Forecast for Winter’s Energy Crisis in Europe

Get the fall and winter outlook on Europe’s worsening energy crisis in this briefing exclusively for Everstream customers.

Lauren McKinley:

Hello and welcome to today’s Situation Brief, Forecast for Europe’s Winter Energy Crisis presented by Everstream Analytics. I am joined today by my colleagues, Josiah Ponnedurai and Jon Davis, who will present today’s content. If you have questions during the session, please add your questions in a Q and A box in the go-to webinar panel, and we will get to as many as time allows at the end of the session, following up after for any we didn’t have time to address. And let’s get kicked off today, I will hand it over to Josiah.

Josiah:

Thanks Lauren, and a very good morning to everyone. So firstly, I’ll speak a little bit about the latest mitigation measures that some of Europe’s biggest economies are taking, and secondly, about what we’ve been seeing at the industry level with respect to production related disruptions. I’ll then hand it over to John, who’ll give us the latest on the weather side of things.

So starting us off with Germany, we’re seeing that the German government is currently under a lot of pressure from industries to bring down energy and gas prices. Many industry sectors are experiencing a rising number of production disruptions, and there’s also talk of offshoring among some manufacturers, especially in the automotive and engineering sectors. Part of the government’s response to all of this industry pressure has been to scrap a planned gas levee view that was supposed to be introduced in October. In its place, they’ve announced a new 200 billion euro energy aid package that includes a temporary electricity price rate to subsidize consumption for households as well as industry.

For industries an expert panel has proposed that the government subsidized gas consumption for around 25,000 industrial users from January 2023. And under this proposed scheme, industrial users would only have to pay 12 cents per kilowatt hour for up to 70% of their gas consumption, with a remaining 30% being charged at market prices. And interesting to note about Germany’s aid package is that the size of the aid package and the subsidies has also ruffled some feathers within the EU. Now, this is because other member states are concerned that Germany might be prioritizing its own economy over the EU internal market, and the subsidy is also coming at an especially sensitive time for the block as the members are trying to agree on its own price cap on natural gas.

Moving on to France, we see that the government is also attempting to bring down gas consumption by implementing a new energy savings plan. This plan will see the country’s total energy consumption reduced by 10% within the next two years, in line with the latest EU measures. That being said, the reduction measures that have been introduced are all voluntary and no mandatory measures have been announced that would force industries to decrease output as of yet.

Moving outside the EU to the UK, we’re seeing that the government is also planning to introduce caps on energy and gas prices through a new 150 billion pound energy relief scheme. The government has also given assurances that power cuts will only be introduced in a worst case scenario if the nation is unable to import electricity and if it faces lower than expected gas deliveries.

With regards to the latest industry numbers, we continue to see a month on month increase in the number of companies reporting production disruptions across the EU heading into the first week of October. This recent spike in production disruptions in September is largely being driven by the metals industry with major foundries and smelters across the EU announcing production scale backs. Note of interest is that these production cuts are being caused by falling demand as much as rising energy prices. Reflecting the reality that downstream customers like automotive OEMs have also begun scaling back production in response to falling consumer demand. Disruptions have also been reported in the pharmaceuticals industry with some pharma companies seeing raw material prices rise by 160% and energy costs increase tenfold. Generic drug makers have also seen their profit margins squeezed as drug pricing systems are preventing companies from adjusting to all of their rising production costs. We’ve also been tracking recent disruptions across other energy intensive industries, including in the chemicals, glass, textile, porcelain, and FNB sectors.

As for countries with the highest number of production disruptions, our data indicates that Germany remains the most impacted by the ongoing crisis since March 2022, followed by other major EU economies like France, Italy, and Spain. So looking forward to the upcoming winter, we expect to see even more production disruptions as companies across the continent scale back in order to prevent gas rationing. Now, even with gas levels across the continent sitting at around 90%, it’s important to note that the EU does not have enough gas supplies to make it through the upcoming winter without some cuts to gas consumption. Now, how much the continent will be able to scale back its gas consumption this winter depends largely on how cold the next few months are expected to get. And with that, I’ll hand it over to John, who will walk us through what to watch for this winter.

Jon:

Great, thank you so much Josiah, and good day everyone. In stating the obvious as we look ahead to this winter, temperatures in Europe will be extremely important in how severe the energy crisis becomes. A warm winter will somewhat ease some of the concerns and the stress in the overall energy crisis. While a cold winter will heighten the crisis, as the need for heating elements such as natural gas increases. And as Josiah just said, certainly the supplies that we have right now are problematic are as we go into winter across Europe.

How do we think about the forecast right now for Europe? We’ll start out with looking at history or trend. The graph that we’re looking at looks at every winter across Europe from a temperature perspective in the core of winter, December, January and February. So in looking at the last 20 years or so, 20 winters, from the turn of the century to now, the trend has been very interesting Over the past 10 years, there’s mainly been warm winters across Europe. In fact, if we look at the last 10 years, 8 of the last 10 years have had warmer than normal temperatures as designated by the red lines on the graph. Before that, the first 10 years of the century actually had more of a bias to colder winters across Europe. So that trend that we’ve seen, colder conditions at the start of this century but the last 10 years warmer conditions, has certainly been a tendency that we’ve seen and that is a good starting point overall in the discussion about the winter. Just looking at statistics, certainly with the trends of the last 10 years that would lean things in the direction of a warmer winter here coming up for Europe.

Now, let’s turn to the fundamentals. When we look at the fundamentals, something beyond the trends that we just talked about, there’s a couple of very important things that drive the weather patterns going into winter. A couple of those are still in the formation stage. The polar vortex, the area of low pressure that develops across the North Pole, that is extremely important in how much cold air flows out of the Arctic into areas like Europe. The polar vortex is in its formative stages right now, and so we’ll get some idea as to the stability or instability of the polar vortex by November and on into early December. Snow pack is also a very important indicator, as to the more snow pack that you tend to see across all of Eurasia it gives the ability to build up cold air, and if that cold air has the function to move into areas of Europe, then that’s very important overall, and that process is also beginning. So those are things that will be monitoring over the next four to six weeks.

The item that we can talk about right now and has a major impact on jet stream patterns on a global basis is global sea surface temperatures. The map that we’re looking at right now looks at global sea temperature anomalies. Areas in red are warmer than normal water temperatures. Areas in blue are colder than normal water temperatures. One item that’s had major ramifications around the world the last couple of years is La Nina event, areas of colder than normal water in the Equatorial Pacific. But that doesn’t have a big correlation or it’s not a big driver to the pattern across Europe, so that doesn’t really make that much difference as to the winter here coming up.

What does make a difference is what we see here in the North Atlantic. There’s a very warm pool of waters in the North Atlantic, south of Greenland. And again, water temperatures don’t tend to change very rapidly. So the area that we’re seeing right now is one of the warmest that we’ve seen in the last 20 or 30 years across the region. Why is that important? It’s important because if it persists into the winter, for example into December and January, then that sets up a pattern that features the jet stream moving north up into Greenland and the Atlantic, but then downstream into Europe, troughing, and that gives the mechanism for cold air to move into Europe. So that is one of the items that we’re watching for extremely closely in the persistence of this feature.

If this warm pool of water in the North Atlantic, which is historically significant, if that maintains itself until late November, December, then that would correlate to colder air moving it, especially early on in the winter across Europe. And it’s one of the most important things here right now and through history, we do expect this to be somewhat of a feature. It’s hard to talk about the specific magnitude, but we do expect this to be a feature here overall.

So finally, this is a very important item here coming up, but other items that we’ll come up and we’ll talk about as we go toward winter, the snow pack in Eurasia, the stability of the polar vortex building up over the North Pole, and those are the items that are most important here coming up is we head toward one of the most critical in winters in Europe ever.

Lauren:

Thank you to our organizers and Josiah and Jon for presenting today. And at this time, we will close the session. Have a great day.

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