Rising tensions over the Ukraine crisis have left many wondering about its implications for the energy picture in Europe. The conflict comes at a bad timing for the continent: utility bills for the average EU household are up 54% since 2021 and gas inventories are just about half full – way below the 5-year average.

While lower supply from Russia is partly to blame for the situation (the IEA estimates that Russia’s supply to the EU could be a third higher than it is now), Europe’s energy crisis is more the result of global market dynamics than it is the result of geopolitics.

A surge in natural gas demand globally in 2021 (+4.6%), combined with supply outages, has notably driven prices up across the globe. Prices in Asia and the EU rose more than fourfold in 2021(compared to 2020), reaching their highest level in two decades. Prices in the US were also impacted, though to a lesser degree: Henry Hub monthly prices currently stand at $4.38/MBtu — double the 2020 levels but still below the 2005 peak of $13.42/MBtu.

In the short-term, mild weather and increased LNG imports are helping the EU deal with lower gas supply from Russia. Diplomatic efforts are also underway to help the EU hedge a potential supply disruption in Ukraine, through which about a third of Russia’s gas supply to Europe is delivered.

In the longer term, an effective way to reduce energy price volatility will be to increase energy efficiency and reduce dependence on fossil fuels. According to the IEA’s latest analysis, for instance, an energy mix compatible with the Paris agreement would leave consumers 40% less exposed to shocks in fossil fuel prices.

Getting to that end state will require some work and investments, but the EU has been performing well in that regard. As a group, EU countries collectively invested $219bn in the clean energy transitionlast year, making the EU the second best performer after China ($266bn), ahead of the US ($114bn). And in 2020, renewable energy overtook fossil fuels as the EU’s main power source for the first time ever.

Unfortunately, the rise in natural gas prices has also led a gas-to-coal switch in power generation. As a result, while renewable energy deployment in the EU mostly displaced coal generation between 2011-2019, half of new renewable energy additions since 2019 has been displacing gas instead, according to research firm Ember. Indeed, the current price differential between gas and coal is so large that even record-high levels in the EU carbon price (it passed the $100/tCO2e mark this week) haven’t been able to discourage the switch from gas to coal (this would require a price of $226/tCo2e).

All of this will dent the speed at which the EU power sector can decarbonize in the short-term. Some coal-dependent countries see the recent – but controversial – decision by the EU Commission to include some gas projects in the EU taxonomy of sustainable activities as a way to help reverse that trend. Yet despite having some protective clauses, the proposed inclusion might end up locking in capital in stranded fossil assets instead of directing it towards renewables, which are already the cheapest form of power production. The gas markets might be in crisis, but so is the climate.

Energy Turmoil