Those who visit Warsaw at this time of year do not usually enjoy temperatures close to 20°C. Bilbao usually has cold, non-tropical weather in January. However, this winter is strange. Across Europe, temperature records are being broken, and energy prices are plummeting: the price of natural gas at the continent’s main hub has fallen to levels seen only before the Ukraine war.
A warm fall delayed the heating season and allowed gas storage facilities to fill to capacity. The current heat has allowed them to fill up again (see chart), a surprising turnaround in the dead of winter. In total, Europe has extracted half the gas from its facilities than in the last two winters. And the forecasts point to a mild season finale.
reasons for joy
Good weather is not the only reason for joy. Gas supply increases as new liquefied natural gas terminals come online. A wet autumn and windy winter have helped power hydroelectric and wind generators. French nuclear power plants, shut down for maintenance, are gradually returning to the grid. “The factors that caused the 2022 energy crisis are all relaxing at the same time,” observes Lion Hirth of the Hertie School of Governance in Berlin. Electricity prices in Europe have fallen to pre-summer levels.
This is providing an economic boost to the continent. Confidence indicators have been rising for two consecutive months. Contrary to pessimistic predictions, German industrial production continues to hold up. Unemployment remains at very low levels across Europe; and the forecast of the companies is to hire more, not cut jobs. Analysts raise their growth forecasts. Goldman Sachs bank no longer sees the eurozone slipping into recession in 2023. As with the so-called Little Ice Age (16th-18th centuries), climate change is changing the fortunes of the European economy.
Change in volume of gas stored
However, it is still early to announce the end of the energy crisis. For starters, prices are still well above normal. Global electricity prices are roughly double those of mid-2021. The same gas that today costs about €75 per megawatt-hour sold for €10 before covid-19. Further declines are unlikely. There will surely be a rebound in gas demand from the industry; gas-fired power plants may begin to replace coal-fired ones.
Still, even with storage facilities bursting at capacity, Europe is still lacking what the International Energy Agency, an official forecaster, estimates the continent will need should next winter be a bad one. Asian demand for gas is increasing and will do so even more when the Chinese economy returns to normal. As the consultancy Timera Energy points out, the gas market continues to operate at the limit of its supply capacity, which means that strong price swings are possible.
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Europe will do well to take advantage of its luck. Leaders should use the opportunity to reconsider the multitude of aid schemes introduced over the summer, many of which are costly, ineffective and poorly targeted. They will do well to focus the money on the most vulnerable and link it to green investments. After all, it is the strangely warm weather that has given Europe its current reprieve. The fight against climate change will only intensify as the energy crisis fades.
© 2023 The Economist Newspaper Limited. All rights reserved.
Translation: Juan Gabriel López Guix
