Following the spike in European gas and power prices since mid-June, we believe that the Energy Crisis, and in particular affordability, has reached a tipping point, likely requiring significant policy intervention. In our view, the market continues to underestimate the depth, the breadth and the structural repercussions of the crisis – we believe the repercussions will be even deeper than the 1970s oil crisis.

At current forward prices, we estimate that energy bills will peak early next year at c.€500/month for a typical European family, implying c.200% increase vs. 2021. For Europe as a whole, this implies a c.€2 tn surge in energy bills, or c.15% of GDP. We believe the market is exaggerating regulatory concerns in power generation, the more so given indications reported in QE and Reuters (September 1), which suggest that the EU is planning to recommend the introduction of price caps, and the elimination of windfall taxes. This would be a very positive development, we believe. At the same time, investors appear to be ignoring the structural positives, such as the urgent need to accelerate electrification investments.

Consumers soon to spend c.€500/month on power and gas For most families and industrial customers, energy bills are renegotiated every twelve months; on our estimates, energy bills for most consumers will peak this winter. We estimate a c.€500/month cost for power and gas currently, implying a c.200% increase vs. 2021 when average bills were c.€160/month. Energy bills could approach €600/month in a zero flows (from Russia) scenario we believe.