Will Russia freeze Europe this winter?

The heat may be gripping the headlines but it’s how we survive this winter’s cold that is spooking financial markets around the world and unsettling investors, particularly across Europe. 

As Bloomberg’s energy expert, Javier Blas, warned this week in his column – essential reading for anyone wanting to know what is really going on – the bailout of the European energy market is going to be very expensive. 

Blas reckons that $200bn is a conservative estimate, and that while in the short-term governments will have to prop up the utilities, the bill will eventually be paid by the taxpayer. He likens the crisis to “a falling chain of energy dominoes — one in which each tile is worth many billions of euros.”

The tiles are already coming down. In Germany, crisis talks are taking place between Uniper, one of the biggest importers of Russian gas, and the government about a potential bail-out to tackle its financial problems following shortage of gas supplies and rocketing prices. 

The talks are complicated by the fact that Uniper is majority-owned by the Finnish group, Fortum. Although Germany’s economics ministry says it’s working with both Uniper and Fortum to find ways of helping the importer with its liquidity problems following Gazprom’s decision to cut supplies to Germany. 

Uniper – which on Sunday was forced to extend its €2bn credit line with the state-owned KfW bank – has only received 40 per cent of its contracted gas supplies from Russia. This has forced it to buy more expensive gas from other sources to make up supplies, pushing it into the red.  

The crisis has reached such levels that Dr Fatih Birol, director of the International Energy Agency, yesterday published the most extraordinary doomsday warning, claiming that the world is experiencing the “first truly global energy crisis in history.”

The situation is especially perilous in Europe, he says, which is the epicentre of the energy market turmoil precipitated by Russia’s invasion of Ukraine in February and the sanctions which followed. Yet he also points out that the IEA raised the alarm back in September last year, well ahead of the invasion, claiming that Russia was already preventing gas supplies coming into Europe, creating artificial tightness in markets and driving up prices just as tensions over Ukraine were heating up. 

His latest warning comes across a little like “I told you so.” But you can see why: the IEA published its 10-point plan to reduce the EU’s reliance on Russia’s natural gas and even gave practical guidance on how to mitigate the effect. But not enough was done. (The IEA estimated that a third of gas could be saved with the right measures.)

Luckily, the IEA doesn’t give up. It’s come up again this week with a 5-point plan which hopefully governments will listen to more carefully than before if we are to avoid a catastrophic winter. In this scenario, parts of industry will be switched off while many homes across the continent will be unheated, either because supplies are being rationed or energy costs are so high that the public can’t afford to pay. 

Dr Birol doesn’t mince his words: “Europe is now forced to operate in a constant state of uncertainty over Russian gas supplies, and we can’t rule out a complete cut-off. In my view, it is much better to take steps now to prepare for winter than to leave the well-being of hundreds of millions of people and European economies at the mercy of the weather or, even worse, to give unnecessary extra leverage to President Vladimir Putin of Russia.”

He adds that in his conversations with European leaders – and with European Commission President Ursula von der Leyen and all the EU Commissioners last week – he has been urging them to do all they can right now to prepare for a long, hard winter and to work with non-EU countries too. Burning coal and other fuels to save gas is top of his list. 

Now comes the scarier bit. Dr Birol sets out a scenario in which gas flows through Nord Stream return after 21 July to the low levels they were at before the current halt – but at the start of the winter heating season on 1 October, Russian gas supplies to Europe are cut off completely.

“In this situation, the EU would need to have filled its gas storage facilities to above 90 per cent of their capacity by then to get through the coming winter. And even then, it could still face supply disruptions in the latter part of the heating season.”

We will see how seriously governments are now taking his advice when the European Union delivers its plan for energy security tomorrow. According to Reuters, the European Commission’s plan is to encourage countries to introduce financial incentives for companies to cut gas use and use state aid to encourage industries and power plants to switch to other fuels – if they can source them, that is. 

At the same time, they want to see countries push hard with widespread public information campaigns to nudge and persuade consumers to use less heating and cut back on all electricity.

Another energy-saving measure would be for all public buildings to lower their average temperatures; even a one degree drop brings enormous savings if carried out properly.  

Other draft measures to target industries include auctions or tenders where big factories would be given compensation for using less gas. Governments will be able to decide which industries could be forced to close, with other essential utilities kept open.

If all this sounds apocalyptic, it is. But now is the time to do it as gas suppliers build up their seasonal stocks over the next few months ready for the autumn change in temperatures. 

What the EU aims to do is build up as much supply as possible to have a buffer for when electricity demand peaks. At the moment, the EU’s gas storage is at 62 per cent, but it wants to have 80 per cent by November.

We may not be as dependent on Russian gas as the rest of Europe but that does not mean we are immune in the UK if Russia does cut back, or cut-off, supplies. While most of the country’s gas is either piped from Norway or physically delivered from Qatar, we have problems with storage and will be hit by higher prices as a consequence of even more shortages. 

Even Norway, rich with oil, gas and water, is looking at rationing electricity. Norwegian hydropower producers have had to cut back on output to save water for the winter because a long dry spell has left reservoirs at below average levels. 

Hydropower provides around 90 per cent of Norway’s electricity but the excess – if there is any – is an important export to Europe. No one – and no country despite its apparent riches – is exempt from this energy crisis, one of security as much as supply. 

Dr Birol notes at the end of his stark warning: “This winter could become a historic test of European solidarity – one it cannot afford to fail – with implications far beyond the energy sector. Europe may well be called upon to show the true strength of its union.” Outside or in the EU, that includes the UK too.