Real Assets
Three Takeaways from the Worsening Energy Crisis
Article
Aug 12, 2022
The global energy crisis that worsened in late February with Russia’s invasion of Ukraine has deteriorated significantly. In late July, Russia’s gas deliveries to Europe continued to decrease, with the Nord Stream 1 pipeline now currently running at only 20% capacity.1 This gas shortage has come at the same time that severe heat waves scorching parts of Europe have increased demand for power. As a result, natural gas prices are now roughly triple what they were at the start of the year. We see three key takeaways for investors from the worsening energy crisis.
High European Power Prices for the Foreseeable Future. Russia accounted for 40% of the European Union’s total gas consumption in 2021, as well as 46% of the EU’s coal imports.2 In the short term, Europe remains reliant on gas as a key source of power. Its near-term limited alternatives to Russian gas include increasing gas deliveries from other sources (including the U.S., a boon to U.S. midstream energy companies), substituting coal for gas, and trying to restrict local gas usage. Europe’s limited alternatives mean high power prices in the region are likely here to stay for some time. So far, one-year forward baseload power prices have risen around fivefold in most major European markets over the last year and are now at their highest level ever, according to Bloomberg data.
Potential Value Opportunities in European Utilities. We will be closely watching the potential impacts of a gas shortage on European utilities. Some utilities may be negatively impacted by high gas prices. This is because they may be contractually obligated to provide gas to produce electricity, regardless of the gas source, opening them up to price impacts that could negatively affect earnings. In addition, some utilities that benefit from high power prices could find themselves in the crosshairs of government intervention, as a potential “windfall tax” on profits derived from high power prices isn’t out of the question in some countries. European utilities stocks have suffered as a result of this uncertainty. However, with uncertainty comes opportunity, and we will look to take advantage of value-driven opportunities.
Increased Policy Support for Renewables Worldwide. The shortage of supply to Europe and resulting high power prices have highlighted the importance for countries globally of having a secure and diverse energy supply. Countries around the world are recognizing that ensuring energy security is a proactive form of energy policy, with developing clean energy sources a key part of creating secure supply. As a result, policy support for renewables generation is accelerating. Renewable energy costs appear to be falling at the same time that fossil fuel costs are soaring, with renewable power generation now nearly 50% cheaper to run than natural gas power plants, according to Bloomberg. Looking forward, we expect renewable capacity additions (e.g., deployment of new renewable energy plants) to meaningfully accelerate through the end of the decade. Read more in the full Real Assets Monthly (here).
ENDNOTES
1 Source: Bloomberg, "Europe Gas Prices Jump as Gazprom Cuts Nord Stream Flows Further," July 25, 2022.
2 Source: European Commission, "REPowerEU: Joint European Action for more affordable, secure and sustainable energy," March 8, 2022.
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