Difficulties remain as Europe prepares to further diversify energy supply
Source: Xinhua Editor: huaxia 2022-03-19 11:04:30
In a winter with heated discussion on how to cut the soaring natural gas prices and redesign the future of Europe's energy supply, the Russia-Ukraine conflict has made the argument more intense and the economic fallout has piled increasing pressure on the region to find answers.
However, setbacks are many. Since Europe has relied on Russian gas for long, it was expected that the region, at least in the short term, would face a bumpy ride as it tries to further diversify the energy supply. Solutions would either come at a high price or need a long time to take shape, analysts have said.
A European problem
This winter, it has been clear enough that natural gas has become more of a European problem. While energy inflation has increased in every major economy, the increase has been particularly acute in Europe, said Neil Shearing, an associate fellow with the Global Economy and Finance Programme at the think tank Chatham House.
Compared to oil that can be shipped to different markets, whose prices therefore do not tend to differ substantially between regions, most gas is transported through fixed pipelines, which means that prices can differ considerably between regions depending on local demand and supply conditions, Shearing added.
Over the years, natural gas continued to play a major role in the energy transition for its lower greenhouse gas emissions than coal, and its importance cannot be overstated for European families. It accounted for 32 percent of the European Union (EU) final energy consumption in households, and the main use of energy by households was for heating their homes, according to the EU statistical office Eurostat.
Vulnerability remained as Europe's energy largely relied on imports. More than half of the EU's energy needs were met by net imports in 2019, Eurostat said, with Russia accounting for more than 40 percent of imports of natural gas to the EU. This in part explained high volatility in gas prices facing Europe amid the Russia-Ukraine conflict.
The impact varied with wide disparities in these countries' needs. Western Europe, for example, imported 75 billion cubic meters from Russia in 2021, accounting for 25 percent of its total demand, while in Eastern Europe, Russian gas was equal to 57 percent of overall needs, according to data from the Oslo-headquartered energy research and business intelligence company Rystad Energy.
Britain, which only received a small proportion of its gas from Russia, could not stay away from the market volatility anyway. The country has a small gas storage capacity, and according to a government report, imports accounted for more than half of the country's supply in 2020.
Economy has already been hard hit. Energy was contributing almost 3 percentage points to annual inflation in the eurozone, Shearing said.
In Britain, the energy price cap will jump from the current 1,277 pounds (about 1,681 U.S. dollars) to 1,971 pounds (about 2,595 dollars) per year for about 22 million customers in April, and gas accounts for at least 500 pounds (about 658.2 dollars) of that increase, according to the British Chambers of Commerce.
While the prices were expected to ease from the highs once winter ends and demand ebbs, the downtrend would possibly not last long. If gas inventory could not be rebuilt through the summer, "We'd be facing a catastrophic situation of gas storage being close to zero for next winter," said Kateryna Filippenko, analyst at energy consultancy Wood Mackenzie. "Prices would be sky high. Industries would need to shut down. Inflation would spiral."
A Long shot
Overall, seeking solutions to the long-time problem, officials and experts opted for diversifying sources of supply in the short term and stepping up investment in renewables for the future.
Difficulties, however, loomed. "There is no near-term easy fix in terms of energy prices," said analysts from the asset management company Schroders.
In the short term, coal power is a temptation. Despite Europe's efforts for a greener future, coal still mattered in its energy mix. Preliminary numbers suggested coal-generated electricity increased in the region last year for the first time in almost a decade, according to Rystad Energy.
"Gas, hydro and wind power generation dropped last year, increasing the pressure on other energy sources, including coal, to bridge the gap," it said.
But a step further risks more controversy. "Of all the options including coal, nuclear, solar and wind, thermal coal is by far the quickest way to convert power plants from using gas. But the gas-to-coal switch comes with a cost to the environment and our narrative in Europe about the green transformation," said Peter Garnry, head of equity strategy from Danish investment bank Saxo Bank.
To boost local gas output is not an easy answer either. While the Groningen gas field in the Netherlands, which is one of the largest in Europe, could theoretically scale up production by more meaningful volumes, "politically this will be a difficult decision, given that the production cap has been gradually reduced due to seismic activity in the region," said analysts from the Dutch financial services corporation ING Group.
Outside of the region, choices are also not many. Global gas markets and Europe's other pipeline suppliers such as Algeria and Norway were already producing and exporting at full capacity, and long-term contracts potentially limit the volume of gas that firms could redirect to Europe, even as continental prices rise, according to analysts from the Brussels-based economic think tank Bruegel in February.
To ease the gas crunch, Europe has looked to liquefied natural gas (LNG). In January, LNG imports into Western Europe hit a new all-time high utilizing 100 percent of the region's regasification capacity, said Rystad Energy. As the data suggest, there is a problem about regasification capacity, which is a process of converting LNG back to natural gas by heating it.
Across the region, "there is limited spare capacity to allow for increased imports from current levels," said the ING analysts. While the bulk of spare capacity sits in Spain, it could "do little to help ease the shortfall elsewhere in Europe" since Spain is not well connected to pipeline infrastructure in the rest of Europe, they added, noting that new plans to build LNG import terminals will also take some time.
Then there come the high costs. "Europe will not only have to find somebody to sell this gas, but also someone willing and able to buy it," said Bruegel analysts, stressing that "buying at record prices in a market environment in which geopolitical decisions and the strategic behaviour of a pivotal supplier can drastically change the demand-supply balance is a bet with limited upside and massive downsides."
For the future, in a plan announced by the European Commission earlier this month to reduce the EU demand for Russian gas, importance was attached to such options as boosting energy efficiency and increasing renewables.
Applauding the decisions, some analysts tried to avoid being over-optimistic, noting that these goals would not be achieved overnight.
"Many of the goals seem highly ambitious," said Ed Crooks of Wood Mackenzie. Noting the high targets for biomethane production in 2030 and for LNG by the end of 2022, he added: "That is a very demanding pace of change, and it will not be a surprise if some of those deadlines are missed."
