Europe Will Pay a High Price to Free Itself From Russian Energy
Europe has benefited from relatively cheap natural gas from Russia for decades. But for all the talk now of diversifying away from this supply, the plain reality is that it will not be easy to find alternatives. It will be a yearslong undertaking.
The continent imports roughly 40 percent of its natural gas from Russia. That’s an enormous amount. Liquefied natural gas from the global market would be the main substitute, but competition will be intense and prices are likely to rise and remain high. Consumers will bear the burden. But even if a premium must be paid for energy security, an added benefit could be an accelerated transition to cleaner fuels.
The dominant position held by Gazprom, the Russia-owned energy giant, as the region’s principal gas supplier was causing problems even before the invasion of Ukraine. The company’s decision to stop offering gas on the daily spot market — which refers to one-off deals rather than gas delivered under term contracts — in the fourth quarter of last year helped to push up prices rapidly. Now Russia’s demand that customers pay for its gas in rubles risks gas cutoffs as early as May as some European countries balk at this unilateral change of contract terms.
The European Commission wants to reduce Russian imports by two-thirds in 2022 by turning to alternative supplies and reducing overall gas demand. But even a cursory analysis of this move reveals that the short-term impact will be painful — for consumers not only in Europe but also around the world.
Some European politicians argue that this is the price that must be paid to maintain Europe’s values in the face of Russian hostility. But the bottom line is that a complete embargo on Russian gas this year would mean severe economic hardship for many countries on the continent. There simply isn’t enough alternative gas available.
Still, the European Union’s plan is ambitious; it seeks to reduce by more than 100 billion cubic meters this year the 155 billion cubic meters of natural gas Europe imported from Russia last year. Even so, E.U. countries would still have to swallow hard and buy from Russia roughly one-third of what they’re buying now to power industry and keep all of the lights on.
How would this reduction be accomplished?
On the supply side, the commission’s main objective is to obtain an extra 50 billion cubic meters of liquefied natural gas. That will be a tall order. With new projects and a return to the market of supplies that were disrupted by production and technical issues in 2021, an extra 40 billion cubic meters should be available on the global market, but Europe will not be the only potential buyer. Growing demand in Asia will continue to pull liquefied natural gas to the East, meaning that perhaps only 30 billion cubic meters will be available for Europe. To obtain another 20 billion cubic meters, Europe will have to compete for it, and that means two things — higher prices and other countries’ ending up with less and turning to dirtier fuels like coal.
Europe is also hoping to receive 10 billion cubic meters of pipeline gas from such places as Norway, Algeria and Azerbaijan. This may be possible if maintenance of gas field infrastructure is delayed and production is maximized, but it can be only a short-term fix. At some point, fields will have to be repaired or pipelines will reach full capacity or both. Moreover, the bounce in liquefied natural gas supply in 2022 is set to slow over the next two years. Even though new supply has been promised, these multibillion-dollar projects take years to develop. The years 2023 and 2024 could be equally challenging, if not more so, for gas supplies than 2022.
As a result, Europe will be able to achieve only about half the reduction in Russian imports from non-Russian gas supplies, so gas consumption also must be cut.
The E.U. strategy is reduce consumption by 38 billion cubic meters, or about 9 percent, over the course of this year. How the E.U. achieves this could have important long-term implications. The main focus is on electricity suppliers, which would attempt to cut gas demand by 20 billion cubic meters by installing more wind and solar capacity. Greater use of coal may also be a short-term necessity and is already occurring in some countries, but the increased focus on renewables could accelerate a shift toward using more carbon-free energy throughout the region by 2030.
Indeed, some countries are also rethinking their aversion to nuclear power, which was shunned by many European nations after the Fukushima disaster in Japan in 2011. Not only would this further European efforts at energy independence; it would also reduce emissions in line with Europe’s net-zero emissions goal by 2050.
Consumers are also being encouraged to use energy more efficiently. Turning down thermostats across Europe by 1 degree would save an estimated 10 billion cubic meters of gas, according to the International Energy Agency, although success would also depend on how cold the winter ahead turns out to be. Increasing the use of rooftop solar and installing heat pumps in homes can save another four billion cubic meters of gas combined, although E.U. governments would need to provide incentives for that to happen.
The E.U. will also seek to increase the production of biomethane — natural gas generated from waste material — by 3.5 billion cubic meters, an increase of 120 percent over 2021. This will be difficult to achieve, but record high gas prices should at least help to encourage investment in a more expensive, but greener, alternative.
Therefore, although there is likely to be short-term price pain as Europe moves to divorce itself from its dependence on Russian natural gas, the E.U. strategy can lead to long-term gain.
Morally, Europe will defend its values and demonstrate its strength in the face of Russian aggression. And the emphasis on reducing demand for natural gas and speeding up the development of green energy will help Europe reduce its greenhouse gas emissions, an ever more urgent imperative as the world continues to warm.
James Henderson is the chairman of the gas program and director of the energy transition research initiative at the Oxford Institute for Energy Studies. He is also a visiting professor at Masaryk University in the Czech Republic and at the College of Europe in Warsaw.