The Unexpected Crisis
People all around me got surprised by their exploding electric bills. For example, a friend of mine saw her December bill jumping to 700 euros compared to 250 last year. Personally, I have no idea how bad it will be for me, the electric company IT system has been unable to produce our bill for 2 months...
What surprised me is that no one knew it was coming. Even less about why it happened.
The general public has been kept in the dark when the crisis was entirely foreseen since at least August-September and talked about a lot amongst finance professionals.
Mainstream media have utterly failed at their task, so I will to try to explain it.
What Is Happening?
The crisis is pan-European, but in many countries, citizens are completely unaware it is happening. My family in France does not feel concerned, as the French government decided to let EDF, the national electric company, take a massive 8 billion euros loss instead of rising the electric bills to consumers. This helps in the short term but means higher prices or taxes down the road.
For countries unwilling to shelter their citizens, like Estonia where I live, the national headlines look like this:
This is also massively hurting the industry. For example, energy-intensive aluminum production is stopping all over Europe.
More worryingly, fertilizer production is stopping as well, just before the new crop planting season. Less fertilizer will mean less and more expensive food in 2022 and 2023.
So how did we get here?
Why Is It Happening?
Gas prices
The first obvious cause of the surge in energy cost is the price of natural gas in Europe. It went x4 in just 1 year.
This is due partly due to renewable energy producing very little last summer. A lot of rain in Western Europe and no wind in the North Sea. So we burned gas to keep the lights on.
Therefore we now have record low inventories of gas while most of the winter is still ahead. In 2018, a cold wave had depleted quicker than expected well stocked up inventories.
In 2022, if we get a few cold months ahead, Europe might entirely run out of gas. This very real threat of freezing in winter is the center of the problem.
Gas deliveries
As you can see in the graph above, inventory started to be below the normal level as early as October. This is when Europe's main supplier, Gazprom, has started to deliver less gas than usual. Partially it was due to low Russian inventories given priority ahead of winter.
Gazprom has been pressuring for signing long-term contracts and refused to deliver more than what its contractual obligation requires.
Russia kept the pressure on Europe in parallel to the diplomatic and military stand-off in Ukraine. Since December, gas deliveries have dropped to 0.
Shooting ourselves in the foot
The theory of the "green transition" is that fossil fuels are becoming irrelevant, replaced by solar and wind. But after a 2021 summer that was windless and sunless, we have tapped into too much of our gas inventory to handle the winter.
We also actively closed domestic European production of "fossil" energy, under pressure from green activists and the EU bureaucracy.
Coal, gas, oil, everything must stop:
So it is not too surprising that we are getting so dependent on Russian imports. But at least, we can rely on nuclear power, a carbon-free power source with world-class industry leaders in Europe, right?
Well not if we are aggressively closing nuclear power plants. Germany closed half of its remaining power plant on 31 December 2021. They will close the rest of it before the end of this year. France and UK have also closed some nuclear power plants.
Just while blackouts loom and crazy prices are destroying European industries and consumers' wallets.
What Will Happen Next?
Where are we?
So what is the situation?
Renewable power is too unreliable to be depended on, at least until a massive improvement in the technology
Gas inventories are dangerously low
Supply is mostly Russian, as we stopped domestic EU production
Russians are keeping supplies tight and geopolitical tensions are higher than ever
Nuclear power is being shut down in the middle of an energy crisis
What will be done?
I would like to say the crisis will pass by summer 2022, but it is unlikely.
The Russian gas supply is going to stay tight at best, maybe fully stop for months or years in case of a Ukraine invasion.
Other suppliers like the USA or Qatar do not have enough capacity to supply all of Europe. Their gas is also a lot more expensive due to technical reasons.
Renewables are not able to replace the Russian gas supply even in the best of years.
EU politicians, especially Germans, are not going to change their minds about pushing for the green transition.
Wait, governments are not doing anything?
For once, green parties are not going to suddenly turn pro-nuclear.
The political and mediatic elite is unlikely to stop pushing for more renewable. Or to kill fossil fuels. Actually, they think that power price going x5 is a clear sign we need MORE unreliable power sources.
So ordinary EU citizens should prepare for multiple years of high energy prices and/or shortages. Besides, new gas fields or new nuclear power plants will take years to start producing anything. In the meanwhile, more of the same failed policy will produce more of the same result.
The Consequences
The immediate effect will be an even higher energy bill. But this will also mean a higher price for anything requiring energy ... which is ... everything. So prepare for MUCH worse inflation.
Steel and aluminum in cars and machines, food (needing fertilizer), wood, construction materials, paper, gas, oil, really everything you need in everyday life. This will also mean that companies will increase prices preventively to stay afloat.
So What Can "I" Do?
The personal side
First, you need to accept your power and gas bill will be 3-4x higher than it used to be. So plan your finances accordingly.
You can upgrade your home insulation and replace your heating system and hot water boiler with less consuming heat pumps.
An alternative and reliable source of heat for winter is also recommended. Something independent from the grid. I personally favor wood, as I can relatively easily stockpile 1-2 years' worth of wood in the garden shed.
A cooking method that depends on a fuel you stock at home (gas bottle, wood stove, etc...) is also a good idea.
For all it will probably do, I also encourage you to manifest very clearly to politicians in your country you are not happy getting poorer because of their policy mistakes.
The money side
This article is mostly for raising public awareness. But this is still an investing blog after all.
One thing you can do is secure with your bank a long FIXED rate for improving your home energy efficiency, but also buying a windmill, solar panels, or anything that can produce electricity. This should help reduce your electric bill. But it will also help if inflation gets out of control.
I did that and with a 10% inflation rate in my country, the 4.9% fixed-rate loan at the bank is actually a -5.1%. The bank is already giving me back interest when taking inflation into account. While I also sell power to the grid.
If inflation climbs to 15-20% like it did in the previous energy crisis (the oil shock of the 1970s), a fixed rate will make the debt go away very quickly. And I will still have solar production for the next 30 years.
Another option if you are willing to take the risk is investing in companies that will benefit from the crisis.
I have recently analyzed such companies, as Transocean, Pepco, RusHydro and CNOOC.
In any case, I recommend staying away from most European stocks, as the region is bound to enter a recession with all the factories closing and people cutting spending to afford their bills.
Good luck and stay warm.