The energy challenge and potential implications for the Irish food industry
John Tobin, Data & Market Intelligence Specialist
Since the Russian invasion of Ukraine, the concerns surrounding Europe’s energy security have been well highlighted. However, despite all of the reporting on this topic, uncertainty still abounds about just how severe the situation will be this winter. This article aims to summarise the current energy challenge in Europe, and examine government strategies in place to address this energy deficit and the impact of higher energy prices. Lastly, we take a look at some of the potential implications for Irish food businesses post winter 2022/23.
Where are we now?
According to a report by the Economist Intelligence Unit, gas storage tanks in the EU are estimated to be 62% full on average, with some countries expected to be unable to fulfil their gas requirements this winter ("Europe’s bleak midwinter", 2022). However, even if countries are able to fulfil gas needs, it will be more expensive than prior years. In addition, flows of gas through the Nord Stream 1 pipeline were slow to resume after the completion of maintenance this summer and more recently have ground to a halt with no indication of when supplies may resume or at what level (Twidale & Bull, 2022). This has resulted in gas prices in Europe increasing more than fourfold on last year. When compared to gas prices in the U.S, EU prices are now almost nine times higher when previously they were broadly similar.
What efforts are being taken?
In an effort to reduce reliance on Russian natural gas, EU member states have agreed to voluntary measures to reduce demand for natural gas by 15%. However, if the sought for reductions are not obtained, some countries may be forced to implement rationing and the distribution of gas regulated, with households and essential services prioritized (Liboreiro, 2022). In recent weeks energy prices have witnessed renewed upward price pressure. On September 9th EU energy ministers met to discuss a number of proposals to address this issue and are due to convene once more on September 30th in an effort to redraft these proposals into final laws. The aim of these measures will be to cap revenues on non-gas fueled generators make from selling electricity and imposing windfall taxes on fossil fuel firms. The monies generated from these measures would then be used by governments to support consumers and businesses to cope with higher energy costs (Hovet & Abnett, 2022).
The above chart shows EU gas futures since the beginning of 2021. In light of the indefinite closure of Nord Stream 1 on Monday Sept 5th 2022, gas prices had increased to almost €300 per megawatt hour (MWH) at one point. Almost a fourfold increase between June and August. The impact of this has seen higher prices for electricity and gas passed on to consumers with energy companies highlighting how hedging strategies have worked to offer some form of protection from higher prices to date ("Latest News | PrePayPower", 2022).
What are the potential implications for the Irish Food and Agriculture sector?
Similar to other sectors higher energy prices have increased the cost of producing food. Fertiliser is an important input in producing food and its cost of production is highly sensitive to fluctuations in natural gas prices. This is due to natural gas being a key feedstock in fertilizer production and a source of power. As a result, companies such as Yara and CF Industries reduce output in the EU as this has become unviable in recent weeks (Gebre & Elkin, 2022). Higher fertilizer prices and/or scarcity of fertilizer could have a negative impact on yields. In addition reduced production of fertilizer, will also result in less food grade carbon dioxide being produced, an essential input for food, drink and meat processors. ("Closure of last Co2 plant poses supply risk for meat industry - BMPA", 2022).
In conclusion, the impact of higher energy prices in particular natural gas and potential shortages in Europe could pose some significant challenges for food and agricultural businesses over the coming winter and into next season, in terms of being able to produce food, but also being able to do this in an economically viable manner. As the current situation is quite volatile it will be more important for such businesses to stay abreast of developments, reviewing their financial performance more frequently in these volatile times and implement strategies to ensure their continued success. Some sources of information which may prove useful, in monitoring the evolving energy challenge are monthly commodity reports from the World bank which have prices on a range of commodities; and sites such as Trading economics; https://tradingeconomics.com/ and Reuters; https://www.reuters.com/ which have more regular updates and insights on commodity markets. In addition, those seeking energy crisis strategy thought starters may find McKinsey & Company’s - Insights on the trends shaping the energy landscape, of use.
Closure of last Co2 plant poses supply risk for meat industry - BMPA. BMPA. (2022). Retrieved 5 September 2022, from https://britishmeatindustry.org/press-releases/closure-of-last-co2-plant-poses-supply-risk-for-meat-industry/.
Europe’s bleak midwinter. Economist Intelligence Unit. (2022). Retrieved 5 September 2022, from https://www.eiu.com/n/campaigns/europe-energy-crisis/.
Gebre, S., & Elkin, E. (2022). Bloomberg - Europe’s Deepening Fertilizer Crunch Threatens Food Crisis. Bloomberg.com. Retrieved 6 September 2022, from https://www.bloomberg.com/news/articles/2022-08-26/europe-s-fertilizer-crisis-deepens-with-70-of-capacity-hit#xj4y7vzkg.
Hovet, J., & Abnett, K. (2022). EU plans Sept 30 summit to greenlight emergency energy plans. Reuters. Retrieved 13 September 2022, from https://www.reuters.com/business/energy/eu-plans-sept-30-summit-greenlight-emergency-energy-plans-2022-09-13/.
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Liboreiro, J. (2022). Winter is coming: All you need to know about the EU's 15% gas reduction plan. Euronews. Retrieved 5 September 2022, from https://www.euronews.com/my-europe/2022/07/27/winter-is-coming-all-you-need-to-know-about-the-eus-15-gas-reduction-plan.
Sheppard, D., & Seddon, M. (2022). Russia indefinitely suspends Nord Stream gas pipeline to Europe. The Irish Times. Retrieved 5 September 2022, from https://www.irishtimes.com/business/2022/09/05/russia-indefinitely-suspends-nord-stream-gas-pipeline-to-europe/.
Twidale, S., & Bull, N. (2022). EU gas price rockets higher after Russia halts Nord Stream flows. Reuters. Retrieved 5 September 2022, from https://www.reuters.com/business/energy/no-stream-eu-gas-markets-brace-price-surge-after-latest-russia-gas-cut-2022-09-04/.