheless, left Europe extra uncovered to cost volatility: as demand for fuel rose, so did the payments.

Till 2022, the ups and downs have been manageable. The spike skilled in late 2021 within the midst of the financial restoration obtained a middle-of-the-road reply from policy-makers: tax cuts, vouchers for weak households and subsidies for struggling firms.

However the resolution of Russia, the EU’s foremost power provider, to invade Ukraine has stretched the liberalised system to its most excessive limits. Hypothesis surrounding Gazprom’s subsequent transfer is rife and dictates the market’s wild ebbs and flows.

Households now grapple with impossibly costly electrical energy payments, factories slash their manufacturing hours in a bid to avoid wasting energy and governments draft plans for the dreaded chance of fuel rationing. In the meantime, power drives inflation to document highs, central banks rush to hike rates of interest, the euro reaches parity with the greenback and a deep recession looms over all the continent.

“In case of a recession, our lives might be more durable in some ways, however simpler when it comes to power. Fuel demand will drop and produce costs manner from the place they’re now,” stated Professor Stern.

“Nevertheless, we can’t see ‘regular’ costs anytime quickly – not for a minimum of for 3 to 4 years,” he added, downgrading De Croo’s ominous warning.

The continent, Stern stated, stays “critically provide constrained,” no matter latest offers with the USA, Egypt, Israel, Algeria, Azerbaijan and Canada geared toward diversifying power suppliers.

The most recent information reveals Europe imported document quantities of liquefied pure fuel (LNG) from America, to the detriment of the Asian area, a standard purchaser, as China undergoes a pointy financial slowdown.

However not even this excellent news has been sufficient to pacify fuel costs. The concentrated push in favour of LNG, which affords better selection than pipelines however entails excessive prices to construct coastal terminals, is excepted to take a number of years to completely materialise and simmer Europe’s rattled power market.