RIO DE JANEIRO, BRAZIL – Brazil is not the only country currently experiencing an energy crisis. In China, the northeast of the country has registered blackouts due to a shortage of coal, the nation’s main energy source. In Europe, natural gas prices have skyrocketed, leading to a risk of shortages as winter nears in the continent, where gas is also used to supply heating systems.
All three crises are occurring as global economies recover with the advance of vaccination, and threaten production and supply chains worldwide. But is there any connection between them?
WATER IN BRAZIL
The Brazilian energy crisis occurs as a result of another, the water crisis. Classified as the worst in over 90 years, the lack of rainfall, linked to climate change, has pushed hydroelectric plants’ reservoirs to very low levels.
The main source of energy in the country’s energy matrix, the low production of hydroelectric plants had to be offset by the use of thermoelectric plants, which operate mainly on natural gas. Due to their higher operating costs, energy bills skyrocketed, with a new tariff flag and incentives to save energy.
The crisis occurs as the country begins a process of economic recovery and reopening after the pandemic. This context leads to rise in energy consumption, thereby exacerbating the situation.
GAS IN EUROPE
The energy crisis on the European continent has a different villain: natural gas, an important component of the continent’s energy matrix, in addition to being the source of heating for homes, whose price has skyrocketed in recent months.
The reason is the recovery of the economy with the advance of the Covid-19 vaccination. As businesses reopen and people leave their homes more, demand for energy increases, including from industries, which have started to produce more.
Here the traditional market law applies: If demand grows and supply doesn’t, prices increase. More expensive gas is ultimately reflected in electricity bills, which are expected to rise across the continent.
According to Independent Commodity Intelligence Services, between early August and mid-September gas was 119% more expensive in Germany. In France, the hike reached 149%.
The European scenario has worsened even more since the continent’s energy production through wind sources fell below expectations, notably in the North Sea region, which needs to be complemented with natural gas.
The situation is expected to worsen in the coming months with the onset of winter. Low temperatures will increase demand for natural gas for heating systems.
The crisis goes beyond the European Union. The United Kingdom has also been facing rising natural gas prices, reflected in higher electricity bills. The country was ultimately damaged by Brexit, since it left the European common market where gas prices are lower.
In addition, the UK is also struggling to distribute fuel, due to a shortage of truckers. Several stations have seen their pumps run dry, and the government has had to use the army to secure distribution.
COAL IN CHINA
The world’s second largest economy has yet a different villain in its energy crisis: coal. The main component of its energy matrix, China has tried to become greener, with laws to reduce greenhouse gas emissions and lower the use of coal, replacing the ore mainly for natural gas and reducing imports and mining.
However, China’s industries are still heavily dependent on coal. In the global recovery scenario, with growing demand, they were forced to increase production. This means more energy production through coal.
High demand emerged against a shortage of coal supply and calls for provinces to use less of the mineral, which led prices to skyrocket. Just last Tuesday, September 28, thermal coal futures contracts rose 7%, reaching a record high of US$204.76 per ton.
With less coal, a number of Chinese regions have started to enforce power rationing, and the northeast of the country has experienced blackouts. Some provinces are urging the government to increase imports of the mineral in order to avert further blackouts for industries and households.
The power rationing may hinder the technology supply chain. This week, companies responsible for supplying chips to Apple and Tesla reported that they have suspended production at a number of plants due to restrictions on energy use.
Blackouts and rationing would also reduce industrial production, which should affect the supply chains of several products.
Should it persist, the scenario should have a global impact. Forecasts for China’s Gross Domestic Product (GDP) growth have started to be lowered.
THE CONTEXT BEHIND THE CRISES
Professor at IEE-USP Virginia Parente says that the current energy crisis in Brazil is linked to drought and climate change, while the crises in Europe and China are linked to supply and demand issues.
“Coal is the most used fuel in the world to generate electricity, and it is reaching record prices for a few reasons. The La Niña event in the Pacific has increased the amount of rainfall and caused flooding in coal mines in producing countries in Asia, particularly Indonesia,” Parente said.
“Other producers like Colombia and South Africa are also experiencing production issues due to pandemic and infrastructure problems. Australia, another important producer, is restricted in the pace of production due to climate agreements, and China has stopped importing coal from there,” she said.
According to the professor, this supply constraint means that gas plants are highly demanded. “In Europe, the biggest gas supplier is Russia, but it is under sanctions from the United States, so it can’t increase gas supply as before.”
“It’s a short-term issue. I think the long-term trend is for accommodation, for La Niña to disperse, for other negotiations in Europe to increase supply by other producers, and for lower energy consumption. But Europe is entering winter, where demand for energy for heating greatly increases, this also includes the United States, Canada and Japan, so there will be demand pressure and energy prices will rise,” she says.
The professor says that this price shock can reach Brazil, but with a delay and to a lesser extent, since gas prices also depend on oil prices.
Escopo Energia’s executive director Lavinia Hollanda says that the effects of the crisis should be more intense considering China, deeply affected by the lack of coal, which can lead to a lack of products and impacts in global chains. If the country’s economy slows down, the negative effects would be felt on a global level.
“This scenario should be short lived, but it always has long term effects, although difficult to project. In any case, the climate emergency will happen, but we rely on technological innovations to help the process,” Hollanda says.