Energy

Structural fallout from EU energy crisis - deeper than the 1970s oil crisis: Goldman Sachs

By Market Index
Mon 12 Sep 22, 5:00pm (AEST)
Cold European scene
Source: Unsplash

Key Points

  • Goldman Sachs believes the EU Energy Crisis, and in particular affordability, has reached a tipping point
  • Energy bills to peak early next year at around EUR500/month for a typical European family
  • The broker suspects renewable sources (wind and solar above all) could lower energy bills by around 75%

Following the spike in gas and power prices since mid-June, Goldman Sachs believes the Energy Crisis, and in particular affordability, has reached a tipping point, likely requiring significant policy intervention.

Goldman’s believes the market continues to underestimate the depth, breadth and the structural repercussions of the crisis, which the broker fears will be even deeper than the 1970s oil crisis.

Goldman’s wouldn’t be surprised if – based on current forward prices - energy bills peak early next year at around EUR500/month for a typical European family.

This implies a 200% increase since 2021 and for Europe as a whole, this implies a EUR2tn surge in bills, or around 15% of GDP.

Scope for price caps

The broker expects energy bills for most consumers to peak this winter, with energy bills likely to hit EUR600/month in a zero flows from Russia scenario.

In light of these projections, Goldman’s see scope for the introduction of price caps in power generation, which the broker estimates could save Europe around EUR650bn in power bills annually.

These caps could follow a Spanish example where two co-existing caps: (1) a cap on gas prices that CCGTs are permitted to translate to the electricity price (c.EUR70/MWhg, which compares with current TTF levels of c.EUR200/MWhg); and (2) a cap on the level of remuneration fixed-cost technologies (hydro, nuclear, wind, solar) are allowed to receive (c.EUR75/MWh).

Tariff deficit

Given that price caps wouldn’t fully solve the affordability issue, Goldman’s suspects the introduction of a “tariff deficit” might eventually be needed, to spread the recent spike in bills over 10-20 years, hence allowing the utilities to securitise promptly these future payments.

“Although this scheme would limit demand destruction, we believe it would smooth the increase in tariffs, limit the near-term decline in industrial production, and largely defuse regulatory risk,” the broker notes.

Electrification could reduce energy bills to 25%

One structural solution presented by Goldman’s is a new market design in power generation – to decouple gas prices from the remuneration of fixed-cost generation sources (hydro, nuclear, wind, solar) – and an acceleration in the electrification of the economy.

The broker expects the deflationary effect (and the fixed-cost nature) of renewable sources (wind and solar above all) could lower energy bills by around 75% versus current levels.

With the economics of renewables having dramatically improved over the past decade, Goldman’s concludes that wind and solar are now part of the solution to the affordability problem, not their cause.

“Structurally, we believe electrification would provide the most-cost effective, permanent solution… we believe bills would largely decouple from gas prices, thus minimising the volatility of future monthly payments.”

Related Tags

Written By

Market Index

Get the latest news and insights direct to your inbox

Subscribe free