LexisNexis
lslaw

Energy: supply pressures create crisis in Europe

Neil HodgeWednesday 1 December 2021

Since the summer, Europe’s energy sector has been under strain – and under government and regulatory scrutiny, over its response to severe market challenges. Oil prices are high and wholesale gas prices continue to increase, despite government intervention aimed at giving providers a freer rein to respond.

Experts say Europe’s current energy crisis is akin to those experienced in the 1970s. Brent Crude reached a five year high of $84 per barrel during September, while natural gas spot prices are up more than 500 per cent year-on-year, forcing gas-to-coal switching – with its implications for pollution – and putting the brakes on the EU’s attempt to transition to green energy. Manufacturing has also slowed down – or halted temporarily in some sectors – as soaring costs forced companies to shut down.

Europe is facing numerous serious energy supply problems. Domestic energy production has decreased, while Russia, a key supplier, is sitting tight on its gas reserves. Global demand for liquefied natural gas is outstripping supply, particularly since China, itself enduring an energy crisis caused by floods and Covid-19-related disruption, has doubled its imports to compensate for the lack of domestic coal production.

Middle Eastern markets are also unlikely to satisfy Europe’s demand. For example, the EU is no longer the top market for oil-rich countries like Qatar, which has shifted its focus to East Asian customers who pay a premium. As a result, the EU is left to bid higher and higher for imports. Objections to Russia’s ambitious Nord Stream 2 gas pipeline, particularly in Germany, are likely to be dropped if the situation worsens.

Of the countries in Europe, the UK has perhaps been one of the worst-affected by the energy crisis. Its experience highlights a number of the reasons why the market is in dire straits and why all companies should be aware of the implications if supply pressures continue.

Since the start of the year, 25 energy companies have gone bust in the UK after the price of wholesale gas soared globally – 22 of them since September. Ofgem, the country’s energy regulator, lifted the price cap on household gas and electricity bills by 12 per cent to £1,277 in October to assist the sector. However, several companies collapsed because they were unable to pass on the wholesale price rise to the consumer.

In late November, Bulb, founded in 2015 and the UK’s seventh largest energy company with a five per cent share of the market, became the first provider to require ‘special administration’ measures. It will now be run by the government through the regulator until it’s rescued, a new buyer is found or customers are migrated to other companies.

In November the Chief Executive of major energy company ScottishPower, Keith Anderson, warned that customers will have to cover the cost of the recent spate of UK energy company failures through higher bills. He largely blamed these failures on the government’s price cap, calling the UK energy market ‘broken’.

It’s not just ballooning gas prices that the UK has had to contend with. A petrol shortage in September, caused by a lack of tankers to transport the fuel, forced the government to announce plans for a temporary visa scheme to allow 5,000 heavy goods vehicle drivers to come to the UK to alleviate the crisis. That number is some 95,000 less than needed, according to industry body the Road Haulage Association.

The crisis forced the government to relax competition rules among petrol companies to secure enough fuel supplies. It also had to suspend competition law to enable carbon dioxide producers to continue operating after a drop in production – caused when rising energy prices forced plants to close down – threatened fresh food deliveries. 

The government has needed to provide financial support to one of the sector’s largest players, CF Fertilisers, which supplies around 60 per cent of the UK’s CO2, after the rise in wholesale gas prices forced the company to temporarily halt its operations. The ‘limited’ financial assistance could cost the UK taxpayer millions of pounds, the UK’s Secretary of State for Environment, Food and Rural Affairs, George Eustice, conceded. 

Contracts […] just mean that you are going to get some compensation for a lack of supply but they don’t deal with the immediate problems that companies need to contend with

Shane Freitag
Chair, IBA Energy, Environment, Natural Resources and Infrastructure Law Section

The EU has also been pressed by individual Member States to relax competition rules. So far the European Commission has largely resisted such a move, although it released a temporary ‘toolbox’ in October to help governments cope. However, some countries – such as Spain – are pressing for an EU-wide response to allow them to relax rules the way the UK has done.   

Sylvie Gallage-Alwis, a partner at law firm Signature Litigation, says it’s important for companies to check exactly what degree of leeway competition authorities are prepared to provide. For example, while the measures put in place by the EU during the early days of the pandemic were meant to help companies, they also created risks later on, she says, ‘because each national regulator had a different definition of what the end of the pandemic means and when it occurred’.

Shane Freitag is Chair of the IBA Energy, Environment, Natural Resources and Infrastructure Law Section and National Leader in the Electricity Markets practice at Borden Ladner Gervais, based in Toronto. He believes companies need to tackle supply chain disruption caused by events such as the energy and fuel crises ‘as just another risk’. 

‘Contracts – even if written well – just mean that you are going to get some compensation for a lack of supply but they don’t deal with the immediate problems that companies need to contend with in the meantime, which is replacing that supply at likely a higher cost’, he says.

Freitag believes companies will have to accept a certain amount of risk even if they have a contract. ‘They will have to go beyond and look at their supply chains and check how they are managed and how resilient they are’, he says. ‘For example, is the company reliant on one or two key suppliers? Should the company have more inventory to tide it over if the supply chain falters? Making these kinds of checks may take up a significant amount of time but it will provide more assurance in the long run as contracts are only as good as the supply chain of the companies you are dealing with.’

Image: eamesBot/Shutterstock

Download the IBA Global Insight app

Access expert analysis on international rule of law, business and human rights