Europe’s current energy crisis was predictable – and was predicted
Headlines focus on Europe’s energy challenges today, with extremely high natural gas prices shocking consumers and businesses. But it was quite predictable, and in fact it was expected. The real problem was the shift to natural gas as a bridging fuel, and too much emphasis on building efficiency instead of switching fuels.
These US data show a clear picture that has implications on a global scale. The boom in hydraulic fracturing and shale oil from the 1990s to 2010 led to a period of artificial stability in natural gas prices, and at a historically low level. Fracking companies started going bankrupt in 2019 because their debt-fueled business model and race to the bottom were unsustainable. The COVID crisis has put more pressure on them with globally reduced demand for oil and gas, so more operations have gone bankrupt or have shrunk significantly. Some European countries have completely banned hydraulic fracturing, given its significant negative externalities of methane leakage, pollution of aquifers, micro-earthquakes and general pollution.
Then the Saudi-Russian price war put a nail in the coffin of the unconventional mining industry, targeting high-priced producers around the world. This meant that unconventional oil extraction was in the spotlight, and much of the natural gas comes from shale oil deposits in many areas.
As a result, the ability to increase the supply of natural gas when demand increases has drastically diminished around the world. It is no longer effectively something with an endless supply that can be increased in a few weeks at most.
During the same period, the world has built many natural gas plants to replace coal, a partial good because the production of natural gas has lower emissions than coal, something which is somewhat undermined by methane leaks. Some, like Texas, restructured their power generation around the assumption of just-in-time extraction and delivery of natural gas, and they froze in the dark in February 2021 as a result.
Europe faces another facet of the same challenge Texas took on eight months ago. It consumes 33% more natural gas per year than in 1990, after a short-term decline in the early 2010s.
Natural gas is now returning to its mid-2000s habit of being a fluctuating price resource, with both greater month-to-month variation and even greater seasonal variation. All the economies and facilities that have made strategic business decisions based on the false assumption of low prices and stable natural gas prices are paying the price this year. Given the growing concern over methane leaks from natural gas and shale oil extraction sites over the past decade, and given the clear reality of the climate crisis, this is not A suprise.
It also adds another nail in the coffin of “blue” hydrogen as a future source of energy, even as the oil and gas industry works very hard to dismantle the coffin. Most hydrogen systems from natural gas assume cheap natural gas and stable prices, without significant competition in demand for a finite resource. Already unaffordable with the fictitious CCS, all governments should look at the natural gas price shocks and reliability failures of 2021 and move away from ‘blue’ hydrogen, regardless of lobbying from the fossil fuel industry and tax revenues.
The answer to these challenges is also clear. Governments that have focused on natural gas as a bridging fuel and building energy efficiency programs should have focused much more on renewables and fuel switching. Wind and solar do not have seasonal price peaks, and managing intermittency is a matter of overconsumption of cheap renewables, more transmission and storage on the grid, all of which are clearly understood and modeled.
Building efficiency is good, but changing fuel to eliminate leaky high GWP gas boilers and air conditioners by replacing them with modern heat pumps with low GWP refrigerants with COPs of 3-4 avoids much more of the root causes of the problems we face. Low cost wind and solar providing high efficiency electric heat pumps is a long overdue policy.
This shift in natural gas from a low-cost product consistently available in as large quantities as demand was masked by lower demand during COVID, as buildings remained empty during the winter of 2020-2021 and the power consumption was declining. However, as people returned to work or school in September and October 2021 and the weather cooled, the quite predictable happened.
The demand for heating and the demand for electricity have increased, the demand for gas has increased and the supply of gas is effectively capped at a low level. Supply and demand being what they are, gas prices have skyrocketed. It’s not rocket science, it’s not Nobel Laureates Kahneman and Tversky’s thinking on the psychology of how decisions are actually made, it’s basic economics. Supply capped, demand rising, prices rising.
I predicted this in Q1 2020 as an obvious result, and I was not the only one to see it. The implications of fracking bankruptcies, COVID, and the Saudi-Russian price war should have been clear to anyone looking at space. McKinsey released a report late last year making roughly the same points, although they do so for different reasons than mine, as they happily work with oil and gas companies and countries to help them sell more fossil fuels more profitably, not something I choose to do.
Will decision makers clearly see the writing on the wall? True, Texas will refuse to accept the lessons of 2021, but that doesn’t mean the United States as a whole will. Brussels and European parliaments should rethink their electricity networks and their hydrogen dreams, and refocus on concrete solutions to the climate crisis. Canada should pull out of its blue-tinted hydrogen policy and move to a truly green policy.
But the usual suspects blame renewables for Europe’s current problems, just as they falsely blamed renewables for Texas’ problems earlier this year. These voices are amplified by the usual suspects, and policymakers are likely to hear what they want to hear as much as anyone. It’s a fight for reality, and sadly, truth travels much slower than lies.
The lessons of 2021 are deep, rich and far reaching. But the pockets of the fossil fuel companies fighting for their lives, if not the lives of their children or the children of their employees, or the children of the world, are also deep, rich, and far-reaching. As I have been writing about hydrogen regularly for years, pointing out the failures of demand and supply assumptions, a regular refrain has been that although I am clearly right in what I say, my analysis and the points others like Paul Martin, Mark Jacobson and Robert Howarth, among many others, will be drowned in a flood of oil-soaked lobbying.
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