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Europe’s Net Zero agenda hits home – with eye-watering energy bills

Sophie Mellor, Fortune

Running out of gas as the cost of energy hits record highs, Europe is facing a “power crunch”—one that has been years in the making. As the global demand for gas soars, Europe’s uptake of intermittent renewable energy sources such as wind and solar, combined with its aggressive shutdown of coal and heavy EU carbon taxation, has caused its electricity supply to tighten.

The continent’s gas crunch is causing extreme volatility, with the U.K. on Thursday seeing its electricity price jump 10-fold during one seven-hour period, to a record high of £2,300 ($3,180) per megawatt-hour (MWh), as Ireland, which regularly exports wind energy to the U.K., itself faced supply shortages.

They’re not alone.

This volatility has brought higher prices, hitting record highs across Spain, Germany, and France. Residential users, meanwhile, bear the brunt of the cost.

The eye-watering bills come as both the European Union and United Kingdom push to become global leaders in decarbonizing their energy grids. Last year, for example, the EU pledged it would achieve net zero by 2050, a commitment that means phasing out carbon-intensive energy sources over the next decade for more sustainable sources like wind and solar. Complicating matters: Energy prices have soared this year as demand everywhere picks up, leaving homeowners in the middle of the push and pull of an increasingly volatile global market.

Customers in both Spain and Portugal are now paying an average of €140 ($165) for a MWh of electricity, according to Iberian Peninsula electricity market operator OMIE—the highest since 2002. And on Thursday, Spain’s day-ahead electricity was at a record €152.32/MWh. Over in France and the U.K., EDF Energy said it would raise its standard variable tariffs by 12% from Oct. 1 to account for rising wholesale energy costs. And France’s benchmark power price for delivery next year also hit a record high, at €99.50 per MWh.

Such record gas prices are not usually seen in the months before winter, when more power is needed to heat homes.

A controversial connection

If there’s a lifeline, it could come from Russia.

Russia’s state-owned energy giant Gazprom announced Friday that it had finished construction of the controversial 750-mile Nord Stream 2 natural-gas pipeline to Germany. The timing couldn’t be any juicer, as it comes just a day after U.K. electricity prices hit an all-time record and Ireland warned that a power shortfall could lead to blackouts.

If all goes to plan, Russian gas could begin flowing to the European continent within a month.

Until then, European consumers will have to pay the price. “I don’t see a reason for blackouts, because there are more than enough sources of electricity supply. It’s just going to be expensive,” says Carlos Torres Diaz, head of gas and power markets at energy research firm Rystad Energy.

Years in the making

The current power crunch is the product of years of policy choices, many made with the best of intentions, and has left Europe in a sticky political situation.

For the past several years, Europe has been shutting down its own gas fields domestically to reduce impact on the environment. The largest gas field in Europe, the Dutch Groningen field, is currently being decommissioned eight years earlier than initially planned, with its output reduced to a “minimum” flow that is meant to be used only as a backup energy source. Similarly, gas production in the U.K. is down 28% year to date, according to global natural resources consultancy Wood Mackenzie, with Norwegian gas production also stilted due to maintenance.

Russia has not ignored Europe’s increasingly precarious energy supply. Russia limited export flow of natural gas over the summer in a criticized move to maximize profits, leaving Europe in a tight spot, and now, with Europe’s anguish rising, Russia is making noise about getting gas flowing through the Nord Stream 2 pipeline as soon as possible.

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