The wholesale price of natural gas in Europe started rising above its historical average in the summer of 2021, around the time that Russia began reducing gas pipeline exports. After reaching a level 2000% higher than its historical average in the summer of 2022, it then fell dramatically. The price is now only 30–60% higher.
Yet bills for households remain well above pre-crisis levels. As of July 2023, the typical U.K. household will pay around £2,074 per year for energy – almost double what they were paying in April of 2021. What’s more, the thinktank Cornwall Insights predicts that household energy bills will not return to their pre-crisis levels until the end of the decade “at the earliest”.
How can this be? Wholesale prices of natural gas are way down from their peak, and are now only slightly above the historical average. Why are energy bills set to remain elevated until at least 2030?
The main reason is that energy bills aren’t determined by current prices; they’re determined by the prices wholesalers paid in the recent past. And over the last two years, wholesalers have paid an absolutely huge amount for gas. Just how much?
Seb Kennedy of Energy Flux estimates that since 2021, European energy firms have spent around $1.1 trillion on gas. This is about equal to the amount they spent over the ten years between 2010 and 2020. What’s more, gas consumption has actually fallen since 2021 (which helps to explain why the wholesale price has come down) so the rise in expenditure comes entirely from an increase in price.
Kennedy admits the figure is based on a “simple calculation” and therefore has a “high margin of error”. But he believes it’s “in the right ball park”. (Note that he includes the UK, Turkey and Ukraine as part of Europe.)
Here’s more or less what happened. When gas prices spiked in the summer of 2022, European policymakers panicked. Fearing there would be shortages in the upcoming winter, they told energy firms to buy up huge quantities of LNG – with the goal of refilling gas storage. And while they succeeded in refilling gas storage, the cost of doing so was enormous.
The chart above puts the figure of $1.1 trillion into perspective. As you can see: it’s bigger than the GDP of Saudi Arabia, more than twice as big as the estimated reconstruction costs for Ukraine, and more than 44 times bigger than the cost of Hinkley Point C – the world’s most expensive nuclear power plant.
“The rush to fill underground gas storage facilities at the height of the market was understandable,” he notes, “but the costs were apparent at the time, and governments put consumers on the hook”.
Since the winter of 2022/23 passed largely without incident, it might appear that European policymakers “solved” the energy crisis. But what they really did was hide the costs. You can’t a spent a trillion dollars in two-and-a-half years and expect there not to be consequences. European citizens will be paying off the debt for years into the future.