Bitter Cold Brings Chaos as Global Energy Systems Show Strain

(Bloomberg) -- Freezing weather that’s sweeping the northern hemisphere is causing chaos in energy markets and damaging infrastructure with households from Japan to Pakistan and France being asked to curb their electricity use.

In Asia, extreme cold prompted record-high power demand and a scramble for natural gas to keep the lights on in China, Japan and South Korea. In Sweden, heavy snow brought down sections of the power grid while French households were advised to delay doing their laundry to save energy.

The extreme, widespread cold took markets by surprise. The spikes in energy demand during the bitter winter, coupled with weak wind generation, power plant closures and liquefied natural gas tanker delays highlighted the shortcomings of global energy systems in weather conditions that are only set to get more volatile.

There could be more to come. A relatively rare weather phenomenon with the potential to disrupt the polar vortex -- the winds that usually keep cold air contained in the far north -- is threatening to send an Arctic blast across North America, Europe and Asia from late January.

“The distortion of the polar vortex appears to be prolonging the severe winter conditions in some northerly areas and potentially Europe,” said David Thomas, independent adviser and former head of LNG at Vitol Group. “It may not be over just yet. Several companies are feeling the pain and the elevated power prices must be hurting large consumers.”

The extreme conditions left some energy traders and utilities flat-footed, sending prices for electricity, fuel and vessels to record highs.

In Asia, LNG spot rates jumped 18-fold from last year’s lows and helped send European gas prices to a 12-year peak. Britain’s national grid was forced to issue numerous appeals for generators to increase output as low wind generation coincided with the cold snap and pushed wholesale electricity prices for peak periods to more than 1,000 pounds ($1,367) a megawatt hour.

European gas markets like the U.K. and Spain, which don’t have large amounts of gas storage, and are more dependent on the “incredibly tight global LNG market are more exposed if below normal temperatures are sustained,” said James Huckstepp, manager for EMEA gas analytics at S&P Global Platts.

Lights Out

China is struggling to keep the lights on after some of the lowest temperatures since 1966 boosted domestic demand just as manufacturing ramped up after the pandemic. Ice is also wreaking havoc on grid infrastructure, while the frigid weather disrupted transport and delayed LNG tankers at Qingdao.

Big industrial users are first in line to have electricity supplies cut, followed by commercial buildings, in order to keep supply safe for residential consumers.

Meanwhile in Japan, its utilities have asked consumers to conserve electricity, and the government has ordered independent producers to boost output to maximum capacity.

Tohoku Electric Power Co. bought several cargoes of low-sulfur fuel oil for oil-fired power plants that are utilized only when gas-fed facilities have been maximized. Japan’s Ministry of Economy, Trade and Industry has begun speaking to refiners and urged them to help supply local utilities with LSFO supplies.

Wrap Up Warm

Earlier this week, the French grid operator issued a red alert for high power demand and appealed to households to put on a jumper rather than turn the heating up. Electricite de France SA advised customers to delay doing their laundry while power demand was high.

Parts of northeastern Sweden got the biggest snow dump since 2012, with 60 centimeters in just one day, according to the nation’s Meteorological and Hydrological Institute. The storm overwhelmed grids and has left many thousands of customers without power this week.

Vattenfall AB, the Nordic region’s biggest utility, hired a helicopter to clear snow and ice from power lines, using a long pole to shake snow off cables or a grip claw to lift trees from the line.

In Spain, the government is considering ways to intervene in the electricity market when there are sharp price increases, as happened when demand surged during the cold spell that blanketed Madrid in a rare snowfall. Some consumer bills in the regulated market are linked to wholesale prices that are at the highest in a decade.

With natural gas shortages, power plants in Iran are burning low-grade fuel oils that create toxic smog, or switching off entirely, triggering blackouts.

Pakistan is facing a gas shortage, too, despite running its two LNG terminals at full capacity in January. The Asian nation has cut gas supplies to industries and limited flows to compressed natural gas stations to a few days a week as residential demand more than doubled compared to the summer and was higher than in previous winters.

How cold the rest of the winter gets is likely to be the key driver for whether higher energy prices will be sustained.

Even if temperatures ease, the impact of tighter LNG supplies is likely to be felt into the summer and to feed into other markets. As north Asia, the biggest consumer of LNG, restocks supplies that demand will support price benchmarks throughout 2021. What was expected to be a finely balanced summer just a month ago, is now looking increasingly tight, according to Wood Mackenzie Ltd.