Bad Energy Decisions Made Europe’s Energy Crisis Worse: IER Analysis

The Industrial Park of Hoechst in Frankfurt, Germany, on June 23, 2022. Germany is activating an emergency plan for natural gas supplies to ward off a crisis this coming winter. (Michael Probst/AP Photo)

Though many blame the Russian attack on Ukraine as being the main driver of Europe’s energy crisis, the actual reason began well before the conflict, and is linked to bad energy decisions by the bloc, according to an analysis by the Institute for Energy Research (IER).

Post the COVID-19 lockdown in 2021, energy demand in Europe “came back with a vengeance,” according to the analysis published on Dec. 19. However, since Europe had cut leases for oil and gas production, banned hydraulic fracking, and shuttered its nuclear and coal plants while pushing renewable energy policies, the region did not have enough readily available energy to meet the rising demand.

As a result, Europe was forced to use its energy stockpiles, and the region eventually faced an energy crisis following the Russia–Ukraine war.

“Now, Europe is faced with energy shortages, skyrocketing energy prices, and major uncertainty regarding its energy and economic future. Yet, it has not given up on its energy transition to renewable energy (wind and solar power) despite their weather dependency and lack of firm power capability,” the analysis said.

Between 2004 and 2019, Europe spent more than $1 trillion on its renewable energy transition efforts. The region now needs to spend an additional $5.3 trillion to reach net-zero emissions by 2050.

Germany’s Woes

The IER cited the example of Germany to stress how the energy crisis was more of a homemade problem rather than resulting from external causes. Germany’s wind-power generation fell from 132.1 terawatt hours in 2020 to 117.7 terawatt hours in 2021, a decline of 24 percent. To make up for this, Germany boosted its coal power output by 21.1 percent last year.

“Germany finds itself at the mercy of the weather, both for renewable energy production and the level of demand that may result from a cold winter. Conservation plans are already in place and energy rationing may result in the event of a long cold spell,” the analysis stated.

Germany’s energy import bill, which grew by €7 billion in 2020 and 2021, is expected to surge by €124 billion for 2022 and 2023 combined—posing a massive challenge to its industries, and the economy as a whole.

Countries like India and China are looking to improve the life of their citizens by investing in coal, oil, natural gas, nuclear, alongside renewables, the analysis stated.

But Europeans are turning away from fossil fuels despite having built their economies on them, IER noted. The agency warned that President Joe Biden seems to be going down a similar renewable energy “helter-skelter” path while disregarding the ramifications it will have for Americans.

European Union Price Cap

Europe is also facing the threat of a deepening energy crisis due to its proposed price cap on gas prices. In a Goldman Sachs report, analysts warned that implementing a price ceiling without capping demand risks making the region’s supply deficit worse as it might boost consumption, according to Bloomberg.

In addition, the price cap can make it even more difficult for European importers to significantly raise their bids to secure liquefied natural gas (LNG) supplies. If Asian nations bid higher prices, LNG exports will swing toward the East rather than Europe.

The EU price cap is expected to come into effect in February 2023. The European Union has set the natural gas price cap at $56 per million British thermal units. During two weeks in August and September, Asian LNG prices traded above this level.

The European Central Bank also warned in a recent opinion that the gas price scheme might backfire and increase volatilities in the market, and may even jeopardize the financial stability of the eurozone.