Russia Wins the Energy Race and Captures the Crimean Prize

The occupation Ukraine’s Crimea peninsula by unmarked Russian troops brought Russia’s energy dominance over Europe back into headlines. Europe ‘appears’ constrained in a strong response because its reliance on Russian gas. Strong economic sanctions against Russia could start a trade war, with Russian sourced gas spiking in price leading to higher European electricity and heating bills.

"Any advice on dealing with foreign energy investors?"
“So what’s the price for ‘cheap’ energy?”

The debate around potential sanctions is framed as the EU versus Russia. But this is Europe, the inter-factional fighting within Europe actually leads countries allowing Russia to walk away unmolested with the Crimea Peninsula. There is an unreported race in Europe: the energy price war. In each country this plays out differently, for those in the west of Europe it is the result of the high initial cost of shifting towards renewable energy, for those in the east, it is reliance on Russian gas.

Spain, which once offered ‘you can’t loose’ subsidies to anyone hooking up solar panels to the grid have now removed all incentives and are looking for ways to claw back previous financial commitments. From Germany, the Czech Republic to Bulgaria the standard feed-in tariff, which paid a premium on every kilowatt produced, has fallen out of favor due to consumers opening electricity bills and dying of sticker shock. Or so it seems.

The high cost of electricity in Europe is now a constant topic of discussion for European leaders. Europe has a disproportionately high priced gas and electricity system compared to the United States.  Politicians are scrambling to find ways to reduce the bill in Europe. Hungary, in the run-up to next month’s elections, has reduced electricity and gas prices by 25% over the past year. Losses for the energy providers are mounting and investments have significantly dropped. Even in the UK, the idea is floated to freeze electricity bills.

utility investments in Hungary

The energy price war is as much internal as external. The external is the low priced shale gas that has flooded the US power market. Making cleaner burning gas more feasible than coal power stations, and pushing cheap, and easily transportable coal into the European market. As the price of gas has dropped in the US, EU external dependency on imported gas has increased between 2001 and 2011 by almost 20% according to Eurostat’s dependency barometer, with Germany increasing imports by 10%. The global price of gas is relevant for Europe’s economies.

Importantly, the price war is also between Central Eastern European countries like Poland and Hungary against the perceived high priced countries of Germany and France. The drive for shale gas in Poland is an attempt to drop the price to bring the chemical and manufacturing industry from next door Germany. The recent agreement between Hungary and Russia, has Russian Rosatom building two new nuclear blocs is fueled by Hungary’s Prime Minister’s belief that nuclear in Hungary will be cheaper than heavily renewable based electricity in Western Europe. Not even the Russian invasion of the Crimea, which others compare to the Russians stomping out Hungary’s 1956 revolution, has shaken the Prime Minister’s decision – nor his support for Russia and Putin (I don’t strongly agree with this simplified comparison, but honestly, it is really disgusting that Orban doesn’t personally come out with stronger opposition to Russia and Putin’s move – this really exemplifies what kind of person and leader he is.  But I digress).

Any economic sanctions against Russia for invading the Crimea holds the potential for higher gas prices in the European market. Despite recent efforts to diversify away from Russia, the price of gas in the EU is of national economic and political importance. Voters and industry expect the cheapest energy prices possible. Economic stagnation on both sides of the Atlantic forces politicians to look at how they can cut costs, increase economic activity, and compete against each other. Lowering energy prices can be equivalent to lowering taxes, providing an economic wallop. The message is clear, Russia wins the Crimea, but Europe needs Russia’s help to compete against the US – and with each other.