Introduction
In recent years, one of the central topics within society has been the energy crisis. Its consequences are felt and seen the most when paying the monthly electricity and gas bills, even though the impact is also significant in other sectors than the residential sector, such as the food or transportation industry. When analysing the complete crisis, including causes, consequences and measures taken, it is visible that it remains one of the most complex phenomena of the last decades, as was also stated by Clark Williams-Derry, an energy analyst at the Institute for Energy Economics and Financial Analysis [2]. However, it is crucial to know which events had a pivotal impact, to gain a broader understanding of how economies of different sectors are interconnected. Some of these key contributors will be discussed here, together with the overall impact of the crisis. Finally, some measures taken and consequences are discussed.
Key contributors to the energy crisis
Covid 19 and reduced oil production consequences
The general concept of supply and demand plays an important role in deciding the market equilibrium price. Initially, the OPEC countries, which are responsible for the largest amount of oil exportation, decided to reduce their exports. This decision originated from the covid-19 crisis and the implementation of the lockdown regulations, which caused a significant decrease in oil demand in the transportation sector. Therefore, OPEC countries, such as Saudi Arabia, decided to reduce their exports [2]. However, when the effects of the pandemic decreased, travel started increasing once again combined with the flexibility of working from home, which in total caused a growth in the domestic energy consumption. This combination of decreased supply with an increase in demand contributes to a price rise. [1]
A consequence of the rising oil prices is the increase in popularity of coal consumption. Many European countries have been looking for cheaper alternatives to match supply to demand and coal has proved to be a popular substitute. Economically, this substitution might be beneficial and the pandemic has kept CO² emissions relatively low in the corresponding years. However, the reintroduction of the intensive use of coal has now pushed the amount of emissions over pre-pandemic levels [3]. Thus, the energy crisis is not solely an economic crisis, it also certainly has a significant environmental importance.
The war in Ukraine and the natural gas supply
A popular misconception is that the war in Ukraine is the sole cause of the energy crisis. Needless to say that the conflict in Eastern Europe certainly has its impact on energy prices, nonetheless there were irregularities in the energy market even before the conflict took place. When Russia threatened to invade Ukraine, many economic allies made their position clear by imposing quotas on Russian products. Conversely, sanctions were also implemented by Moscow. Russia, which holds 12% of the global market share in natural gas, turned off their supply to continental Europe [1]. This sanction has had significant consequences in the European natural gas market, since they depend on natural gas for 25% of their total energy supply [2].
Climate change contribution
The crisis was also affected by the extreme weather conditions present in recent years. A multitude of droughts and the occurrence of heat waves meant that there was a lack of hydropower available and an increased need for air-conditioning, which caused a rise in energy demand. This contributed further to an increased energy demand and a further mismatch between supply and demand. This caused some countries to further switch and implement the cheaper coal combustion as cited previously [2].
Impact of the energy crisis
Impact on the gas prices
As previously mentioned, Russia was one of the main natural gas suppliers for Europe. Following the war and European quotas enforced on the import from Russia, the natural gas prices took an unprecedented rise, as is visible in figure 1. When comparing the peaked values found for the prices in September 2022 to the pre-crisis values from 2020, an increase of as big as 25 times the original value is visible in Europe [4]. Fortunately, this value is decreasing now, due to the measures taken by Europe and the shift to other suppliers of natural gas and other types of energy resources. However, the increase to this day is significant and further measures were still necessary.
Impact on the electricity prices
Due to the increasing gas prices, many European countries resorted to coal as a cheap alternative. However, the increase in demand caused these prices to rise. Since both natural gas and coal are amongst the leading electricity generation sources within Europe, contributing for around one-third of the total generation, these significantly impact the electricity prices. As a consequence of their linear relation, the electricity prices in Europe skyrocketed in 2021 and the first part of 2022, which is shown in figure 2. This also demonstrates that different countries experienced different magnitudes of price increases, which can mainly be attributed to the countries dependence on natural gas and coal. For example, Sweden had a less significant price increase, since it is mainly dependant on nuclear energy and hydropower [5].
It is visible that figures 1 and 2 take similar form and demonstrate the correlation between the electricity and natural gas prices. However, figure 2 presents the prices up until march 2023, which further shows the decrease. This is due to the emergency regulations taken in Europe and the use of alternative sources of energy, which will both be explained in the next section [5].
Consequences and measures taken
Shift to renewables
Europe’s climate goals for both 2030 and 2050 emphasise the objective to reduce greenhouse gas emissions and achieve climate neutrality in the EU by 2050. Amongst others, a shift in the energy generation portfolio is necessary and renewables, such as wind and solar energy, will become increasingly important. The energy crisis accelerated this transition, since the increased prices of coal and natural gas created a strong incentive to switch to other sources for electricity generation. Figure 3 demonstrates the growth of the share in the total power capacity of both wind energy and solar PV and the decrease of coal and natural gas. [6]. However, for the further implementation of these renewables, some challenges are still present. There is some uncertainty in the generation of these energy sources due to the stochasticity of both the sunshine on the panel and the wind power respectively. Therefore, further development of storage technologies for these types of energy generation is necessary or other alternatives are needed next to this to match generation to demand. Aside from this, further improvements in demand side management is necessary to guarantee a successful integration of the renewable energy sources in the generation portfolio.
Emergency regulations
The energy prices peaked in September 2022, which caused the EU countries to enforce emergency regulations from the first of December 2022 until the first of March 2023. These include three different measures to reduce the energy bills and aide citizens and businesses. Firstly, a decrease in the total electricity consumption on a daily basis is enforced to decrease demand and thus decrease prices. Secondly, a price limit is put on the electricity prices. More specifically, an upper limit of €180 per MWh is implemented for all electricity generators. Third and finally, a structure is implemented to ensure that fossil fuel business provide financial solidarity to people and businesses in compensation for the increased prices [7].
Conclusion
This article demonstrate that in the coming years, a greater energy independence will be one of Europe’s key priorities. The current energy crisis can be contributed to several factors that have a direct impact on society. Reduced oil production due to the Covid-19 pandemic and disruptions in gas supply caused by the war in Ukraine have led to rising energy prices and an increased financial pressure on citizens and businesses. To address this crisis on the long term and ensure a sustainable future, a shift to renewable energy sources combined with increases in energy efficiency and innovation will be essential. This offers an opportunity to reduce dependence on fossil fuels and build resilient energy systems. Investments in wind and solar energy, as well as the development of advanced energy storage technologies, will be key for this implementation. However, on the short term horizon, it will still be important to take measures to limit the current price increases and ensure access to affordable energy for all. To conclude, the energy crisis requires continued attention and commitment to address the complex issues and strive for a resilient and sustainable energy system for the future.