Europe reconsiders its energy future
AFTER RUSSIA’S annexation of Crimea in 2014 Europe feared that Vladimir Putin would cut supplies of piped gas passing through Ukraine to European customers. That worry led Poland’s then prime minister, Donald Tusk, to issue a stark warning: “Excessive dependence on Russian energy makes Europe weak.” As a full-scale invasion of Ukraine by Mr Putin’s forces unfolds, Europe looks, if anything, weaker. Despite some efforts to diversify supply, install cross-border gas connections and build plants to import liquefied natural gas (LNG), in the decade to 2020 Russian exports of piped gas to the EU and Britain shot up by a fifth by volume, to make up roughly 38% of all that fossil fuel consumed in Europe. That year more than half of German gas came from Russia.
Mr Putin’s latest aggression may at last shake the old continent out of its energy complacency. On February 22nd, as Russian tanks were preparing to roll into Ukraine, Germany suspended final approval of Nord Stream 2, a controversial new gas pipeline linking it with Russia. Days later the chancellor, Olaf Scholz, vowed “to change course in order to overcome our import dependency” with more renewables, bigger domestic stores of gas and coal, and revived plans for LNG terminals. At the EU level, a wide-ranging proposal to guarantee the bloc’s “energy independence”, due to be unveiled by the European Commission on March 2nd but postponed as a result of the war, is expected to advocate strategic stocks and mandatory gas storage to deal with the Russia risk in the short term, and a dramatic expansion of renewable energy and clean technologies such as hydrogen in the long run.
That would be a giant shift in EU energy policy, which used to focus merely on ensuring that energy markets remain competitive. In the past few years, as climate became the dominant concern, the policy’s goals broadened. With the threat of Mr Putin’s weaponisation of energy looming ever larger, even the twin objectives are “not enough”, says Teresa Ribera, a Spanish deputy prime minister. The EU must now reconcile three competing objectives: cost, greenery and security.
Europe has made real progress on the first horn of this “energy trilemma”. Liberalisation of energy markets has helped keep prices down through competition. The continent has also got serious about decarbonisation. But if Europe is to shake off its reliance on Russian gas, sacrifices on cost and climate may be unavoidable.
Start with the short term. Last month Ursula von der Leyen, the commission’s president, insisted the EU could survive this winter even with “full disruption of gas supply from Russia”. Gas storage units were emptier than usual a few months ago, owing in part to low levels in those operated by Gazprom, Russia’s state-controlled gas giant which controls 5% of the EU storage capacity. They are fuller now. High prices have lured LNG cargoes from Asia. If Mr Putin turned off the taps, prices would rocket again—attracting more LNG. European governments would squirm, then pay up for the remaining weeks of winter, after which gas consumption drops off sharply. They have also secured promises of emergency supplies from Japan, Qatar, South Korea and other allies if needed. And they could tap “cushion gas”, a layer of stores not normally meant for consumption.
Over the medium term, the outlook darkens. Nikos Tsafos of the Centre for Strategic and International Studies, a think-tank, reckons that Europe imports around 400bn cubic metres of gas a year. Replacing the 175bn-200bn it gets from Russia with a mix of alternative supplies and reduced gas consumption will be “very tough” beyond 2022, he says. Stumbling into spring with badly depleted stocks will make preparing for next winter difficult.
To gird itself for a possible crunch, Europe needs to stockpile Russian gas while it is still flowing (ideally over the summer, when gas prices tend to dip). It has to find alternatives to Gazprom’s molecules, lest these evaporate. It needs somewhere to keep those alternative molecules until next winter. And it must tap non-gas energy sources to use the reserves sparingly.
Easier said than done. EU law makes it hard to make Gazprom pump more gas to stockpile even in normal times, which these patently are not. European gasfields in Britain and the Netherlands are past their prime. North Africa, which typically supplies less than a third as much as Gazprom, cannot increase exports enough to offset the Russian deficit.
Europe could regasify a lot more LNG than it is doing (see map)—if, that is, it could get more of the stuff. Contracted flows and limited global liquefaction capacity make that unlikely, explains Richard Howard of Aurora Energy, a research firm. LNG cargoes can be redirected from Asia at a price, but Asian customers preparing for their own winters will be eyeing them, too.
To complicate matters, much of Europe’s regasification capacity sits on its western coasts in Spain, France and Britain. Trans-border gas connections and “reverse-flow” capabilities are better than a decade ago but still lacking. Spain’s under utilised regasification plants are useless in a crisis because its gas links over the Pyrenees are puny and hard to upgrade. Getting all that gas to Germany and other big inland customers is a (literal) pipe-dream, worries a European regulator.
Given these constraints on supply, European demand may need to fall by 10-15% next winter to cope with a Russian cut-off, estimates Bruegel, a think-tank in Brussels. Matthew Drinkwater of Argus Media, an industry publisher, believes that “some rationing” may be necessary.
The problems do not disappear in the longer term. Shell, a British energy giant, forecasts a gap between global supply of gas and demand for it in the mid-2020s. Europe will feel the pinch more than most because of the ways it has discouraged investment in gas. A reliance on spot markets attracts short-term supplies in a crunch but does not send a clear signal about longer time horizons. Adrian Dorsch of S&P Global Platts, a research firm, notes that despite risk for the winter after next, European utilities have done little to secure future supplies. Without government mandates or subsidies, seasonal price differentials are insufficient to justify investments in more storage, says Michael Stoppard of IHS Markit, a research firm.
Europe’s green policies aren’t helping. The EU has been schizophrenic about gas. Some member states, like Germany and Ireland, accept that new gas plants are needed as back-up and a bridge to a cleaner future. Others, such as Spain, want to deny natural gas the “green” label for climate reasons. Although the EU has recently reclassified gas as a “green transition” fuel, the designation comes with lots of strings attached. The confused boss of a big American LNG exporter grumbles that no European utility will sign a long-term contract with him “because they don’t know what their governments will or won’t allow” a decade from now.
Various think-tankers reckon Europe can wean itself off gas almost entirely. Simon Müller of Agora estimates that wind and solar energy could generate 80% of Germany’s power in less than eight years. Lauri Myllyvirta of the Centre for Research on Energy and Clean Air thinks it is feasible on paper to replace all of Europe’s Russian gas imports, equivalent to 370 gigawatts (GW), with renewables capacity. China plans to install more than that by 2025.
Such projections look too rosy. Wind and solar farms are harder to build in democratic Europe than they are in command-and-control China. Christian Gollier of the Toulouse School of Economics points to “massive local opposition” in France to wind projects. Regional squabbles among regulators and other bureaucratic delays can stretch the approval process for Italian wind and solar installations to six years. According to S&P Global Platts, western Europe shut down 9GW of coal power and more than 5GW of nuclear power in 2021. Non-intermittent low-carbon replacements, such as battery storage and biomass, have not kept pace.
As with gas, EU member states talk at cross-purposes when discussing alternative energy sources. While Germany has been shutting down its nuclear fleet, France and the Netherlands want to expand theirs. By 2030 Spain will phase out coal, whereas Poland will still get more than half its power from the dirtiest fuel (and replace most decommissioned coal plants with ones burning gas). This confused approach makes it harder to reach the common goal of ditching Russian gas.
Even if Europe managed to pull off the shift to renewables, it would still need gas to heat homes and businesses. Though the power sector is often in the cross-hairs, it represents less than a third of western Europe’s gas demand. Residential use accounts for some 40%. Reducing gas use in homes requires heavy investments in electric heating, better insulation and super-efficient heat pumps.
Some uses, like high-temperature heat in industrial processes, cannot be easily replaced by green electricity. On one estimate, only 40% of Europe’s industrial use of gas is in low-temperature applications that can be readily electrified. Hydrogen may one day do the job, as well as powering vehicles, generating electricity or providing long-term energy storage. But even the technology’s boosters like Ms Ribera in Spain concede that the hydrogen dream will take a decade or more to realise.
None of this is impossible for Europe to achieve with wise policymaking and pots of money. If war on its door step doesn’t focus European minds, nothing will. ■
For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.
This article appeared in the Business section of the print edition under the headline “Out of Russia’s shadow”