Natural-gas shortages threaten governments’ green goals -...

Natural-gas shortages threaten governments’ green goals - September 25, 2021

AND ANOTHER crucial global market has gone from excess to shortage at breakneck speed. Last September in Europe it cost € 119 ($ 139) to buy enough gas to heat the average home for a year, and the continent’s gas storage facilities were overflowing. Today it costs 738 euros and stocks are scarce. America, which has an abundance of shale gas, has also seen prices more than double, albeit from a much lower level, and could see further increases if its winter is cold.

The deficiency has many causes. A cold European spring and a hot Asian summer stimulated the demand for energy. The resumption of industrial production has raised the global appetite for liquefied natural gas (LNG). Russia has piped less gas into European stocks. Hawks suspect it is trying to scare the market and make sure its new Nord Stream 2 pipeline is approved. But it also suffered disruptions, including a fire at a processing plant in Siberia.

Gas has filled gaps in the production of energy from other sources. The wind didn’t blow much in Europe this summer, while the drought interfered with the production of hydroelectricity. The increase in the price of the permits needed to emit carbon in the MYSELF made coal expensive. So there are few alternatives to gas combustion for electricity and home heating.

While other bottlenecks in the world economy, for container ships and microchips, have sparked a boom in capital spending, investment in fossil fuels is in long-term decline. American shale can only help so much, because gas markets are imperfectly connected through LNG. High prices, when they hit, will mainly serve to ration the limited supply. But it takes large price movements to curb demand. If the next few months are cold, European energy may have to become extremely expensive to persuade businesses and households to use less of it.

Solving this problem requires an accurate diagnosis of what went wrong. Governments have not taken enough account of the intermittency of renewable energies. The world has too little nuclear power, an ever-active low-carbon energy source. Gas interventions and subsidies will only make matters worse. Expensive energy angers voters and hurts the poor. But subsidizing energy quickly, as Italy is doing, or limiting prices, as Britain is doing, will aggravate the shortage and make politicians’ commitment to green seem hollow. Governments should use the welfare system to support household incomes, if necessary, while helping energy markets to function efficiently.

The long-term challenge is to smooth out volatility as the shift to renewable energy continues. Storing the battery eventually at low cost could solve the intermittency problem; at this time, even more gas storage would help. In the meantime, the changes to the market could improve things.

In Britain, many small energy suppliers that offer, say, one-year fixed-price contracts to consumers, but buy energy at variable rates, will soon go bankrupt. Convincing firms that sell at fixed rates to protect themselves from wholesale price increases should encourage more physical gas storage. Another idea is to invest more in connection networks (a recently failed connection between Britain and France) and in LNG infrastructure, so that arbitrage exchanges can balance disparities in global energy supply.

Dirty power sources should be expensive. But without reliable alternatives, price increases raise inflation, lower living standards and make environmentalism unpopular. If governments do not manage the energy transition more carefully, today’s crisis will be the first of many that threaten the vital transition to a stable climate.