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Eurozone: Rising Energy Prices Threaten Recovery

The sharp rise in electricity prices will inevitably weigh on household purchasing power and the European economic recovery.

By EC Invest

In the midst of the energy transition, Europe faces a surge in energy prices leading to a rise in the price consumers pay for their electricity, weighing on their purchasing power, and risks derailing the recovery. Everywhere, prices are breaking all the records for both electricity and gas.

At the origin of this surge in prices, there is first of all the energy transition. If everything leads us to believe that the future belongs to renewables, the present still belongs to hydrocarbons. This is all the more the case since, trying to get rid of coal-fired power stations as quickly as possible and, in some countries such as Germany, nuclear power, Europe has increased its dependence on natural gas. Gas remains the second-largest source of electricity generation, behind nuclear energy.

However, while the end of the summer typically marks when Europe builds up its gas pour stocks in the winter, Russia is hardly in a hurry to increase its deliveries. So there are stocks to rebuild in Russia and the will to direct its gas production to Asia.

Almost unnoticed in December 2019, just before the pandemic, the start-up of the Power of Siberia pipeline allowed the country to become a supplier to China. The new pipelines under construction should allow it to cement its position among the country’s leading suppliers and reduce the dependence of Russian gas on European markets.

At the same time, maintenance of Norwegian production capacity limits the quantities supplied by Norway. And on the renewable side, the lack of wind on the North Sea weighs on wind production. Therefore, Europe is in a perilous situation where it is short of energy at the arrival of autumn. Some are already talking about the possibility of supply problems, especially if winter is to prove harsh. But in the immediate future, the impact of rising energy prices on purchasing power is worrying. Across Europe, electricity prices are skyrocketing, and the authorities are reacting as best they can, with some thinking of taxing the profits of the utility sector as Spain proposes to do. This will weigh on the benefits of utilities as well as their ability to invest in the energy transition.

While the risks associated with the pandemic remain the main threat to the European recovery, the surge in energy prices supports the difficulties of production and supply chains as one of the other risks to be taken into account in the coming months.

We maintain a small presence in European equity markets as a diversification.


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