How long will the energy crisis last?

Niall Farrell, Senior Research Officer, ESRI

As we face into a winter of uncertainty and potential power shortages, businesses are asking how long this energy crisis will last and whether this is the beginning of a new normal, or a more short term challenge that will be overcome.

Niall Farrell, a leading energy economist with the ESRI is clear that things will likely never go back to the way they were but that there is light at the end of the tunnel.

“As soon as Russia invaded Ukraine they essentially sent an invoice to Europe saying that gas prices were going up. The shocks that have happened, there is nothing more that can be done by Russia that can do us more harm. If you look at the muted response to the closing of Nordstream 1 pipeline recently – the worst has already happened – enough action has been taken by the EU to stop it getting to catastrophic levels, and we’re on the way to a solution – that’s what the markets are saying.”

“But even if Russia stopped the war now, we will never go back to Russian gas because there is no trust. The reason Europe was buying so much Russian gas was because it was cheaper, and other sources will be more expensive but in the medium term, prices won’t be as high as they are now.”

“The EU is being successful in procuring gas on world markets. We are competing with Asia and other parts of world and we are sort of winning on gas supplies. As things progress, capacity will come onstream, what’s slowing it down is building the platforms and infrastructure. That is the limiting factor. There is enough gas out there.”

“In the short term it is about spreading the burden of those price increases fairly, in the medium term it is about ensuring we have enough energy and in the long term it is about getting off gas completely. We have to deploy renewables to do that but there are supply chain issues and it will be more difficult, slower and more expensive than it would have been before the crisis."

”However, the 80% target by 2030 which was an ambition is now a target we need to achieve, because it will reduce our gas dependency. It will take 5 to 10 years to build the renewables capacity we need.”

Gas futures have been falling recently, is that a sign that the crisis is abating?

“The price of gas has been coming down a little bit, some of the panic has fallen away in the market and that is down to a lot of work done at EU level to tackle the crisis. There is less uncertainty that it will not be the worst-case scenario in winter.”

“The prices will get higher in winter, but that’s to be expected [because of higher demand in winter], other than some unexpected other shock, things should improve after that.”

“However, energy prices will be higher for the foreseeable future, but maybe not at the level we are at now. We are not going back to the old days [pre-war] but where it lands between where we are now and where we were before is the question?”

So how long will this energy crisis last?

Farrell thinks the situation will settle down within a year or two as the new infrastructure needed for new gas supplies comes onstream and renewables deployment ramps up to reduce our dependency on fossil fuels.

“We are in the medium term now. The key determining factor is how long it takes to build renewables infrastructure – storage, interconnection, balancing flexible generation. The renewables future is here now.” “We have been doing a good job on renewables but the question is what do you have in place to compliment renewables – flexible generation, storage – gas will be with us a long time, we need interconnection and demand side management.”

Hydrogen is also a key part of that picture. “Hydrogen makes sense with offshore renewables but it is also about the price of that electricity, we will be competing with other countries like Morocco who are installing huge amounts of solar and solar is cheap.”

“Big decisions have to be made especially on decarbonising heat, but you don’t want to back just one horse, electrification or hydrogen.” There is also debate about whether new fossil fuel exploration should go ahead off the Irish coast in the context of this crisis. Farrell is clear that he sees no rational for such a move even with current challenges: “If it came online by Christmas then there might be an argument for it but it will take at least 5 years to come onstream, and by then, we’re out of the worst of the crisis.”