Author: Lauren Foye, Head of Reports at Zero Carbon Academy
Europe along with the USA has faced unprecedented increases in energy demand and rapidly increasing prices since the end of summer 2021. With sanctions against Russia including the phasing out of Russian gas (which currently accounts for a third of the EU’s annual consumption), by the end of the decade the EU faces a monumental challenge in sourcing alternative energy supplies.
fossil fuelsfSource: The Guardian
Europe’s energy crisis worsens
As the energy crisis continues to spread globally following Russia’s invasion of Ukraine, Europe has already been gripped by high energy costs for the past 6 months. As we reported previously (in our blog “The 2021 European Gas Crisis Saw the EU’s Coal Exit Screech to a Halt”, Europe had already faced heavy energy price increases going into the winter 2021, with Brent crude reaching a 5-year high and natural gas prices up in excess of 500% year on year. For example, Dutch TTF natural gas (a European benchmark for gas prices) had a high of 132.93 Euros on 6/10/21 vs a low of 13.2 on 6/10/20. Some EU member countries in response have switched energy supplies from gas to coal, putting the brakes on the EU’s green energy transition. According to a study by Ember, this surge in gas prices was caused by several factors, including:
- A cold winter in early 2021 within the Northern Hemisphere, which depleted gas storage levels.
- Increased demand and higher prices paid in Asia and South America resulted in liquefied natural gas (LNG) being delivered there rather than to Europe.
- Rising Global demand for gas as Covid-19 restrictions were lifted.
- Lower than expected fossil gas imports from Russia into the EU.[i]
The war in Ukraine has only exasperated the rising fuel costs for European consumers and businesses, with Brent crude prices increasingly volatile- reaching almost $140 per barrel on March 7th, the highest since the 2008 financial crisis. For context, Brent crude was just $84 per barrel in October 2021. Russia itself forms a considerable part of European fuel imports, and almost half of Russian exports of oil went to OECD European nations in 2020. The rise in prices in 2021 is in stark contrast to 2020, where oil prices were actually negative at the start of the pandemic, reaching -$37 per barrel on 20th April.
Russia’s crude oil and condensate exports by destination, 2020
Source: US Energy Information Administration
Sanctions by Western nations See Russian sourced fuel supplies reduced
In response to Russia’s latest invasion, western nations have perhaps been surprising in their readiness to apply meaningful sanctions to Putin’s regime and the Russian Economy. These sanctions extend towards reducing, and in some cases ending, the purchasing of Russian sourced fuel. According to the Oil & Gas Journal, Russia holds the world’s largest natural gas reserves at 1,688 trillion cubic feet.[ii] Bloomberg note that Russia pumps enough gas into Europe every day to cover a third of the continent’s consumption. Whilst, at present the EU are phasing out Russian fossil fuels by 2030, there is the risk that Russia could cut all supplies entirely. In order to wean themselves from Russian supplies the EU drew up a plan which would require member states to acquire alternative LNG supplies, almost equivalent in size to annual deliveries to South Korea (the market’s third-largest buyer)
“This would place huge upward pressure on LNG spot prices, as Europe essentially fights with Asian countries over who will avoid destroying demand,” said Saul Kavonic, an energy analyst at Credit Suisse Group AG. “It’s very inefficient to see Australia LNG cargoes head to Europe, but that could happen now as most of the rule book for energy markets has been thrown out the window.”[iii]
Additional LNG import demands proposed by the EU in context of the global market demand
Source: Yahoo Finance referencing Bloomberg[iv]
At present, the EU plans reduce EU demand for Russian gas by two-thirds before the end of 2022, as well as phase out its reliance on Russian energy by 2027. This compares with the US and UK who are both banning the import of Russian oil by the end of 2022. The United States accounts for a trade value of $950 million in terms of crude oil imports from Russia, according to the UN Comtrade report 2020[v].
“It’s a very difficult situation that, on the one hand, we have these financial sanctions that are very hard but on the other hand, we are supporting and actually financing Russia’s war purchasing oil and gas and other fossil fuels from Russia. We have to get rid of the fossil fuels coming from Russia as soon as possible.” – Sanna Marin, Finnish Prime Minister
EU leaders mull ‘joint European investments’ to support member economies as well as consumers
Concern is also mounting as to how businesses and consumers will be able to deal with rising energy costs, as Russia is increasingly isolated from global supply chains and prices rise further. As current president of the EU council, French President Emmanuel Macron, has suggested “joint European investments” which would be modelled after the 750 billion-euro ($827 billion) recovery plan launched in summer 2020 to help European economies through the COVID-19 pandemic. Some of the funds from that previous scheme remain unused, and so could be reallocated. The EU has also discussed granting temporary aid to companies affected by the energy price crisis, as well as options for emergency measures, such as temporary price limits on fuel costs. However, according to the Washington Post, there has been diverging opinions on how the EU should combat rising energy prices, with Spain and France — the latter of which derives about 70% of its electricity from nuclear energy —calling for natural gas prices to be split apart from electricity costs. The French argue that the influence of natural gas costs in setting wholesale electricity prices is disproportionate[vi].
The challenge facing the EU is that energy dependence, in terms of type, varies greatly by member state. For example, North Macedonia, Finland and Bulgaria all receive over three quarters of their gas from Russia. However, it is worth noting the relatively low proportion of total energy usage attributable to gas in these countries- North Macedonia- 9%, Finland- 5%, and Bulgaria- 13.6%.
Other countries which rely heavily on gas for their total (all sources) energy use are Italy- 45% of their total energy in 2018, Germany- 26.7% in 2021, The Netherlands- 42% in 2018, and France- 16.1% in 2020.
Share of gas supply from Russia in selected European countries (2020 or latest available)
Source: Forbes, referencing European Union Agency for the Cooperation of Energy Regulators[vii]
Unfortunately, even if the EU can find the required alternative supplies of natural gas, namely LNG- the block simply does not have the import conversion, and will have to rely on storage capacity. According to a recent study by ING: “The bigger issue for Europe is the limited amount of regasification capacity. So regardless of whether there is enough export capacity, Europe will struggle to completely offset Russian gas due to capacity constraints on the import side.”[viii]
Should Russian supplies stop entirely ING add: “While there is some flexibility in LNG supply, the key constraint for Europe at the moment is the limited amount of regasification capacity. We estimate that under a best-case scenario Europe could increase LNG imports by around 68bcm from 2021 levels. This is still far short of the 155bcm which was imported from Russia last year.”[ix] Germany is confident that it can meet short-term needs with its own gas reserves Should the last few weeks of winter remain mild. The EU has storage tanks across the continent on average at only 31% capacity at the start of this week – roughly half as full as in 2020. This should be enough to see out this winter, but are there will need to be a concentrated effort to ensure they are recharged by LNG supplies in time for the next cold spell.
With the ability to replace all Russian gas with other gas suppliers unlikely, the result is that realistically the EU will have to source more of its energy from alternatives, which opens the door to a huge increase in lower carbon energy. Already, Finland has opened the long expected Olkiluoto 3 nuclear plant, which is expected to replace imports from Russia and provide 14% of the country’s electricity. Germany has declared a desire to implement new renewables at “Tesla speed” and plans to double onshore wind capacity to 110GW, increase offshore wind to 30GW and add nearly 200GW of solar energy, a 40-fold increase, with the necessary Renewable Energy Sources Act expected as early as July this year. However, while in the longer-term, the block will ramp up the rapid introduction of renewables and other energy sources such as nuclear and wean itself of coal and gas, in the short term there is still a need to look at re-stocking its depleted LNG reserves for winter 2022/23, mindful that Russia cannot necessarily be relied upon for this.
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