Alphavalue | On Friday last week, Electricité de France cut its 2022 nuclear production target by almost 10% to 300-330 TWh, following extended shutdowns at five of its 56 nuclear reactors (7.3 GW). This is coupled with deadlocked NATO-US talks with Russia over the Kremlin’s military presence on the Ukrainian border. The situation means that if there is less nuclear power, the dependence on Russian gas will be greater. Didn’t we see this problem coming over the last three months when Russia upped the ante on Ukraine?
Less cheap nuclear power and more expensive gas is an explosive mix for European governments interested in limiting the increase in the price of electricity paid by the consumer. Politicians see energy prices as votes. The French government is well aware that the combination of EDF’s lack of production and providing cheap energy to consumers will cost some €16 billion to the budget. This is how next April’s presidential elections destroy any hope of balancing the accounts of a spendthrift state.
The situation is not much better in the UK, where the government has to foot the bill for the bankrupt electricity companies, whose customers have had to be transferred to the groups that are still standing, through taxes. For households, the next bite at their household budgets may be close to £10 bn before the VAT cuts for electricity give a respite of about £2 bn. The £8 bn difference is not that far off the cost the French government will have to face to ease the pressure on its citizens’ pockets. Other European countries, not to mention Spain, are suffering the same headache between what would be acceptable electricity prices and what is currently being paid.
The double bucket of cold water from the cut in EDF’s nuclear production and the Russian situation may be the straw that breaks the camel’s back. One can speculate on the domino effect that may arise, namely:
Spot energy prices in Europe may follow the upward path. This may be good news for power generators, although most sell into the futures market. Basically, there is no impact on the P&L (profit and loss) of these groups, although there is an impact on the balance sheets of the companies in the sector. The example of this is Uniper (which groups the former conventional generation business of E.On and is controlled by the Scandinavian FORTUM which has had to secure €10 billion through new credit lines to cope with the impact of the volatility of gas and electricity prices). In essence, debt collateral (margin calls) are costing a fortune.
Some industrial businesses will have to schedule closures when energy costs become too high (aluminum, fertilizers, electrolyzers, etc.).
Vladimir Putin is likely to be able to cope longer with the political wear and tear of exporting less gas, and therefore having less revenue, than European countries with voters up in arms over energy prices. In this context, the “green” transition becomes practically impossible to implement. Let’s say that green energy subsidies financed by a surcharge on household energy bills are out of the question. The European green agenda is being set by Moscow. Indeed, Gazprom is exporting less gas, but its sales are reaching remarkable levels, as contracts are indexed to spot prices (about 55%) and its Q3’21 Ebita increased by 142%.
The price increase in Europe is akin to around €1,000/acc “disappearing” from household portfolios, just for heating. Add to this the higher price of gasoline/diesel, which remains an unavoidable cost for most. In short, consumption should suffer. The blanket cannot cover the feet and the head at the same time….
Inflation in manufacturing products is unlikely to outpace energy demand in the consumer’s pocket. Businesses that depend directly on consumers should suffer the consequences, as higher prices will mean consumers will have to cut back on spending. So will GDP growth.
The global battle for access to scarce fossil resources may be favouring China (more gas, less coal, more Russian oil and gas) and quite possibly the U.S. oil industry.
