What triggered the crisis?
Russia supplies about 40% of Europe’s natural gas imports, which powers its industry and households. Now, as the European Union opposed Russia’s invasion of Ukraine, imposed sanctions against Russia and offered military and humanitarian aid to Ukraine, Putin responded with sharp cuts to natural gas supplies to the EU. It’s already causing widespread misery in Europe.
While Russia has openly punished some EU countries for being “unfriendly", Putin is also seen to be covertly targeting other countries.
In March, Putin declared that “unfriendly" countries must pay for piped gas in rubles. The European Commission, though, ruled that taking these orders from Putin would violate EU sanctions on Russia and urged companies to pay only in the currency mentioned in their contracts–mostly euros or dollars. Russia subsequently cut off gas supplies to Poland, Bulgaria, Finland, the Netherlands and Denmark.
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On 27 July, Russia’s state-owned energy giant Gazprom halved the quantity of natural gas flowing through the Nord Stream 1 pipeline, extending to Germany, to about 20% of capacity and attributed it to technical reasons. Germany, however, saw it as a calibrated move to send gas prices soaring in the aftermath of the Ukraine war. There are three other pipelines feeding Russian gas to Europe, but the one that runs through Poland and Belarus has also been closed.
Now, in another twist, Gazprom has announced it would shut down Nord Stream 1 pipeline for three days, from 31 August to 2 September, for unscheduled maintenance works, triggering a surge in European natural gas prices. The European Union will see it as another arm-twisting attempt by Putin.
What has been the impact of Russia’s cuts in natural gas supply?
There has been a sharp drop in Russian gas supplies to Europe recently–from about 40% of imports to about 15%. It has sent natural gas prices soaring across the continent. Almost 20% of European electricity is powered by gas plants.
On Friday, the year-ahead contract for German electricity touched 995 euros per megawatt hours, and in France, prices breached 1,100 euros, over a tenfold rise in both countries from last year. Germany buys almost half its gas supply from Russia and is now facing dwindling supplies in the winter months amid concerns Putin may cut off gas feed completely.
Meanwhile, Britain's energy regulator Ofgem has announced it would almost double the electricity and gas price cap to an average of 3,549 pounds per year, attributing it to Russian cuts in gas supplies and the removal of Covid restrictions.
How severe is the problem?
To get a sense of the gravity of the energy crisis in Europe, consider this. The surge in energy prices in the UK will leave almost two-thirds of all UK households in fuel poverty by January, shows a recent study by the University of York. Even after the planned government support, many middle-income households would find paying their energy bills tough. The study shows that 18 million families, about 45 million people, would see a cost-of-living crisis.
Until recently, Germany bought more than half of its gas from Russia. And the government of Europe’s largest economy is now battling to shore up winter gas supplies amid growing fears that Moscow could soon turn off the taps completely.
Spiking energy costs threatens to spiral into a recession–consumption will get hit in Europe’s biggest economies as household budgets get squeezed, and businesses too may have to defer expansion plans because of galloping energy inflation.
Meanwhile, Russia’s oil and gas companies may be selling less energy, but their earnings may have actually grown because of the spurt in prices, says the International Energy Agency.
How is Europe fighting the crisis?
Without Russian natural gas supplies, the European Union has been forced to consider alternatives. One of them is liquefied natural gas (LNG) imports from the US and Qatar. Germany is expediting the construction of LNG import terminals, but that can’t be a near-term solution. There is high LNG demand from Asia as well, making LNG imports expensive.
European countries are adopting desperate measures, pushing through energy-conservation measures. Spain, for example, has introduced a new energy-saving plan with guidelines for air-conditioning and heating systems. France too has new rules for air-conditioned stores, while in Germany, the government debates the possibility of keeping its nuclear plants running for some more time instead of shutting them down. Some media reports suggest many Germans are even saving wood for the winter.
In July, EU energy ministers inked an agreement needing member countries to reduce gas use by 15% from August to March in the wake of the developments in Russia. Still, it promises to be a harsh winter in Europe.
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