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The EU Is Getting Ready for a Prolonged Crisis: Energy Update

The EU Is Getting Ready for a Prolonged Crisis: Energy Update
Workers walk past the facilities to receive and distribute natural gas on the grounds of gas transport and pipeline network operator Gascade in Lubmin, northeastern Germany. Photographer: Odd Andersen/AFP/Getty Images

The European Union is set to intervene in energy markets to take the pressure off companies that are being squeezed by a liquidity crunch. It will also propose a clawback on excess profits by power and oil companies as it seeks to protect citizens from soaring costs.

EU officials are set to meet in Brussels on Friday to consider next steps. All eyes are on the calendar as the cold season approaches — but this winter may be just the beginning of a prolonged crisis, according to some observers.

The bloc is also considering capping the prices paid to Russia for imported gas, Commission President Ursula von der Leyen said earlier, raising the stakes in a standoff with Moscow. President Vladimir Putin has said Russia won’t supply oil or gas to any nations that introduce price caps.

Key Developments:

Why Europe Wants to Change the Way Power Gets Priced: QuickTake

(All timestamps London.)

Sugar Seeks to Get Ahead of Crisis (3:15 p.m.)

European sugar companies are processing crops a few weeks earlier than usual this year to try to avoid the worst of a winter energy crunch. Starting sooner should bring forward the end of the campaign, which typically wraps up during the coldest months — when energy supply is expected to be especially tight.

Germany’s Nordzucker AG has began processing, while Suedzucker AG and French producers Cristal Union and Tereos also plan earlier starts. But there’s a risk that doing so will mean beets — which have already been hit by drought — miss out on much-needed rain, potentially curbing production.

London sugar futures are near a multiyear high

Switzerland Takes More Steps (2:45 p.m.)

The Swiss government plans a hydropower reserve to strengthen energy supplies and help avoid bottlenecks near the end of the winter. The reserve can only be tapped to bridge critical supply shortages that the market can’t regulate itself, the government said in a statement on Wednesday. It’s one of several measures being taken. On Friday, Switzerland bought eight mobile gas turbines — which can run on gas, oil or hydrogen — from GE Gas Power.

Asia LNG Demand Still to Come (2:30 p.m.)

Asia has been later than usual in buying liquefied natural gas to fill storage facilities to prepare for the winter, as high prices have scared buyers away, according to Michael Sabel, chief executive officer at Venture Global LNG.

“In Asia, demand will still come out,” he said in an interview at the Gastech conference in Milan. “No one talking about China this year, but it’ll come out. Asia is very short of physical LNG.”

Europe Faces Tougher Winters Ahead (2:25 p.m.)

The loss of Russian natural-gas supplies will cause reserves to be depleted faster when temperatures drop in the coming months and make the process of preparing for following heating seasons even more difficult, according to energy executives, who predicted the strain will last until at least 2025.

“Europe could have an even bigger problem next winter,” Niek Den Hollander, chief commercial officer at German energy giant Uniper SE, said in an interview at the Gastech conference in Milan this week.

The main issue is the lack of viable alternatives to gas piped from Russia, as new LNG export capacity takes some three years to build. That means Europe faces a painful reset with consumers and businesses forced to rein in energy consumption.

EU, Regulators to Discuss Easing Collateral Crunch (2:17 p.m.)

The EU is set to act to ease the crunch in energy markets caused by surging collateral requirements, according to a document published by the Commission. It wants to “engage with the relevant securities and banking regulators to explore ways to enable market participants to find the collateral to meet margin calls,” according to the document.

Citi’s Morse: Years Before Prices Recede (1:35 p.m.)

Citigroup Inc.’s Ed Morse says gas prices will be elevated for a while yet. “It’ll be somewhere between 2025 and 2027 that we’ll see the prices in Europe coming back to where they were at the beginning of 2021,” Morse, the firm’s global head of commodities research, said in an interview with Bloomberg TV.

“You can only produce as much LNG as you have liquefaction capacity, and it doesn’t grow overnight. That’s the reason why Europe is going to have to wait to mid- or later in the decade” to have ample supplies to replace Russian gas. He added: “We also have to remember that the Russian game plan isn’t completely over.”

Naturgy Calls for End of Dutch Benchmark (1:30 p.m.)

The Dutch gas benchmark — known as the Title Transfer Facility, or TTF — should be replaced, according to Francisco Reynes, chief executive of Spain’s Naturgy Energy Group SA.

It would be “reasonable” for energy markets to stop relying on the benchmark, Reynes said at an event in Madrid Wednesday. TTF pricing is currently harmful for industrial competitiveness and domestic prices, and is hurting the income of families, he said. Naturgy is one of Europe’s largest buyers of LNG and also imports natural gas via an undersea pipeline from Algeria.

Execs Pour Cold Water on Gas Price Caps (1:20 p.m.)

Executives at exporting and trading companies at the Gastech conference in in Milan have questioned the viability of gas price caps, including LNG. Europe needs to attract available supply from global markets and such measures won’t contribute to any additional supply for Europe, they have said.

“It doesn’t create any solution to the problem,” Helge Haugane, senior vice president for gas and power at Equinor ASA, said in an interview earlier this week. “Suppliers need price signals to send gas to where it is needed most. Gas is a global commodity and there is not that much supply, so there is not much we can do.”

LNG Output Must Jump to Solve EU Problem: API (1:10 p.m.)

Europe can’t solve its energy crisis just via LNG cargoes being redirected to the region, according to Dustin Meyer, vice president of natural gas markets at the American Petroleum Institute. Replacing Russian gas is challenging and can only be achieved if the global LNG export capacity increases quickly, he said.

“That is a problem that must be solved only through investments in new capacity, new supply,” said Meyer in an interview in Milan. “The diversion of cargoes has been very helpful in the short term, but in the long term, we need investment in export capacity.”

Oil Majors So Far Unfazed by EU Pitch (12:47 p.m.)

Shares of European oil majors were little changed on news of the EU’s proposal, with BP Plc and Shell Plc down less than 1%. Von der Leyen said Europe plans to impose a “solidarity contribution” on fossil fuel companies, but it’s not yet clear how much of an impact that will have on the record profits of big oil companies.

“It’s easy to say these things, but it will depend on who and how,” said Henry Tarr, analyst at Berenberg. “The devil’s in the details.”

Truss Opposes UK Windfall Tax (12:05 p.m.)

UK Prime Minister Liz Truss said a windfall tax on energy companies would hinder investment in the economy. “It’s the wrong thing putting companies off investing in the UK just as we need to be growing the economy,” she said in her first Prime Minister’s Questions. The premier will announce her energy plan to help households and business with soaring bills in the House of Commons on Thursday.

Also see: Truss Plans £40 Billion Energy-Aid Package for UK Businesses

Von der Leyen Pitches Emergency Plan (12:03 p.m.)

The European Union will pursue radical measures to reduce electricity consumption and cap power prices in an emergency intervention to curb soaring energy costs that are sending shockwaves through the region’s economy.

The EU’s executive arm plans to propose that the bloc’s 27 member states limit excessive revenues of companies producing power from sources other than gas and use the profits to support consumers, Commission President Ursula von der Leyen said. That would be done through imposing a price cap on electricity generated from technologies such as renewables, lignite or nuclear energy.

The unprecedented plan to step into energy markets also includes a levy on fossil-fuel producers, a price cap on Russian gas imports, measures to increase liquidity for energy companies if needed and a mandatory target reduction of electricity use.

EU Targets Excess Profit of Non-Gas Power Producers (11:30 a.m.)

The European Union aims to recapture excess profit from power producers that don’t rely on expensive gas to help consumers as soaring energy prices bite.

EU proposals for a price cap of 200 euros per megawatt hour applies to revenues obtained by production of electricity from wind, solar and geothermal energy, hydropower, biomass, landfill gas, sewage treatment plan gas, biogas, nuclear, lignite and crude oilshale oil, according to a draft regulation seen by Bloomberg News.

China’s Gas Storage Review Risks Order to Buy LNG (11:25 a.m.)

China is checking if there is enough natural gas in storage before winter, sparking concern that importers may be asked to buy more LNG, exacerbating the global shortage.

Because of the slack demand at home due to virus restrictions, China’s LNG importers have been diverting shipments to more profitable markets overseas, like Europe. However, an order by the Chinese government to boost storage for winter could halt that and intensify competition for LNG, risking to drive up gas prices around the world.

EU Price Cap Would Shift Costs of Supply Risks (11:20 a.m.)

The European Union’s proposed price cap on electricity not generated by gas of EU200/MWh would reallocate the costs of supply risks in power and gas markets from consumers to generators, according to Jefferies.

However, it could theoretically lead to higher demand, which would exacerbate scarcity and supply issues. In that context, the EU needs to put greater emphasis on policies that reduce electricity consumption, Jefferies said.

Swedish Utilities Want Fixed-Rate Contracts Scrapped (11:10 a.m.)

Some power companies in Sweden want to cancel multi-year fixed-rate contracts with consumers as a result of the “force majeure” clause, state broadcaster Swedish Radio reported, citing people familiar with the matter.

The companies, which were not identified in the article, fear an extended period of high power prices as a result of Russia’s invasion of Ukraine.

Europe’s Newest Reactor Ramps Up (10:55 a.m.)

Power output at Europe’s newest reactor is set to hit a landmark 1,000 megawatts overnight as it ramps up toward full production, bringing some relief to the region’s strained market.

Finland’s Olkiluoto-3 nuclear unit will provide much-needed supplies to the Nordic nation’s taut power system when it reaches full capacity later this autumn, after imports from Russia were cut completely in May.

EU Seeks Power-Demand Cut of 10% (10:25 a.m.)

The European Commission is seeking a deal to reduce power demand across the bloc by 10%, according to people familiar with the situation.

There’s also a proposal to cut demand during peak hours by 5%, while the commission is proposing a price cap on electricity not generated by gas of EU200/MWh, people familiar with situation said.

Soaring Energy Threatens German Companies (10:15 a.m.)

More than 90% of German companies view the rising energy prices as a serious or even existential threat to their businesses, according to a survey of the influential business lobby group BDI.

About 40% of companies are planning to postpone investments into ecological or digital transformation because of rising energy prices.

Pakistan Sees Gas Becoming Unaffordable (10:05 a.m.)

Gas will become unaffordable for developing countries, Iqbal Z Ahmed, chairman of Pakistan GasPort Consortium Limister, said on a panel at Gastech in Milan.

“There should be some focus on making volumes available to emerging markets,” and the industry, gas producers and developed nations should find a solution, he said.

LNG Import Capacity Offers Europe Leverage (9:55 a.m.)

If Europe doubled its import capacity for liquefied natural gas, it would give the region more negotiating leverage with Russia, said Michael Sabel, chief executive officer of Venture Global LNG.

The company is supporting LNG regasification projects in Europe, which typically cost $500 million to $2 billion, he said.

Gas Storage May Run Empty, Industry Warns (9:45 a.m.)

Europe’s gas storage could run empty this winter if demand cuts are not rolled out urgently, industry group Eurelectric warned.

“Energy prices are soaring, amid throttled gas flows and increased scarcity in the market, pointing towards supply shortages this coming heating season,” the lobby group said in a report. Record wholesale electricity prices are exerting pressure on the retail market with prices up 84% since January 2021, it said.

Putin Says Give Us Turbines for Gas (9:25 a.m.)

“Give us turbines and we’ll turn on Nord Stream tomorrow, but they won’t give us anything,” President Vladimir Putin said at the Eastern Economic Forum in Vladivostok.

Accusations that Russia is using gas as an energy weapon are “nonsense,” said Putin, adding that a potential price cap on Russian oil and gas is “another stupidity.”

Greece Moves to Cut Energy Use (9:15 a.m.)

Greece announced measures and penalties Wednesday that aim to cut the use of energy in the public sector by 10% in the near future and by 30% by 2030.

Measures include changes to street lighting and ensuring that lighting and air conditioning units are turned off when offices are not in use. Measures and incentives to encourage a reduction in energy consumption in the private sector and households will be announced in the coming days, the government said.

Scholz Accuses Russia of Blackmail (9:05 a.m.)

Chancellor Olaf Scholz accused Russia of seeking to blackmail Germany and its European partners by shutting off gas deliveries and dismissed an apparent leak in a key pipeline as “pretense.”

“Russia could deliver if it wanted to,” Scholz said Wednesday, according to the text of a speech to the lower house of parliament in Berlin. He said Gazprom PJSC simply needs to request a turbine for the Nord Stream 1 link that is in western Germany and ready for use after repairs.

Deutsche Bank CEO Sees Recession in Germany (9:00 a.m.)

Europe’s largest economy is set for contraction on the back of soaring inflation, energy supply bottlenecks and the disruption to global supply chains, Deutsche Bank AG Chief Executive Officer Christian Sewing warned.

“We will no longer be able to avert a recession in Germany,” Sewing said during a speech in Frankfurt on Wednesday. “We believe that our economy is resilient enough to cope well with this recession — provided the central banks act quickly and decisively now.”

German Aluminum Smelter Halves Output on Energy Costs (8:41 a.m.)

Aluminum producer Speira GmbH will cut output at its smelter in Germany by 50% in response to soaring energy costs.

The curtailment adds to the extreme toll that the energy crisis is having on Europe’s metals industry, which is one of the biggest industrial consumers of power and gas. The region’s aluminum and zinc production capacity has fallen by about 50% within the past year, and industry groups have warned of further closures over the winter months.

Gas, Power Futures Fall Again, Giving Up Gains (8:41 a.m.)

European gas futures erased earlier gains, with traders awaiting details from the region’s policymakers on measures to stem the effects of the energy crisis. Benchmark front-month gas contracts traded in Amsterdam dropped as much as 6.2%, while German next-year power declined 3%.

“The market is currently torn between conflicting feelings: fears on Russian supply, optimism on LNG supply and stock levels, all while waiting for the reforms on energy markets that EU is about to adopt,” according to EnergyScan, the market analysis platform of Engie SA.

Europe’s Energy Costs Surge by 1 Trillion Euros (8:11 a.m.)

Europe’s energy costs will exceed pre-pandemic levels by more than 1 trillion euros, according to estimates by S&P Global Ratings. The impending redesign of EU gas and power markets will be “complex and bear many risks” Emmanuel Dubois-Pelerin, lead analyst for EMEA utilities said.

“Given massive collateral postings in volatile power markets, we believe European governments are increasingly willing to support liquidity on energy exchanges and at European utilities against massive hedge collateral posting movements,” he said.

Netherlands Reaches EU Gas Storage Target Early (7:44 a.m.)

The Dutch government confirmed on Wednesday that the country’s gas storage facilities are on average 80% full, nearly two months before the EU deadline. The cabinet had previously allocated an addition 10 million euros ($9.9 million) to fill the large Bergermeer gas storage facility as much as possible over the previous 68% target. Levels are expected to reach around 90%. Facilities at Grijpskerk and Alkmaar will be filled to full capacity and the Norg storage facility has now been filled to about 85%.

“We will continue to fill the gas storage facilities in the Netherlands in the coming period so that we have a buffer for the uncertain times that Europe is facing,” said Climate and Energy Minister Rob Jetten.

Gas Prices Move Higher After Recent Wild Ride (7:33 a.m.)

Gas futures in Europe edged higher early Wednesday after wild moves in the previous two days. Dutch front-month contract, the European benchmark, added 2.7%, with traders weighing risks to Russian supplies against moves drafted by politicians to fix the crisis ahead of winter. Gas supplies from Norway are also curbed due to seasonal maintenance, with volumes bottoming out at the lowest since mid-July on Wednesday. Works will wrap up next month.

European gas prices edge higher after recent wild ride

Germany Seen Sliding Into Recession (7:33 a.m.)

For Germany’s industrial backbone, small and medium-sized enterprises, higher energy prices look like a “ticking time bomb”, according to according to ING Groep NV. With ongoing pressure on consumers’ disposable incomes, companies’ pricing power is fading, Carsten Brzeski, chief macro-economist said.

“Judging from the first macro data for the third quarter, the German economy has not fallen off a cliff at the start of the third quarter but is rather sliding into recession,” he said.

Australia Moves to Allay Japan’s Gas Cut Fears (7:33 a.m.)

Australia says it’s doing what it can to ensure supplies of liquefied natural gas to Asian customers will remain reliable, in response to concerns producers could be forced to redirect to relieve domestic shortfalls.

The nation, which vies with Qatar for the title of top LNG exporter, has the power to force producers in the east to redirect uncontracted cargoes tipped for international markets for domestic consumption, but has so far declined to use it. Even if Canberra decides to tighten the rules when the current agreement expires on Jan. 1, the impacted volumes are likely to be relatively minor — about 4% of Australia’s exports, according to BloombergNEF.

Crisis May Extend Beyond Next Winter (7 am)

Europe could face an even bigger problem next winter with no end in sight for the energy crisis, Niek Den Hollander, Uniper’s Chief Commercial Officer, said in an interview in Milan.

If Russian gas flows remain curtailed, it’s possible that nations won’t be able to fill up storage sites effectively next summer, he said.

“We could see low inventories in the end of this winter, and that would make it very difficult to procure gas and fill up storage again for security of supply next winter,” Den Hollander said. “It all depends on how much LNG Europe will be able to attract and will also depend very much on the weather.”

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