Europe’s energy market: Torn between cost and climate

The dynamics of Europe's energy market have shifted considerably over the past year, despite the ongoing COVID-19 pandemic. While European countries discuss how to change the regulation framework to meet their 2030 climate goals, skyrocketing global gas prices have brought the focus back to the short term and to the cost and challenges of the energy transition. IHS Markit forecasts that in the coming years, Europe will find itself having to manage concerns about energy costs with the need for climate action.

• In the short term, affordability is the major concern. Contrary to the initial expectation, commodity prices will not fall back down as quickly as they rose: during 2022, wholesale power and gas prices will remain at a premium to historical levels. Consequently, energy costs will stay at the top of governments' agendas in 2022. Longer term, higher energy bills could slow the development of electrification initiatives or the implementation of carbon taxes on fossil fuels.

• Climate ambitions remain high. European countries continue to raise their climate ambitions. Recently, Ireland, Denmark, and Spain have upped their renewable targets. By mandating a climate-focused government, Germany confirms its role as a European climate leader, but its much higher ambition raises tough questions about market design.

• Tensions build between climate and practicality. The outcome of the discussion on the EU taxonomy proposal to include natural gas is a direct result of the understanding that Europe will not be ready to deliver enough low-carbon gas to meet strict environmental credentials ahead of 2030. Similarly, the energy crisis and prospects of increasing costs for consumers are weighing over the discussions on the "Fit for 55" package. So far, the focus on energy prices and the magnitude of the package have eclipsed the full implications of the package. As discussions progress and the complexity of making changes becomes clear, the timeline of approval may slip.

• A wide range of technologies are needed. Renewables will provide the bedrock of tomorrow's power and gas markets, but a wide range of technologies will be required, in particular to ensure continued security of supply. In 2022, decisions will be made to kick off investments in floating offshore wind, hydrogen, carbon capture and storage (CCS), and nuclear.

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Posted 11 February 2022 by Alun Davies, Senior Director, European GPE retainer service, S&P Global Commodity Insights and

Coralie Laurencin, Senior Director, Gas, Power, and Energy Futures, S&P Global Commodity Insights and

Sylvain Cognet-Dauphin, Executive Director, Climate and Sustainability, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.