In one word: Draining

The current situation in Russia and Ukraine is energy draining, quite literally unfortunately…

Historically Russia has been the European Union’s biggest gas supplier, covering about 40% of EU's demand. It is shown that squeezing gas (out)flows to minimal levels is an extremely powerful tool during times of war. Furthermore, it is likely that as long as Europe maintains sanctions on Russia, the Kremlin is going to use gas supply scarcity as a political tool, which contributes in keeping gas prices in the region go through the roof.

Russia’s latest attack on the European gas supply happened end of last month when gas flow was cut down to 20%. Gazprom PJSC, the largest multinational energy corporation in Russia (market cap of 4.30 trillion RUB equivalent to 71.8 billion USD) blamed a turbine issue for reducing the flow on the key Nord Stream pipeline. This incident caused the gas prices to jump 30% simultaneously. To put this in context, right now, almost the entire European continent is operating at electricity prices above EUR 600/MWh. This equates to $1,000 per barrel of oil, with the understanding that the last decade the average cost of electricity was in the EUR 20-30 range. A few rate hikes won’t be fixing this problem and many companies (especially with high energy input) will go bankrupt because they simply can not compete with other markets (that do not suffer these high energy prices).1

A cold winter, this is getting serious!

The majority of Europe is feeling the consequences of Russia’s tight grip on the gas supply, but no country is as negatively affected as Germany. A few examples to illustrate this, i) the presidential palace in Berlin is no longer lit at night, ii) the city of Hanover is turning off warm water for showers, pools and gyms and iii) the entire country is trying to save as much as gas as possible before the winter arrives.

Germany, Europe’s biggest economy is heading for a cold winter since nearly half of its homes are relying on Russia's energy. In an attempt to regain balance between supply and demand, the government recently started communicating goals to cut down the demand by 20%. To close the gap, the ministry allowed to revive coal-fired power plants. But that requires time, and time is not in Germany's favor...

If the balance between supply and demand won’t be re-established, the German government has the ability to declare a so called "gas emergency", giving the (federal) state the power to take control of fuel distribution. This would result to a slow down of industry, because they will be cut first, while households and critical institutions, like hospitals, are being protected. Households won’t be cut off completely, but the room temperature is likely to be less comfortable. At the end of June Germany declared stage 2 of its 3 tier emergency gas plan: It moved from the early warning phase into the alarm phase, with the next stage being the emergency phase. Time is not in Germany's favor...

These high gas prices have already pushed 1 out of 4 Germans into energy poverty, meaning that the costs for heating and lighting take away the ability to cover other costs. That number is likely going to keep trending higher if these unsustainable prices remain on the horizon.

The business world is also increasingly concerned. A survey on 3,500 companies showed that 16% of industrial firms are considering reducing production or completely giving up certain operations. The International Monetary Fund estimates that Germany is at risk of losing 4.8% of economic output and the Bundesbank has estimated the potential damage at around 220 billion euros (!).1

Replenish

It’s the EU's challenge to resist Putin’s aggressive measures and keep energy flowing across borders. And unfortunately, desperate times call for desperate measures. Chemical company BASF SE as an example, despite its recent commitment in "going green", plans to partially switch its power and steam production in Ludwigshafen to heavy oil (in order to free up gas to sell back to the grid). Other chemical companies could move production to Turkey where they have the ability to access the pipelines of Azerbaijan.1

Another major opportunity is nuclear energy. However, European countries differ in their approach on this innovative form of energy: France has an established nuclear industry, Germany is closing its nuclear plants and the UK is building more. 2

Unsurprisingly, the most sustainable way to solve not only the energy crisis but also the climate crisis at the same time is to focus on renewable energy. Energy-intensive industries will most likely turn to regions where renewable power is reliable and more established, like Germany’s windy coast or solar-rich areas in the Mediterranean. Building more renewables is a great solution, but it comes with its complexities and bureaucracy. Official rules and formalities stall quick construction of solar forms and onshore wind. In times of emergency.2

Time will tell how things play out. In times of crisis, shouldn’t governments shorten these processes? Will the European Union pass this big test of working together as a union to solve this crisis?

In terms of Proptech, we are seeing already pullbacks on ESG commitments + abovementioned headwinds. We commented earlier this year the next 18 months will be where the veracity of commitments made will be shown.

There’s huge potential in Real Estate for using clean technology, but hopefully the recent wobbles are an anomaly.

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1) https://www.bloomberg.com/news/articles/2022-08-01/germany-heading-to-gas-emergency-with-russia-keeping-nord-stream-flows-reduced?srnd=premium#xj4y7vzkg

2) https://www.top1000funds.com/2022/05/solutions-to-europes-energy-crisis/

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