OPINION: Russia’s ‘Suicide by Energy’

There is a disruptive economic force manifesting itself in Europe. While it won’t harm Europeans, this force has a significant potential to enact serious consequences onto Russia. Ironically, given that Putin himself set the force into motion, it is a self-inflicted wound. The subject – as almost always is the case with Russia – is energy. Putin’s war with Ukraine is causing irreparable damage to Russia’s decades old “European cash cow,” and the longer the war rages, the damage grows.

Europe’s Energy Crisis

When the war began, the economic impact on Europe’s energy sector was staggering. The loss of Nordstream, sanctions and a host of other issues generated the perfect storm. While demand remained constant, supply was severed. Exacerbated by FUD (fear, uncertainty, and doubt), prices skyrocketed. As you can see from Figure 1 (Trading Economics), the price for natural gas jumped 500 percent across the EU, eventually settling back down to pre-war levels. Such a spike, had the cost remained would have economically crushed the EU, perhaps something Putin expected.

Cost of EU Natural Gas

Given the relationships, other energy sectors suffered as well. As shown in Figure 2, electrical energy sector spiked by approximately 300 percent for many EU nations (chart by Statistica 2024). While the 2022-2023 price shocks of European energy were extensively covered by news media, the more recent price reductions remain relatively unreported. Even more interesting, perhaps, is why. The truth? This summer, much of Europe is producing more energy (electrical) than it knows what to do with.

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A Glut of Power

It’s true. Due to a massive increase in solar panels and wind turbines (most because of substantial government subsidies), Europe is in an interesting position. In May, as the length of days increased, German electrical providers (both companies and individuals selling home solar generated energy back into the grid) generated a massive amount of supply in a market with someone stable demand. The result was an 87 percent price reduction in less than 10 days. German electrical demand is roughly 52.2 Gigawatts, yet with all producers feeding the grid, the nation has 81.7 Gigawatts, over 50 percent more than they need. Theoretically, Germany could sell such excess to neighboring nations. However, Germany’s neighbors are in a similar situation and demand across Europe is drying up. To Germany’s south, Austria directed the company Verbund to idle their hydroelectric power plant on the Danube during the day. With so much renewable energy flooding the market, excess supply is driving prices to extremely low levels. In a somewhat shocking twist to Austrians, the government continues to pay Verbund as if it were producing energy, a somewhat draconian move to stabilize the price of electricity. 

EU Electrical Costs vs Time

There are some skeptics who claim this issue is merely a “summer high” and that when winter returns, markets will stabilize given the reduction of renewable energy into the grid. There is some validity to that argument, as the days are shorter and solar input will dramatically reduce. Furthermore, a lack of cost-effective energy storage options (batteries) exacerbates the challenge for renewable energy to provide sustained and consistent energy throughout the day. Those skeptics who look towards the winter, however, seem to have a limited perspective of the future, failing to realize yet another summer will follow, with even more renewable energy into the grid.

A substantial reason for the rise of Europe’s green energy supply is governmental incentives, even with this summer’s surplus of electricity, there are few signs that nations are eliminating subsides. This will only increase the supply of electricity.

Across many nations, rebates from €2,000 up to €3,500 are available for residents transitioning from oil heating to electric heat pumps. When combined with solar, the rebates soar. In Salzburg, one man reported a purchase of solar and heat pump for €60,000, €20,000 refunded by the government, a third of the cost… and all this spells one thing. Trouble for Putin.

Putin’s dilemma

There’s no arguing that Russia has been a longstanding powerhouse in the European energy sector. And clearly, most of that is in transferring oil/gas, not electricity. But there is also no arguing that all forms of energy are interconnected.

With such dramatically low electrical energy costs, Russia better get concerned. Many Europeans are abandoning gas/oil energy systems and moving to electrical based ones. Traditional oil/gas systems such as heating and vehicles are being replaced by electric options, in many cases with additional governmental incentives for the transition. While not every energy consuming system has an electric option, many do, and thus, these transitions will significantly reduce the long-standing European demand for oil/gas.

If the war were to end today, Russia might be able to salvage some level of her pre-war supply to Europe, but the longer they meddle with Ukraine, the amount reduces. Many already see this demand decay as some are already stating it is unlikely Nordstream will be reconstructed.

Such significant decisions only compound Russia’s problem. And while Russia has found other customers for her gas during the conflict, the long-term outlook is bleak. One customer, India, is buying Russian energy to refine and resell it, but as the market for India dries up, so will their demand.  

China: Russia’s war ally and economic adversary

While the news out of Moscow and elsewhere touts China as Russia’s closest ally, especially given the Ukraine war, China is crushing Russia in energy economics, especially when it comes to Europe. Over 90 percent of all solar systems imported into the EU come from China. In effect, as China gets wealthy in the electrical energy markets, they are suffocating Russia. Chinese President Xi Jinping has long been an opportunist, and although China and Russia may share a common dislike for the US and West, he has zero responsibility to Russia when it comes to economic gains. As for President Putin, there is little chance he doesn’t see what’s going on. However, his hands are tied. Without a massive course correction which abandons the war in Ukraine, there’s no choice but to watch China take what was once a dominating revenue stream for Russia.

The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.