Economic impacts of the European energy situation

2022 has been quite a year, particularly for those following the world's energy markets. The situation between Russia and Ukraine has led to much wrangling over gas and oil and a big push towards clean energies such as wind, solar, and hydropower. In addition, many economies are looking at ways to scale back their energy consumption ahead of what could be a difficult winter.

Rising energy prices and interruptions in supply and delivery are a reality, leaving many governments rushing to put solid preparations in place.

The fallout of the current situation has sent shockwaves across multiple industries, especially of the stock market. Many energy companies have seen their fortunes rise and fall throughout the course of a day. While this makes investors and shareholders nervous, it does provide interesting opportunities for those keen on index trading. For example, the S&P Energy Sector, S&P Global Clean Energy Index, and even the Energy Select Sector Index, which group together leading public energy companies, have witnessed an interesting few months.

Developments across different countries and different times are all having knock-on effects, but staying abreast of them can help investors figure out which way certain indices will go.

Each country is facing its own challenges in the wake of the ongoing situation. Here is a snapshot of some of them across Europe.

Blackouts in Kosovo

During the height of summer, the government of Kosovo announced citizens would experience scheduled power cuts every day. The country’s energy distribution company stated that scheduled power cuts would impact consumers nationwide from 8 am every day. These cuts would follow a schedule of six hours on and two hours off every 24 hours in a bid to save energy.

But just before it was set to be implemented, the energy ministry announced it would be cancelling the cuts, for now at least. This was due to it managing to secure some energy capacity from Albania, but it is not yet known what the deal entails and how long the supply will last.

Neighbouring Albania is facing its own struggles as it generates 100% hydropower, but droughts are impacting it amid already existing seasonal issues. Hydropower generates most of its energy during the spring and summer months, and as Albania cannot store it, the authorities sell it to other countries. As they cannot store the power, they repurchase fossil fuel from their neighbours during the winter months.

In short, this means Tirana came to the rescue of Prishtina during a time when they had excess supply. Still, it is unlikely they will do the same in the autumn and winter, meaning power cuts could be back on the agenda during the year’s coldest months.

Uniper in trouble

On 22 July, the German government bailed out one of the world’s largest gas importers to the tune of EUR 15 billion. The company, the fossil fuel section of E.ON, was receiving gas from Russian supplier Gazprom, which it then sold to local utility companies and business clientele. But as Moscow reduced the flow of gas through Nordstream 1, it had a significant impact on the company, which risked collapse.

But the German government stepped in at the last minute with a massive state-bank loan to the struggling company, which, in return, would see the government assume a 30% stake. A further EUR 7.7 billion has also been made available if needed by Uniper. But the Finnish state company, Fortum, a majority stakeholder at the time, said they would not contribute any funds.

Uniper was importing gas via Gazprom at what are believed to be lower prices due to long-term and favourable contracts. But with gas flows decreasing, they were forced to purchase gas on-the-spot market at vastly inflated prices. This meant the company was losing hundreds of euros a week with no end or solution in sight.

On 22 August, the company was forced to fire up one of its coal-fired plants after Moscow announced a three-day interruption in gas supply to Europe. The plants, which were due to be phased out, will run between the end of August and the end of April 2023 to increase energy security. Many in Berlin are warning of a long, cold winter, with houses and businesses struggling to get their hands on the energy they need.

France nationalises EDF

French energy giant EDF is currently being bought out and nationalised by the state because of catastrophic losses brought on by the energy situation across the world.

But the French nuclear company took surprising action in mid-August when it announced it was suing the state for EUR 8.3 billion after it claimed the government made it sell energy at a loss. The lawsuit and compensation claim relates to an extension of the country’s price cap, which was announced back in January 2022.

Under President Emmanuel Macron, EDF was made to sell power to competing companies at prices below those on the market to stem the rise of the cost of living. The company, currently undergoing nationalisation, said it lost EUR 8.3 billion (and counting) due to the decision.

But this is not the only woe. In July, a group of EDF employees and shareholders said they were set to file a lawsuit against the French state over the company’s nationalisation. They claim it goes against their interests and that of the company.

Bulgaria vs Gazprom

In April this year, Russian gas company Gazprom cut off Bulgaria and a handful of other European countries from receiving its gas. The dispute stemmed from a request from Moscow to pay the contracts in rubles which countries argued violated their long-standing agreements and posed a risk in terms of conversion rates.

As no solution was forthcoming, Bulgaria was amongst those that found itself cut off. Following the development, the government of now-ousted prime minister Kiril Petkov negotiated several other deals, including one with Azerbaijan and another with the US for seven shipments of liquefied natural gas.

But during the summer, Petkov’s government fell and was replaced by a caretaker government appointed by President Ruman Radev, who was much friendlier with Moscow. Days later, Energy Minister Rosen Hristov announced that entering negotiations with Gazprom was inevitable and that it would be done to save Bulgarians money.

But whether or not it actually will is up for debate, and experts have argued that the US LNG would work out much cheaper while being a much more stable supply. Either way, the energy security of Bulgarians this winter is hanging in the balance as there is also confusion over whether there is enough gas to last for the next month or not. Hristov said there were no gas resources past September, while the director of Bulgargaz just a week before said there are reserves until the end of the year.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes