Politics

How Europe can become independent from Russian energy


By Michał Wojtyło (published in cooperation with the Jagiellonian Club think tank)

The Russian invasion of Ukraine has been met with a decisive reaction from the West, including economic sanctions on a scale that few anticipated. Negotiations are also ongoing in a sphere that the major economic strike has so far omitted: imports of energy resources from Russia to the European Union.

This month’s announcement of the bankruptcy of the Swiss-registered Nord Stream 2 AG, which was to be the operator of the eponymous pipeline, is very good news in this context. It follows the suspension of the certification of the investment by German regulators and American sanctions targeted at the project. It will certainly make it even harder to reactivate this Russian investment, which would have made Europe even more dependent on Russian gas.

Polish PM appeals to Germany to stop Nord Stream 2 Russian gas pipeline

Yet huge sums of money are still flowing into Russia from the EU. On 3 March alone, the bloc received a gas delivery from Russian valued at €660 million (also a consequence of record gas prices). In 2020, the EU spent $60 billion on importing Russian energy ($8 billion for gas, $2.8 billion for coal, with the rest being crude oil and petroleum products). The export of energy resources to Europe is worth around 10% of the Russian Federation’s annual budget – more than Moscow spends on its army.

The blocking of Russian banks’ access to SWIFT has a bittersweet aspect. Although seven Russian banks have indeed been cut off, two key players – Sberbank, the biggest in Russia, and Gazprombank, associated with payments for export of Russian natural resources – were omitted. The reason was concerns about an abrupt rise in energy prices in the EU, which would have involved major complications in the purchase of hydrocarbons from Russia, as well as Moscow potentially turning off the gas tap.

Poland as an example for the EU

The EU’s energy policy must be “de-Russified”, said Anna Moskwa, Poland’s climate minister, in response to the dramatic events beyond the border.

Particularly crucial is independence from natural gas. The international coal and crude oil market is more globalised and flexible, with more entities that can supply these materials. They are also easier to transport than gas, which needs either pipelines or complicated and expensive liquefication and regasification infrastructure (LNG).

Of course, obtaining coal or oil from new directions will be more expensive. Time is needed for adaptation (Poland especially is not in a position to rapidly reduce the import of these materials). In the current situation, however, this is a cost and effort that must be borne consistently to cut the flow of money into the Russian budget. It may be especially useful now to be open to oil from sanction-hit Iran – a new agreement between the West and Tehran has reached advanced negotiations.

Independence from Russian gas has been on the EU agenda for years and particularly promoted by Poland. Fortunately, the Polish political class (regardless of party allegiances) has made genuine strides in this regard. From next year, the Baltic Pipe, the LNG terminal in Świnoujście, and gas infrastructure connections developed consistently for years with Poland’s neighbours will bring independence from direct purchases from Russia.

The real diversification gamechanger will be the Baltic Pipe, which will allow import of Russian gas to end this year. Last week, Gaz-System’s Danish partner in this investment, Energinet, confirmed that the timetable for the beginning of gas transmission on 1 October will be kept to.

The pipeline’s capacity then will be 2-3 billion m3 annually, and from next year its potential will rise to around 10 m3, meaning it can fully replace the previous supplies from Gazprom. The gas will come from the Norwegian Continental Shelf, where Polish state-owned gas company PGNiG has a licence. Moreover, there are already plans for the next LNG terminal – a floating storage and regasification unit (FSRU) in Gdańsk.

Polish state firm buys further Norwegian gas licences

In light of the tragic situation in Ukraine and the challenge of minimising import of Russian resources and increasing the region’s resilience, the completion of the GIPL pipeline linking Poland and Lithuania is to be accelerated (to 1 May this year). The EU-subsidised pipeline will have an annual capacity of 2.4 billion m3 in both directions.

It will therefore be possible to increase the import of LNG from the Lithuanian port of Klaipėda, only 26% of which was used in the period from November 2021 to February 2022. But to what extent is the rest of the EU willing to cut itself off from Russian natural gas?

Europe’s gas problems

In the traditional energy trilemma, EU policy has traditional emphasised concern for the environment and economic profitability; they treated the third dimension, security, as the least important. But recent events beyond the bloc’s eastern border have changed the situation.

At EU level, diversification of gas sources has not only not failed to materialise, but weakened: in 2009-21, the share of Russian gas in total EU-28 demand (with the UK) grew from 25% to 32%. This was caused by a drop in the EU’s own production in favour of imports, including from Russia, which currently accounts for around 40% of the EU’s entire gas imports.

The problems caused by inaction made themselves felt in autumn, when Russia decided to deepen the energy crisis, limited itself to supplies within long-term contracts, and refused to increase exports to the EU, although this would have made excellent economic sense.

According to the International Energy Agency (IEA), supplies of Russian gas through pipelines to the EU in the first seven weeks of this year were 37% lower than in the same period last year. The volumes being sent not are increasing, but there is no certainty that this is a lasting trend – Russia’s previous reputation in the West as a reliable supplier of resources is severely weakened.

Poland “will be independent from Russian gas in six months”, says PM

The Kremlin in fact decided to worsen the situation on the European gas market even earlier. Gazprom did not fill its storage facilities in western Europe in the months before the heating season, but only emptied them. The storage filling level was 28% lower than the five-year average at the beginning of the heating season. The largest storage facility in Germany, operated by Gazprom, was only around 10% full. Yet this turbulence did not cause natural gas shortages this winter. Why? Could this indicate that the EU is able to cope without Russian gas?

Precious experiences with LNG

The supply shortages in traditional directions have partly been covered thanks to LNG – in January the level of supplies of liquefied gas to the EU and UK were three times more than the previous year and 70% higher than supplies through pipelines from Russia. The relatively mild winter in both Europe and North-East Asia, as well as good conditions for production of electrical energy from wind farms, were both significant factors.

Poland generated record amount of electricity from wind in January

LNG deliveries were therefore able to be redirected from the Asian to the European direction, and use of gas for heating households could be reduced. Half of the additional LNG from the start of the heating season arrived from the United States (37% of the total). As recently as 2016, there was no American LNG arriving in Europe. The other biggest LNG exporters are Qatar and Australia.

Is there technical scope for increasing imports so they might replace the Russian ones entirely? Imports through pipelines from North Africa, Azerbaijan and Norway are already close to the maximum level. Italian foreign minister Luigi Di Maio’s optimism from his recent visit to Algeria suggests that this direction still has potential for greater use of the existing infrastructure, although it is probably limited to diversification for Italy, which imports 40% of its gas from Russia.

According to Bruegel, a think tank, the potential for receipt and regasification of LNG in Europe is still not fully realised – in the last four months, LNG terminals in the EU have been used between 30% and 70% of capacity. The think tank’s experts stress that the US arrival on the LNG market has increased the number of conflicts with flexible destination clauses to an average of 64%. We can therefore assume that producers also have scope for increasing the LNG supply for Europe.

This will require the agreement of countries including those in the Far East, which, even if it is given by states such as Japan (as was the case this month in a gesture of solidarity) or South Korea, it is not clear for how long and on what scale. These countries also need resources for post-pandemic recovery.

The next key aspect that many analytical institutions have been emphasising is appropriate replenishing of gas storage to increase independence from Russian resources. According to Bruegel, it is crucial before next winter to refill the gas in European storage to a volume requiring an injection of around €70 billion.

It is also worth emphasising European states’ differing degrees of dependence on Russian energy resources. Central and Eastern Europe are the most dependent (including Germany, more than half of whose gas comes from Russia, and Bulgaria, which imports all its gas from this direction). At the other extreme are Portugal, Ireland and Spain (almost zero imports from Russia). Without effective European coordination, this difference could create intra-EU divisions which Russia will certainly try to play for its own benefit.

Poland better prepared for Russia cutting off gas than others in Europe, says deputy PM

Europe without Russian gas next winter?

Brussels has announced a plan for phasing out the import of Russian materials to be based on six actions:

  • diversification of gas sources (LNG and development of biogas and hydrogen)
  • increasing development of renewables (accelerating component production and installation procedures)
  • developing transnational energy interconnections
  • reinforcing EU contingency planning for security of supply
  • increasing replenishing of gas storage before next winter (at least 90% by 1 October every year)
  • improving energy efficiency

The proposal for EU action presented by the European Commission this week targets a reduction on the demand for Russian gas by two thirds by the end of the year and making Europe independent from Russian fossil fuels “well before 2030”.

These steps are in line with the proliferation of expert analyses on ways of achieving European independence from Russian gas. Bruegel, for instance, stresses the importance of increasing LNG important from other directions and replenishing storage facilities in Europe, with all EU states being required to maintain a particular level.

Coordination on the European market is also seen as essential, to prevent states from raising prices to fill their own storage. Such actions will also increase the costs of the whole operation for energy companies. Bruegel’s analysts suggest that contracts for difference, with the state reimbursing the difference to companies, could be a useful solution.

A new report by Aurora makes further recommendations for the period up to March 2023: delaying nuclear retirements in the EU (short-term savings less than 5 billion m3), keeping coal plants online and reverting old capacities (more than 7 billion m3), changing consumers’ behaviours (4 billion m3), increasing the popularity of renewables (less than 1 billion m3), reducing industrial energy use and switching energy from gas to coal or oil (10-15 billion m3).

The IEA also published 10-point proposals aiming to reduce European dependence on Russian gas by a third, and with additional temporary actions (increased coal burning) even by a half by next winter.

The proposals included minimal replenishment of the EU’s storage, increased production from biomasses (which worked at 50% of potential in 2021) and nuclear energy, mass installation of heat pumps instead of gas boilers, and increasing energy efficiency, including reduction of average temperatures in buildings in the EU. At present it is over 22°C, but every degree less means around 10 billion m3 less gas used each year.

A revival of coal?

The most surprising recommendations are not just short-term delays on turning off coal plants, but also temporary reactivation of retired units. In an unexpected about-turn, Frans Timmermans, the first vice-president of the European Commission, claimed that coal can replace Russian gas.

He mentioned the possibility of skipping the transition from coal to gas – planned by many countries, including Poland and Germany) – in favour of staying with coal and then immediately moving to renewables. This could result in a more rapid switch to renewables, and thus be in line with the EU’s long-term energy goals.

It is important to remember, however, that although the rest of Europe is less dependent on coal than Poland, especially when gas prices are high it is often used for electrical energy production (20% of the annual total). EU states import 55% of their coal from Russia, and Germany 50%. More expensive substitutes will have to be found in this sector too.

Coal drops from 87% to 71% of Poland’s energy mix in a decade, with renewables up to 17%

But any embargo on Russian coal is less significant than a potential one on gas. The impact on the Russian economy would be limited – just 60 million tonnes of the 200 million produced by Russia are exported to the EU. Coal sales from Moscow in other directions is also simpler than with gas, with China a key client.

Leaving the current situation aside, in the long term no major revival of coal in the EU is likely, even if in the short term it helps increase the economic pressure on the Putin regime. Europe has plotted a clear and lasting course with the European Deal, with renewables and nuclear energy still on the horizon as a long-term solution to dependence on Russian hydrocarbons.

Poland still has much to do

Poles can be proud of the cross-party efforts to diversify gas supplies to their country. We must continue these moves, as well as working to become independent from oil and coal from Russia.

It is also essential to make a quick decision on the choice of a supplier of technologies for Polish nuclear power stations so that its construction can begin as soon as possible. Decisions need to be taken now based on concrete and enormous measures for investments in modernisation and development of the electricity grid (including connections with neighbours), to allow further development of renewables and increase the system’s resilience to supply shocks.

Germany to use “legal instruments” in response to Poland’s nuclear power plans

In this context, it is also necessary to liberalise the damaging “10H rule”, which seriously limits the development of onshore wind energy. Another extremely important initiative should be wide-ranging actions to increase energy efficiency – reduction of energy use in Poland is of the utmost importance if we really want to build our independence.

A review of the integrated national energy and climate plans submitted by all EU member states to the European Commission shows that the available energy efficiency measures include thermomodernisation of buildings, popularisation of cogeneration in heating, development of integrated public and multimodal transport, electrification of individual transport, mass exchange of lighting for LED bulbs (both public and individual), promotion of the circular economy, higher energy saving norms for appliances, and a mass energy efficiency information and education campaign.

***

The EU and Poland face huge challenges and sacrifices. The war in Ukraine must force investments not only in defence, but also in other sectors of the economy, including energy, and not only because of the need to support Ukrainians “here and now”. Without decisive steps in energy, Poland’s security and sovereignty will be endangered in the long term.

Translated by Ben Koschalka. Main image credit: Markus Spiske/Unsplash

Michał Wojtyło is editor and publisher of the Jagellonian Club website and a member of its Analysis Centre





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