Europe’s energy crisis: a brief respite or a lasting recovery?

Europe has been facing a significant energy crisis ever since Russia cut off most of its gas exports to the region last summer in response to economic sanctions related to its aggression in Ukraine. This caused gas prices on the EU’s wholesale market to skyrocket to over €340/MWh and electricity prices to follow suit.

However, a mild winter and an oversupply of gas led to a decline in gas prices to below €24/MWh in June, a 30% decrease in May. In some countries, electricity prices also dropped to new lows and recently turned negative in Finland. This was due to increased solar and wind power production, rainy weather that boosted hydropower output in other parts of Europe, and low power demand due to the COVID crisis. While this may seem like a sign of a lasting recovery, it is a temporary dip, and Europe will likely continue to experience seasonal price volatility. Despite the current price dip, Europe has not yet solved its energy problems. The weather conditions have helped to increase the share of renewable energy sources in the power mix, which is suitable for the climate and reduces dependence on fossil fuels. However, Europe needs to prepare for more frequent and pronounced price fluctuations as it transitions to more renewable energy sources.

As a result, the region needs to invest in grid infrastructure, interconnections, storage solutions, and demand-side management to ensure flexibility and resilience. It must also develop a common energy market for cross-border trade and price signals reflecting energy sources’ actual value.
Additionally, Europe needs to continue diversifying its gas supplies and reducing its dependence on Russia. The European Commission has implemented policies to ease the region’s energy crunch. It reported progress made since it presented its REPowerEU plan one year ago, which aimed at diversifying gas supplies and reducing reliance on Russian gas.

Among the measures taken were a 90% gas storage target ahead of the winter heating season and a 5% demand reduction target for electricity during peak hours. Looking ahead to next winter, Europe is better prepared, with gas storage levels reaching 60% compared to last year’s average of around 30%, according to Kristian Ruby, secretary general of Eurelectric, the EU’s power industry association. However, Europe should not expect stable and low energy prices for long. As it transitions to more renewable energy sources, it will face more frequent and pronounced price fluctuations depending on weather conditions and supply-demand dynamics. “What we experience now is what we can expect to happen frequently in a highly renewable-powered system,” Ruby said to Euroactiv. “When weather conditions are right, there will be a strong downward pressure on prices,” he added, noting that high precipitation in Finland significantly impacted its hydropower capacity and electricity prices.

In conclusion, Europe’s energy crisis is not over; it is just taking a break. While the current dip in energy prices may be a temporary respite, Europe needs to prepare for more frequent and pronounced price fluctuations as it transitions to more renewable energy sources. By investing in grid infrastructure, storage solutions, ,demand-side management, energy efficiencies policies Europe can ensure flexibility and resilience in its energy system. Additionally, by developing a common energy market that allows for cross-border trade and price signals that reflect the actual value of energy sources, Europe can reduce its dependence on Russia and diversify its gas supplies. Europe must continue developing and implementing policies to ease the region’s energy crunch.