Energy crisis turning systemic?

On January 14th, another shutdown of one of EDF’s nuke power plants combined with chilling threats from Russia as Ukraine talks with the US and NATO went nowhere. Less nuke power means that Russian gas is much needed. Russian gas supply has been essentially nil over the last three months when Russia raised the ante on the Ukraine situation.

Less of cheap nuke power and more expensive gas is an explosive mixture for European governments keen on capping the rise at the consumer level. Energy prices make votes. The French government is all too aware as the combination of missing EDF output and the forced delivery of cheap power to French consumers will cost a neat €16bn to the budget. This is how presidential elections in April destroy any hope of balancing the books of a profligate state.

The situation is no better in the UK where the government has to pick up the tab of failed energy brokers whose end clients have been transferred to survivors with the difference being funded from taxes. For households, the coming bite may be close to £10bn before allowing for VAT cuts of possibly £2bn. £8bn is not far off the cost that the French government will incur to protect its citizens. Other European countries suffer from the same conflict between spot prices and acceptable ones.

The joint EDF and Russian blows may be the proverbial last straw. One may speculate about ripple effects:

  • European spot power prices will surge higher, presumably good news for generators … but most have sold forward. So essentially no P&L impact but possibly a negative balance sheet one if the Uniper/Fortum example (€10bn extra funding needed) is an industry-wide issue. In essence, margin calls on hedges are costing a nominal fortune. 
  • Full industries will have to shut down where the energy component is too high (aluminium, fertilisers, electrolysers…).
  • It is likely that Russia can stand the political pain of exporting less gas/collecting less revenues for longer than European governments can face irate voters. It will be impossible to implement any costly green transition in that context. Say subsidies to green power funded by an extra charge on households’ power bills are out of the question. In effect, the European green agenda is driven by Moscow. Gazprom is exporting less gas indeed, but revenues are through the roof as contracts are indexed on spot prices (c. 55%) and its Q3  21 EBITA gained 142%.
  • The surge in prices in Europe is akin to taking away c. €1,000/year from European household pockets, for heating alone. Throw in the higher cost of gasoline/diesel which remains an unavoidable cost for most. Consumption should capitulate.
  • Inflation at the manufactured goods levels is unlikely to survive the energy call on consumers’ pockets. Businesses facing consumers should take a hit as higher prices will mean consumers trading down. So will GDP growth.
  • The global fight to access scarce fossil resources may be turning to China’s advantage (more gas, less coal, more Russian oil and gas) and quite possibly to that of the US oil industry.

It is easy to sum up things by revisiting the following much-used drawing.

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