REPowerEU: Europe’s Energy Plan to Mitigate the Energy Crisis & Russia-Ukraine War
European Commission President Ursula von der Leyen delivers a press statement on the RePowerEU initiative to become independent of Russian gas, in Brussels, Belgium, May 18, 2022. (Photo by Zheng Huansong/Xinhua via Getty Images)
The Russia-Ukraine war has caused a soaring increase in global energy prices as well as energy security concerns. European Union member states have a heavy dependence on gas, oil, and coal imports from Russia. The recent gas supply interruptions to Bulgaria and Poland confirmed the urgency to address the lack of reliability of Russian energy supplies. 85% of people polled believe that the EU should reduce its dependency on Russian gas and oil as soon as possible. For the energy and security concerns, the EU is planning to circumvent Russia’s energy supply and seek a faster green transition.
What is EU’s Plan to Confront Energy Crisis
In March 2022, EU leaders consented to phase out Europe’s dependency on Russian energy imports as soon as possible. In May, the European Commission drafted the REPowerEU: a plan to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition. The report claims that it can significantly reduce the dependency on Russian fossil fuels by this year and accelerate the energy transition through four approaches: save energy, diversify energy supplies, substitute fossil fuels with its clean energy transition, and smartly combine investments and reforms. This plan can speed up the green transition by having 63% of EU electricity produced from renewables by 2030, which is higher than the 55% goal in its 2019 plan.
REPowerEU aims to achieve a ⅔ cut in Russian gas consumption by the end of 2022, and end the dependence on its fossil fuel by 2027. In the meantime, the EU seeks a way to secure long-term sustainability through rapidly transitioning to green energy.
Energy-saving is the direct and short-term measure to answer the energy shortage. Every business, organization, and individual can save energy. In addition to behavioral change, fiscal measures are also encouraged to stimulate energy saving, such as tax rate reduction on eco-friendly products and companies. As of now, there are multiple measures have been proposed, including increasing the binding of the Energy Efficiency Directive (EED) target, “Playing my part” plan to support individual energy reduction costs with the cooperation of the International Energy Agency (IEA). Lowering demand will directly decrease the payment to Russia’s energy import, which was around 1bn Euro (1.02bn USD) per day before the Russia-Ukraine war.
Meanwhile, the EU is working with international partners to find alternative energy supplies. In the short run, they are looking for fossil fuels but from different suppliers. Similar to the Covid-19 vaccine purchasing program, the Commission will consider setting up a joint purchasing mechanism that will negotiate and contract gas purchases. In the long run, they are seeking renewable hydrogen as well. A Massive scaling-up and speeding-up of renewable energy will boost independence and green transition. Also, the EU is trying to provide a shortened and simplified permission process for major renewable projects.
Smart investment is also an important part of REPowerEU action. Recently, the EU plans to become the top investor in the world’s tallest dam in Tajikistan, aiming at assisting Central Asia in circumventing Russia’s energy export. Even though it is unclear when the investment will be officially started, an EU official said that the decision could be made later this year.
Be Realistic Towards Green Transformation
The immediate and complete transition to sustainable energy is unrealistic. Fossil fuels are hard to quit. It generates 64% of today’s global supply. As for now, some countries have to burn more coal and buy non-Russian gas to meet the demands.
Meanwhile, the EU recently approved a law to categorize gas and nuclear as sustainable energy. Even though there are 278 members of the European Parliament who voted against it, it still didn't meet the 353 majorities required to reject the proposal. Greta Thunberg, the young climate change activist, commented on her Twitter that it will delay the sustainable transition. People raised fears and worried about whether this will destroy the previous efforts on green energy. Although there are critics that it can prolong the EU’s reliance on fossil fuels, it is a pragmatic approach to the transition to renewable energy.
Despite a compromised plan to use traditional energy at first and gradually replace it with green energy. The largest biogas producer Nature Energy in Denmark said that the EU’s target can be still hard to achieve. The CEO of Nature Energy told the media that it will require at least 2 years to secure permits and construct factories, which is still longer than the EU’s goal to double the biogas output by the end of this year.
Excerpts from REPower’s Ten-Point Plan:
1. No new gas supply contracts with Russia
Gas import contracts with Gazprom covering more than 15 bcm per year are set to expire by the end of 2022, equating to around 12% of the company’s gas supplies to the EU in 2021. Overall, contracts with Gazprom covering close to 40 bcm per year are due to expire by the end of this decade.
This provides the EU with a clear near-term window of opportunity to significantly diversify its gas supplies and contracts towards other sources, leveraging the options for imports provided by its large LNG and pipeline infrastructure.
Impact: Taking advantage of expiring long-term contracts with Russia will reduce the contractual minimum take-or-pay levels for Russian imports and enable greater diversity of supply.
2. Replace Russian supplies with gas from alternative source
Complementing the point above, our analysis indicates that production inside the EU and non-Russian pipeline imports (including from Azerbaijan and Norway) could increase over the next year by up to 10 bcm from 2021. This is based on the assumptions of a higher utilisation of import capacity, a less heavy summer maintenance schedule, and production quotas/caps being revised upwards.
The EU has greater near-term potential to ramp up its LNG imports, considering its ample access to spare regasification capacity.2 LNG trade is inherently flexible, so the crucial variables for the near-term are the availability of additional cargoes, especially those that have some contractual leeway over the destination, and competition for this supply with other importers, notably in Asia.
The EU could theoretically increase near-term LNG inflows by some 60 bcm, compared with the average levels in 2021. However, all importers are fishing in the same pool for supply, so (in the absence of weather-related or other factors that limit import demand in other regions) this would mean exceptionally tight LNG markets and very high prices.
Considering current forward prices and the LNG supply-demand balance, we have factored into our 10-Point Plan a 20 bcm increase in the EU’s LNG imports over the next year. The timely procurement of LNG can be facilitated by enhanced dialogue with LNG exporters and other importers, increased transparency, and efficient use of capacities at LNG regasification terminals.
The increases in non-Russian pipeline and LNG deliveries assume a concerted effort to tackle methane leaks, both across Europe, where leaks are estimated at 2.5 bcm a year from oil and gas operations, and among other non-European suppliers - especially those that flare significant quantities of gas today.
There is limited potential to scale up biogas and biomethane supply in the short term because of the lead times for new projects. But this promising low-carbon sector offers important medium-term upside for the EU’s domestic gas output. The same consideration applies to production of low-carbon hydrogen via electrolysis, which is contingent on new electrolyser projects and new low-carbon generation coming online. Increased output of low-carbon gases is vital to meet the EU’s 2030 and 2050 emissions reduction targets.
Impact: Around 30 bcm in additional gas supply from non-Russian sources.
3. Introduce minimum gas storage obligations to enhance market resilience
Gas storage plays a key role in meeting seasonal demand swings and providing insurance against unexpected events, such as surges in demand or shortfalls in supply, that cause price spikes. The value of the security provided by gas storage is even greater at a time of geopolitical tensions.
The current tight seasonal price spreads in European gas markets do not provide sufficient incentive for storage injections ahead of the 2022-23 heating season, as demonstrated by the results of the recent gas storage capacity auctions in the EU. A harmonised approach to minimum storage obligations for commercial operators in the EU’s single gas market, together with robust market-based capacity allocation mechanisms, would ensure the optimal use of all available storage capacity in the EU.
Our analysis, based on the experience of recent years, suggests that fill levels of at least 90% of working storage capacity by 1 October are necessary to provide an adequate buffer for the European gas market through the heating season. Given the depleted levels of storage today, gas injection in 2022 needs to be around 18 bcm higher than in 2021.
Regional coordination of gas storage levels and access can provide an important element of solidarity among EU member states and reinforce their gas supply security ahead of the next winter season.
Impact: Enhances the resilience of the gas system, although higher injection requirements to refill storage in 2022 will add to gas demand and prop up gas prices.
4.Accelerate the deployment of new wind and solar projects
In 2022, record additions of solar PV and wind power capacity and a return to average weather conditions are already expected to increase the EU’s output from these renewable sources by over 100 terawatt-hours (TWh), a rise of more than 15% compared with 2021.
A concerted policy effort to fast-track further renewable capacity additions could deliver another 20 TWh over the next year. Most of this would be utility-scale wind and solar PV projects for which completion dates could be brought forward by tackling delays with permitting. This includes clarifying and simplifying responsibilities among various permitting bodies, building up administrative capacity, setting clear deadlines for the permitting process, and digitalising applications.
Faster deployment of rooftop solar PV systems can reduce consumer bills. A short-term grant programme covering 20% of installation costs could double the pace of investment (compared with the IEA’s base case forecast) at a cost of around EUR 3 billion. This would increase annual output from rooftop solar PV systems by up to 15 TWh.
Impact: An additional 35 TWh of generation from new renewable projects over the next year, over and above the already anticipated growth from these sources, bringing down gas use by 6 bcm.
To read the rest of the Ten-Point plan, click here.
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References:
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