Every day brings news of how Europe’s energy policy is reacting to Russia’s invasion of Ukraine. It’s a big topic and fast moving. Helen Farrell gives a summary of the situation so far. She lists some of the major U-turns at both EU and national levels, the IEA’s ten-point recommendations, the feasibility and repercussions of cutting Russian fossil imports, the prospects for clean energy (solar, wind, nuclear, storage) and our net zero targets. Farrell also points at China’s options, the global player pulled in two directions by its relationship with Russia and its ambitions for uninterrupted international trade.
As Russian missiles pummel Ukraine, the fast-changing situation is prompting some far-reaching energy U-turns in the US and Europe.
- The Nord Stream 2 pipeline that was to bring Russian gas to Germany has been mothballed.
- The UK says it will phase out Russian oil imports by the end of 2022.
- The US has announced an immediate embargo on Russian oil.
- Germany is to funnel an additional EUR 200 billion into renewable energy by 2026. The money will be used to fund the expansion of e-car charging infrastructure, hydrogen production, lower power prices and the construction of more renewable power sources.
- The EU has announced plans to cut Russian gas imports by two-thirds by the end of 2022.
- Italy, often accused of moving too slowly on renewable projects, in February gave the go-ahead for six new wind farms, with a capacity of 418Mw
The EU spends as much as USD 1 billion per day on Russian oil and gas, and many observers maintain these payments are helping to fund the conflict currently raging in Ukraine. There is now a wave of activity aimed at reducing its dependence on Russian energy supplies.
EU plans to cut Russian oil, gas, coal
In their Versailles declaration on 10 March, the EU Member States announced that they had agreed to phase out Europe’s dependency on Russian gas, oil and coal, in particular by: accelerating the reduction of the EU’s reliance on fossil fuels; diversifying fuel supplies and routes, including through the use of LNG and biogas; further development of a hydrogen market in Europe; speeding development of renewables and their key components and streamlining authorisation procedures for energy projects; fully synchronising and interconnecting the EU’s power grids; reinforcing EU contingency planning for security of supply; and improving energy efficiency. The bloc is also going to prioritise gas storage and LNG investment infrastructure.[1]
“Because of what’s happening in Russia, there are no taboos in the choices member states can make,” Frans Timmermans, the EU’s climate czar, told environment committee lawmakers on Monday 7 March. He left it up to each country to decide whether they will make up the drop in Russian oil and gas imports by burning more fossil fuels in the short term or by boosting investments in renewables. In practice both will happen — an uptick in coal, oil and gas imported from non-Russian sources as well as a push to expand solar, wind and nuclear power.[2]
Versailles summit of EU leaders, 10 March 2022 / SOURCE: France Diplomatie
IEA recommendations to Europe
The IEA has given separate, detailed guidance as to concrete steps to achieve the EU objectives.
IEA’s ten step plan to reduce Europe’s dependence on Russian gas
- Do not sign any new gas supply contracts with Russia.
[Impact: Enables greater diversification of supply this year and beyond] - Replace Russian supplies with gas from alternative sources
[Impact: Increases non-Russian gas supply by around 30 billion cubic metres within a year] - Introduce minimum gas storage obligations
[Impact: Enhances resilience of the gas system by next winter] - Accelerate the deployment of new wind and solar projects
[Impact: Reduces gas use by 6 billion cubic metres within a year] - Maximise power generation from bioenergy and nuclear
[Impact: Reduces gas use by 13 billion cubic metres within a year] - Enact short-term tax measures on windfall profits to shelter vulnerable electricity consumers from high prices
[Impact: Cuts energy bills even when gas prices remain high] - Speed up the replacement of gas boilers with heat pumps
[Impact: Reduces gas use by an additional 2 billion cubic metres within a year] - Accelerate energy efficiency improvements in buildings and industry
[Impact: Reduces gas use by close to 2 billion cubic metres within a year] - Encourage a temporary thermostat reduction of 1 °C by consumers
[Impact: Reduces gas use by some 10 billion cubic metres within a year] - Step up efforts to diversify and decarbonise sources of power system flexibility
[Impact: Loosens the strong links between gas supply and Europe’s electricity security][3]
Are these actions feasible?
The EU relies on Russia for 40% of gas imports, 27% of oil imports and 46% of coal imports. It could feasibly replace Russian coal with supplies from the US and Australia in 2022. Longer term, running coal plants at full capacity and delaying plans to mothball coal plants could help reduce Russian gas imports by 15%.
Germany, however, cannot fully replace Russian oil and gas any time soon: Russia delivers 55% of the country’s gas supplies. Since the escalation of hostilities in Ukraine, European countries have actually bought more Russian gas on long term contract. Norway does not have spare capacity, and Europe has already bought as much LNG as it can this winter. The global move to block some Russian banks from SWIFT payments still allows importers to pay for Russian gas through non-sanctioned banks using the SWIFT payment system.
Oil prices were rocketing even before Russian tanks started moving into Ukraine, and could rise to as high as USD 200 per barrel. On 10 March 2022, prices stood at USD 120 per barrel, up from USD 64 per barrel in April 2021.
Currently, the EU is contracted to buy 155 bcm of gas from Russia in 2022. It wants to cut this to around 50 bcm, partly by vying with Japan and China for more LNG supplies and by stepping up gas supplies from Azerbaijan, Norway and Algeria. It also aims to accelerate plans to fix leaks in the gas infrastructure.
The IEA has suggested the entire European population should turn down their thermostats by 1 degree to help cut the need for Russian gas, which alone might cut demand by 7%.
What will be the repercussions of actions taken against Russia?
In an interview with Nitish Parwha at Slate magazine in February, an associate fellow at the Carnegie Endowment for International Peace, Noah J Gordon, argued there are troubling times ahead. Gordon believes that Russia may seek compensation under the Energy Charter Treaty for the cancellation of Nord Stream 2.[2]. Deutsche Welle has already reported that Wintershall Dea, one of the main investors in Nord Stream 2, said it sees no reasonable scenario in which there will be political intervention without compensation.[4]
Wintershall Dea is majority owned by the German chemicals giant BASF and has numerous activities in Russia’s western Siberia region. It has invested EUR 730 million in the EUR 10 billion Nord Stream 2 project. The other investors in the pipeline are Germany’s Uniper, France’s Engie, Anglo-Dutch Shell, and Austria’s OMV. [3]
Russia-Germany Nord Stream 2 pipeline route underneath the Baltic Sea / SOURCE: Nord Stream 2 AG
Net zero: what’s the outlook?
Gordon is downbeat. ‘Well, will it hurt global climate cooperation generally? I think almost certainly, when we’ve already seen some climate backsliding since COP26 with record coal consumption, emissions rising again, the oil and gas subsidies I mentioned before, and just taking attention away. Who’s going to talk about COP at a time like this? ‘.
‘On the other hand, you could get a paradigm shift after this, like we did after 1973 and the Arab oil embargo with a greater focus on alternative energy, such as nuclear, and an energy efficiency drive back then in the EU and Japan and even the U.S. in terms of car fuel economy standards.’
Investment in renewables is set to accelerate
Germany’s move to accelerate investment in renewables is likely the first of many moves in Europe to move away from fossil fuels. The EU has committed in March to a renewed push towards renewable energy in its 10 March Versailles declaration (see above).
Gordon argues that investment in renewables is the answer to the dependence on Russian gas, but acknowledges it will not yield quick results. If coal-fired plants previously scheduled for closure are kept operational, and efforts made to replace Russian gas with domestic production through fracking or long-term import contracts, that will lock in fossil fuel use. Better, he argues, for countries to invest in heat pumps, solar power and other renewables.
Solar ramp-up
Solar power capacity is likely the easiest to ramp up quickly. Demand for solar panels is already surging against a backdrop of soaring fuel prices, and could be boosted further with such steps as mandatory solar panels on new build homes, speeding up permits, and ensuring that large solar projects are prioritised only where there is capacity in the grid, rather than where solar farm developers have acquired land.
Wind power permits
Wind power is currently held back by an often tortuous permit process. Streamlining those processes, and prioritising larger projects, could help Europe to boost deployment by almost 20%, calculates BloombergNEF[5]. Almost 19 GW of power has already been approved in Europe and the UK, and if the schedule for construction is brought forward, Europe could see that additional capacity operational within two years.
Nuclear
As for nuclear, fierce debate surrounds the issue of whether this should be classified as green energy or not. Germany has undertaken, controversially, to decommission its nuclear plants in the wake of the 2011 Fukushima disaster. Extending the lives of three reactors set to shut by the end of 2022 could cut Germany’s total gas consumption by about 3% over the next two years, based on BloombergNEF projections. It is not at all clear this is a decision Germany’s government is happy to take. In Europe as a whole, whether the political will is there to set the 10-year process in motion for controversial new nuclear plants is debatable.
Storage issues loom
Whatever the will for renewable power, if there is not enough battery storage on the grid, there will be no back up for when the sun is not shining and the wind is failing to blow. The trouble is limited global supplies of lithium, required for battery manufacture, are mostly absorbed by the electric car industry: 80% of lithium is used for batteries in electric cars, not for grid storage. The UK has recently aired a plan to use electric cars that are on charge as storage at times of peak demand. Inventive solutions such as these will become more widespread as the demand for clean, locally generated energy grows.
Other innovative grid-scale storage solutions are on the radar that don’t need any rare metals, like pumped hydro. Whatever happens, there is no quick fix.
What will the crisis mean for China’s energy supplies?
In the near term, China too will need to take into account the global surge in gas prices. These are likely to lead to unwelcome inflationary pressures in the same year in which president Xi Jinping will be sworn in for an unprecedented third term in office.
Russia accounts for 17 per cent of China’s oil supplies and 15 per cent of its natural gas imports, and in 2021 supplied China with 16.5 bcm of natural gas by pipeline or as LNG. A second pipeline into north east China is set to bring the country an additional 10 bcm/yr from Siberia from 2024, adding to existing contracted volumes that are set to grow to 38 bcm in 2025.
In the longer term, China is likely to benefit from buying Russian oil and gas in yuan-denominated trading using its cross border interbank trading system, so bypassing the SWIFT system commonly used for energy payments, to which Russia now has limited access. However, there remains a risk that by continuing to trade with Russia, China might become the target of secondary sanctions. It remains a priority for China to protect its existing global markets.
Any grounds for optimism?
The global disruption to the energy landscape following the escalation in hostilities between Russia and Ukraine can only lend renewed urgency to a search for energy alternatives. This has already been gathering pace as the world begins to wake up to the climate emergency.
Perhaps the greatest beacon of hope is the endless ingenuity of human endeavour. ‘Necessity is the mother of invention’ is a well-worn phrase. It means that in a crisis, human ingenuity can find unexpected and inventive solutions. The political will to move towards renewables is much more acute, and the funding issues that previously stood in the way of green initiatives are likely to be less of an obstacle in this new normal.
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Helen Farrell writes on the energy sector
REFERENCES
- https://www.consilium.europa.eu/media/54773/20220311-versailles-declaration-en.pdf ↑
- https://fortune.com/2022/03/09/europe-wean-1-billion-russia-energy-habit/ ↑
- https://www.energyvoice.com/oilandgas/392705/iea-issues-10-point-plan-to-reduce-eus-russian-gas-dependence/ ↑
- https://www.dw.com/en/nord-stream-2-investor-wintershall-awaiting-compensation/a-60907012#:~:text=German%20gas%20and%20oil%20firm,Nord%20Stream%202%20gas%20pipeline. ↑
- https://www.bloomberg.com/news/features/2022-03-08/can-europe-weaken-putin-s-power-over-global-energy ↑
