Sufficient energy resources (like numerous fossil fuels, gas and/or oil, etc.) have always been vital for national political economy. As soon as energy serves certain interests in national, regional and political dimensions, the best way in energy policy is energy security. Recent EU’s politico-economic decision to avoid crises connected to logistics’ disruptions in energy supply is being discussed among the member states…
The EU leadership and the member states are presently going through organizational, coordinated and logistics’ turmoil – while showing strong unity and solidarity – in order to overcome present difficulties in external supplies. Presently states have to import more energy sources, better from democratic regimes, which in turn need to step up supply while also investing heavily in renewables. About half the EU member states would be hit by a partial or total cut-off of external gas supply – presently, mainly from Russian deliveries; overall, the flow of Russian gas is presently less than one-third of what it used to be last year.
In 2021, Russia exported around $55.5 billion worth of natural gas to other countries worldwide: export revenues more than doubled compared to 2020. The highest natural gas export value was recorded at $69.11 billion in 2008.
Gazprom is a Russian energy corporation established in 1989 and co-owned by the government. The company has the monopoly on the country’s gas export market through a clause in Russian Federal Tax Code, thus limiting access of domestic competitors, such as Rosneft and Novatek, to international markets. The leading gas company in Russia, Gazprom is also the global leader in gas production by output, measured at nearly 40 billion cubic feet daily in 2020.
Besides exploration and production, the company is engaged in marketing, transportation, distribution, and other supply chain components. In 2019, Gazprom accounted for nearly 11 percent of the world’s natural gas output; the company is an example of a national champion, as the corporation advances Russia’s interests and accounts for over five percent of the country’s GDP.
In order to reduce dependency, the European Commission has set up a joint gas storage facility which is presently filled at about 65 percent of total capacity. Besides, the EU-27 has set up a continental Energy Platform for joint purchase of needed energy resources and proposed a special REPowerEU plan. This plan’s goal is to put an end to the Union’s dependence on external fossil fuels as soon as possible (e.g. to reduce it by two thirds already by the end of 2022) through diversification, renewables and energy efficiency.
European energy sovereignty: two main pillars
The first pillar is about gas supply: the Commission would like to increase supply from other trustworthy sources than the Russian one. The external gas supply has already increased since January 2022 (long before the Russia-Ukraine military conflict) by 35 bcm presently.
To reach the goal, the EU entered into agreements with the US and Canada on increased supplies of LNG; besides, Norway promised to step-up gas supply considerably. Some other states and regions are involved too: e.g. Qatar, the Gulf States, Algeria, Egypt and Azerbaijan.
Due to these efforts, in the first half of 2022, the LNG supplies to the EU increased by 21 bcm and pipeline deliveries by 14 bcm; totally, the EU states have received an extra 35bcm of non-Russian gas in 2022, although the target in the REPowerEU Plan was 60 bcm of additional supplies in 2022. All the main directions in the REPowerEU, such as diversification, joint gas purchases, ramping up renewables and hydrogen, increasing energy efficiency and tackling high prices, etc. remain the Union’s absolute priorities.
The second pillar is about an overall reduction in gas demand for all sectors of member states’ economy and in households, as well as energy savings. Besides, the EU is working on increased energy supplies through renewables as the “energy of the future”: it is not only a clean energy source and is home-grown, but it is independent of external supplies.
The EU has produced – since the beginning of 2022 – additional 20 gigawatts of renewable energy, which is equivalent to about 4 bcm of “replaced gas”. As the IMF has recently acknowledged, the cost of transition to renewables is lower than continuing with fossil fuel; i.e. the costs of modern EU efforts are lower than continuing with fossil fuels.
As to energy saving, the EU situation is difficult: Commission president noted that presently over ten member states have triggered an “early warning” concerning their gas supply and one state has even triggered an alert.
Thus, for the first time in its history, the EU has to address energy security issues; the efforts shall be proactive and prepare for a potential full disruption of Russian gas. This is a likely scenario, as the gas crisis in the EU-wide economic integration (mainly based on the Single Market facilities) will affect every EU state. Some simple and necessary solutions are: saving gas, quickly fill in gas storage in the states and drastic reduction of gas consumption publicly and privately. Politically it is a highly sensitive issue both for the EU and the member states: in some states, e.g. in France, in some eastern states gas is mainly used for cooking and heating; ordinary people would not get “a recommendation” not to use recently bought gas cooker anymore.
Preventive and emergency instruments
There are two objectives in the perspective European energy strategy:
= first objective is about immanent restrictions: every EU state should reduce the use of gas; on the reduction of gas consumption, the EU is asking the member states to reduce it by 15% (during the beginning of August to the end of March 2023), which would be equivalent to about 45 bcm of gas saving. With such a reduction, the EU states can make it safely through this winter in case of a complete disruption of Russian gas.
If the states managed to save 15% of the storage, they would safely survive through the winter; the states can reduce potential GDP losses if they start presently apply preventive reductions instead of taking reactive measures later on. The EU Energy Platform can support joint purchasing and coordinate distribution of gas across the EU. Besides, the EU will continue to promote the requirements of the EU Energy Savings Plan and ask all member states to launch awareness campaigns to encourage gas-saving behavior.
The second objective concerns the EU institutions, which are supposed to provide a safety net for all EU member states, the idea associated with the solidarity among the states. There are some states that are more directly exposed than others to external gas supply; that means they are more vulnerable than others to potential energy disruption.
By the reason of objectivity, almost all European states (even those outside the EU) will suffer from the consequences of supply’s disruption as these states are functioning in the European “single market”. Therefore, argues the Commission, it is important that all states now contribute to the saving, the storing and sharing gas market facilities with the neighbors in case of need. Energy solidarity is a core principle depicted in the EU Treaty; besides, there is an EU Security of Supply Regulation that foresees that the member states can count on each other, and that the EU’s decision is based on this emergency instrument.
Thus, the EU is both asking for some voluntary cuts in usage and would invoke possible mandatory demand reduction, noted Commission Executive Vice-President, F. Timmermans.
Reference to: https://ec.europa.eu/commission/presscorner/detail/da/speech_22_4631
In facing a possible gap between gas supply and demand, the EU has estimated that this gap would be around 30 bcm in an average winter, 45 bcm in a colder one, and even larger if the winter is exceptionally cold. The Commission assumes that non-Russian LNG and pipeline supply will remain high through the winter, noticed Commissioner A. Simson. He also added that the EU states have already made “remarkable progress despite the challenging situation on the gas market, and the filling level today is very close to 65%”.
But if the supplies from Russia are cut by the level of 80 percent (by this November), the issue of available gas supply option “will become very challenging”.
Citations from: https://ec.europa.eu/commission/presscorner/detail/da/speech_22_4631
National scene: the Baltic States
In 2021 about 90 percent of natural gas in Latvia was imported from Russia; besides, for North Macedonia, Moldova, and Bosnia and Herzegovina, Russian delivery was the only source of natural gas supply during 2019-20. Among other Baltic States, in Estonia the portion of natural gas from Russia was significantly lower, measured at 12 percent; generally, Russia accounted for over 39 percent of all extra-EU gas imports in 2021.
For example, a decade-old successful energy transformation of Lithuania’s central heating system, which used to be gas-dominated, now runs at 80 percent on biofuel; so is the great progress in this regard in Estonia.
With low population density in Latvia, there are great opportunities to develop wind farms and other renewable projects, both on land and at sea; it all makes economic sense as gas prices likely to remain high in the near future. The EU states shouldn’t be using gas to generate electricity, as some countries still do; quite noticeable is the voiced opinion and predictions to use nuclear power or even coal in the short term.
From the economics point of view, the European “zero-gas dilemma” is about price logistics: it would be possible to purchase gas from other countries, but at what cost? By proper logistics and planning supplies, the Baltic States’ energy issues can be met by the Klaipeda’s liquefied natural gas terminal in Lithuania; talks have been going on among the Baltic States “to harmonize terminal’s use”. According to the Baltic States’ government officials, a possible transition to liquefied gas could lead to a substantial increase in gas prices, although everything will depend on global gas-market situation.
Another important aspect of Latvia’s energy links with Russia is the shared electricity supply grid BRELL; the disconnection is only planned for 2025. One of the board members in the Latvian electricity transmission company “High Voltage Network” acknowledged that currently Russia was not going to exclude the state from the grid; however, the Baltic transmission operators would be prepared for the worst scenario and not leave countries without electricity.
Electricity supply for the Baltic States would be soon fully connected to the EU-wide electricity grid, but these states should produce more electricity without using gas. However, the Latvian government ordered Latvenergo (the state electricity-supply company) to acquire two terawatt-hours of natural gas so that, in the event of disconnection, the shortage could be compensated by the thermal power plants. The agreement has been concluded; so during summer time that gas would be delivered through the Klaipeda LNG terminal. The acquired volumes can come e.g. from external suppliers in the US, Qatar and Norway, though the purchasing price was not disclosed.
Reference and citations from: https://eng.lsm.lv/article/economy/economy/latvias-dependency-on-russian-energy-is-overstated-says-em.a446689/
Opposition is growing against the Commission’s proposal for a voluntary reduction in gas consumption by 15% until next spring, with southern countries leading the opposition. National ministers met in the Council recently to discuss the plan, which is subject to multiple amendments coming from different fronts.
“The Commission’s proposal is not necessarily the most effective, most efficient and just, so it is therefore with the deepest regret Spain doesn’t support this proposal”, said Teresa Ribera, the Spanish minister for the ecological transition. Her Greek counterpart, Kostas Skrekas, also raised concerns about the horizontal 15% reduction target, while João Galamba, Portugal’s secretary of state for environment and energy, called the plan “unsustainable” and “disproportionate”. A Nordic official said the 15% objective was acceptable but will probably become more “flexible” to better reflect each country’s peculiarities.
Some states’ leaders stressed the importance to find a “common joint approach” and noticed that almost all EU member state were for the principle of solidarity, which underpins the Commission’s entire plan.
Two main sticking points appear under discussions: the 15% reduction target and the Union Alert system. On the first one, a group of countries, led by the South, complain the proposal fails to take into account national circumstances. The EU’s energy mix is far from homogenous: countries use renewables, nuclear power and fossil fuels in varying degrees according to their geography, economy and political priorities. For example, Spain has a wide network of terminals along its coastline that allows for greater imports of liquefied natural gas (LNG) from a variety of suppliers, while Germany is still overly dependent on Nord Stream 1, the massive pipeline that feeds Russian gas directly into the country.
The second point in negotiations is the Union Alert system, under which the Commission will be empowered to turn the voluntary 15% reduction into compulsory action in the event of a severe gas shortage. The EU wants to activate the unprecedented mechanism at its own initiative or following the request of three member states; it will consult the EU Council but without requiring its endorsement. A large number of countries is pushing back to ensure the Council has a greater say; a latest proposal suggests ministers will have to approve by a qualified majority the activation of the EU-wide “alert system”.
The minimum number of countries who can request the trigger will be increased from three to five. Some governments are also trying to secure exemptions and carve-outs from the binding system to protect sensitive industries that might fall under rationing. Coastal countries endowed with LNG terminals argue they would like to be completely excused from any mandatory or solidarity measure.
The burden of a final agreement falls with the Czech’s governance, which is the current holder of the EU Council’s rotating presidency: it is tasked with steering the discussions and finding an optimal agreement without watering-down the whole plan. It seems that the Czech presidency intends to add exemptions and carve-outs to the 15% target that “make sense” and are based on broad industrial sectors, rather than on national concerns. The member states’ ambassadors have been discussing the Commission’s draft since it was presented on 20 July and have gathered several times to exchange views and adopt amendments. As a EU official with knowledge of the ongoing negotiations put it: “we want to keep the ambition to the maximum possible extent; there is no Plan B”.
Note: our Institute will follow the outcomes of the special energy Council’s decision.