Gas, coal and electricity prices have recently risen to their highest levels in decades. These increases have been caused by a combination of factors, but it is inaccurate and misleading to lay the responsibility at the door of the clean energy transition, argue Carlos Fernandez Alvarez and Gergely Molnar of the IEA in a commentary dated 12 October.
The historic plunge in global energy consumption in the early months of the Covid-19 crisis last year drove the prices of many fuels to their lowest levels in decades, they note, but since then, they have rebounded strongly, mainly as a result of an exceptionally rapid global economic recovery (this year is on track for the fastest post-recession growth in 80 years, they say), a cold and long winter in the Northern Hemisphere, and a weaker-than-expected increase in supply.
Natural gas prices have seen the biggest increase, with European and Asian benchmark prices hitting all-time records in early October – around ten times their level a year ago. US month-ahead natural gas prices have more than tripled since October 2020 to reach their highest level since 2008, and international coal prices are around five times their level a year ago, with coal power plants in China and India having very low stocks ahead of the winter season, the commentary notes.
The strong increases in natural gas prices have prompted substantial switching to the use of coal rather than natural gas to generate electricity in key markets, including the United States, Europe and Asia, the commentary says, with increased use of coal in turn driving up CO2 emissions from electricity generation globally.
The higher gas and coal prices, combined with rising European carbon prices, have resulted in higher electricity prices. In Germany, electricity prices in October leapt to their highest level on record, up more than six times from a year ago, the commentary observes, while in Spain, where gas-fired power generation plays a larger role in setting electricity prices, the increase was even higher, and lower-than-expected wind generation has provided further upward pressure.
In China, rigid electricity tariffs have not followed the large increase in coal prices, the commentary says, and as a result, coal power producers have insufficient coal on hand and rolling blackouts have occurred across two-thirds of Chinese provinces.
In India, the economic recovery and related increase in energy demand are also causing a coal shortage, the commentary notes, and power plants that rely on imported coal have slowed or even halted operations, while some plants that rely on domestic coal are starting to run out.
The current high coal and gas prices are not the result of a single “shock event” on the demand or supply side, Alvarez and Molnar argue, “rather, they result from a combination of supply and demand factors.”
Investments in oil and natural gas have declined in recent years as a result of two commodity price collapses – in 2014-15 and in 2020. “This has made supply more vulnerable to the sorts of exceptional circumstances that we see today. At the same time, governments have not been pursuing strong enough policies to scale up clean energy sources and technologies to fill the gap."
Unplanned outages at LNG liquefaction plants, upstream supply issues, unforeseen repair works, and project delays have all contributed to tightening of the global gas market, Alvarez and Molnar suggest.
Gazprom, while honouring its long-term supply contracts, “reduced its exposure to short-term sales and has not replenished its own storage sites in Europe to the levels seen in previous years”, while “gas supplies from the Groningen fields in the Netherlands, which are being closed in 2022, continue to be reduced as planned.”
Graph: Evolution of energy prices (source IEA)