Commentary

The European Energy Collapse – A Chain of

Contingencies or a Recurring Nightmare?

Zlata Sergeeva and Nikolay Fedorov

February 2022

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

Summary

Choosing to rely exclusively on renewable energy sources (RES) and

eliminating hydrocarbons can lead to signicant difculties for an energy

system. Challenges may arise when energy storage is insufcient to

guarantee a stable power supply. The lack of suitable technologies to apply

RES in certain sectors, such as maritime and aviation, can also create

problems. These challenges were explicitly demonstrated in the United

Kingdom and European Union energy markets in September and October

2021. An unexpected decline in production from RES and high demand

for natural gas in Asia both occurred at that time. Moreover, an incident

disrupted production at a key Gazprom gas condensate processing plant.

This conuence of events resulted in a sharp increase in natural gas

prices. In the context of an ongoing transition away from coal-red power

generation toward cleaner energy sources, electricity wholesale prices

for customers experienced unprecedented increases. Energy suppliers

collapsed, governments spent billions of euros to help consumers, and

dependence on coal ironically increased. In this commentary, we discuss

whether this series of events was an aberration or a sign of fundamental

risk based on a clear internal logic. If the latter is true, then these events

may occur regularly unless lessons are learned and challenges are

addressed. We also touch upon the role of carbon neutral versions of

conventional hydrocarbon products in reconciling market needs with

climate goals. These products are elements of the circular carbon economy

concept.

Calamity in the European Energy Markets: What, When

and Where?

In September and October 2021, European energy markets faced a

situation that can be described as a perfect storm. Benchmark title transfer

facility (TTF) natural gas prices surged to unprecedented levels, reaching

$40 per million British thermal units (MMBtu) on October 5 (Figure 1).

Power prices followed the same trajectory. They increased by an average

of 4.8 times in France and 5.3 times in the United Kingdom (U.K.) over

2016 to 2020 levels (Figure 2). Coal prices also climbed to record levels,

reaching $11.5 per MMBtu on October 5, 3.8 times above the 2016 to 2020

average price (Figure 3).

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

Figure 1. Month-ahead TTF futures.

Figure 2. Month-ahead power prices in France and the U.K., 2021 and 2016 to 2020 average.

Source: KAPSARC, based on data from Bloomberg.

40.1

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TTF natural gas month-ahead prices (2021) TTF average month-ahead prices (2020-2016)

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100

120

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July

Aug

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Dollars/MMBtu

U.K. month-ahead power prices (2021) France month-ahead power prices (2021)

U.K. average month-ahead power prices (2016-2020) France average month-ahead power prices (2016-2020)

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

These market

responses raise

questions about the

European Union’s

(EU’s) ability to reach

carbon neutrality

by 2050

This emissions

reduction campaign

greatly reduced

China’s coal output,

resulting in soaring

coal prices

Figure 3. Month-ahead Rotterdam coal futures, 2021 and 2016 to 2020 average.

Source: KAPSARC, based on data from Bloomberg.

11.5

Jan

Feb

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Apr

May

June

July

Aug

Sep

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Nov

Dec

Dollars/MMBtu

Rotterdam month-ahead coal prices (2021)

Rotterdam average month-ahead coal prices (2020–2016)

These market responses raise questions about the European Union’s

(EU’s) ability to reach carbon neutrality by 2050. For comparison, after

net carbon neutrality commitments from developed countries, China

announced its intent to achieve carbon neutrality by 2060, a decade after

the EU. In March 2021, China published its 14th Five-Year Plan, which

included carbon intensity reduction targets. Soon after, President Xi Jinping

announced that China would strictly control coal generation until 2025 and

start phasing it out after that (Climate Action Tracker 2021). This emissions

reduction campaign greatly reduced China’s coal output, resulting in

soaring coal prices (Xuewan et al. 2021). However, unpredictable factors,

such as an unexpectedly rapid rebound from pandemic shutdowns and a

boom in China’s exports of manufactured products, led to surging energy

demand. China was not prepared to meet this demand with other energy

sources. The EU may continue to face similar difculties.

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

A Perfect Storm of Contingencies

Several coincidental factors on both the demand and supply sides

signicantly affected energy markets throughout 2021. The rst such factor

is weather conditions. The winter of 2020 and 2021 was long and cold,

lasting about 1.5 months longer than the previous winter (Degree Days

2021). Consequently, unusually large withdrawals were made from natural

gas storage facilities to satisfy the demand for winter heating. Natural gas

demand in the rst quarter of 2021 was 6.3 billion standard cubic meters

greater than normal (National Association of Oil and Gas Service 2021).

Natural gas storage was therefore more depleted than usual at the

beginning of the traditional summer lling season (BBC News Russia

2021). However, European gas storage facilities were not replenished as

quickly as usual because of high summer gas prices. By early August, they

were at less than 60% capacity, a 10-year low (Figure 4). Moreover, some

countries had gradually reduced their total storage capacities to avoid

additional investments in costly infrastructure. For instance, in 2017, the

U.K. shut down the Rough storage facility, which had provided 70% of its

gas storage capacity for over three decades (Ambrose 2021c).

Figure 4. Natural gas levels at European storage facilities.

Source: KAPSARC, based on data from Bloomberg.

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Levels in European storage facilities, 2021 2020

2019 2018

2017 2016

2015 2014

2013 2012

2011 Average [2020-2011]

August 5: an incident

occurs at a Gazprom

plant near Novy Urengoy

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

Thus, European gas storage facilities were already lagging dangerously

behind schedule in preparing for the upcoming winter in early August. Then,

an accident occurred at a Gazprom plant near Novy Urengoy. On the

night of August 5, a large re broke out at a gas condensate processing

plant and was not extinguished for a full day. The resulting damage forced

Gazprom to stop producing both natural gas and condensate at its key elds

in Urengoy and Yamburg. The gas and condensate production processes

are interrelated. Gazprom therefore argued that it was technologically

impossible to export ‘fat’ gas (with condensate) through the Yamal-Europe

pipeline, which accepts only ‘dry’ gas (without condensate). Consequently,

the accident halved the volume of natural gas supplied to Europe via the

Yamal-Europe pipeline. Even before the consequences of the accident

were fully realized, the market reacted. TTF prices immediately increased

by another 6% following the announcement of the accident (Podobedova

2021). Pipeline deliveries were below pre-accident levels as of September 14

(Schukin 2021). On September 29, volumes delivered via the Yamal-Europe

gas pipeline were still at half of their normal levels. However, Gazprom

ofcials stated that this volume reduction was temporary and related to one

client’s orders (Interfax 2021).

The third coincidental factor, increased demand for gas in Asia, was

the culmination of political processes in the Asian market that had begun

several years earlier. China was the central driver of these processes.

In 2018, relations between Australia and China began deteriorating

when Australia banned the Chinese company Huawei from competing

for contracts to build its 5G network (Reuters 2020). Political tensions

remained high, and coal shipments from Australia were temporarily

disrupted in 2019. China also began allowing fewer Australian cargo ships

to unload at its ports (Biswas 2021). Then, in mid-2020, Australia called

for an investigation into the origins of COVID-19. China responded by

imposing an unofcial ban on coal imports from Australia (Russell 2021).

Concurrently, China began to introduce restrictions on its own domestic

coal production and usage.

China needed to compensate for this reduction in coal imports and

production amid its rapid recovery from COVID-19. Thus, China’s natural

gas imports, including liqueed natural gas (LNG), soared (Liang

2021). This increase in natural gas will also help China achieve its stated

climate goals. Thus, this trend is unlikely to weaken in the coming years.

China is increasingly committed to reducing its dependence on coal, and

only gas can help it reduce this dependency. China’s LNG imports in the

rst half of 2021 were 28% higher than in 2020. Analysts expect 12% to

13% year-on-year growth in Chinese LNG imports in the second half of the

year, despite already high prices (Aizhu and Jaganathan 2021).

Natural gas in the Asian market is traditionally traded at a premium to the

European market. However, more than half of the LNG currently exported

to Asia is xed and supplied under oil-indexed contracts. The volumes

available for the spot market to react to the Japan Korea Marker (JKM)-

TTF differential are therefore in limited supply. Thus, the market is likely

to respond to even small differences in supply. In the summer of 2021,

the price gap between the two markets remained very small (Figure 5).

Suppliers were therefore encouraged to ship LNG to Asia instead

of Europe.

China is increasingly

committed to

reducing its

dependence on coal,

and only gas can

help it reduce this

dependency

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

The trend toward

greater volatility,

however, is based

on a set of events

and actions that may

occur in different

forms somewhat

regularly

The effects of these

policies on current

markets and energy

systems can be very

costly

The Potential for a Recurrence

This conuence of events may initially appear to be isolated. However,

it highlights an emerging fragility in energy markets that may make them

more susceptible to various disruptions on the supply and demand sides.

In the future, 2021 may be regarded not as an aberration but as the rst in

a series of increasingly volatile years for energy. Individual market swings

may be impossible to predict. The trend toward greater volatility, however,

is based on a set of events and actions that may occur in different forms

somewhat regularly.

New national energy policies aim to phase out hydrocarbons to decrease

greenhouse gas emissions and achieve various recently announced

net-zero emissions targets. These policies have resulted in some progress.

However, the effects of these policies on current markets and energy

systems can be very costly. Using the U.K. as an example, we can show

that existing technical capabilities in renewable energy are not sufcient to

provide stable electricity output. In particular, utilities are unable to manage

the intermittency of renewable energy sources on a large scale. Thus, the

energy supply to consumers and industries may be disrupted. Ironically, the

easiest solution to this volatility and the lack of a stable energy supply from

renewable sources may lead to even more carbon dioxide emissions.

Figure 5. JKM and TTF month-ahead spot prices, 2021.

Source: KAPSARC, based on data from Bloomberg.

Jan

Feb

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Dec

Dollars/MMBtu

JKM month-ahead spot price, 2021 TTF month-ahead spot price, 2021

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

In the U.K., the late summer of 2021 was unexpectedly warm but not

particularly windy. Thus, the demand for electricity for space cooling was

higher than normal. At the same time, electricity generation from wind

farms was lower than expected (Figure 6). In the rst half of September

2021, wind farm output accounted for between 0% and 20% of the U.K.’s

domestic generation. In the same period in 2020, wind’s share of total

output sometimes exceeded 50%.

Figure 6. Wind generation in the U.K. as a percent of total generation, September 2020 and September 2021.

Source: KAPSARC, based on data from Elexon BMRS (2021).

10%

20%

30%

40%

50%

60%

Sep' 1

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Wind generation as a percent of total own generation in the U.K., 2021

Wind generation as a percent of total own generation in the U.K., 2020

The U.K.’s National Grid Energy System Operator (ESO) was forced to

offset the loss of generation from wind with hydrocarbons. The National

Grid ESO has no long-term contracts for securing natural gas at a stable

price. Moreover, natural gas spot prices were extremely high at that time.

Thus, the ESO was forced to balance the U.K.’s electricity supply using

coal, which is cheaper. For instance, Électricité de France’s (EDF’s)

coal plant West Burton A, which had been on standby, was red up on

September 6 (BBC News 2021b). As a result, the share of coal in the

U.K.’s total electricity generation jumped to 7.2% that evening (Figure

7). In the late evening and early morning hours of September 14 to 16,

coal’s share decreased slightly to 5%-6% of total electricity generation.

On September 15, a re started on a sub-sea cable of the Interconnexion

France-Angleterre (IFA) 1 interconnector between the U.K. and France

(Britton 2021). Half of the IFA 1 interconnector’s capacity for electricity

imports from France, or 1 gigawatt (GW), was shut down (Reuters

2021). Repairs are expected to be completed by the end of March 2022

(Sheppard, Wilson, and Thomas 2021). Imported electric power from IFA

1 typically provides 3% of the U.K.’s electricity consumption during peak

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

Figure 7. Power generation by fuel type in the U.K., September 2021.

Source: KAPSARC, based on data from Elexon BMRS (2021).

hours (2 GW out of 33 GW consumed). Thus, this loss is not objectively

critical. However, the perception of the impact had more signicant effects,

as electricity prices in the U.K. wholesale market spiked on the news. On

September 15, these prices reached a 10-year record high, peaking at

$73.3 per MMBtu (Figure 7). This record was beaten on September 28,

when prices climbed to $80.8 per MMBtu.

In 2017, the Rough storage facility, which provided 70% of the U.K.’s gas

storage capacity, was shut down (Ambrose 2021c). Without enough storage

facilities, the intermittency of renewables could not be balanced properly.

This imbalance led to the sharp increase in energy prices. As a result,

several U.K. energy providers, which together supplied more than 1.5

million customers, collapsed (BBC News 2021c). We provide more detail

on this collapse in the “Consequences of the Crisis and Possible Solutions”

section.

Without enough

storage facilities,

the intermittency of

renewables could not

be balanced properly

10%

20%

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70%

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90%

100%

9/1/2021

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9/23/2021

Natural gas Nuclear Wind Coal Other

7.2%

58%

17%

11%

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

Russia’s Role in the Market

Several groups have made allegations that Russia, and Gazprom in

particular, is trying to cash in on the problems of European consumers.

The International Energy Agency publicly called for Russia to increase its

supply of natural gas to the European market (Ambrose 2021a). A group of

European lawmakers called for the European Commission to investigate

Gazprom’s role in the recent gas price surge. They allege that the Russian

gas monopolist may use the market crisis as a pretext to circumvent

regulatory approval for the Nord Stream 2 pipeline. Gazprom may start

supplying gas via this pipeline without approval (Krukowska, Tanas, and

Khrennikova 2021).

However, European countries stopped buying new natural gas on spot,

preferring to withdraw some gas from the storage facilities which were

lled during the period of lower summer prices (TASS 2021a). As a result,

Gazprom booked only one-third of the offered Yamal-Europe pipeline

capacity (31.4 million cubic meters per day) for October and refused to

book additional transit capacity via Ukraine (Marrow and Golubkova 2021)

due to the lack of demand. Chairman of the Gazprom Board of Directors

Viktor Zubkov stated on October 28 that the company fully complies with its

contractual obligations (Rossiyskaya Gazeta 2021).

Moreover, in 2021, the supply of pipeline gas from Russia to Europe

reached historically high levels. In the rst half of 2021, European

imports of Russian gas were 17.2 billion cubic meters greater than during

the same period in 2020, an increase of 22%. The main buyers of this

gas were Germany, Turkey and Italy. Russian gas exports to Germany

increased by 44% and to Italy by 14% year-on-year. Turkey’s pipeline

imports from Russia increased threefold relative to those in the rst half

of 2020 (TASS 2021b). Even compared with the rst quarter of 2019, the

supply of gas to Europe from Russia was almost 5% higher (Gazprom

2019, 2021).

The volume of natural gas that Russia sells to European customers

is limited by its availability. According to Oxford Institute for Energy

Studies estimates, Gazprom has no spare volumes available (Fulwood

and Sharples 2021). Additionally, Gazprom has domestic priorities and

is currently preparing for the Russian winter by lling domestic storage.

Guaranteeing export volumes in excess of its contractual agreements to

European customers is a way for the company to demonstrate goodwill.

However, it is not an obligation. Gazprom must consider the impacts this

could have on its balance sheet (Sobko 2021).

However, European

countries stopped

buying new

natural gas on

spot, preferring to

withdraw some gas

from the storage

facilities which

were lled during

the period of lower

summer prices

Guaranteeing export

volumes in excess

of its contractual

agreements

to European

customers is a way

for the company

to demonstrate

goodwill. However, it

is not an obligation

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

Implications for the EU

Given the current energy crisis, the positions of some EU members on

climate action seem to have become less unied. For instance, the Czech

Republic has asked for changes to the EU’s carbon dioxide emissions

reduction plan. It claims that the current version of the plan will damage the

Czech economy, especially its automotive industry (Ponikelska 2021). The

Czech Republic is heavily dependent on coal, and the automotive industry

employs more than 700,000 people. These jobs are threatened by the EU’s

proposal to ban combustion engines from 2035.

Additionally, Poland refuses to shut down operations at the Turow lignite

mine, even after an EU court order requiring it to do so. In accordance

with the order, Poland is subject to a penalty of 5 million euros (€) per day

starting in June 2021 unless it ceases its extraction activities (Bodoni and

Onoszko 2021). However, the country claims that switching off the mine will

threaten its energy security, as 70% of Polish power is generated from coal.

The events of September 2021 have called into question the EU’s and

U.K.’s plans to phase out coal entirely. The U.K. announced its plan to

phase out coal in summer 2021, with a deadline of October 2024 (Vetter

2021). However, the CEO of Drax, a U.K. power company, has stated that

the plan to close its two coal plants by September 2022 may be delayed.

The government may ask the company to keep them operational (Kennedy

2021).

France is pushing for the signicant development of nuclear power, which

not all EU member states welcome. In October 2021, ministers from 10

countries, including France, addressed the EU leadership in Brussels

regarding this issue. They provided a letter stating that nuclear energy

“must be part of the solution” (Stickings 2021). Furthermore, President

Emmanuel Macron of France announced that by 2030, the country will

invest €1 billion (1.16 billion U.S. dollars) in the development of nuclear

technologies. These technologies are to include small modular reactors

and atomic waste recycling (De Beaupuy and Nussbaum 2021). This

example illustrates the challenges that European countries face in reaching

consensus on the appropriate energy mix given the pressure from many

directions.

Altogether, the EU must overcome several types of challenges to achieve

its target of net-zero emissions by 2050. Even interim targets, such as

reducing greenhouse gas emissions to 55% of 1990 levels by 2030, will be

difcult to achieve. The situation is further complicated by the COVID-19

pandemic and the disruption of global supply chains.

Consequences of the Crisis and Possible Solutions:

Carbon Neutral Hydrocarbons

The EU faces a complex set of policy challenges and market dynamics in

trying to achieve carbon neutrality. As this study illustrates using the 2021

European gas market, efforts to replace hydrocarbons with renewables

can paradoxically increase reliance on hydrocarbons. Clearly, an energy

system that relies entirely on renewable energy is not practical in the

The events of

September 2021 have

called into question

the EU’s and U.K.’s

plans to phase out

coal entirely

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

near term, or perhaps ever. A more sophisticated approach that sensibly

incorporates the use of hydrocarbons as an energy source is likely to be

the best option.

The events in September and October 2021 and the resulting high energy

prices triggered a chain reaction of events. Large purchasers of energy,

such as heavy industries and public utilities, have faced severe hardships,

as the following list of consequences shows:

• In August 2021, Achema, a Lithuanian company, was forced to delay

plans to restart its ammonia facility.

• OCI N.V., a Dutch company, had to partially shut down production at its

ammonia plant in Geelen.

• CF Industries, a major fertilizer company, was forced to shut down

operations at two manufacturing complexes in the U.K. on

September 15. The shutdown was “due to high natural gas prices”

(Business Wire 2021).

• On the same day, two utility companies in the U.K. ceased trading.

These companies were Utility Point (with 220,000 domestic customers)

and People’s Energy (with 350,000 domestic customers and 1,000

non-domestic customers) (Lewis 2021).

• On September 17, Yara International announced that it would cut

about 40% of its European ammonia output. This cut was because

of the high price of natural gas feedstock. This Norwegian company is

the world’s second largest ammonia producer. The decision will impact

Yara’s facilities, which have a production capacity of about 2 million

tonnes per year (Solsvik et al. 2021).

• On September 20, one of the largest Ukrainian fertilizer producers,

Odessa Port Plant (OPP), announced that it would suspend

production for ve weeks. The suspension was due to a sharp rise in

gas prices. Another Ukrainian fertilizer company, Ostchem, reduced its

ammonia and urea production for the same reason (Davydova 2021).

• On September 21, British Steel stated that “these colossal,

unprecedented [price] rises make it impossible to protably make

steel” (Kinch and Varriale 2021).

• By September 23, ve more U.K. energy providers collapsed.

These companies were Hub, MoneyPlus, PFP, Green and Avro Energy.

In total, seven companies failed, accounting for more than 5% of the

market. As a result, the British government regulator Ofgem moved 1.5

million U.K. customers to new suppliers, such as EDF and British Gas

(BBC News 2021c).

• The U.K.’s sixth largest energy provider, Bulb (1.7 million customers),

is seeking nancing to avoid collapse. Another energy company,

Igloo, is working with restructuring consultants (BBC News 2021a).

More collapses may follow if prices continue to rise and the U.K.’s

government does not provide subsidies.

• The large Spanish fertilizer company Fertiberia decided to curtail its

operations at several production sites. It stopped production at its

Palos de la Frontera site as of October 1 (Cockerill 2021).

A more sophisticated

approach that

sensibly incorporates

the use of

hydrocarbons as

an energy source is

likely to be the best

option

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

EU households are now facing a sharp increase in energy bills. For

example, retail electricity prices are expected to rise by an average of

10% next year for households in France. German gas providers are

expected to raise prices by 12.6% this fall (Paull 2021). Spain, Italy and

France have announced several government aid measures to support

their citizens. For instance, France plans to spend about €600 million to

provide €100 subsidies for low-income households. Italy spent €1 billion

on direct interventions in the energy market to cut consumer prices. It is

also expected to announce a €4.5 billion support package for households

(Khan et al. 2021). Spain plans to regain about €650 million from energy

companies and €2.5 billion from utilities that beneted from “excess prots”

(Ishwarkimmins 2021). The Spanish government claimed that “this situation

can provoke a backlash against carbon-cutting initiatives.” It argued that

carbon-cutting policies “may not stand a sustained period of abusive

electricity prices” (Krukowska and Lombrana 2021). The U.K. is considering

a similar windfall tax on energy providers (Ambrose 2021b).

Given these events, a resulting question is how climate goals can be

achieved without threatening the stability and affordability of the energy

supply. Several approaches can address this broad challenge. However,

given the scale of the challenge, a holistic approach is needed that is

not limited to the energy sector. Climate goals can only be achieved

sustainably and successfully through a combination of solutions. A

complete discussion of these solutions warrants a separate study

via multiple lines of research. However, possible solutions include

nature-based solutions; enhanced energy efciency in the consumer and

industrial sectors; carbon capture, utilization and storage technologies;

and direct air capture.

One holistic, economy-wide approach, namely, the circular carbon

economy (CCE) concept, is currently in development. Combining the pillars

of reducing, reusing, recycling and removing, the CCE concept is exible.

It considers the unique aspects of countries’ pathways to achieving climate

goals (KAPSARC 2020). The idea of circularity emphasizes the closed

loop nature of an economic system in producing energy and resolving

any externalities.

Among the variety of solutions that may be incorporated in the CCE

approach, carbon neutral versions of traditional hydrocarbons can

play a critical role. These technologies include carbon neutral LNG and

carbon neutral oil. Carbon neutrality has no universally established

denition. Usually, carbon neutral cargo incudes a carbon offset that

covers up to 100% of the emissions in different stages of its value chain.

These offsets can stem from a variety of activities, such as sequestering

or avoiding emissions (Fattouh, Heidug, and Zakkour 2021). Emissions

can be sequestered through carbon capture, utilization and storage

technologies, which capture and reuse carbon dioxide emissions or store

them in geological formations (Aramco 2021; U.S. Department of Energy

2021). Emissions can be avoided by reducing or replacing activities that

generate carbon emissions. For example, avoiding emissions may involve

introducing more energy efcient practices (Helmholtz Climate Initiative

2021).

Climate goals can

only be achieved

sustainably and

successfully through

a combination of

solutions

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

Carbon neutral hydrocarbon products offer some of the advantages

of conventional fossil fuels, such as high reliability, similar physical

properties and compatibility with existing infrastructure. They may not

require additional investments on the consumer side. They also provide

environmental benets, such as smaller or even net-zero carbon footprints.

Moreover, they can be traded at relatively low prices. According to our

estimates, the cost of carbon neutral LNG may range from $8 to $12 per

MMBtu. The price premium over other LNG is relatively small compared

with the price volatility that current gas markets are experiencing. Thus,

carbon neutral LNG can be competitive on the energy markets.

Carbon neutral LNG markets are new but are much more developed

than carbon neutral oil markets. The rst carbon neutral LNG cargo was

announced by Shell in June 2019, and the carbon neutral LNG market

has developed rapidly since then. As of November 2021, 30 deliveries

or announcements of planned deliveries of such cargos were made

worldwide. By comparison, only four carbon neutral oil cargos have been

supplied thus far. Figure 8 shows the costs of carbon neutral LNG relative

to current TTF natural gas spot prices. Based on this comparison, industrial

companies may be able to use carbon neutral LNG to reduce emissions in

their products’ value chains.

Carbon neutral

hydrocarbon

products offer some

of the advantages of

conventional fossil

fuels, such as high

reliability, similar

physical properties

and compatibility

with existing

infrastructure

Figure 8. Cost of carbon neutral LNG versus TTF natural gas month-ahead prices with plant shutdown points.

Source: KAPSARC, based on data from Bloomberg and companies’ ofcial websites.

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2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

30.0

Jan

Feb

Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Carbon neutral LNG cost range (estimation) TTF natural gas month-ahead prices, 2021

2020 2019

2018 2017

2016 2015

2014 2013

2012 2011

CF Industries shuts

down two U.K. fertilizer

plants

Collapse of Utility Point and

People's Energy (U.K.)

British Steel: "Impossible to

proﬁtably make steel"

Seven failed energy

providers account for

>1.5 million U.K.

customers

Achema (Lithuania)

decides not to restart

ammonia plant

OCI’s ammonia plant

(Netherlands) partially

closes production

Yara cuts 40% of

ammonia production

Fertiberia

fertilizer (Spain)

curtails

operations

Ukrainian fertilizer OPP

suspends production for

ﬁve weeks; Ostchem

curtails production of

ammonia and urea

25.324.8

24.3

22.7

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

Concluding Thoughts

As this commentary demonstrates, several factors disrupted the European

energy market in fall 2021. One such factor was the lack of large-scale

technological solutions that can balance the intermittency of renewables

with the simultaneous phasing out of fossil fuels. Another was the series of

unexpected events that led up to the disruption. These events included the

long winter of 2020 and 2021, high natural gas demand and the rerouting

of LNG to the Asian market. An incident at a Gazprom plant and warm

weather in September 2021 compounded these issues. The U.K. and the

EU faced major consequences, including:

• Natural gas and coal spot prices rapidly increased threefold to vefold.

• Retail electricity prices sharply increased for customers by over 10%.

• Several utility companies serving more than 1.5 million customers

collapsed.

• Governments spent billions of euros helping utility companies maintain

the provision of electricity to customers.

• Coal plants were relaunched, leading to greater greenhouse gas

emissions and raising questions about whether these countries would

achieve their climate goals.

• Large industrial consumers of natural gas, such as fertilizer and steel

plants, reduced or shut down production.

The CCE concept offers a holistic, adaptable solution that both meets

climate ambitions and guarantees energy security and a stable supply for

consumers. Carbon neutral versions of traditional hydrocarbon products

can be included within this. Because the market for carbon neutral

hydrocarbons remains immature, the rules and standards for offsets and

trade remain unclear. However, this market is developing rapidly, and

new practices and regulations are continually being established. Further

research from KAPSARC will focus on these issues.

The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

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The European Energy Collapse – A Chain of Contingencies or a Recurring Nightmare?

Legal Notice

This Document (and any information, data or materials contained therein) (the

“Document”) shall not be used without the proper attribution to KAPSARC. The

Document shall not be reproduced, in whole or in part, without the written permission

of KAPSARC. KAPSARC makes no warranty, representation or undertaking whether

expressed or implied, nor does it assume any legal liability, whether direct or indirect,

or responsibility for the accuracy, completeness, or usefulness of any information that

is contained in the Document. Nothing in the Document constitutes or shall be implied to

constitute advice, recommendation or option. The views and opinions expressed in this

publication are those of the authors and do not necessarily reect the ofcial views or

position of KAPSARC.

About KAPSARC

About the Project

The King Abdullah Petroleum Studies and Research Center (KAPSARC) is a

non-prot global institution dedicated to independent research into energy economics,

policy, technology and the environment, across all types of energy. KAPSARC’s

mandate is to advance the understanding of energy challenges and opportunities

facing the world today and tomorrow, through unbiased, independent, and high-caliber

research for the benet of society. KAPSARC is located in Riyadh, Saudi Arabia.

The project “The Future of Hydrocarbons in a Carbon-Managed World” is aimed

at estimating the consequences of international carbon regulation for hydrocarbon

markets. Conventional hydrocarbon producers have started responding to this regulation

with ‘carbon neutral’ versions of their products. Nowadays, the carbon-neutral LNG

market is more developed than the carbon-neutral oil market. This project is focused

on accumulating existing experience of the delivery of carbon-neutral hydrocarbon

products, analyzing the likely transformation of market fundamentals due to the

increasing requirements for carbon neutrality and proposing a pathway to help Saudi

Arabia to keep its competitiveness in the evolving market.