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Can Europe free itself from dependence on Russian fossil fuels?

Rehden, a sleepy village in north-west Germany with Western Europe’s largest natural gas storage facility, offers the key to understanding how difficult it will be for Europe to decouple from Russian energy.

The underground site, which covers an area the size of 910 soccer fields and accounts for a fifth of Germany’s gas storage capacity, is owned and operated by Gazprom, Russia’s state-owned energy company.

Gazprom, which controls a third of all German, Austrian and Dutch gas storage facilities, emptied the tanks in Rehden and other EU locations unusually low values last year in an apparent attempt to squeeze European energy supplies ahead of Russia’s invasion of Ukraine.

The conflict has suspended the tough bet on Russian energy by Germany, Italy and much of Europe as a strategic mistake, say economists. Russia supplies more than 40 percent of the EU’s gas and coal imports and a quarter of its crude oil.

“In Germany it is a bit problematic that we always focus on one solution and rely almost entirely on it,” says Veronika Grimm, an economics professor at the University of Erlangen-Nuremberg, who advises the government. “Maybe we’ve woken up now.”

With increasing calls for Europe to block Russian energy imports, governments are now looking at alternatives, part of an EU-wide push Reduction in the block’s gas imports from Russia by two-thirds next year.

“That is the first question of order: build terminals and conclude contracts that are independent of Russia,” said Jörg Kukies, the chief economic adviser to Chancellor Olaf Scholz.

As policymakers prepare for potential gas shortages and try to build the infrastructure to diversify away from Russia, Europe faces some tough energy security issues.

Could Russian shipments to Europe be cut off?

Such an energy shock cannot be ruled out. Poland has called on the EU to ban all Russian energy imports, while Moscow has threatened to halt gas supplies to Europe in retaliation for sanctions.

But during Germany has suspended the Nord Stream 2 pipeline which would have doubled direct Russian gas supplies to Germany, has defied calls for a full embargo on Russian energy, with Scholz calling continued supplies “essential”.

Leonhard Birnbaum, CEO of Germany’s largest energy group Eon, agreed with Scholz’s position last week: “Without Russian gas, it won’t work in the short term – at least not without serious consequences for the European economy.”

Europe’s daily energy bill to Moscow is around 800 million euros. President of Ukraine Volodymyr Zelenskyy demanded Berlin to sever its economic ties with Russia, which he said is “only using you and other countries to fund its war.” A YouGov poll this month found that 54 percent of Germans support a Russian energy boycott.

Gerhard Mangott, a professor of international studies at the University of Innsbruck, said Russia gets 23 percent of government revenue from taxing oil exports, while taxes on gas accounted for just 8 percent.

“I think Europe will cut off oil supplies from Russia, but I doubt they will cut off the gas,” he said. “Moscow can retaliate by turning off the gas anyway.”

Most European countries have contingency plans to deal with gas shortages by prioritizing household supplies and curbing production in energy-intensive sectors. Bruegel, the think tank, estimates that suspending Russian imports would mean Europe would not refill storage tanks before next winter and force a 10 to 15 percent reduction in energy use through rationing.

The European central bank estimates a suspension of Russian energy imports would likely reduce this year’s eurozone growth by 1.4 percentage points to 2.3 percent.

but a study The National Academy of Sciences Leopoldina concluded that “a short-term cessation of Russian gas supplies would be manageable for the German economy” and rationing might not be necessary.

Can Germany wean itself off Russian energy?

Not easy. According to the World Bank, Germany imports around 60 percent of its total energy consumption. Half of Germany’s gas and hard coal imports come from Russia, which also supplies a third of the country’s oil imports.

Thus, while Germany could find alternatives to Russian oil and coal, it would struggle to replace Russian gas quickly a recent study by Econtribute, a research group from the Universities of Bonn and Cologne.

Germany burns gas for about a quarter of its electricity generation, and it is also used for heating homes, heating and cooling industry, and manufacturing chemicals.

Liquefied natural gas could help, but it would be expensive: Germany has no LNG terminals and would be dependent on other countries to handle imports.

While the EU currently imports gas from Russia with a capacity of 1,768 TWh, the Leopoldina study estimates that the block with its current infrastructure only has capacity to increase LNG imports by 1,100 TWh.

Germany’s Economics Minister Robert Habeck said on Sunday he had achieved a long-term goal LNG supply agreement with Qatar.

Is Italy in the same boat as Germany?

Yes. Italians voted overwhelmingly in a 1987 national referendum after Chernobyl to introduce a moratorium on nuclear energy development. Renewable energies cover only 11 to 12 percent of Italy’s energy needs, well below the European average of 22 percent.

With gas providing 40 percent of its energy needs — and 40 percent of that gas comes from Russia — it will take time to reduce Italy’s dependency.

“We don’t have a good energy mix,” said Roberto Cingolani, Minister for Ecological Transition. “The mistakes that the country has made for decades cannot be corrected in a year.”

Italy’s domestic gas production has plummeted, from about 20 billion cubic meters per year – about a third of the national requirement – to just 3.7 billion cubic meters per year, largely due to environmental concerns.

“We have reduced our domestic gas production, but we have increased imports,” Cingolani said. “The impact on the environment has been constant, and we have harmed the economy itself.”

How will Europe escape its Russian energy ties?

Germany is enforcing legislation mandating that all gas storage facilities must be at least 90 percent full by December – up from just 25 percent now. If necessary, this will be done via government purchases as part of a broader EU initiative Storage for boost gas.

Berlin also hopes to speed up the construction of three LNG terminals. “The conventional wisdom was five years [to build a terminal]’ Kukies said. “We’ve reduced them to three, and we think we can do it in two, maybe even faster.”

Part of the longer-term plan is increased investment in renewable sources such as wind and sun, which already cover more than 19 percent of Germany’s energy needs.

Berlin has ruled out extending the life of its remaining three nuclear power plants. Instead, production from coal-fired power plants using German lignite is to be increased.

Ferdi Schueth, vice-president of the Max Planck Institute, said higher CO2 emissions from burning coal would be compensated by the EU emissions trading system, which is preferable to “opening the worm box again” on nuclear power.

Cingolani said Rome has secured tentative deals from major gas exporters for 16-18 billion cubic meters a year — about half of its Russia imports. But tapping into those supplies also requires renting two floating regasification plants at a cost of €36-54 million per year.

Italy is also accelerating the approval of large renewable projects, but getting new energy up and running will take time. “Unfortunately, that’s not something you can fix in one day,” Cingolani said.

Additional reporting by Alexander Vladkov in Frankfurt and Neil Hume in London

https://www.ft.com/content/b32bf4fc-608c-46fa-944b-0b3fe8642919 Can Europe free itself from dependence on Russian fossil fuels?

Adam Bradshaw

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