Europe's long, cold winter has just begun

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I'm a glass-half-empty kind of person. If anything could go wrong, I assume it will go wrong. And that's the lens through which I look at the European energy crisis. Perhaps my biases cloud me, but I think we should all be skeptical of the emerging narrative that says the worst is over.

The good news is that energy prices have certainly fallen a lot in the past three months. Natural gas prices are down to around 135 euros ($141.14) per megawatt hour from a peak of 350 euros set in August. European electricity prices have more than halved in the same period. Plus, Europe has managed to build up its gas inventories nearly to the brim, and one of the warmest autumns on record reduced consumption significantly.

And yet. Both gas and power prices remain sky-high compared to historical averages. Even after the drop, gas is today seven times more expensive than it was in the 2000-2020 period; the price of electricity is 10 times higher. The cumulative impact matters, too. It's not just how high prices go, but how long they stay up there. The period of high prices today looks like it will last a while.

But my biggest issue with the "worst is over" mantra is that the cold season has only just started. The meteorological winter began on Dec. 1. The astronomical winter doesn't start until Dec. 21. Ahead lie the 100-plus coldest days of the year. And we simply don't know whether the season will be normal, mild or bitingly cold.

Listen to the energy bulls, and everyone is worried about high pressures over Greenland, which can block Atlantic storms, pushing freezing air from high latitudes into Europe and causing cold, windless days that are terrible for electricity markets. The bears believe the threat is hyped, and see instead the potential for several Atlantic storms blowing into the continent, pushing up wind generation and keeping temperatures closer to the average.

There's still a significant risk that consumers will be asked to reduce demand. Localized blackouts remain a strong possibility, particularly for France, Finland, Ireland and Sweden. In its winter outlook, released last week, the association of the European companies that manage the grid (ENTSO-E) said: "[The] situation this winter is critical but manageable." That doesn't sound like the worst is over.

Last week also offered a preview of how a crisis could develop in the coming months. Across Europe, the wind nearly stopped, forcing the grids to lean harder on gas-fired power stations and, in Germany, on coal. In the past, the French nuclear industry would have stepped up, exporting electricity to everyone. But France was importing lots of power because many of its reactors have been down for repairs, further tightening the market. As a result, electricity prices surged. In the Nordic region, the weekly average price surged to 318 euros per MWh, the third-highest weekly price ever.

With so little wind, Germany fired up its coal plants. At times last week it was producing 40% of its electricity from them, polluting as much as coal-hooked nations like India and South Africa. If nothing broke, it was because it wasn't particularly cold.

From now on, the dreaded scenario is what energy professionals in Germany call a Dunkelflaute — literally meaning the dark doldrums, a period with little solar and wind electricity and high demand because of low temperatures. If a Dunkelflaute episode hits Europe — and some traders and meteorologists believe there's a high chance of one this week or next — the region will be in trouble. The grid operators would likely ask consumers to cut their demand to avoid blackouts.

If that's not worrying enough, there are two other reasons I remain concerned about the region's energy crisis.

The other is that although prices are lower than in July and August, they remain high enough to kill the manufacturing sector. When Russia invaded Ukraine in late February, many executives braced themselves for a six-week energy crisis; soon, they realized it would last at least six months. Now they fear it's going to be six years.

Last week, Thomas Schaefer, one of the most senior executives at Volkswagen AG, publicly said what many other business people and policymakers had only raised in private. "When it comes to the cost of electricity and gas, in particular, we are losing more and more ground," he said, warning that unless prices fall quickly, investment in Europe will be "practically unviable."