Russia’s weaponization of its natural gas supply to Europe triggered big increases in energy prices and double-digit inflation last summer. But more recently, the EU success in energy conservation and construction of new liquefied natural gas (LNG) terminals, combined with mild weather, has led to declines in European natural gas prices to levels last seen before the Russian invasion of Ukraine. And as renewable energy has scaled up, the postinvasion jump in coal- and oil-based power production has also returned to lower levels.
But Europe’s energy problems are far from over. No longer vulnerable to Russian energy blackmail, Europe faces continued challenges in addressing climate change.
Fears of an energy shortfall were heightened a year ago as Gazprom initially failed to refill its storage facilities in the European Union for the winter of 2021-22 and the Russian government cut off supplies completely through the Nord Stream 1 pipeline last June.
European natural gas prices have dropped to levels last seen in late 2021 before the Russian invasion, which spread concerns about the lack of Russian gas in European storage facilities. Figure 1 shows how the EU wholesale Title Transfer Facility (TTF) Benchmark natural gas price was stable at €15/megawatt until the COVID-19 pandemic drove the price down, followed by the price spike last year. Prices have now dropped back to below €60 on average during January 2023, with the forward curve projected to be relatively flat between €60 to €70/megawatt until the end of winter 2025. This average price level last occurred in the late summer of 2021.
Energy markets therefore do not envision natural gas shortages in Europe going forward in the coming winters. To be sure, global LNG prices on which Europe relies will be higher than the long-term contracts for Russian piped gas, but as futures prices in the coming years have collapsed (solid red line converging to the dotted red line in figure 1), this price increase is no longer ruinous in scale for European industrial gas consumers. Many of these consumers will soon also pay the full EU Emissions Trading System (ETS) carbon price of €85/ton. Fears of Putin “deindustrializing” Europe are overblown.
Changes in the supply sources for European electricity production since the war began indicate that the European Union was shaken last year by three simultaneous energy crises—Russian gas cuts, a dramatic decline in nuclear power production, and a drop in hydropower production. Figure 2 illustrates how especially damaging the decline in wartime EU nuclear power production has been.
EU nuclear power production dropped by more than 100 terawatt hours (TWh) from March-November 2022, compared with the same period in 2021. The decline reflects a falloff in French nuclear power production, which had to catch up on overdue pandemic-era reactor maintenance. Another factor in the decline was the summer low (cooling) water levels in several French rivers adjacent to reactor sites. The continued phaseout of remaining German nuclear power added to the EU decline.
Separately, EU hydropower production declined because of the record-setting drought, especially in Southern member states. Accordingly, climate change has played the larger role in dragging down European noncarbon electricity production since Russia invaded Ukraine.
The decline in traditional base-load (i.e., stable 24/7 power production) nuclear and hydroelectric power production after March 2022 caused European suppliers to increase production from both coal- and gas-fired power plants, despite the price spike in the latter fuel. As a result, the region’s very expensive gas-fired power plants supplied the last required, or marginal, electricity to balance the European power grid. This caused European power prices to rise dramatically in tandem with the price of natural gas during the summer and fall of 2022. Spiking natural gas prices spilled over, so to speak, into European electricity prices last year.
Fortunately, European consumers responded positively to price incentives. European electricity demand dropped by more than 70 TWh after March 2022 compared with the year before, while increased solar, wind, and other renewable sources helped counter the drop in nuclear and hydroelectric power production.
Encouragingly for Europe’s green transition, the increase in fossil-fuel-based power production after March 2022 has been very temporary and has begun reversing in recent months (figure 3).
After increasing during the first six months of Russia’s invasion, coal- and oil-based power production in the European Union has been declining relative to 2021 levels since September 2022. Gas-produced power started declining in November. This decline is unsurprising, since EU power producers must pay the full ETS CO2 emissions price when producing electricity from fossil fuels. They can do so profitably only when no other sources of power production are available and electricity prices are hence very high.
Assuming there will be adequate cooling water in French rivers, French nuclear power production is likely to return to close to its normal level in 2023, as maintenance overhangs are cleared and reactors restarted. European rainfall and hydropower production may return to normal this year, though again climate change may be an obstacle as another year of drought may again depress turbine water flows. A further increase in solar and wind power production in 2023 seems a given, as significant new renewables capacity is being added to the European grid.
These trends add up to non-carbon-emitting power production in Europe increasing at the expense of power production based on coal, natural gas, and oil. Power production derived from Europe’s fossil fuels will certainly continue to decline during 2023, which will help further reduce Europe’s natural gas demand and further lower the continent’s dependence on Russia. Today it is mostly climate change, not Russia, that is slowing Europe’s green power transition.
The data underlying this analysis are available here.