Europe faces winter energy crisis as natural gas prices hit record highs

As September turned toward autumn across Europe, the wholesale price of natural gas had climbed to levels no one had seen before. In the United Kingdom, France, Spain, Germany, and Italy, the cost was spiraling upward with each passing week. Households were already receiving bills that shocked them. Businesses were doing the math and finding their operations suddenly unprofitable. And winter was still months away—the season when heating systems would run constantly and electricity demand would spike.

The crisis had multiple origins, none of them simple. A cold spring had forced Europe to draw down its natural gas reserves at precisely the wrong moment, when storage tanks should have been filling. By the time warmer weather arrived, the continent was behind on replenishing its supplies. Rebuilding those reserves proved harder than expected. The global economy was rebounding from the pandemic, and demand for liquified natural gas had surged. China, in particular, was aggressively bidding for LNG shipments as it shifted away from coal, outcompeting European buyers in a tight market. Meanwhile, Russia—which normally supplied about a third of Europe's natural gas—was delivering less than it had before the pandemic. Analysts debated whether production problems or deliberate strategy explained the shortfall, but the effect was the same: less gas flowing west.

Other sources of power that might have filled the gap were unavailable. Summer had been calm, leaving North Sea wind farms quiet. Coal was being phased out under climate pressure. Germany was shutting down its nuclear plants by 2022. The result was a perfect storm of scarcity meeting rising need. Between early August and mid-September, the price of electricity for next-day delivery in France jumped 149 percent. In Germany, it rose 119 percent. Britain, which operated a just-in-time energy market without the storage capacity of continental Europe, saw prices surge 298 percent. A fire that disabled a power cable importing electricity from France had made things worse.

The human and economic consequences were already visible. Seven small British energy providers had collapsed in recent weeks, unable to absorb the cost increases. Avro Energy, which had supplied about 580,000 customers, was among them. Dozens more companies were teetering on the edge of failure. Industries were shutting down. British steelmakers had suspended operations. Yara, a major fertilizer producer, was cutting ammonia production across Europe by roughly 40 percent because the cost of natural gas—at $900 per metric ton of output that sold for $600—made manufacturing impossible. The company's CEO noted plainly that production had become unprofitable and would shift to plants elsewhere in the world.

The crisis was reaching into the food supply chain itself. CF Industries, a major US fertilizer manufacturer, had halted operations at its UK plants. The company produced carbon dioxide, a gas essential to the British food industry—used to stun animals for slaughter and to preserve fresh and packaged goods on supermarket shelves. The government had agreed to subsidize the company with several million pounds of taxpayer money to reopen the factories. Even with that intervention, prices for CO2 would rise, and whether those increases would be absorbed by industry or passed to consumers remained unclear.

Governments were scrambling to respond. Spain announced emergency measures to cut energy bills. France planned one-time payments of 100 euros to nearly 6 million lower-income households. In Britain, Prime Minister Boris Johnson's team was debating how much state support to offer. A price cap for consumers was being maintained, but it was accelerating the failure of small energy companies that couldn't operate profitably under those constraints. Kwasi Kwarteng, the UK business secretary, assured Parliament that there would be no supply emergencies, no blackouts, no homes left without heat. But the costs were mounting, and the political choices were becoming unenviable.

Economists were already revising their forecasts. Jessica Hinds at Capital Economics warned that higher energy costs could make consumers cautious about spending, dampening economic recovery at a fragile moment. Inflation expectations were rising. Previous forecasts of 3.5 percent headline inflation for Europe in late 2021 were being revised upward to 4 percent. Bank of America analysts noted that gas prices could push inflation further above the 2 percent target for longer than expected. The crisis would likely extend into 2022.

Much depended on the weather. If the coming winter proved particularly cold, the pressure on supplies could become severe. Henning Gloystein, director of energy and climate resources at Eurasia Group, warned that if temperatures dropped sharply, industries might be forced to reduce consumption to prioritize household heating—a politically toxic choice. Norway, which supplied about 20 percent of Europe's natural gas, was increasing exports starting in October, but experts saw little relief in the near term. The continent was entering winter with depleted reserves, constrained supplies, and no easy way out.