Winter energy ‘sad’ will cost Europeans $200bn – or more

By Javier Blas

It is a chain of energy dominoes that are falling in a wave – a chain in which each tile is worth many billions of euros. A bankrupt utility here, a country’s energy reserves there. When the dust settles, the total bill for bailing out the European energy market this winter will easily top $200 billion.

This may sound trivial – and it is admittedly a rough estimate. But the calculation is conservative and based on what we know today. It does not cover the worst-case scenario of both a complete cutoff of gas supplies to Europe from Russia and a colder-than-average winter.

How many understand what is coming?

Very few politicians seem to grasp the scale of the coming crisis and its costs, with France’s Emmanuel Macron and Germany’s Olaf Scholz being among the only ones who seem to have already grasped it (the rest, in many cases, remain busy with internal political developments in their countries).

The European Union has called for an emergency meeting of energy ministers later in July. However, this should be the prelude to a Summit of Heads of State or Government focusing on energy before the summer holidays.

The EU should decide on a major energy saving programme, including a public campaign to support it and make it clear that countries will help each other by sharing what little natural gas is available. This means inviting the UK, Switzerland and Norway to the negotiating table in Brussels.

Bankruptcies are coming – corporate and consumer

As gas and electricity delivery prices in the coming months continue to rise, more European utilities and energy retailers will struggle.

Consider Germany, where the price of an electricity contract for delivery a year from today rose last week to a record high of more than 350 euros per megawatt hour, a 750% increase from an average of 41 euros between 2010 and 2020. Natural gas prices gas for 2023 in Europe have also increased recently.

The only chance of survival for utilities is to pass the huge jump in wholesale prices on to their customers. This, however, simply moves the bailout down, as households and businesses will face unaffordable bills and need governments to help them.

Ultimately, taxpayers will bear the cost — either directly and immediately, through higher retail energy and gas prices, or later, over the years, through higher taxes to pay for the bailouts. European governments should be open and clear about this cost: they can make the case that it is money well spent, in order to block Vladimir Putin.

“Suit” of tens of billions

Let’s start on the utility side. Germany’s Uniper, the biggest buyer of Russian natural gas, is almost bankrupt. It recently requested a state bailout, and preliminary estimates put the bill at €10 billion. This figure is likely to prove conservative. Electricite de France (EDF) has failed as a reliable electricity producer and needs help. Paris, which already owns the majority stake, will also renationalise the rest of the company’s shares, at a cost of at least 8 billion euros.

Uniper and EDF are just the tip of the iceberg – two utilities among dozens serving more than 200 million households in the EU and the UK. The majority may be able to ride out the storm. However, many others will need help. At best, they will require state-guaranteed loans and other government guarantees to buy overpriced gas on the spot market to replace the loss of Russian gas. At worst, they will need to be nationalized, even temporarily.

Government guaranteed loans are not trivial. Earlier this month, the Czech government gave the country’s state-controlled utility CEZ an emergency loan of 3 billion euros. This for a company that serves a country of just over 10 million people. The German government, through state bank KwF, has already given 15 billion euros in loans to the country’s natural gas market operator to buy gas and fill storage facilities ahead of winter. Whether these loans will ever be repaid is questionable.

The case of Britain

Now let’s look at households. The UK is a prime example of the problem.

In February, London announced a multibillion-pound bailout to cushion the impact of a 54% rise in the country’s retail energy price cap – the limit up to which utilities can charge families annually for electricity and natural gas. At the time, the price cap rose from £1,277 ($1,512) to £1,971 a year, effective April 1.

From October 2022, the price cap is set to jump to around £3,300 a year. The increase in the order of – almost – 70% is expected to be announced in early August.

However, the median UK household’s annual pre-tax income is £31,770. This means that a typical household will spend more than 10% of their income paying for electricity and natural gas – this is the standard definition of energy poverty.

Without government money, families will stop paying their bills, creating a debt problem for their energy providers. Either London will bail out the families or it has to bail out the utilities.

The likely size of aid that the UK government should provide? Earlier in 2022, a £693 rise in the annual price cap brought the need for a £9.1bn consumer grant. The (albeit rough) maths suggests that the coming £1,300-a-year increase will trigger a £17bn bailout.

Consider just these well-known examples, and a $200 billion bill in European bailouts, nationalizations, government-guaranteed loans and other similar measures doesn’t sound so frivolous anymore.

Expensive winter

And the problem can get worse very quickly. Again, consider Uniper. Because Russian President Vladimir Putin has cut gas supplies to Germany by around 60%, Uniper is losing around 30 million euros each day from having to buy the same gas on the spot market.

That equates to around €10bn a year – roughly the cost of what the German government currently plans to spend to keep it afloat. If Putin shuts off the flow completely, the utility’s daily losses would jump to about 100 million euros a day, or more than 35 billion a year. The government will have to provide this amount if it wants to keep the lights on in German homes.

If utilities are allowed to pass on higher gas costs to consumers, Goldman Sachs estimates that European households would have to pay €470 a month for electricity and gas, 290% higher than typical costs in mid-2020. This is clearly out of reach for many, perhaps most, and much larger bailouts will be needed to help consumers cope.

Next winter will be expensive. The only question now is how much.