What is the REPowerEU Plan?
The global shortage of natural gas and crude oil continues to drive market volatility and historically elevated prices. In the first quarter of the year, short-term natural gas prices on the most prominent European exchange were five times higher than the 2021 average. In addition to elevated short-term prices, the futures market pricing is two to three times higher than 2021 prices for the next three years.
The current market suggests that investors expect natural gas prices to remain volatile and elevated for the foreseeable future. While the entire supply chain is affected by these prices, consumers bear the brunt of the costs. Suppliers and companies pass costs onto consumers leading to higher energy bills, cost of goods, and overall inflation.
The European Union released the REPowerEU Plan with the goal of reigning in energy costs in the short and long term to reduce the current economic burden companies and consumers face. The plan would mobilize over €300 billion to reduce reliance on Russian gas and oil and accelerate renewable energy investments and adoption to develop a more resilient energy system.
The Current State of European Energy
The European energy crisis began due to a historically cold winter that lowered natural gas reserves, lower than expected renewable energy production, and overreliance on Russian natural gas. As summer approaches, new factors are driving the sustained supply shortage for natural gas.
The Ongoing Russian War
Russia is the largest supplier of natural gas to the European Union. While the European Union set goals to reduce its reliance on Russia, an unprecedentedly frigid winter caused historically low natural gas reserves due to high energy demand. When Russia began amassing troops along the Ukrainian border, this action became a catalyst that ignited volatility in the natural energy market.
As a result, the European Union began accelerating the diversification of its energy supply chain to reduce its reliance on and economic support of Russia. The European Union spent as much as $1 billion per day importing Russian coal, natural gas, and oil. With the ongoing conflict in Ukraine, this became an untenable situation that necessitated energy supplier diversification.
The European Union’s decision to accelerate this process caused additional ripples across the global energy markets. While many countries like the United States do not rely on Russian natural gas, the European Union must replace up to 40% of its natural gas supply with new sources. This introduced a new, large competitor into the market for natural gas that drove up short-term and long-term natural gas prices.
The United States Heat Wave
The National Oceanic and Atmospheric Administration forecasted that the United States will experience above-normal temperatures throughout summer. The forecast is leading many investors to predict an increase in energy demands across the board including natural gas. Given the current state of the global market, this could lead to an even tighter supply chain in the near future.
The United States’ natural gas supply is further compounded by the European Union purchasing natural gas from and contracting with American producers. With an overall summer heatwave predicted, American energy demand will rapidly rise as people flock indoors and use more water, air conditioning, and electricity to avoid the heat. While American natural gas producers will greatly benefit from this, the global supply chain will face even further constraints.
The forecasted summer heatwave combined with European Union demand for American natural gas are factors driving the short-term and long-term energy market prices. As more nations place sanctions on Russian energy, an already tight supply chain will become even tighter. Unless companies can rapidly increase production to fill demand, the price of natural gas will remain volatile and elevated.
Rising Carbon Credit Prices
The global carbon markets are growing at a rapid pace. The market grew 20 percent year over year for four consecutive years with analysis estimating the global carbon market to be worth between $5 billion and $180 billion by 2030. The healthy growth of the market is leading more and more companies and investors to participate in the market.
Source: Refinitiv
The European energy crisis is forcing companies to rely on fossil fuels to meet short-term energy demands. While renewables are the long-term solution, companies are generating more emissions to meet global energy demands which leads them to purchase more carbon credits to offset their emissions. This activity and rise in demand for carbon credits is leading to an increase in price.
While a healthy carbon credit market is necessary to incentivize companies to transition to renewable energy, they contribute to higher short-term energy prices. In order to offset the costs of purchasing more carbon credits at an increased price, companies pass the costs up the value chain and ultimately to consumers through higher energy prices. This becomes another factor that drives the energy crisis and historic energy prices across the world.
