European Energy’s Paradigm Shift | Seeking Alpha

High Voltage Electric Power Lines At Sunset

imaginima/iStock via Getty Images

By Linus Claesson

Policymakers have moved from a single objective of net-zero, to a “trilemma” of goals including net-zero, supply security, and affordability.

Even in the depths of the Cold War in the 1970s and ’80s, Russian natural gas continued to flow into Europe. A severe reduction of gas supply would mark a sharp deviation from history – but, alas, could be a real possibility given today’s rapidly changing geopolitics.

European natural gas consumption stood at about 527 billion cubic meters in 2021, of which roughly 170bcm was supplied by Russia; clearly, interrupted flows would prove highly disruptive. The European Commission’s plan to lower reliance on its eastern counterpart depends heavily on offsetting Liquified Natural Gas imports and accelerating the deployment of renewables. Higher LNG imports represent the largest short-term contributor to energy diversification, but this market is already tight, and extra demand would tighten it further. To attract large additional quantities of LNG, European gas and LNG prices would need to rise to a level where demand destruction would take place elsewhere, most likely in Asia. In the short term, LNG demand has low price elasticity, which means that European gas prices may need to rise from current record levels. Further, power prices in Europe are driven by variable operating cost on each marginal unit of production – meaning that if natural gas prices go up, power prices would rise in tandem.

These dynamics put European households in a particularly vulnerable position. Besides cost inflation in gasoline and food, the average household would see its gas and power bills increase by nearly €900 per year or about 76%. On the other hand, policy actions including claw-backs and tariff freezes are set to cover about 40% of the implied increase – limiting the average household increase next year to around 47% versus 2020.

The “trilemma” of balancing the conflicting dynamics of net-zero ambitions, supply security, and affordability clearly brings challenges to the investment decision-making process. How should investors juggle policy intervention, a cost-of-living crisis, and rising investment needs and higher capital intensity, while also facing the tail risk of curtailed European natural gas imports? We believe an answer lies in power network assets and renewables developers, which we consider to be positively exposed to many or all of these dynamics. These assets benefit from higher inflation as well as current and pending policy initiatives, which we think is likely to raise their earnings power. Companies with such assets may represent an interesting place to start the search for attractively valued ways to mitigate the impact of the inflationary European energy squeeze on credit portfolios.

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

© 2009-2022 Neuberger Berman Group LLC. All rights reserved.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Be the first to comment

Leave a Reply

Your email address will not be published.


*