Allianz Risk Barometer 2023 -
Rank 4: Energy crisis

Even before the invasion of Ukraine, energy prices had been rising. The post-pandemic economy recovery in 2021 had seen demand surge, while supply chain blockages and delayed maintenance work caused widespread disruptions. Long winters in Europe and East Asia compounded the power crunch, along with a weak year for wind production, which particularly affected major European wind-power producers like the UK, Germany and Denmark.

The global energy market destabilized further with the invasion of Ukraine by Russia, the world’s largest exporter of fossil fuels, in February 2022. There followed a drought in much of Europe, impacting hydropower capacities, while in France more than half the nuclear reactors were shut down for maintenance or because of technical issues.

The European Union’s dependence on imported, non-renewable energy sources was thrown into sharp relief by the Ukraine crisis – in 2021, a quarter of all energy consumed in the bloc [1] came from Russia, including 40% of its natural gas [2]. Unsurprisingly, the energy crisis ranks highly among European businesses in this year’s Allianz Risk Barometer, at #3 (32% of responses), compared to #4 globally (22%), #8 in the Americas (14%) and Africa and the Middle East (16%), and #10 in Asia Pacific (11%). The EU has banned the import of Russian crude oil and will ban other refined petroleum products from February 5, 2023. Various European governments have emergency plans in place in case of any controlled power cuts that need to be made over the winter – sometimes called ‘load shedding’ or ‘brownouts’. Gas stores in the EU are at around 90% [as of December 2022], but some analysts are warning against a short-term outlook when it comes to the current energy crisis, saying the winter of 2023-2024 could be even worse [3].

“In response to the energy crisis, some businesses have been reducing gas consumption by switching to LPG (liquefied petroleum gas) or oil, or reactivating or upgrading redundancy systems that have long been unused,” explains Stefan Thumm, a Regional Head of Risk Consulting at AGCS. “This has the potential to increase the risk of technical failure and change a company’s risk profile. For example, switching from a coal supplier in Russia to another global source could cause issues for boilers because of differences in coal composition.

Maintaining plants that were scheduled for decommissioning, or reactivating cold-reserve plants – those with capacity that is not yet ready for immediate use – puts maintenance staff under pressure, from shortage of skills and specialist services to lack of spare parts.”

Thumm adds that any business interruption loss could potentially be much higher as electricity prices have soared: “It is therefore more important than ever to assess and mitigate operational risks with a professional underwriting and risk consulting dialogue.”

The only thing that is not “bad” about the current energy crisis is its timing. Europe, as well as other locations, is on the threshold of a green transformation. This means that companies have a choice: they can rely on energy-cheap foreign countries – or progress towards the electrification of production processes and the hydrogen economy, which it will be critical to support through wise investment.

“The time and money currently being spent on the gas price brake would be far better spent on a forward-looking investment policy,” says Ludovic Subran, Chief Economist at Allianz. “Because one thing is clear: even the smartest energy price brake will not save Europe as an industrial location; at most, it can only buy time, which companies must use for the necessary green transformation.”

While the energy crisis could have a positive long-term impact on the decarbonization of the economy, the associated increase in energy poverty could also undermine the acceptance of climate policy – unless effective and lasting aid measures can be established. “A new social contract is needed to address the long-term challenges of the higher energy prices likely during the green transformation,” says Subran.

There are two channels of impact: via the generation of income (labor) and use (consumption). Overall, the employment effects of the green transformation are likely to be small, at least in net terms. In fact, there is likely to be a massive shift in jobs across sectors and regions. “Green” jobs will require different and higher skills, so lower-skilled workers are likely to be hit hardest by these upheavals in the labor market.

In the course of the green transformation, relative prices will also change. Carbon prices make energy consumption more expensive, and regulations and standards will drive up the prices of housing and food, for example. This will affect different income groups differently.

“Even if their energy consumption is generally lower, lower income groups will suffer particularly from rising prices. Therefore, more needs to be done over the long-term to protect the most vulnerable households,” says Subran. “Social justice demands that corrective action be taken here to ensure an equal distribution of the costs and benefits of the green transition. The mistakes made in globalization in the past should not be repeated: although the internationalization of value chains has significantly increased global prosperity and produced many winners (in all countries), there have also been many losers, whose welfare losses and difficulties in adjusting have been inadequately addressed by policymakers.”

In view of these long-term requirements for a just transition, the current ad hoc measures to cushion the impact of the energy crisis on households and companies do not inspire much confidence, says Subran. For example, in Europe they are not targeted or coordinated and threaten to damage solidarity among EU members: “What is needed is a coordinated fiscal policy response, for example, repurposing the €200bn+ of Next Generation EU funds still remaining and/or setting up a new crisis fund at the European Commission, using SURE (the EU’s temporary Support to mitigate Unemployment Risks in an Emergency program) as a blueprint (backed by government guarantees). The sooner governments can agree on a common and targeted approach to the energy crisis, the less collateral damage there will be, both in terms of fiscal hang-over and acceptance of socially sustainable climate policies.”