Over the past 20 years, Europe closed its coal plants to embrace wind turbines. But, that back-fired in 2021 when wind energy decreased resulting in less generation from the continent’s wind turbines. With fewer coal plants to fall back on, Europe turned to generating electricity from natural gas, causing natural gas prices to skyrocket and forcing Europe into a greater reliance on Russian natural gas. The result was manufacturing and fertilizer plants were forced to close, some power suppliers went out of business, carbon dioxide emissions increased, and about 80 million Europeans are now living in energy poverty—up from 50 million in 2019. The European energy crisis shows what chaos can erupt when supply diversity in the electric sector is tampered with, and when governments start picking political winners and losers aggressively.
Output from Wind Turbines Declines
Capacity factors from Europe’s largest wind producers in Britain, Germany and Denmark were just 14 percent of installed capacity in the third quarter of 2021, compared with an average of 20 to 26 percent in previous years. Germany, which has the continent’s highest wind power capacity, recorded combined output from both on and offshore wind farms down around 16 percent. In Europe, when fossil fuel plants are brought on line to back up wind turbines, they must pay for costs associated with their carbon emissions, i.e., carbon taxes that are passed onto consumers. Prices for carbon permits that utilities and manufacturers that emit carbon dioxide are required to own under the EU’s emission-trading scheme have also jumped this year, as governments keep persisting in their goal of “net zero” emissions.
The world’s largest developer of offshore wind farms, Orsted, indicated that the lower wind speeds had a negative 2.5 billion crowns ($379.20 million) impact for the first nine months of the year compared to 2020. Germany’s RWE said weaker winds caused profits at its wind and solar units to fall by 38 percent in the first nine months of the year. Renewables are noted for their intermittency and more renewables will make prices even more volatile, as weather will largely dictate prices. Carbon dioxide emissions in Germany increased 25 percent in the first half of 2021 due in large part to a 25 percent decline in wind, underscoring the unreliable nature of weather-dependent renewables.
Energy Prices Skyrocket
The decline in wind output has resulted in more natural gas demand, raising natural gas prices. European gas prices hit a new record high after a pipeline that brings Russian gas to Germany switched to flow east, a move the Kremlin said had no political implications. Natural gas on the TTF trading hub in the Netherlands hit a record level of about $60 per million British thermal units. European gas prices doubled in December and are about 15 times what natural gas is selling for in the United States.
Because natural gas is a key fuel to back up wind in generating electricity, electric power prices also soared across Europe. In Britain, power was trading for about 340 pounds, about $450, per megawatt-hour, a wholesale metric, on the Epex Spot exchange. That’s about three times the average price of electricity over the year.
The closure of three French nuclear plants to check for faults has further aggravated the power market, as France is a major exporter of carbon free nuclear power to other European nations.
Manufacturing Firms Close
The increase in power prices led Europe’s largest aluminum smelter, Aluminium Dunkerque, to shut down around 3.7 percent of its production in early December. Alcoa Corp. is planning to halt primary aluminum production at its plant in Spain for two years. While aluminum prices have rallied more than 40 percent this year, profitability is being eroded by the far greater surge in power prices. Businesses in Spain are in a particular quandary because fixed-price power contracts are less common than in France or Germany, exposing them to prices in the spot market. Spain has also been a leader in deploying renewable energy, and like everywhere else, their prices have been climbing significantly.
Zinc operations run by Nyrstar in northern France plan to close for maintenance in January because French power prices look set to be high and volatile in early 2022. Production of zinc—used in construction, autos, green energy products and goods such as washing machines—is among the industries most exposed to the energy price increases. Output cuts have raised prices for zinc and analysts at Citigroup expect many other zinc smelters to follow Nyrstar’s Auby plant in curtailing production or shutting altogether. Despite France getting most of its power from nuclear plants, French industries are seeing electricity prices that reflect the natural-gas shortage that affects Germany’s and U.K.’s prices.
Energy Companies Fold
In the U.K., 28 suppliers to over 4.2 million households have failed this year, according to regulator Ofgem, which will require suppliers to undergo financial stress tests starting January. The companies folded because the British government caps prices energy suppliers can charge consumers, which means that they may not be able to pass along the full cost of the increase in fuel prices. This is particularly interesting because the U.K. government has been very actively pushing policies which have driven costs higher for consumers in pursuit of their net zero goals.
The cost of shifting customers to surviving suppliers including EDF and subsidiaries of Centrica PLC and Royal Dutch Shell PLC is increasing. Ofgem had to sign off on £1.8 billion ($2.41 billion) in payments to cover the costs of supplying energy to customers from failed firms. Those payments did not include costs involved in keeping energy flowing to the 1.6 million customers of Bulb Energy, the biggest failed supplier. Court-appointed administrators are running the company because it had too many customers to move them quickly to other energy firms.
Energy bills for U.K. consumers are expected to jump in April, when the price cap is expected to increase to £2,000 ($2,694) from £1,277 ($1,720). The increase is expected to add 1.8 percentage points to consumer-price inflation in the U.K.
Europe May Change Its Tune on Nuclear and Natural gas
The European Union has drawn up plans to classify some nuclear power and natural gas plants as green investments that, if approved, could set off a resurgence of nuclear energy on the continent. The European Commission has begun consultations with European Union countries on the proposal, which is intended to provide a common set of definitions of what constitutes a “sustainable investment” in Europe. A final plan is subject to approval by a majority of member states, or by the European Parliament. What is abundantly clear is that some in Europe are becoming concerned over the rapidly escalating costs of energy that have accompanied the energy transitions politicians have been pushing in Europe.
Nuclear power would be considered a sustainable investment if countries can safely dispose of radioactive waste. New plants would be considered sustainable investments through 2045 and would have to undergo safety upgrades during their lifetime to ensure “the highest achievable safety standards.” Natural gas plants would be deemed “transitional” green energy sources for investment purposes if they meet certain emissions criteria and replace other fossil fuel plants with higher emissions. This may cause problems of energy security for Europe, however, since they are increasingly discouraging investments in natural gas production domestically and may be headed toward growing dependence upon Russia for their energy.
Finland has already completed construction of Europe’s largest nuclear reactor. The Radiation and Nuclear Safety Authority in Finland has granted the country’s fifth nuclear reactor permission for initiating and conducting low power tests. Olkiluoto 3 is set to start regular electricity production in June 2022 and is estimated to increase Finland’s electricity production capacity by 1,600 megawatts, covering around 15 percent of the country’s electricity consumption. In comparison, the maximum wind power production capacity in Finland is 2,500 megawatts.
The Netherlands announced that it will not only keep its existing nuclear power plant operating but also build two additional ones. The government has allocated €5 billion ($5.65 billion) for new plant construction. Both France and Britain have also promised a major expansion of nuclear energy.
Conclusion
Energy and electricity prices are at record levels due to Europe’s over-reliance on intermittent renewable energy, inadequate supplies of nuclear and coal power as those fuels are being phased out, shortages of oil and gas due to under-investment in oil and gas exploration and production, and anti-fossil fuel policies. This coincides with European nations boosting demand for electricity by moving rapidly towards electric vehicles as the only choice for consumers. As a result, more Europeans are in energy poverty and manufacturing firms are closing. The European energy crises should instruct Americans what not to do, but the Biden administration is heading down the same path in reckless speed, like the Europeans did decades ago with apparent disastrous results.
