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How Europe Escaped a Looming Energy Crisis

From the WSJ

Only a few months ago, Russian officials were taunting Europe about a brutal winter to come, and the continent was bracing for an energy crisis of historic proportions.

Then Europe made an odds-defying escape—at least for now.

A continentwide push to save energy and a spate of mild weather have put Europe on track to dodge the debilitating energy crunch that many feared when Russia cut the continent’s natural-gas supplies last year.

Households and businesses across Europe are consuming significantly less energy than expected, even given record-setting warm weather that has lingered across the region over the last three weeks. High prices have delivered a powerful incentive to use less gas and electricity. And public-education campaigns launched by governments to encourage energy saving appear to be working, officials and analysts say.

“There’s a consciousness about how we use energy, and how much it costs, that is greater than ever before,” said Brian Motherway, head of the International Energy Agency’s efficiency division. “The response has been quite striking.”

The reduction in demand has provided a security buffer for Europe’s gas supplies, which have shifted away from Russia since the invasion of Ukraine to other producers, mainly the U.S. and Norway. The biggest source of new supply has been imported liquefied natural gas, principally from the U.S.; the continent is racing to build new LNG terminals, with the most recent opening Friday in Lubmin on Germany’s north coast. Europe’s gas storage is around 82% full, well above normal levels of around 65% at this point in winter.

The unexpected supplies are prompting economists to upgrade their economic forecasts for the region. They have also blunted what little leverage Russian President Vladimir Putin has left to dissuade Europe from supporting Ukraine.

Europe’s energy woes are far from over. Analysts say a key question is how much hardship and economic damage have resulted from the efforts to save energy. Large-scale shutdowns of energy-intensive industries threaten to erode Europe’s industrial base. Some households face soaring electricity and gas bills despite their efforts to consume less.

European gas prices remain high by historical standards, posing a long-term threat to the continent’s manufacturing base. The cutoff of Russian supplies has left Europe heavily reliant on LNG, which is transported mainly by ship and is significantly more expensive than gas arriving by pipeline.

“The region is suffering a persistent shock that will limit economic activity for quite some time,” economists at Bank of America wrote in a note Friday.

For now, Europe has slashed its energy consumption without making a big dent in economic growth. Gas demand in the European Union was down an estimated 20% in the fourth quarter compared with the period a year earlier, according to the IEA. In France, electricity consumption over the past month was down nearly 10% after adjusting for temperatures. German gas consumption since the start of December was 15% less than expected after accounting for weather, according to Germany’s energy regulator.

People are turning down their thermostats across the continent, installing heat pumps and renovating their homes to improve efficiency. Manufacturers have cut their gas consumption by switching to fuel oil where possible or squeezing waste out of their industrial processes. Others are curtailing manufacturing that depends on gas and importing replacement precursors from the U.S., the Middle East and other regions with much cheaper supplies than Europe.

“The ability to adapt and improve efficiency has been beyond what I thought would be possible going back to last summer,” said Svein Tore Holsether, chief executive of Yara International, a fertilizer producer that is one of Europe’s largest gas consumers.

Since gas prices soared in 2021, Yara has raised and lowered its European production of ammonia, a precursor of fertilizer that relies on gas as a feedstock, depending on the fuel’s price. That has allowed the company to keep producing fertilizer in Europe while outsourcing the most gas-intensive step—the production of ammonia—to factories elsewhere when gas prices jump.

When Russia invaded Ukraine in February last year, Europe’s energy supplies were highly vulnerable. The region’s gas storage was running low because of strong demand fueled by the global economy’s reopening from the pandemic and lower deliveries from Gazprom PJSC, the Kremlin-owned energy giant that was Europe’s single largest gas supplier.

Fears grew about winter energy supplies when Russia in June began to cut shipments via the Nord Stream pipeline, Europe’s main artery for importing natural gas. Europe said the move was the Kremlin’s effort to punish the continent for supporting Ukraine with military equipment and sanctions against Moscow. Russian officials began taunting Europe with warnings that the continent would freeze come winter.

“No one canceled the winter and alternative supplies of gas, oil and coal are expensive or simply unrealistic,” said Dmitry Medvedev, the deputy chairman of Russia’s Security Council.

Now, Europe’s healthy gas stockpiles are even providing some comfort for next winter. If Europe finishes the season with relatively high levels of gas in storage, governments and utilities won’t have to buy large quantities to fill storage ahead of next winter. That will help keep prices low this summer, analysts say.

Risks to Europe’s supplies remain. Russia, which still supplies around 8% of the EU’s gas supplies, could shut off deliveries altogether. China’s economy is opening up again after the government abandoned its zero-Covid policy; analysts say that is likely to increase Chinese demand for imports of liquefied natural gas, driving up prices on the global market.

Climate scientists say Europe is at growing risk of heat waves and drought, which last summer sharply cut the continent’s hydropower generation, a key source of electricity.

“There’s still no redundancy in the system,” said Ben McWilliams, an analyst at the think tank Bruegel in Brussels. “We’re still in a place where prices could massively spike if there is one issue.”

Still, analysts say that Europe’s ability to cut energy consumption this winter shows how the region can protect its economy from external energy shocks.

“In the mid-1970s when we had the first oil crisis, it was a real revolution in energy efficiency,” said Mr. Motherway of the IEA. “We could be seeing the start of another period like that.”

 
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