Energy Risk Europe Leaders’ Network: geopolitical risk

As geopolitical risk and uncertainty pose new challenges throughout the energy supply chain, Energy Risk’s European Leaders’ Network convened in London on November 25 to discuss the impact of these developments on energy firms.

It was widely agreed that the Russian invasion of Ukraine in February 2022 plunged Europe into a new market paradigm in which firms not only have to secure new sources of oil and gas but also deal with new supply-chain risks while being exposed to the international price of gas. 

“Geopolitical risk from the Ukraine crisis is affecting supply chains in an unprecedented way,” said one participant. “Everything is much more interconnected now.”

“Europe is now completely exposed to the international price of gas,” another participant said. “This has made us much more permeable to any changes in US trade policies.”

Being exposed to US trade policy at a time when it is extremely unpredictable is a huge challenge, the group said. While they agreed that risk levels today are probably more manageable than they were during the Covid-19 pandemic or when Russia first invaded Ukraine, the policy uncertainty is a much bigger challenge.

“What’s most challenging is not so much the uncertainty in the world but the uncertainty of policy-making,” one member said. “Donald Trump is inherently unpredictable so we can’t easily predict how politics will evolve in the next few days and weeks.”

Out of the many US administration policy changes this year, some of the most impactful for energy firms in Europe have been trade tariffs and the unwinding of environmental policy in favour of fossil fuels. Both potentially create challenges for European competitiveness at precisely the time European energy firms have been forced to play on the international stage with increased reliance on US liquefied natural gas, the group noted.

One member pointed to the shock announcement in August this year that US tariffs would be imposed on one-kilogram and 100-ounce gold bars, which created turmoil in the gold market. This was later referred to by the White House as “misinformation” and Trump clarified that gold would not be tariffed. 

“How do we react to these constant policy changes?” the participant asked. “How do you model it? Supply chains are so interconnected now, so everything affects everybody.”

This has brought higher regulatory and compliance risk for energy firms, especially with the rise of sanctions on Russia. “Who knows who’s working with who on the entire supply chain? It’s something we can’t control,” said one participant.

Europe is now completely exposed to the international price of gas. This has made us much more permeable to any changes in US trade policies

A Leaders’ Network participant

A key geopolitical question is how soon the Russia/Ukraine war will end and whether pipeline gas will resume flowing to Europe after a ceasefire. While diplomatic efforts to broker peace are ongoing, there still appears to be some major sticking points to achieving an agreement.  Even in the event of peace, a speedy return of Russian piped gas to Europe looks unlikely, several participants said.

“There is a market expectation that pipeline gas will resume after the ceasefire, but I don’t think it will be coming to Europe for several years,” said one. As a result, power prices are likely to remain impacted by gas prices for some time.

Additionally, power market participants are facing challenges caused by growing amounts of renewable energy entering the grid, falling clean energy subsidies and surging demand forecasts due to data centre growth.   

“How do we organise the management of this new energy system – which is changing all the time – with the end of subsidies, the rise in data centres and the rush for gas turbines?” one member asked, adding that geopolitics is further complicating things by making materials more costly with longer delivery times. “Our business is a lot more uncertain than it was,” he said.

Green light?

European green energy policy is another major source of uncertainty, the group said. Members said they are watching European policy around the energy transition closely to understand what type of fuels might be required by their customers over the next few years. “For now, the type of fuel that will be allowed or required in the future remains quite unclear,” said one member.

A major reason for the lack of clarity is that the green agenda is competing with other pressing priorities. As a result of Covid and four years of war in Europe, many governments are facing snowballing debt. “Countries have so many priorities, including re-arming, and it’s all happening at a time when there’s huge government debt, so ending subsidies to the transition or changing the benefits is very likely,” said one contributor.

Less favourable economics for renewables going forward is making it harder to hedge using power purchase agreements with long time horizons, said one participant. “That’s why I think banks will need to step in and provide funding solutions,” he added.

Another geopolitical development mentioned was de-dollarisation – the reduction in the use of US dollars in world trade and financial transactions. This is already playing out in energy markets where, following Western sanctions, Russian oil products exported to India, China and Turkey are exchanging hands in the buyers’ local currency.

Countries have so many priorities, including re-arming, and it’s all happening at a time when there’s huge government debt, so ending subsidies to the transition or changing the benefits is very likely

A Leaders’ Network participant

Risk management approaches

Against the backdrop of uncertainty and greater global interconnectivity, members said they are trying to look at how they can manage their risk profiles more effectively, and establish and run more effective stress scenarios, especially around supply chains.

“Whether it’s physical or financial commodity risk, we’re looking at how we can capture basis type volatility and hedge our commodity exposure more effectively amid these idiosyncratic shocks that keep coming to the market,” said one member.

Being able to take a holistic view of risk is vital, but not something all firms are geared up to do, said another participant. 

When it comes to modelling this new world, there are some immediate data problems.

“On the oil side, people are still arguing over demand figures from last year,” said one member. “Also, the most highly regarded analysts can be hundreds of thousands of barrels a day apart in their supply-and-demand assessments.” In fact, the divergence in assessments is getting wider, he said, noting that the latest forecasts of Opec production differ by 1.6 million barrels a day (mbd). “There are more companies doing this analysis than ever before, with the latest technology like ship tracking and so on, and yet the forecasts are wider than ever.”

While there may be natural biases in the reporting, the reason for the growing divergence in numbers could be the increase in unreported transactions not compliant with sanctions, another member said. “It’s been proven over the last three years that these types of transactions have increased and could probably explain a 2mbd margin of error, which is huge, and probably why the economic effect of sanctions hasn’t been that fast to take effect.”

Illegal transactions in sanctioned crude are hard to capture in models and make regular recalibration necessary, one participant said. “Sometimes models need to make a jump to adjust supply and demand to reflect what’s happening just outside the market,” he said. “While the majority of the data is pretty consistent with what it used to be, events are creating this massive error and we have to recalibrate our models in a way that’s discretionary, which is very unusual.”

Another participant argued that while oil industry data may be subject to delays and discrepancies, power industry data can produce much wider potential outcomes as it is based on weather forecasts and assumptions around things like the rate of renewables growth and the performance of the grid.

The group questioned some of the assumptions that go into power market models as well as regulations affecting power markets. For example, China currently provides 70–80% of renewables infrastructure, one participant noted. He said the assumption China will continue to supply these critical materials is baked into many forecasts. “But will it? Do we need to source production from somewhere else?” he asked.

The role of nuclear energy to plug the gap between fossil fuel-produced energy and renewable sources is seen as vital by some governments but has been curtailed by others, particularly Germany, members noted. “Decisions to close nuclear power plants in Germany show a lack of understanding of how the energy industry works and how to make a vision of a green world a reality,” said one participant. “The idea that we’ll arrive there without any side effects is problematic.”

Battery storage mitigates the risk of intermittency but brings other problems – the chain never finishes

A Leaders’ Network participant

One source of risk mitigation could be the growth of battery storage, another contributor noted. The European battery market is expanding rapidly. In 2024, 22 gigawatt hours (GWh) of battery energy storage system (Bess) were installed across Europe, taking Europe’s total battery fleet to 61GWh at the end of 2024, according to SolarPower Europe. Forecasts suggest it will need to reach more than 200GWh by 2030 to meet demand.

However, while battery storage addresses the issue of intermittency, it causes problems such as noise pollution and decommissioning challenges while it doesn’t address the problem of lack of inertia on the grid when there are high levels of renewables and sudden imbalances between supply and demand.

“Battery storage mitigates the risk of intermittency but brings other problems – the chain never finishes,” said one participant.

All of this makes modelling the many and varied risk drivers extremely challenging. “Something that’s become very difficult is the confluence of market and credit risk,” said one contributor. “You can’t look at them in isolation.”

The relationship between these risk drivers, and others, is very problematic for traditional models, noted another participant. “Bringing renewables and batteries into the picture provides more complexity, as well as the question of how to model things with different distributions. How do you measure them together, how do you arrive at a unified risk measure for someone to make a decision?” he asked.

With so much uncertainty around, scenario planning and stress-testing remain vital. One member described a slightly different approach to scenario planning. “Rather than coming up with a scenario and looking at what the impact of that would be, we’re taking our portfolio… looking at the left tail and carrying out at a reverse stress test.” This is not a new tool for risk management, but one that’s become more relevant recently, he added.

The inaugural Energy Risk European Leaders’ Network meeting was sponsored by KWA Analytics. Energy Risk Leaders’ Networks bring together senior risk decision-makers from across the energy industry to discuss the most pressing risk management topics and to share best practices.