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European energy crisis: the security, affordability and sustainability dilemma

The EU is currently in the middle of a historical energy crisis, mostly driven by high gas prices. Already before the Russian invasion of Ukraine, the rise of energy prices and market turmoil drastically increased power bills on the continent and caused severed repercussion for people and companies. The Russian invasion of Ukraine has aggravated this situation, underlining the EU’s dependence on imports for 90% of its gas, 40% of which arrives from Russia. The transition towards a low-carbon economy, the post-COVID recovery curve combined with geopolitical conflicts created the perfect storm. With this blog post, Dr2 Consultants aims to shed light on how the EU is addressing the energy crisis.

In response to the energy crisis, on 8 March, the European Commission published REPowerEU: Joint European Action for more affordable, secure and sustainable energy. The Communication presents actions that would make the EU more resilient by accelerating the deployment of renewable energy as well as ensuring the security of energy supply. Following the Russian invasion of Ukraine, the Communication has a strong focus on decreasing Europe’s energy dependency on gas imported from Russia. The Commission thus proposes measures to diversify supplies away from Russian pipeline gas towards liquified natural gas (LNG) and other natural gas suppliers.

Moreover, to avoid low gas storage in the future, the Commission will propose by April an EU-level gas storage policy that would put forward legal requirements for Member States to ensure a minimum level of gas storage of at least 90% by 1 October each year. To reduce the EU dependency on fossil fuels, the Commission sets out measures to unlock the solar, wind energy and heat pumps potential. Notably, the Commission invites also the European Parliament and the Council of the EU to boost the Fit for 55 legislative proposals with higher or earlier targets for renewable energy and energy efficiency. One of the other goals of REPowerEU is to decarbonize the industry by accelerating the deployment of innovative hydrogen-based solutions and cost-competitive renewable electricity in industrial sectors. In addition, the Commission announces a recommendation on fast permitting for renewable energy projects. The Communication aims to promote the rollout of renewable and low carbon gas production with a focus on hydrogen and biomethane. In this regard, the draft suggests an ambition to produce 35 billion cubic meters of biogas by 2030 and to import 10 million tons of renewable hydrogen by 2030.  Other actions set out measures to support Member States in regulating energy prices in the electricity market and provide short-term relief to heavily exposed companies (e.g., in the form of state aid).

Sustainable goals will help address the European energy crisis

The EU’s ambitious climate agenda to phase out coal and the stricter rules of the EU ETS was one of the elements that led to an increase in carbon prices reaching a record peak of €88/ton on 8 December 2021. At the same time, the low gas storage in Europe and the increasing demand for gas worldwide drove both gas and coal prices further up and exert strong inflation pressures on the cost of electricity. In addition, the low wind power generation in the past year, the higher demand of energy due to weather conditions and the closure of nuclear plants in countries like Spain, France, Germany and Belgium exacerbated the tightness in the energy market in Europe.

Nevertheless, the European Commission underlines that the way out of the energy crisis is the acceleration of the implementation of the European Green Deal, including a faster deployment of renewable energy and the rollout of low-carbon gases. Indeed, during his speech at the European Parliament, European Commission Executive Vice-President Frans Timmermans pointed at the transition to renewable energy resources as a solution to the energy crisis. As part of the climate ambition, in the Taxonomy Complementary Climate Delegated Act, the European Commission indicated that gas and nuclear energy would play a pivotal role in accelerating the shift from coal towards a climate-neutral economy.

How does the EU respond to the crisis?

On 1 March, the European Parliament held an extraordinary Plenary session to discuss the EU’s response to Russian invasion of Ukraine. In the adopted resolution, MEPs call for a significant reduction of energy dependence on Russian gas, oil and coal. The resolution stresses the importance of diversifying energy sources, increasing energy efficiency and speeding up the clean energy transition.

Fit for 55 services

In parallel, MEPs responsible for the negotiations on Fit for 55 legislative package on energy, proposed solutions to address the current crisis. On the one hand, Rapporteur on EU ETS, MEP Peter Liese, suggested to lower the threshold to issue more permits at times of rapid price rises. The proposal entails the use of Article 29a of EU ETS according to which the European Commission should release 100 million CO2 allowances into the market from its market stability reserve over a period of six months if, for more than six months, the average permit price is more than two times the average price in the two preceding years. On the other hand, MEP Markus Pieper, who is the Rapporteur on the revised Renewable Energy Directive (RED III), aims to increase the renewable energy targets to 45% by 2030 to reduce the EU’s dependency on Russian gas. He said, “The Russian war against Ukraine is now forcing us to focus even more on our strategic autonomy, apart from climate change”.  Dr2 Consultants is constantly following the developments in the European Parliament and the Council of the EU on the proposed reform of EU ETS and RED III in light of the vote on the initial positions expected in June 2022.

Moreover, on 7 February, during the 9th EU-US Energy Council, the EU and US representatives addressed the issue of energy security within the EU and its neighborhood countries. In this light, the EU and the United States reaffirmed their cooperation to focus on avoiding energy and resources supply disruptions and improving diversification of energy suppliers (e.g., via global LNG markets).

The importance of diversification of energy sources

The EU measures to address the crisis and ensure the security of supply have one common denominator: the diversification of energy sources. Following the conflict on the Russia-Ukraine border, Russia, who is the largest supplier of gas in the EU (40%), decided to cut back on gas shipments across Ukraine, which counts for a third of gas flow. This had a significant impact on the import of gas to the EU. Notably, in 2021, the EU imported an average of over 380 million cubic metres (mcm) per day of gas by pipeline from Russia, or around 140 billion cubic metres (bcm) for the year as a whole. In addition, around 15 bcm was delivered in the form of liquefied natural gas (LNG). The total 155 bcm imported from Russia accounted for around 45% of the EU’s gas imports in 2021 and almost 40% of its total gas consumption. With reduced deliveries, the gas reserves in EU countries have been much lower than usual. Moreover, Europe suffered from the competition with Asia for supplies of LNG, where many countries boosted their consumption in the post-COVID-19 recovery, thus diverting LNG cargo away from European markets. Notably, China became the largest LNG importer at the beginning of 2021.

Dr2 Consultants continuously monitors the developments of the discussion on the new EU rules for the energy sector and supports its clients on these matters accordingly. If you would like to know more about this regulation or the overall legislation that the Commission will publish on the energy policies, please contact Dr2 Consultants to learn more about our services.