Deutsche Bank: Nine pictures to understand the European energy crisis

time:2022-12-09 author:Technology stocks
Deutsche Bank: Nine pictures to understand the European energy crisis

Since the outbreak of the Russia-Ukraine conflict, Europe has followed the United States in imposing energy sanctions on Russia, and Russia has reduced its natural gas exports to Europe as a response, triggering a protracted energy crisis in Europe. At present, the situation in Russia and Ukraine is still confusing. Russia and Europe are at a deadlock. Where will this energy crisis in Europe go in the future? Deutsche Bank analyst Adrian Cox recently released the "European Energy Crisis 101 Report". The study believes that Germany will cut its natural gas demand by 20% in order to survive the winter safely when Russia completely cuts off its natural gas supply. In addition, six major events within the EU in the next two months may determine the future trend of the European energy crisis.

Why does the EU need Gazprom?

Europe itself is a major natural gas-intensive area in the world. Apart from Russia and Ukraine, there are also many natural gas resources in the North Sea. However, due to factors such as huge internal disagreements on mining, liberalization of the natural gas market, and regulatory failures, the EU's natural gas production has gradually shrunk in recent years, while increasing imports of the "cheap bowl" of Russian gas. Until the outbreak of the Russian-Ukrainian conflict, Gazprom still accounted for 40% of EU gas consumption. Germany, which is the most reliant on Gazprom among EU members, has been hit the hardest. Data show that natural gas supply from Russia accounts for 55%-60% of its demand. In Germany, natural gas accounts for about 15% of the power generation energy mix. Although the proportion of renewable energy has soared in recent years, natural gas power generation still plays a pivotal role.

Why can't other energy sources fill the gas gap?

Because their situation is not optimistic. In the first eight months of this year, European nuclear power generation fell 18% year-on-year and hydropower fell 24%, resulting in a 4% decline in overall power generation. France, the European nuclear power giant, has a total of 56 nuclear reactors, producing two-thirds of its total electricity production. However, these nuclear reactors are aging, and some 32 nuclear reactors are currently undergoing routine maintenance or corrosion risk assessment and are out of operation. Affected by this, France's electricity production capacity is less than half this year. In the past, France has been the No. 1 electricity exporter in Europe for many years, but this year it has become a net importer of electricity. In addition, the extreme high temperature weather in summer has caused the water level of the Rhine River to drop to a near historical low, the hydropower generation capacity has dropped significantly, and the water used for cooling reactors in nuclear power plants and coal transportation for power have also been affected.

Where do Gazprom alternatives come from?

As the peak of winter gas consumption is approaching, nervousness and anxiety can be seen everywhere in Europe. In order to spend the winter safely, European countries are doing everything they can, looking for air everywhere, and they are very busy. In Germany, for example, gas from the Netherlands-Luxembourg (Belgium, Netherlands, Luxembourg economic union) and Norway has filled most of Germany's supply gap in recent months.

How many countries in the EU have reached their gas storage targets?

Most countries. The European Council passed a rule in late June that would require member states to hold gas inventories at least 80 percent of their gas storage capacity by this winter. Data from Gas Infrastructure Europe showed that the EU gas storage rate had already reached the target at the end of August. At present, its gas storage rate is gradually increasing. As of September 21, the natural gas storage rate in the EU has reached 86.46%, and the gas storage rate in Germany exceeds 90%.

EU plans to cut gas demand by 15%, does that work?

For the European economic locomotive, it is difficult. In July, EU member states agreed to "voluntary cuts" in natural gas use by 15% from August this year to March next year to deal with energy shortages. Data compiled by Deutsche Bank show that German companies have cut their electricity consumption significantly below the average annual electricity consumption level for 2018-2021, however, household electricity consumption is largely unchanged, so "households will suffer from winter." test". Ben McWilliams, an energy research analyst at Bruegel, a top European think tank, previously warned: "A gas storage rate of 100% will only meet the peak demand of more than two months in the European winter, and the remaining demand will need to be transported from outside Russia during the winter months (country) imports to meet it. With gas storage rates staying close to this level, the EU still needs to reduce demand by about 15%.”

Has Germany stored enough gas for the winter?

Deutsche Bank's modelling shows that if Germany cuts demand by 20%, Germany could survive the winter even with a complete outage of Gazprom, at the cost of depleting much of its current storage before the peak heating season ends. some natural gas.

How does Germany make up for the gas shortage?

Deutsche Bank concluded that if German demand is cut by 15%, gas from Norway remains at the high level of 2020, gas imports from the Netherlands-Luxembourg are 3 bcm higher than last year, and German gas If the gas storage rate is maintained at the level before the start of winter, then, this winter, Germany can barely completely replace Gazprom.

What does the energy crisis mean for the European economy?

The economy is down and inflation is soaring. To Deutsche Bank in the euro zone, the continued supply outage of Nord Stream 1 increases the downside risk of the economy. With the tightening of natural gas flow, the euro zone economy may face a longer and deeper recession. In 2023, the economy will face four consecutive quarters of contraction. GDP fell by more than 2% for the year. In addition, upside risks to inflation have intensified. Deutsche Bank expects euro zone HICP inflation to rise to 10% and peak in December, before falling to an average of 6.2% in 2023. Germany's economic growth rate will fall by 3%-4% in 2023, according to Deutsche Bank. In 2023, German inflation may reach 8%-12% (may fall on the short end).

The next six crucial time points

The six major events within the EU in the next two months may determine the future trend of the European energy crisis:
  • The EU energy minister plans to announce on September 30 A special energy meeting was held again on Sunday to discuss again whether to set a ceiling on Russian gas prices only, and EU member states are deeply divided on this.
  • Germany's energy regulator, the Federal Network Agency, will reassess Germany's natural gas supply when it publishes an interim report at the end of September.
  • From October 1st, Germany will sell natural gas to German industrial users in an auction. According to the media, the plan aims to incentivize industrial consumers to save energy and reduce emissions.
  • On October 20-21, the quarterly EU summit will be held in Brussels, and the energy crisis will be the main topic of this meeting.
  • At the end of October, Germany's energy regulator, the Federal Network Agency, will publish a final report assessing the country's natural gas supply.
  • In addition, according to the goals set by the European Union and the German federal government, the natural gas storage rate in the European Union and Germany needs to reach 80% and 95% respectively by November 1. For European households and businesses, whether it is safe to spend this winter depends on the performance of EU gas tanks on this day.
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