Here’s What’s Behind Europe’s Surging Energy Prices

Soaring natural gas prices have roiled Britain and the rest of Europe, leading to price spikes in the cost of electricity that are raising utility bills for consumers, putting pressure on energy suppliers and disrupting industries.

The consequences of the turmoil are unfolding every day, as factories shut down, ministers huddle with business leaders to find solutions and idled coal-burning plants are pressed into service to provide more power.

On Wednesday, the crisis became geopolitical as the U.S. energy secretary, Jennifer M. Granholm, appeared to take aim at Russia, the largest supplier of gas to Europe. The United States and its allies, she said, “have to be prepared to continue to stand up when there are players who may be manipulating supply in order to benefit themselves.”

There are suspicionsthat Moscow is using the gas markets to pressure Europe to sign off on a giant new pipeline to Germany called Nord Stream 2. For years, Nord Stream 2 has been a lightning rod in U.S.-Russian relations, although President Biden has agreed to give up objections to the project.

Ms. Granholm said that “we are united with our European allies in making sure you get adequate, affordable gas supply” this winter.

The International Energy Agency, the Paris-based watchdog, on Tuesday also called on Russia to increase gas supplies to Europe, saying it would be “an opportunity for Russia to underscore its credentials as a reliable supplier to the European market.”

Gazprom, the Russian gas company, did not immediately offer a response to the recent criticism. Previously, a spokeswoman said: “Our mission is to fulfill contractual obligations to our clients, not to ‘reduce the concerns’ of an abstract market.”

A number of factors are playing out in the scramble for energy, which seems most acute in Britain. Among other things, it shows that the transition from emissions-causing fossil fuels like coal and natural gas toward renewable sources like wind and solar, while necessary to tackle climate change, remains a work in progress vulnerable to glitches.

“The big thing that it has made me realize is that we still have a huge way to go,” said Cathy McClay, director of trading at Sembcorp Energy UK, a power provider.

Here is a look at the key factors behind the energy price crunch.

Natural gas prices are surging.

Pent-up demand after the pandemic has driven up natural gas prices globally. Deliveries of liquefied natural gas, carried by ship to markets like China, South Korea and Brazil, have surged, drawn by higher prices there, leading to fewer deliveries to northwestern Europe.

The weather has also played a role. Low temperatures at the end of last winter in Europe drove gas demand for furnaces at a time of the year when suppliers are usually filling storage tanks; this leaves the region potentially vulnerable if upcoming months are chilly. In that case, demand would rapidly draw down supplies, further raising prices and threatening shutdowns of energy-intensive industries such as steel and fertilizer makers. Those worries have already driven natural gas prices through the roof.

Russia, the key gas supplier to Europe, has increased supplies but not as much as the I.E.A. and some analysts think it could.

In Britain, whose markets closely mirror those on the continent, gas prices are about five times what they were a year ago, at about $25 per million British thermal units, having risen by about a quarter over the last week.

“These are crazy levels compared to what we are used to,” said Mark Devine, a trader at Sembcorp. The rising cost of natural gas is being transferred into electric bills because gas-fired power plants are the single biggest source of electricity in Britain and much of the rest of the Europe. High carbon taxes are also stoking power prices, analysts say.

“The main underlying driver of the high power prices at the moment is high gas prices,” said Glenn Rickson, head of power analytics for Europe, the Middle East and Africa at S&P Global Platts, a market research firm.

Britain’s climate goals are partly to blame.

Britain is pursuing increasingly ambitious targets to reduce emissions to tackle climate change. This policy has reduced carbon emissions, but sources like wind and solar can vary.

Pollution-spewing coal-fired generators are being closed, and aging nuclear plants are being gradually shut down.

The British government has also allowed companies to close gas storage facilities in recent years, which leaves Britain with little margin in case of supply disruptions or unexpected surges in demand. Analysts say the country is piggybacking on Europe for gas storage, but that could be a risky strategy after Brexit.

These trends left Britain’s energy system exposed in recent weeks.

In the first half of September, low wind speeds meant generation from turbines dropped precipitously at the same time a large number of gas-fired plants were idled for maintenance.

“We are in a transitional system at the moment,” said Rajiv Gogna, a partner at LCP, a consulting firm. When the wind slows, the capacity of the system is tested.

National Grid, the power-grid operator in Britain, has been turning to standby power producers, companies with idle coal- or gas-fired plants that can be switched on in a shortfall. But these operators “knew that most, if not all, of them would be required so could get away with charging a significant premium,” Mr. Gogna wrote in a blog.

The grid, he said, paid about 150 million pounds ($205 million) over two weeks this month for this standby electricity; typically, it pays about £20 million a week.

Britain also relies on the ability to import electricity via undersea cables from the continent. But a Sept. 15 fire at a National Grid facility has shut down a cable providing power from France for six months.

Electric power prices were surging even before the fire. As firefighters fought the blaze, prices briefly touched £2,500 per megawatt-hour, a wholesale measure — roughly 70 times the average price in 2020.

“Six or seven things have gone wrong at the same time,” said Edgar Goddard, a former executive at National Grid who is now a consultant at EPNC, a firm that advises on electricity issues.

The price spike could not come at a worse time.

Britain’s energy regulatory agency, Ofgem, has already raised the ceiling on standard energy rates for millions of consumers by about 12 percent, citing higher natural gas prices.

For many households, the spike could not come at a worse time: Overall inflation is on the rise in Britain, and the government has begun to scale back some of its pandemic-era financial support, including its furlough program and the support for low-income people known as universal credit.

Some of the dozens of smaller electricity and natural gas suppliers, which buy energy in bulk and then offer low-cost contracts to consumers, are being caught short by the jump in prices and are starting to go out of business, potentially leading to less competition.

Analysts say many of them can’t afford to hedge their commitments to supply low-cost energy, while government-imposed ceilings prevent them from raising prices to recoup losses.

The British government has also agreed to pay the costs of operating a fertilizer plant that had been shut down because of high natural gas prices, causing a shortage of carbon dioxide for various industries and raising fears of food shortages.

Will the situation get worse?

Winter is usually a stress test for energy systems. More generating plants in Britain will be coming back on line, and more gas may come to the market, notably from Norway, which recently said it would increase production. Demand, though, will also increase sharply.

Frigid weather, low wind across Europe or other issues could lead to more “high and volatile pricing in the market, significant opportunities for traders and rising bills for consumers,” Mr. Gogna said.