A fresh energy crisis?

Hello listeners and welcome to Plug-Din, the NG News podcast from Montel where we bring you the latest news, issues and changes happening in the NG sector. Europe's NG system is on edge again. Gas prices are highly volatile, spiking, plunging, then spiking again. Keeping routes through the Middle East are on the threat and memories of the 2022 energy crisis are still fresh. So the big question is, are we heading for another one? In this episode of Plug-Din, we ask whether the closure of key global shipping mains could trigger a new energy shock, while electricity prices remain painfully high for European industry and whether Europe's power market is fit for purpose in an era of geopolitical instability. Now I'm joined by Montel's EU correspondent Fatima Sadooki. Warm welcome to you Fatima, great to have you back on the pod. Hi Richard, thank you for having me. Now we're talking about a possible return of an NG crisis. What options does the EU and the EC, the European Commission in particular, have in avoiding another NG crisis at the shield industry from high costs? Richard, right from the start, since the war started almost two weeks ago in Iran, the Commission said that there were no security of supply issues. And this message was repeated this week by the Energy Commissioner, Daniel Gelsen, who said that the block was much better prepared this time than in 2022 when Russia invaded Ukraine. But the key concern is price, the impact on price. The Commission took a while to actually say it would take measures, but we heard the president of the Commission, Selovandalayan, today saying that it is preparing some options and solutions to present next week at a meeting of EU leaders to present some measures, targeted measures, including subsidizing gas prices or putting a gas price cap among other measures. Obviously we're recording on Wednesday afternoon, so Selovandalayan said this Wednesday morning, is that right, Patamam? That is correct, yes. Is there a feeling in Brussels that the current wholesale market design is under attack from either sectors or from certain member states? Yes, one could say so. The reality is that the electricity market design was already due for review even before the war started, so next week's meeting of EU leaders was also going to be the space to discuss the issue. But obviously the impact of the war in Iran on gas prices because of the correlation between gas and power prices in the EU is going to be a key topic and a hot topic. We are already hearing some member states, like Italy, for example, being very vocal about that and calling for drastic measures to tackle the impact on power prices from higher gas prices. Patamam, thank you very much for your time. Thank you. So as volatility returns to energy markets, the big question is whether Europe is facing a short-term shock or the early stages of another energy crisis. And to unpack that, I'm joined by Kylian O'Donohu from Euroelectric and Adina Drogescu from European metals. Thanks Richard, great to be back. Thank you for inviting me. I'd like to ask you first of all, Adina, are we on the cusp of another energy crisis? The honest answer would be, I really hope not. The previous one almost, well, wasn't at all pleasant just to be, you know, to be very, very diplomatic, but we do hope that is not going to turn into that. Although the signs are pointing into a crisis in the formation, it all depends how long the crisis in the Middle East and the closure of the straight will continue. If this is a short-term supply disruption or this turns into something more structural, long-term, then we will see massive negative impacts all over the global economy, not only in Europe, but Europe is the first one affected because of reliance still on fossil fuels. Absolutely. So I think those are the two key questions. Maybe we'll return to later as we will, the straights of a new stay closed and how long for. But Kylian, what's your view? Are we on the cusp of an energy crisis? Is that overstate? Do you think or is that a reality that we're facing? First, I think the word crisis brings connotations of 2022, which we experience after Russian invasion of Ukraine. And I think we need to say we're not there today, then that is not going to happen. So what we've seen at that time, we're not going to repeat that. What is true though is that we have seen in the past 10 days a significant spike in particular in gas prices. When I look this morning, such an increase about a third, all the prices, as we know have gone up, that probably that's more global, the impact is less. I would have to see now what the impacts on the entire prices are for the moment. It's more recent volatile prices, rather than necessarily sustained period of high prices. So that's what we see for the moment. And it's hard to know what we can expect. I think we regard it as LNG as we know we import what 4% of LNG from Qatar, but it's a global market. And obviously if you, if we're taking 25 from the US now and then the demand increase from Asia because not an LNG from Qatar, we know it's all interconnected. So we have to see what the ramifications, if the straights of almost take close for a long time are for global LNG prices. So 2022 versus 2026, and what's different now? So I think the first thing, the obvious thing is the quantity. So in 2022 with regards to Russia, we imported 155, 170 BCM of gas from Russia. As I said earlier, we imported about 4% of our gas from Qatar today. So the scale is much, much smaller. That's the first thing to say. I think the second thing to say is that the reaction to the Russian invasion, there's a dash for gas in Europe. When we basically said we would pay whatever price for Europe, we would pay whatever price we need to do to get this gas. And hindsight that was maybe a mistake. I know we felt we need to fill the reserves, but I know traders seeing the prices are only going to go one way. So the TTF in August 2022, it went over 300, 300 years. So that's not going to happen today. We don't expect that. So an increase of a third, possibly 50%, but not the 10 times increase we've seen in 2022. Absolutely. And we saw a power prices top of 1000 euros as well. So we're not quite a long way off that. But for you and your members, what are the main concerns in 2026? Outside the crisis, or the current situation? You can mention both if you want to. That's fine. So it definitely starts at end with the power prices. We are a high-electro intensive consumers. It's the power prices, the make or break for our business. Just to give you a feeling, one euro increase in the price of electricity translates into 2 million for an aluminum smelter. It is quite an impact. We've seen, as Kylian said, that there's volatility in the market, that forward prices have increased also by sometimes even by 40%. It depends a lot on the location of the operations countries that are less exposed to imports of gas or that are less reliant on gas. They are reacting slower. But obviously, if this situation continues, then we're going to see a more structural increase in the power price on the whole EU market. Obviously, this whole situation will monitor in very closely. Beyond the impact on the power price, which is the main concern for us, there are also concerns related to all the supply disruptions on raw materials, value chain. We also see that the shipping costs have increased. There are costs that are rising all over the place. Our industry is not in best shape. It hasn't recovered after the 2022 crisis that wiped off half of the primary aluminum production in Europe. We are very vulnerable still. Any additional cost is another nail in the coffin. It's not just the level of the price, it's also the volatility. It brings uncertainty, difficult to sign contracts to secure electricity. We feel that there's panic in the market. As Kylian said, it may be that there's a lot of speculation that is going right now. But it is very concerning. Absolutely. I mean, is there a sort of pain threshold for the metal sector here? Is it in terms of power prices? Are we talking anything above 100 or even anything above 50, 60? I mean, where does that lie? I mean, can you say anything about that? We don't. As associations were not allowed as you can guess, but we're not allowed to have information. This is confidential commercial information for companies, but even right now in Europe, we are well beyond the pain threshold. It depends obviously on the sector, the electric intensity of each of each industrial process. So you have metals that are highly electroneg intensive and you have others that are less, but we are well above that already last year. The average wholesale price in Europe was 85 euro per megawatt hour. So that's the way above what other countries, other industries, our competitors abroad are seeing. So we're active on global markets. So we are exposed to such global competition. Of course. Tell you, what's what's, yeah, would you like to comment on that? I mean, I think obviously the aluminium sector and the metals generally, they're important customers of the power industry. So it's important that you keep them in Europe, is it not? Yeah, 100%. I'll see from our side, we want industry to stay in Europe. We want industry to electrifying grow. They're very important consumer base. Also, politically, it's unacceptable to see a deindustriization of the content. So from our side, it's very important that we kind of work together with energy intensive industry and find win-win solutions. What I would say, kind of following from your point from Adina is when we have discussion, it's important to kind of break down a few elements. I think sometimes a bit of a lazy kind of common study. US is cheap, Europe expensive. It's much more nuanced than that as Adina talked about. Parts of Europe are expensive. Parts of Europe are very competitive, richer than all of your, your based in Norway, your from Iceland. So you know that very, very well. We also see some good stories we see, kind of discussions on, you know, aluminium smothers maybe locating in Finland. That's the most electronective industry as Adina knows well. So there is some good stories in Europe, but what we do see, and it's also some of Adina touched upon, is that certain member states, particularly those very heavily exposed to gas, are seeing very, very high prices and very volatile prices. So I think that's an important distinction, distinction to make. Secondly, we are seeing that certain industries in Europe are very much, much challenged. And I think for that we need kind of street decision to say, okay, what is the plan on these certain sectors? And you know, non-fers methods, the sector, which is very important for the economy. It also has been very important for the defense sector. So you know, if in certain parts of Europe, these cannot be competitive based on prices, then we have to success. What do we do? Are we need prepared to let them leave Europe or do we want to keep them in Europe and have stayed aid and certain approaches accordingly? That is a bigger decision, but that's one discussion we probably need to have at some stage. That's one of the solutions. But one of the options anyway on the table, potentially, Kylian, but what are your members most concerned about in this current crisis in 2026? So I think the biggest thing we're worried about is we need a regulatory stability, okay? So we did a review of the electricity market design, and we had the crisis in 2022, then we had the revision in 2023. And we are investing on that basis. In terms of the context, we need to invest about 5.6 trillion from now to 2050. So we need to deploy a huge amount of capital to provide electricity needed for the transition. But when we hear all the discussion, we need to change the market design rules, we need to get rid of marginal pricing, we need to change the whole thing around. That has a big impact on our appetite to make these investments. So that's the biggest thing we're saying is we need a right to stability. We think, as I mentioned earlier, there is issues with certain energy intensive industries in Europe. That is the issue, and we need to find solutions there. We think solutions are linked to taxed, linked to state aid, linked to support for industrial decarbonization, they're the solutions. But this idea, we need to completely overhaul the market from our side doesn't really make sense. And that's why we've been so vocal against the head of the upcoming European Council, which will take place on 19 to 20 to March. I'd like to return to that in the calls for intervention and changes to, for example, the ETS, which it's at least proposing as well as other aspects of the Italian degree. Adina, what do you think? You know, your members are based all over and in some markets that are very much exposed to the gas prices, the marginal price set. Do you think the current market design is fit for purpose? Or do you think it does need changing? The way the market is organized is just reflects the reality of what's happening in the market. So what we see right now happening is just the market reaction to any kind of increase in the price of the marginal source. From our perspective, we also cherish investment, certainly it goes both ways. Investment certainty that the power sector needs for their investment, we need the same investment certainty for our investment. So a constant increase in the prices, in the cost of operating in Europe is not equal to investment certainty. So what we would like to see is measures, a combination of measures, not just one single bullet that will sort out the lack of competitiveness of the industry in Europe. And I think it would be a dangerous path to go and pick favorites because everything is interconnected to the supply chains and the value chains are very complex. So we kind of need everything over here in Europe, particularly in this very uncertain geopolitical context. So while we do have member states that are enjoying a lower electricity prices, we need to make sure that this is happening throughout Europe, not only in just part of it. And that would be the essence of a true internal single market. So what we see is needed, particularly, I mean, there are longer term, we can separate the measures for short term or medium or longer. But in this particular moment, we are looking at the potential crisis. So for that, we need certainty that the industry and the industrial consumers, the electric intensive ones, particularly, will be shielded from such crisis. And what we see right now in the legislation that was adopted after the previous crisis was that the mechanisms that was embedded is extremely restrictive and the conditions for each application or the moment those will be fulfilled and the mechanism potentially would be triggered at member state level. So also it won't be something throughout Europe. Those conditions, when there will be a little field, there will be no industry here in Europe. There are such high standards that are set that is it would be too late. So we need to be accepting Europe that the world has changed and that we need to have mechanism here, mechanism that are triggered quickly in times of crisis. And that such mechanism can offer the legal certainty, you know, the certainty to both power sector and to consumers, to avoid those knee jerk reactions that happened in the previous crisis, where you see a whole, you know, diversity of measures taken at national level to reduce to be a wind from marginal rents or whatever. So this kind of situations they need to be avoided, take fragment the market. We do not want that, but we need that you will level to take pricey situation seriously and to have mechanism that mechanism embedded that can be easily triggered. And that's something that you mentioned is walk you in maybe sector specific mechanisms. But do you, I mean, we are seeing the pendulum now swinging back to towards potentially in some member states anyway about market intervention in the Iberian way, you know, the Iberian intervention, the Iberian mechanism, the Italian market split. It's a patchwork of different different proposals. But our market's failing. Surely there's a supply squeeze and markets are reacting the way they shoot, which is prices are going up. Are markets failing? No, I would say no. I think the market is working very effectively. And I think we have to look at what markets do. And that is decide how it should be distributed and to give investment signals and they are doing that. So I think the market is reacting the way it should react. And what do you make of these kind of this patchwork of course for intervention and to change market design because that's also almost an admission that, you know, in some quarters that the market is failing. Yeah, so I think we need to really break them down kind of, kind of in individually, I think the wholesale calls for a revamp of the current market design. I think that has died down a bit in recent weeks. And I think people kind of buy and large accept that the current market design we have is pretty good. And now we need to implement it. But what we are seeing is in certain member states, particularly in Italy, certain mechanisms they want to introduce, one they're trying to do in Italy is to undertake the ETS effect out of power. I think we have to really caution against this. Firstly, I don't think these things will lower power prices in any shape or form, cemetery brain mechanism. All you're doing is taking from one hand and giving to the other. So that's the first thing. And secondly, we need to be conscious that these things totally undermine the internal energy market. We need to avoid go-to-long strategies. So whatever is agreed through, in terms of reducing energy prices, it should be done at E level and it should not impact the internal energy market. And just the last thing I would say on that is, you know, the Italian idea is just a proposal which would be submitted to the European Commission, a particularly DG competition. I think when you analyze the scheme, it's very, very likely to be rejected on the ground that it distorts the internal markets. So we also have to assess how credible this proposal is in reality. What kind of mechanisms would you like to see then in times of crisis, Dina? I mean, what for that would, I mean, would you like to see a price? Cat, or that, you know, is it you? Why? Or what would help in these kind of situations? Well, we don't have like a clear recipe, what would be ideal in such a situation because, you know, as I said, we both sides, you know, value investment, investment certainty. I think this is the job of policymakers to come with, you know, a solution that will, you know, benefit both sides, the power sector and the industrial consumers. Obviously, you know, if you don't go for a price cap, then you have to go for subsidies. And that is because, you know, either you lower the cost or you provide subsidy, that's how it works. If it goes on to subsidies, those have to be given, you know, equally to preserve the electronic market, those have to be given at a whole new level, not picking, you know, different member states or different sectors. So preservation of the internal market is key also for our industry. We are, you know, also competitors among each other, not only with outside, others outside Europe. What we see is that, you know, the crisis is one item. If we're lucky, you know, it will, we'll go away in a couple of weeks and then we'll all go back to business as usual. But the business as usual, as I said, it's still a structure, we still have structurally high electricity prices. So that needs to be tackled because then this discussion, you know, will constantly come back whether, you know, the market is function properly, whether it's the best organization. So unless we take this discussion seriously and we try to find some solutions, short on solutions until, you know, the investments in production, in generation of electricity are also triggering the, are bringing the lower prices on the market. And hopefully we'll also have lower costs, you know, my everything is. So we need short on solutions if you want. I think more on the medium term, because short term, it really sounds very, very limitedive. But I think on the medium term, we need solutions to be adopted in Europe to tackle the impact of the high electricity price to preserve the competitiveness of the industry. Absolutely. I mean, Killian, just, I know you want to come back on that subject. But just before that, I mean, isn't there here? Isn't this a, you know, a stark reminder of the dependency that Europe has on fossil fuels and what happens? And so surely one solution here is to accelerate the energy transition and to electrify and to further the pace of electrification. Yeah, I think so. I think 2022 was a clear kind of wake up call. And now we really need to, to heed the message. It's not healthy for Europe to be so dependent on volatile fossil fuel. And even if we look, just take the story of gas. So 2022, we say, okay, we're going to go out for Russian gas. Then we switch to kind of, we say, okay, US energies, the way to go, then there's some concerns there. Then we say, guitar energies, some concerns there. Global fuels are something which we've seen from experience they just devolved it bring is not a good basis to do, to plan your economy. So while we see it's better to have some more control and there is a solution out there. It's electrification. And I think if we really kind of take a step back and look at big picture, we kind of have this petrol state in US, bigger, super-produced gas, bigger, super-produced oil. We are seen to the development of an electrostate in China. The electrification rate has gone to by 32% now. And they're really embracing electrification of the economy. And as Europe, we probably have to ask ourselves where we want to be in this discussion. We think it's better to push more towards electrification of our system. That's buildings, transport, and industry because this is something we can control and it's a better basis to plan our economy. If I can just elaborate on that. Just one thing I would say is we did a big security supply study back in 2024. What we see is in terms of electrification is we have a lot of what we need here in Europe. So fantastic sources of wind. We've lots of solar in the south. We've nuclear, which is about 25% of the very solid base load. We have hydro power in the Nordics. We also have the Alps. And we have the biggest, most interconnected internal energy market in the world. So we probably should put these things to good use. I think that's a much better strategy than increasing our dependence in port of fossil fuel. I mean, Adina, can you accelerate the pace of electrification and in so doing shield industry from these kind of fossil fuel price spikes that were hit your sector? I'm sorry, I'm going to have to say that we are electrified and we're the first ones to go down in times of crisis. And what I received from our member companies is that although they have partly in their production processes, they use gas. The exposure is the biggest on electricity price. So we're not the best ones to ask when it comes to, you know, we're not the poster children for promoting electrification because we are mostly electrified and then we're also curtailed or shadown. But it is true that reliance, you know, fossil fuels is what we need to reduce over here in Europe. We need to consume what we can produce locally, that is correct, that is also valid for metals, for instance, what we can produce over here in Europe. We should consume it also. We should consume it. Well, it's the other round. What we consume here should be producing Europe. But coming back to push for more electrification, that needs to happen organically. That needs to be market driven. It needs to be a business case for that. Forcing companies to switch from, you know, fossil fuel to electricity and that's not to be done in crisis mode. That's not to be done in crisis moments. So that has to be, it has to have an economic value for those particular plants. So then that requires a competitive electricity price that would trigger, would make just a good business from switching into going into electricity. And then what's also needed is to provide these are complex intensive activities. So subsidies encouraging the electrification of industry to make the investments, but also op-ex for in case the price is not sufficient to provide the global competitiveness of that plant once electrified, then op-ex support is also required. I'm sorry to say, but unless, you know, the market offers a very competitive price, then for electricity, then we are going to have to resort to subsidies to make that happen. What's your view here, Keling? I mean, what options does the, if this crisis were to be extended in the worst case scenario a week, so months, what options does the European Commission has? Okay, so I think from the Commission side, in terms of the short term measures, there's probably three things they can do. I think the first one is reduce taxes. And I trusted too high tax on this, trust you, higher than gas, which is, which is perverse. That's the first one. The second one is you can have a good time. have targeted state aid for certain industries which you're extremely exposed. And then the third thing I think with regards to emissions trading system, you can probably give some support for innovation. I think it's also very important that any measures we do do not disincentivize investments because as Adina said, we need to just produce a lot more electricity as simple as that. The more electrons in the system, the cheaper power will be overall. So that's what we would push for solutions. I think a couple of other things which are very important to say is when we did the market design reform three years ago, we basically included that the current market design was working pretty well, but there's two things we need to do. We need to incentivize flexibility and we need to promote long-term contracting. And those two things still hold firm today. So I think if we can have more flexible demands, then we avoid the peaks which are quite expensive. I think that's extremely important to push and that's from all consumer groups. I know certainly industries are not that flexible, but we need to incentivize all consumer groups to be flexible. And the second thing is in this conversation so far, we've talked like industry has been fully exposed to the electricity spot price. That's not the case. And allow them have long-term contracts and that's something we need to promote. It's a win-win from both sectors. So I think the more we can promote the long-term contracting between the power generators and the off-takers, the better it is for both parties. And also another flexibility option is of course batteries and I'm sure that's potentially definitely a solution in these very volatile times when you see the huge intraday spreads in prices. I think we have to separate measures that need to be taken to tackle the crisis impact and the structural measures that need to be taken to further the energy transition and to also provide the lead to globally competitive electricity prices in Europe. So for the batteries, yes, they can help with flexibility in the grid, but let's be honest what we need is measures that can be triggered in the next few weeks. Batteries will not be installed in the next few weeks to actually help us help. Well, everyone in Europe at the end of the day because it's not just about industry and the consumer. So the discussion needs to be very clear about measures taken to do it for the crisis purposes and then the structural reforms or the structural measures that need to be taken and where yes, we agree that the flexibility needs to be incentivized, but it has to take into consideration also the technical restrictions of the technical restrictions of certain plants and what also needs to be acknowledged is the stability that is brought to the grid by the base load consumers, which is actually lowering the saving money to the grid. So there are a lot that we can discuss here, but I think it's important to make the distinction between crisis measures and business as usual measures. Absolutely, you're 100 cent right Adina and thank you for making that comment. But unfortunately now we do actually have to draw this to a close, to a close. So thank you very much for the discussion and your insights, very much appreciated. So thank you both for joining the Plugged in podcast. Thank you. 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