The energy situation in Europe is already a genuine crisis and the indications are that it will get worse. For the first time since post-WWII, energy rationing and even the re-nationalisation of energy companies may be the only way governments can their populations through the winter.

Energy-saving rules have been in place all summer long in Europe and gas storage is well ahead of schedule. An energy-saving target of 15 per cent by March 2023 has been set by the EU and may become mandatory. But these measures will not make up for the Russian gas shortfall.

Before the Russia/Ukraine conflict, 70% of Russia’s gas was bought by Europe, flowing into the region through pipeline routes, including the Nordstream 1 pipeline, which has been shut off since early September. Later in the month, Nordstream 1 and 2 suffered multiple explosions that exposed the interior of the pipelines to salt water. The pipelines may have been rendered unrepairable.

The closer to Russia, the more exposed a country is to the Russian gas stoppage – Bosnia, Latvia, Serbia, Slovenia, Austria, Finland, Greece and Poland all get more than 50% of their gas supply from Russia. Germany and Italy are next in line to be deeply affected by this crisis. Industry is bracing for rationing or even shutdowns ahead.

The EU has already diversified its gas imports, with imports of liquid natural gas up by 14 billion cubic metres (bcm) in the first half of 2022, and pipeline imports (up by 21bcm) from Norway, the UK, Azerbaijan, and North Africa. Meanwhile, the UK, which has just rolled out a multi-billion-pound energy bill support package for households and businesses, uses almost as much gas as Germany, but is not so exposed to Russia, being supplied by Norway, its own gas fields and liquid natural gas (LNG) from the US and Middle East.

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However the UK is certainly exposed to the wholesale gas price, causing elevated electricity prices across Europe as coal and oil-fired power stations had transitioned to gas to reduce CO2 emissions. This trend is already reversing – in Germany, coal plants were reactivated in July, and “dirty coal” lignite plants are due back on grid this October. The country’s nuclear phase-out has also been paused until April 2023 at the earliest.

Other plans by the EU include windfall taxes on low-carbon power companies and a levy on fossil fuel producers with the aim of raising £140 billion for energy bills. A gas price cap is likely not feasible as gas suppliers have plenty of other buyers.

Aside from the Russia/Ukraine conflict, there are other long-standing reasons for shortages and high prices. The desire to lower emissions and move from fossil fuels towards renewables has driven recent policies. Western governments and investors have shied from major oil and gas investments not aligned to the net-zero commitments made. However, there has been over-optimism around how quickly green energy sources can take over from fossil fuel energy, leaving an energy supply gap which has been filled with ‘cleaner’ gas.

By contrast, speaking at the Chinese Communist Party Congress this weekend, Chinese president Xi Jinping said: “Based on China’s energy and resource endowments, we will advance initiatives to reach peak carbon emissions in a well-planned and phased way, in line with the principle of getting the new before discarding the old.”

The last seven words make all the difference in the world. In addition, the Chinese government has asked natural gas exporters to halt exports to other countries, so that domestic stockpiles can be built up.

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European governments are currently focused on short-term solutions such as subsidies that come at huge cost and don’t solve problems, but at least buffer households and businesses from rocketing prices. In the medium term, countries may follow China, the UK and Sweden and build more nuclear power stations.

Shipping more liquid natural gas globally is also a solution, but the infrastructure for both of these will take time to develop. Longer-term, there also needs to be ongoing investment into high-tech solutions. The grid-scale battery storage needed to power economies on renewables does not yet exist and hydrogen fuel is in its infancy.

The huge desire for alternative energy sources still exists, but it may help both investors and governments to be aware that the phase-out of fossil fuels is likely on a longer runway than previously envisaged. Cleaner and more efficient fossil fuel use and carbon sequestering may have to play a larger role in reducing emissions.

Energy supply and raw materials, which developed markets do not have in abundance, are currently top of the agenda and sensible long-term decisions have to be made. This is a period of flux and there are, no doubt, surprises ahead. We will be talking about the lessons from this energy crisis for a long time to come.

Robert Minter is director of ETF investment strategy at abrdn