Europe is still roiling under the impact of high energy prices that do not seem to be going away any time soon. Dutch hub TTF natural gas prices dropped to about €70/MWh on December 31 from the €180/MWh peak reached in October, but as winter sets-in they are now back up to €94/MWh. Even though this is a transitory phenomenon, it is now expected that prices will return nearer normal levels only by the mid-2022 and to pre-pandemic levels by 2023.
Their impact is being felt to varying degrees around the East Med region, but more so in Greece and Turkey for quite different reasons.
Like the rest of Europe, electricity prices for Greek consumers skyrocketed to €416/MWh just before Christmas, in comparison to pre-pandemic levels of about €160/MWh in 2019. This is largely due to an increased dependence on imported natural gas, now at 40%, due to the rapid phasing-out of lignite, traditionally used for power generation. As with the rest of Europe, these are leading the Greek economy and industry into a crisis, with the risk of derailing economic recovery if the crisis is prolonged. Greek Prime Minister Kyriakos Mitsotakis sees this as a “European problem requiring a European solution”.
At the December European Council Summit in Brussels, Mitsotakis put forward proposals to address rising energy prices that included collective purchasing of natural gas within the EU, but the Summit broke without agreement on concrete measures to be taken.
In December Greece approved further increases in subsidies for electricity and natural gas for the majority of households, small business and agriculture, first announced in September. These will be funded partly from revenues from the country’s emissions trading system (ETS), but also from Greece’s Recovery and Resilience Fund. Nevertheless, entering 2022, Greek industry is sounding the alarm about the effects of massively increased energy costs, warning that without further support some businesses may soon be forced to close.
Turkey announced massive increases in the price of electricity, natural gas and petrol that came into effect right at the start of 2022. Electricity prices increased by 50% for households and 125% for industry, while gas prices have gone up by 25% and 50% respectively. These have attracted the wrath of opposition politicians, but also people taking to the streets to express their frustration at this latest blow to the country’s economy. With inflation surpassing 36% in December and the lira losing 45% of its value during 2021, Turkey’s economy is in tatters. And it is largely down to ‘Erdogonomics’ – the highly unorthodox economic policies of Turkish President Recep Tayyip Erdogan based largely on keeping interest rates low.
Turkey’s almost complete dependence on imported oil and gas exposes it to the double-whammy of increasing oil and gas import costs, priced in dollars, while the lira is collapsing. This is despite the fact that in dollar terms, Turkey’s gas imports are shielded through long-term oil-price-linked supply contracts.
The increasing cost of energy imports is also fast depleting its foreign-currency reserves. Developing its newly-discovered 540-billion-cubic-meter Sakarya gasfield in the Black Sea, expected by 2023, could provide substantial relief. As is the drive to increase power generation from renewable sources, that now stands at 43%.
The global energy crisis appears to have skipped Israel. The concern there is that electricity prices will be rising by 4.9% in 2022 due to increases in the cost of imported coal. A far cry from the European and Asian energy price maelstrom. At present 23% of Israel’s electricity is produced from coal, but this will stop in 2025. Over 70% of Israel’s electricity comes from using natural gas produced by its two giant gasfields Tamar and Leviathan. Gas prices are fixed through long-term contracts and today stand at $4-$5/mmBTU, shielding Israel from the vagaries of global energy markets.
However, the energy crisis is worsening conditions in Gaza, with the gap between electricity demand and supply now estimated to be 75%, limiting electricity supply to only a few hours per day.
Egypt is also largely shielded from the global energy crisis. It is now self-sufficient in gas, with prices dictated by the government. Energy and fuel price rises are the result of inflation, now running at about 5.7%. Increased reliance on renewables and more efficient combined-cycle power generation are also helping.
The political and economic paralysis of Lebanon has led to an energy crisis of gigantic proportions leading to electricity blackouts and shortages of diesel and petrol that have paralysed the country. An agreement between Egypt, Jordan and Syria, with US blessing, means that natural gas should be supplied to Lebanon through the Trans-Arab gas pipeline to ease the electricity crisis within the next three-months.
It is hoped that parliamentary elections in April and presidential elections in October will lead to much-needed political change, but Lebanon has been there before, with little to show. The Lebanese people desperately need, and deserve, a better year – but will they get it? Omens are not good.
A complete reliance on oil products for power generation has shielded Cyprus from high natural gas prices. Nevertheless, its dependence on oil and the impact of high EU ETS prices have led massive increases in electricity prices causing hardship, especially to low-income households. In November Cyprus reduced VAT on electricity bills for vulnerable households from 19% to 5% for six-months. But the government is now locked in a battle with parliament that voted a bill reducing VAT by 10% for all, including industry. This may now be referred to its High Court.
But despite the energy crisis, support for energy transition remains strong, with Greece targeting to produce 61% of its electricity from renewables by 2030 – and still planning to phase-out use of lignite by 2028 – Israel by 30% and Egypt by 42%.
This crisis has reinforced the idea that a more sensible use of East Med natural gas resources would be to exploit them regionally in support of the region’s post-pandemic economic recovery and to hasten the shift to clean energy.
But as we enter 2022 questions remain. Will another coronavirus variant lead to more lockdowns? Will the EU ETS prices exceed €100/tonne? Are we going to see escalation of the Russia-NATO confrontation? Will a hotter summer lead to even more extreme climatic events? Will another oil crisis cause prices to exceed $100/barrel? Is Europe going to descend into political turmoil? The last two European Council summits have shown a divided Europe on many key issues, including energy and climate. Such events could have a knock-on effect on the East Med region. But it is not all doom and gloom. There is hope that things will go right in 2022 and global – and East Med – economic recovery will continue.