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Europe energy supply unstable, tensions continue

Gas deliveries via the Nord Stream 1 pipeline reportedly plateaued at 20% of the pipeline’s full capacity, with state-run operator Gazprom insisting that western sanctions prevent the delivery of a key turbine needed to complete maintenance work and resume higher delivery levels. German authorities dismissed a claim by the Russian government that documentation proving that the turbine is not subject to sanctions and papers about its technological condition are missing. The turbine remains stranded, making an increase in flows via Nord Stream 1 increasingly unlikely.

Gas flows to the Baltic states also remain unpredictable, even after Gazprom resumed gas flows into Latvia via the Korneti entry point on the Russian border in early August after a week-long suspension due to an unspecified contractual violation. Latvijas Gaze, a gas trader partly owned by Gazprom, has since confirmed that it will not be able to supply enough gas to allow Latvia to meet a gas storage fill rate target by August 31.

Figure 1: Snapshot of TTF neutral gas price index (source: European Energy Exchange).


Importing other energy sources from Russia, such as coal and oil, also faces disruptions. Oil deliveries via the southern part of the Druzhba pipeline, which moves Russian oil to refineries in Slovakia, the Czech Republic, and Hungary via Ukraine, was suspended from August 4 amid a payment dispute related to EU sanctions. While deliveries to Hungary and Slovakia resumed on August 10, flows to the Czech Republic remained halted until 20:00 local time on August 12.

Meanwhile, an EU-wide ban on Russian coal imports that was agreed upon in April went into effect on August 10, further restricting energy flows between Russia and members of the European Union. Prior to the conflict, around 45% of all coal imports into the EU came from Russia, with Germany, Poland and the Netherlands being the biggest buyers.

Regional governments continue to draw up emergency plans to avoid domestic energy shortages during the upcoming winter season. The United Kingdom is reportedly working on an energy crisis response that could include power cuts to businesses, rail services, and consumers, with blackouts of several days expected in January in a worst-case scenario, while Switzerland is considering joining the EU’s plan to cut gas use by 15% in the coming months. In Norway, one of Europe’s key electricity exporters, authorities may propose a new law that would limit some energy exports if water level in the country’s hydro reservoirs fall to extremely low levels. Historically, Norway has generated almost all its electricity from hydro reservoirs while also exporting a considerable amount, but water levels in some reservoirs have dropped more than normal following a drier-than-usual spring.

Other parts of Europe faced uncommonly high temperatures and drought conditions this year, which may hamper electricity generation. Two coal fired power plants that account for around 4% of Germany’s coal-fired power can no longer run at full capacity because the needed coal cannot be shipped via the Rhine River after water levels fell to extreme lows. In France, state-run energy supplier EDF had to intermittently reduce output at nuclear power stations along the Rhone and Garonne rivers amid heatwaves that pushed up water temperatures, which could no longer be used to cool the plants.

As a result of the ongoing disruptions, both short-term and long-term electricity prices reached new heights in some European countries by mid-August. For example, in Germany next-day prices set new records on August 14, while next-year electricity prices climbed by almost 4% to €477 ($487) per megawatt-hour, practically doubling within two months, resulting in prices 6x the same time in 2021.

Figure 2: Number of energy-related factory shutdowns in Europe by month (source: Ever-stream Analytics).

Over the last two weeks, gas storage levels across the continent have continued to rise at a steady pace, particularly in Croatia, Bulgaria, and France, where storage levels rose by more than 13%, 9%, and 8%, respectively. Germany, the region’s biggest economy and heavily dependent on imports of Russian energy sources, managed to fill its storage facilities to 75% by mid-August, two weeks ahead of schedule, according to a statement by the Federal Network Agency. As energy supply from Russia remains unpredictable, authorities are now aiming to reach the next milestone, a fill rate of 85% by October 1, as soon as possible.

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