Europe is facing an energy shortage at a time when colder weather is hitting, increasing demand and skyrocketing prices, with no relief in sight.

Temperatures are expected to drop to below zero degrees Celsius in several European capitals this week, "squeezing" power grids that are already struggling with low wind speeds and the shutdown of nuclear power plants in France.

To make matters worse, Russia is today limiting the flow of natural gas flowing through a major export route to Germany after it reached the supply ceiling over the weekend. This route is expected to be used only partially in January.

As Bloomberg reports, energy prices have been climbing this year, with European gas skyrocketing around 600%. The benchmark European gas contract price galloped 8.8% on Monday, while 12-month electricity in Germany - the "benchmark" on the Old Continent - jumped 3.1% to a new record of 250 euros per megawatt-hour (MWh). France's electricity contract soared 9%, also to all-time highs.

The price of the short-term electricity contract has also become more expensive, along with the cost of using "dirtier" energy sources in Europe. In France, electricity for one-day delivery soared to €442.88/MWh, the highest since 2009, at an auction last week. Already the contract in Germany rose to the highest value ever.

Carbon allowances, meanwhile, climbed 6.2% to €77.84 per ton.

Rising energy prices have fueled inflation, which is a headache for policy makers - who are already grappling with the problem of the spread of the omicon variant of the coronavirus.

Geopolitical tensions between Russia and Ukraine could also make things worse, with a potential invasion potentially pushing prices even higher.

Jeremy Weir, CEO of raw materials operator Trafigura, warned last month that Europe could experience frequent blackouts in the event of a severe winter. That was before Electricité de France said it would proceed to shut down reactors - which represent 10% of the country's nuclear capacity - leaving the region at the mercy of the weather in the peak of winter in January and February.

Benchmark gas prices in the Netherlands rose to pert13o of 149 euros/MWh, the highest for a contract since October 6. Futures halted some of the rise after Gazprom PJSC booked some 21% of the Yamal-Europe pipeline for January in an auction this Monday for one-month capacity. While limited, it is already a change from the less predictable daily auctions that that exporter chose to use for December.

But the auction results "will not diminish the risk of a supply squeeze, given the limited reserves so far," commented Ole Hansen, head of strategy for "commodities" at Saxo Bank. "However, with a market that is desperate for solutions, any small thing helps," he added.

With nuclear power outages, electricity producers will have to use more gas to keep the lights on. When it comes to gas exports to Germany via the Yamal-Europe pipeline, Russia wants to maintain limits, which could force Europe to rely on its already heavily depleted inventories. Storage sites are only 60% full, an all-time low for this time of year.

This Monday, only 4% of capacity was allocated to send gas through the German Mallnow station, where the pipeline through Belarus and Poland ends. This compares with about 35% of available space that Russia has reserved for most days this month.

There is no relief in sight for this market tightening as temperatures are forecast to remain below normal levels in the UK, Denmark and northern Germany next week.

While operators hope that liquefied natural gas may help somewhat due to lower demand in Asia, the detour of freighters will take time and the increase in arrivals at European ports is not expected to occur before January.

Meanwhile, wind power is expected to remain low in Germany until December 23. In France and the UK, wind power generation is estimated to drop on Tuesday, causing even more supply problems.