On October 7th, the first day after an eight-day long holiday, the energy industry received a significant piece of news: Saudi Arabia will increase its oil production in 2024.
Before this announcement, oil prices had dramatically reversed course, dropping for five consecutive weeks after a period of sharp increases. Saudi Arabia’s decision is likely to further push oil prices downwards.
For China, the world’s largest importer of oil, this is undoubtedly good news. Europe is also pleased because natural gas and electricity prices have fallen back to pre-energy crisis levels, with no pressure this winter.
However, nothing is perfect. ‘Bitter cold outside, but coal is cheap,’ is a saying that captures the situation. From the perspective of China’s “exporting the new three” in clean energy, the end of Europe’s energy crisis might not necessarily be good news. Despite the sharp drop in fossil fuel prices, it may not be a positive development for China’s exports of photovoltaics, energy storage, and new energy vehicles.
European natural gas prices have been hovering below 50 euros per megawatt-hour for the past six months, which is less than one-sixth of their peak levels. This comes after various stages, including the Russia-Ukraine conflict, Nord Stream maintenance, and the Nord Stream explosion, and it is approaching the levels seen in 2021.
When we zoom out and look at European natural gas prices on a five-year cycle, the fluctuations become more apparent. The ‘artificial bull market’ that emerged in 2022 due to extreme events in the European natural gas market is now a thing of the past.
Now, let’s take a micro-level look at the current situation in Europe.
According to Trading Economics, on October 6th, news of planned strikes by workers at Chevron’s Australian liquefied natural gas plant triggered a 5% increase in European natural gas futures, reaching 38 euros per megawatt-hour. These strikes pose a certain threat to global natural gas supply, especially as the Northern Hemisphere approaches the winter heating season.
In the past, few things could impact the prices of major commodities like energy more than unforeseen events such as wars, strikes, and production halts. Commodity traders often use these events as tools for investment arbitrage. However, even news of strikes is unable to shake the overall trend of European natural gas, which has weathered many storms. Therefore, Trading Economics also points out that despite short-term price increases, the overall trend in natural gas prices for this week still shows a decrease of over 9% due to mild October weather forecasts, declining demand, and high inventory levels. Currently, European gas storage facilities are over 96% full and continue to receive injections of natural gas. Additionally, industrial demand in Europe is steadily decreasing. All of these factors contribute to maintaining relatively stable natural gas prices.
Due to natural gas and coal being the primary sources of electricity generation in the European Union, accounting for more than one-third of electricity generation in 2022, electricity prices in Europe are highly dependent on the prices of these commodities. Therefore, the close correlation between European electricity prices and natural gas prices is quite normal. This differs from the electricity price trends in China.
Recently, Reuters published a lengthy article reviewing Europe’s energy crisis. One year ago, the Nord Stream pipeline was deliberately and maliciously sabotaged by an explosion. Today, as we look back on the situation one year later, suspicions naturally arise regarding who benefited the most. Additionally, how was the European energy crisis gradually resolved?
According to data from the Oxford Institute for Energy Studies, before the Russia-Ukraine conflict, Nord Stream 1 accounted for 15% of Europe’s natural gas imports in 2021, while Nord Stream 2 was planned but not yet operational. When the Nord Stream pipeline was bombed, European natural gas prices tripled.
According to European Energy Commissioner Kadri Simson, over the past year, the European Union has rapidly increased its capacity to transport alternative supplies. According to EU data, before the Russia-Ukraine conflict, Russia was delivering around 155 billion cubic meters of natural gas to Europe annually, with the majority transported through pipelines. In 2022, EU pipeline natural gas imports decreased to 60 billion cubic meters. This year, the EU expects this number to drop to 20 billion cubic meters.
So, who replaced Russia? The answer is Norway. Norway has replaced Russia as the largest pipeline natural gas supplier to the European Union.
Furthermore, driven directly by U.S. natural gas exports, Europe’s imports of liquefied natural gas (LNG) have surged. Last year, Greece and Poland opened new pipelines to transport non-Russian natural gas. Finland, Germany, Italy, and the Netherlands have all established LNG import terminals, and France and Greece are planning to open more terminals for LNG imports.
Germany was once the largest buyer of Russian natural gas in Europe and had been investing in new natural gas infrastructure. Ole Hvalbye, a commodities analyst at Seaboard Corporation, a U.S. transportation company, stated that the company has deployed three Floating Storage and Regasification Units (FSRUs) capable of importing natural gas equivalent to 50-60% of what Nord Stream 1 transported from Russia annually, which is 55 billion cubic meters (bcm).
To secure supplies, the European Union has initiated joint purchases of non-Russian natural gas. It has also introduced backup rules that require countries to share gas with neighboring nations during crises and agree to legal obligations to fill gas storage facilities, which are typically used for managing seasonal consumption fluctuations.
As mentioned earlier, European natural gas infrastructure data indicates that gas storage across the entire European Union is currently at 96%, which, when fully filled, can meet one-third of the EU’s winter natural gas demand.
While policies from the European Union and various governments are promoting energy efficiency, the main reason for avoiding an energy shortage is the sharp drop in demand caused by high prices.
Weather factors have played a role, as mild winters reduce the energy needed for heating. Because last year was a mild winter, Europe ended its peak natural gas demand season early in the spring, leading to exceptionally high storage levels and less pressure to replenish gas reserves this year.
Some analysts suggest that apart from the uncertainty of this winter’s weather, the reduction in energy use is due to a permanent contraction in industrial production within the European Union.
The German central bank, representing the largest economy in Europe, recently stated that the country’s economy is expected to shrink this quarter due to industrial recession.
Energy Aspects estimates that by 2024, countries like Belgium, the UK, France, Germany, Italy, Portugal, the Netherlands, and Spain could permanently lose 8% of their average industrial natural gas demand from 2017-2021.
Tom Marzec-Manser, Head of Natural Gas Analysis at ICIS, said, “Europe has successfully diversified away from Russian gas, but it has come at the cost of broader economic activity.”
As Europe increasingly relies on renewable energy and pursues a more aggressive energy transition, this has also objectively driven a decrease in natural gas demand.
Wood Mackenzie predicts that Europe’s new energy additions in 2023 are expected to be around 56 GW, which implies a reduction of 18 billion cubic meters of natural gas.
In July of this year, Rystad Energy released an analytical report stating that the inventory of photovoltaic components from China in Europe has reached 40 GW, expected to reach 100 GW by the end of the year.
At the time of this analysis, it was considered that when considering factors such as China’s exports, Europe’s new installations, and in-transit shipments, the 40 GW inventory might be conservative, and it should be closer to 70 GW. Additionally, the proportion of overseas storage for energy storage products in exports is not expected to be smaller than that of photovoltaic components. However, the issue of overseas warehousing for Chinese photovoltaic and energy storage companies is a separate topic and not the focus of today’s discussion.
For China’s photovoltaic and energy storage companies, 2022 has undoubtedly been the brightest moment in recent history. The overseas, especially European, markets have experienced high growth, and the situation has been very favorable. This was largely influenced by extreme events like the Russia-Ukraine conflict, leading to a surge in the European photovoltaic and residential energy storage markets in 2022. Exports of photovoltaic and energy storage products from China also saw explosive growth.
According to Chinese customs data, solar cell exports from China grew by 67.8% in 2022, with Europe accounting for as much as 46%. GCII data shows that exports of energy storage lithium batteries from China in 2022 increased by a whopping 170%.
It is believed that the European markets for photovoltaic and energy storage may still face various uncertainties in the future. In this regard, the author attempts to discuss three aspects: the disappearance of the energy crisis, the long-term competition in new energy, and the realities of European and American manufacturing.
First, the disappearance of the energy crisis is actually a disadvantage for Chinese photovoltaic and energy storage companies. The energy crisis in Europe seems to have disappeared overnight. At least in terms of rigid energy demand, Europeans have passed the most urgent and critical period. If fossil fuels become cheaper and the climate crisis is not taken into account, the pace of energy transition may indeed slow down, unless they fear falling behind in the competition in the new energy industry.
In reality, when faced with tangible interests, ethics often become fragile. Especially in the current environment where major Western economies are generally experiencing sluggish growth, financial and debt crises loom, and geopolitical relations are becoming increasingly complex with a rise in protectionism, achieving climate goals may become even more challenging.
For example, Japan’s decision to discharge nuclear wastewater into the sea, despite ethical concerns, is a perplexing choice driven by interests.
Second, from the perspective of energy security, this is not only about cooperation in the face of common human destiny but also about competition for one’s own future. Energy is the foundation of all industries. New energy, to make an imperfect analogy, is the future equivalent of oil, natural gas, and coal. Whoever controls it, in a sense, controls the future of the world. Therefore, those who have held the initiative in the fossil fuel era, such as Europe and America, are naturally unwilling to fall behind. The Middle East, which has enjoyed the oil dividend for over half a century, is similarly unwilling to fall behind. Emerging economies are even more so—especially in the face of new energy, everyone is relatively equal, and no one wants to fall behind again at the starting line.
This is the essence of energy security. Therefore, the global competition in the new energy field will undoubtedly be long-term, comprehensive, deep, and intense. Fortunately, we are currently far ahead, but we must not be complacent—in core technology, in key raw materials, in manufacturing capacity.
Third, from a realistic perspective, the new energy manufacturing industry is restructuring traditional manufacturing. Starting from October 1st this year, the European Union officially began levying a carbon tax, with a transition period from now until 2025 and a gradual full implementation from 2026 to 2034. This is a complex challenge that may become more significant in the future.
Additionally, in the past month, the European Union has introduced a series of laws regarding China’s photovoltaic, lithium-ion battery, and new energy vehicles. The so-called anti-subsidy measures and the reduction of a single reliance on critical materials supply are actually surface-level actions.
Looking at the current reality in Europe, as mentioned earlier, its industry is shrinking, including industrial powerhouses like Germany and automotive manufacturing strongholds. Therefore, this explains why Europe is so urgent in addressing the climate crisis and energy transition, creating contradictions in the mentioned areas.
For many years, the West has become accustomed to the cost-effective nature of “Made in China,” while we have become accustomed to earning hard-earned money. This is not a problem, but it is not fair or reasonable. So, when Chinese companies enter the high-end manufacturing industry, especially when they are restructuring the high-end manufacturing industry of vested interests, conflicts and tensions are almost inevitable.
In the first quarter of this year, China overtook Japan to become the world’s largest exporter of automobiles. This news was undoubtedly a significant psychological shock to Japan and Germany, the automotive manufacturing powerhouses. You can imagine the impact.
Of course, our own photovoltaic and new energy companies are on a roll, both domestically and internationally. Chinese companies have been accustomed to price wars for many years, but European and American companies, accustomed to barriers such as technological patents and enjoying high profit margins, will likely find it challenging.
In summary, it is inevitable that there will be subtle changes in the European photovoltaic and energy storage markets. For Chinese companies, the most important thing is to anticipate these changes in advance and take proactive and effective measures.
For different economies, after conflicts intensify to a certain extent, setting aside prejudices and jointly seeking and establishing game rules that everyone can accept and are fair is the ultimate solution that aligns with the common interests of all. We should have confidence in this and must have confidence.
