Are there any winners in the European gas crisis?

Europe faces high gas prices and potential shortages as Russian supplies decrease. In the medium to long term, a clear winner from the gas crisis is likely to be the renewable energy sector. The need to curb harmful emissions and to reduce reliance on Russian fossil fuel imports go hand in hand.

Renewable energy projects like wind or solar farms may not be instant solutions to the problem, but they are a lot quicker to get up and running than a nuclear power station, for example. Higher power prices are also feeding into long-term contract prices for power, meaning investment returns on such projects now look more attractive.

“Power purchase agreements (PPAs) have been increasing steadily from €40/Mwh in March 2021 to just under €100/Mwh in June 2022. “This has a direct impact on renewable project returns, with developers noting that some project internal rates of return (a measure used to estimate profitability) have increased from 5-6% two years ago, to closer to 11-12% now.”

Mark Lacey

In May this year, the EU unveiled its “RePowerEU” plan which is designed to phase out dependency on Russian gas and ensure a more diversified supply of power from lower emission sources. This summer’s crisis and the low gas volumes coming from Russia heighten the need for that phase-out to accelerate. Ultimately, this will bring prices down and make the EU more self-sufficient in terms of power generation.

But it may not be a straightforward journey towards renewables. For example, measures to cushion the gas price impact on consumers may have unintended consequences.

“Governments are providing measures to shield vulnerable households from rising energy prices via subsidies, scrapping surcharges or capping electricity prices.

“Subsidising energy consumption is important to help consumers with the cost of living crisis in the short run. But it can have some drawbacks, indirectly incentivising the use of fossil fuel energy and making the required switch from dirty to cleaner technologies even more expensive in the long run.”

Irene Lauro, Economist

However, in the near term, there is a clear winner that emerges from the current crisis: US gas producers. The higher gas prices make it economically viable to recover US gas than would have been possible with gas prices at $3.00/Mcf.

“More importantly, around two-thirds of the total US gas resource base is in Texas, Pennsylvania, West Virginia and Oklahoma. All of these markets have transportable access to international markets and are conveniently located to export gas to Europe at an attractive price of around $8.90/Mcf.

“This is also likely to boost long-term US gas prices. Rather than retracing back down to their domestic cost of around $3.00/Mcf, we think it makes more sense for prices to trade around $5.00-$6.00/Mcf. Clearly, this increases the attractiveness of US gas companies to investors.”

Mark Lacey