Winter Is Coming: Europe's Energy Crisis and the Russian Gas Threat
As Russia cuts gas supplies to Europe, EU countries and the UK are facing an unprecedented surge in energy prices.
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"So what we have to do is to flatten the curve," Ursula von der Leyen, the president of the European Commission, told the media on 7 September.
And no, she was not talking about the COVID-19 pandemic. She was referring to electricity and the demand for it.
With the war between Russia and Ukraine having crossed the 200-day mark, Europe is facing a full-blown, unprecedented energy crisis, and the winter season is not too far away.
Countries in the European Union (and even the United Kingdom) are, to use von der Leyen's words, "now confronted with astronomic electricity prices for households and companies, and with an enormous market volatility."
For instance, energy bills in the United Kingdom, according to the country's energy regulator Ofgem (Office of Gas and Electricity Markets), are expected to spike by 80 percent this winter. For now, Ofgem has stepped in and put a cap on the amount of money that energy companies can charge households.
A regular household's energy bill can't be more than £2,500 a year from 1 October (from £1,971 in the summer). Prior to this intervention, a regular household would have had to pay £3,549 per year due to the 80 percent spike.
On the other hand, Germany which, before the invasion, imported around 55 percent of natural gas and more than 30 percent of its crude oil supplies from Russia, has now announced a €65 billion (£56.2 billion) relief package with respect to the rising energy costs in the country. It includes one-off payments to vulnerable businesses and tax breaks to businesses dealing mostly with energy.
Price caps are also in the fray. "We will propose a cap on the revenues of companies that are producing electricity with low costs," von der Leyen had said in her 7 September announcement.
So, there is a lot to unpack in this energy crisis. How much did Europe rely on Russia for energy before the invasion, and what does that reliance look like now? How did the energy crisis spiral out of control? And what are the EU countries doing to prepare for, what appears to be, a very long winter ahead of them?
Reducing Reliance on Russia
90 percent of Europe's energy needs are imported.
Last year, before the war, gas deliveries from Russia to Europe were around 155 billion cubic metres (bcm). Europe relied on Russia, more than any other country, for around 40 percent of its gas. This has now come down to a mere nine percent, according to von der Leyen's announcement.
Based on the pre-invasion numbers, in absolute terms, Germany and Italy imported the largest quantities of gas from Russia, at 46 bcm and 29 bcm respectively.
In proportionate terms, countries like Lithuania, Austria, and Finland imported most of their gas needs, more than 80 percent, from Russia. In this regard, Germany met 55 percent of its gas needs from Russia but after the invasion, as of June, that has come down to 35 percent. Italy imported 40 percent of its gas needs from Russia before the invasion. That has reportedly come down to 25 percent.
Most of this gas is supposed to be transported through two pipelines:
The Yamal – Europe pipeline, which supplies gas to Poland and Germany via Belarus.
The Nord Stream, predecessor to the Nord Stream 2, which supplies gas to Germany via Ukraine (NS2 bypasses Ukraine). Gas supplies from this pipeline have been cut off for the moment.
France, which imports 17 percent of its gas needs from Russia, is reportedly preparing to cut itself off totally from Russian dependence.
Shutting Off Gas to Europe
Russia, on 31 August, stopped the flow of gas via the Nord Stream 1 pipeline citing maintenance issues and the need to carry out repairs. The halt, Russian energy corporation Gazprom had stated, would last for three days.
The suspension of the gas supply was supposed to last for three days but on 2 September, Gazprom extended that shutdown.
In a statement on Telegram, it stated, "Gas transportation to the Nord Stream gas pipeline has been completely halted until the complaints on the operation of the equipment have been eliminated."
Before the extension was announced, on the same day, the finance ministers of the United Kingdom, France, Germany, Italy, Japan, Canada, and the United States had agreed on a plan to not buy Russian oil above the agreed prices.
British Chancellor Nadhim Zahawi, reportedly after a meeting with US Treasury secretary, Janet Yellen, was quoted as saying, "We will curtail Putin’s capacity to fund his war from oil exports by banning services, such as insurance and the provision of finance, to vessels carrying Russian oil above an agreed price cap."
The signs were always there. Russia via Gazprom had already cut flows through the pipeline to 40 percent of the original capacity in June and to 20 percent in July.
The Kremlin on 6 September also blamed the sanctions, imposed by western countries after Russia's invasion of Ukraine, for not resuming in full its gas supplies to European countries.
Spokesperson Dmitry Peskov cited the sanctions "introduced against our country by western countries including Germany and the United Kingdom" as the reason for Russia's refusal to deliver gas via Nord Stream 1.
Europe's Gas Storage
The Russian gas threat, therefore, forced the European Union to fill up its storage sites to an 80 percent target by 1 November, which is when the European heating season begins. They reached this deadline ahead of time. In the years following 2022, the target must be increased to 90 percent.
Europe seems to have done a decent job given that the storage sites were 55.7 percent full by 25 June.
According to the Aggregated Gas Storage Inventory, a component of the website called Gas Infrastructure Europe, countries like Poland and the UK have reached 99.15 percent and 100 percent respectively.
Germany, which wanted to hit 85 percent storage by October, is running ahead of schedule with 88 percent storage at the moment. France is at 94 percent, and so is Denmark.
The elephant in the room is Ukraine. The country's storage is barely at 30 percent capacity but Energy Minister German Galushchenko said two weeks ago that the Volodymyr Zelenskyy-led government should manage to reach its goal of building 19 bcm of natural gas reserves for the upcoming winter. The heating usually starts in mid-October.
Ukraine's Gas Storage
Gas consumption in Ukraine has plummeted by 40 percent when compared to the pre-invasion levels, but production has decreased by only five percent (based on the numbers given by state-owned energy company Naftogaz).
Ukraine stopped buying Russian gas in November 2015, a year after the annexation of Crimea to reduce its dependence, and started relying more on traders in Poland and Hungary.
Ukraine's ability to survive the winter will also depend on its international allies' necessary financial support for it to import the amount of gas it needs. Needless to say, it also depends on whether Russia chooses to destroy the gas infrastructure in the country.
Over the weekend, the Russian military launched retaliatory strikes in Ukraine (after the latter regained territory) that targeted the the power grid and the heat power plant, causing an electricity blackout in Kharkiv and other areas.
Zelenskyy said that "the civilised world [could] clearly see these terrorist acts" and that Moscow was trying to deprive the Ukrainians of "gas, light, water, and food."
Germany has been searching for alternatives to Russian gas ever since it halted the certification of the Nord Stream 2. It could, according to Reuters, turn towards Britain, Denmark, Norway, and the Netherlands.
Norway has been increasing its production levels to help the EU countries achieve their target of ending reliance on Russian fossil fuels by the year 2027.
Another option is to get more gas from Algeria and Azerbaijan, which currently supply about 20 percent and 10 percent of Europe's gas respectively.
Then there is liquefied natural gas. The United States has said that it can provide 15 bcm of LNG to the EU this year. This is still far less than Russia's 155 bcm supply last year (less than even 10 percent of it in fact).
The problem here is that an increase in supply of LNG to Europe would result in a reduction of LNG supply elsewhere until production increases (constructing a new production facility for LNG takes more than two years).
Reducing consumption is something that Europe has to bank on. The EU has agreed to cut gas consumption by 15 percent. At the same time, it has to manage the prices as well. Putting a cap on Russian energy prices will kill two birds with one stone – it will stop the funding of Vladimir Putin's war machine and it will lead to government-imposed price caps on how much energy companies can charge households (as seen in the UK).
(With inputs from Reuters, The Economist, and Bloomberg.)
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