Europe’s energy market in the wake of Russia’s invasion of Ukraine faces new struggles, as storage empties fast this winter, France’s political turmoil threatens and tensions in Ukraine escalate.
The European energy market never fully recovered from the shock of 2022 and now it faces the potential for another crisis as various factors fail to fall its way.
Dunkelflaute weather
Although the European Union entered the winter months with good storage supplies, these are dwindling following colder temperatures and a wind drought, according to a Bloomberg report.[1] Known in Germany as Dunkelflaute, this spell of cloudy, windless weather is causing a spike in wholesale prices as renewable electricity production slows.[2]
Rising tensions in Ukraine had already caused a 40% surge in gas prices in the year to December 16th.[3] They have not yet reached the heights of 2022, but they are high enough to be concerning amidst an ongoing cost-of-living crisis.
New sanctions and climbing prices
Although Europe’s aim is to wean itself off of gas supplies from Russia by investing in renewables, nuclear and LNG supplies from other regions, the continent is not there yet. Gas still flows to some central European countries from Russia, but this remaining supply is now also at risk. In November, the US sanctioned the last major bank handling payments for Russian gas, Gazprombank.[4] A transit deal that allowed Russian gas to flow through Ukraine is also due to expire at the end of the year, and either or both of these could cut off Russian supply.[5]
Milder winters in 2022 and 2023 helped Europe to keep gas replenished, but as it depletes these resources and more supplies are cut off, it faces a mounting problem. According to broker data compiled by Bloomberg, gas prices for the summer are now more expensive than the following winter, suggesting that costs are going to stay higher for longer, making it harder to refill reserves.[6]
Political turmoil in France
In light of this, the political upheaval in France could not have come at a more inopportune time for Europe’s energy markets. Due to its nuclear power resources, France is the largest electricity exporter in Europe, exporting almost 50TWh (terawatt hours) more than it imported in 2023, according to a report from energy analysis firm Montel EnAppSys.[7] Most of that power went to Germany or Italy at 8TWh each, the report added. According to Reuters, France remains the largest exporter in 2024, accounting for roughly 60% of net electricity exports so far.[8]
But France’s electricity surplus comes at a cost. French utility EDF, which runs the country’s nuclear power, was taken over by the government in 2022 after it accumulated debts of nearly $10bn. That debt is now adding to the government’s own debt obligations, which were a major factor in the government’s collapse.[9] Under Michel Barnier, the government was planning to issue interest-free loans to EDF for new reactors and considering new taxes on electricity supplies.
Both nuclear and hydro power have added significant supply to France’s energy resources, but they are close to topping out on current output levels. Any funding cuts or significant changes in the sector driven by political winds could reduce supplies, thereby dropping the surplus available for export, according to Reuters’ market analysis.[10]
Although not in crisis yet, it’s clear that Europe’s energy security remains fragile, with numerous stumbling blocks in the months ahead. A fresh crisis could be triggered by any combination of these factors, making continued diversification away from Russian gas supplies a key priority for the region.
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