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  1. Policy
26 July 2022

What will gas rationing mean for the EU’s energy future?

The EU is preparing to shut off segments of industry if Russia turns off the gas taps. It is likely to burn more coal, but the emergency could also spur renewables investment.

By Dave Keating

National energy ministers from the EU’s 27 member states are holding a contentious meeting on EU gas rationing in Brussels today, and ministers from Europe’s south have come in with a tough message: we will not bail out Germany for the energy mistakes it has made over the past two decades.

Ministers will vote on the European Commission’s proposal, put forward last week, to give it emergency powers to enforce mandatory gas rationing in the coming months if Russia shuts off the gas taps. That possibility was acute last week when it looked like Russia would not resume gas deliveries via the Nord Stream 1 pipeline after the scheduled end of yearly maintenance on 21 July. Those fears were abated when gas began flowing as planned, but there are still fears Russia will turn off the taps when it will hurt the most – at the start of winter.

The gas flow from Russia to Germany was already at only 40% of capacity, and today Russia reduced the amount flowing through the Nord Stream 1 pipeline to 20%. This will pose a significant challenge to Germany’s goal of filling German gas storages to 75% by 1 September, 85% by 1 October and 95% by 1 November. The country also plans to receive liquified natural gas (LNG) from the US via four floating terminals leased by the government, two of which should be operational by the end of the year – but the government has admitted the situation remains dire.

If EU national energy ministers approve the Commission’s EU gas rationing proposal today, it will be able to declare a “union alert” should the gas supply situation become critical, mandating each EU country to reduce their gas consumption by 15% from their average over the past five years – the same as the voluntary target being asked for now. However, while the reduction amount would be proscribed, the implementation details would be left to the discretion of national governments.

The Commission put out guidance on 25 July on which economic sectors should be prioritised for shutdowns, beginning with power plants or industrial facilities that can quickly switch to other energy sources like renewables or coal, followed by “non-essential” industrial activities that don’t affect health, safety or social needs. The Commission recommends rationing gas for households only as a last resort and says that vulnerable consumers, as defined by the Commission, should be shielded under any circumstance. The reduction should be achieved by 1 March 2023.

However, some national governments are balking, questioning why every country should have the same reduction burden when the dependency on Russian gas varies immensely. They also question why the reduction should be the same regardless of whether the country took decisive action to lower Russian gas use over the past five months, which also varies widely within the union. On average, the EU has decreased its dependency on Russian gas by 5% since the outbreak of the war in Ukraine.

There is particular grumbling in southern Europe, where memories are still fresh of Germany’s perceived lack of solidarity during the debt crisis a decade ago. In a comment clearly meant to emulate similar ones made by German politicians at that time, Spain’s Energy Minister Teresa Ribera said last week: “Contrary to other countries, Spain hasn’t been living beyond its means in energy terms.”

Energy transition impacts

If ministers do approve the EU gas rationing proposal today, it will have significant implications for Europe’s energy transition to reach its 2030 target of a 55% decrease in emissions and its 2050 target of net-zero emissions. Thomas Gelin, a campaigner with Greenpeace, says the Commission’s plan is “a green light for industries to switch back to unsustainable energy sources like oil and coal, while households, whose energy needs for heating increase during the winter season in Europe, are left with no real support and no concrete alternatives”.

The system of rationing prioritisation, he says, will encourage facilities to switch to coal in the short term – and the Commission has not conducted an impact assessment about what the plan, along with no-strings-attached taxpayer support for energy-intensive industries such as steel, cement or chemicals, will mean. Last week Germany bailed out German utility Uniper, Europe’s largest buyer of Russian gas, taking a 30% stake in the company to save it from bankruptcy due to skyrocketing prices.

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Today, ahead of the ministers meeting, the European Climate Foundation published an initial report on the effects of Russia turning off the gas taps and the different options European policymakers have. It identifies 15 structural levers to shift supply and demand in the EU, and finds that even if all 15 levers are pulled this winter, it may not be enough to cover the shortfall. However, the report also concludes that if the right decisions are made in the near term, Europe can emerge from this crisis stronger on energy security through a greater reliance on home-grown renewable electricity.

“Europe and the world do not have to choose between addressing today’s energy security crisis and the climate crisis,” writes Fatih Birol, executive director of the International Energy Agency (IEA), in the report’s introduction. “While lost supplies from Russia need to be replaced in some cases through short-term increases in fossil fuel production elsewhere, the lasting solution to both crises is a huge and rapid scaling up of investment in energy efficiency, renewables and other clean technologies.”

The report, based on research by a group of experts from organisations including Rhodium Group, Agora Energiewende, University of Maryland and National Renewable Energy Laboratory, concludes there would be no need for any major new investments in gas infrastructure as a result of the shut-off: not new LNG terminals and not new pipelines.

LNG terminals require lifetimes of more than ten years for economic viability yet “utilisation of these assets would be in doubt beyond 2025” as the EU already had pre-Ukraine war plans to cut fossil gas by around 30%, or 116 billion cubic metres (bcm), by 2030. There are also “no viable options to ramp up indigenous [fossil gas] production by 2022 or 2025”. While new floating LNG terminals can provide some additional supply, they should have time-limited contracts to prevent lock-in, the report suggests.

If Russia shuts off the taps, the report recommends governments introduce fast-track permitting for wind and solar projects, leverage public money for energy efficiency projects, accelerate industrial electrification, quickly build up staff for building renewables installation and limit gas infrastructure investments to short-term contracts. However, the report also acknowledges that a temporary halt to the decrease in coal use is “inevitable” as a result of the gas supply crunch.

Of the various levers that policymakers have at their disposal to replace demand for Russian gas by 2025, only a few can be pulled without seriously impacting climate goals.

“It is conceivable that more aggressive measures may become politically feasible and necessary in the event that Russia cuts off gas supplies,” the report notes. “In such a scenario, gas prices are likely to remain very high and be accompanied by a political and security imperative to minimise exposure to natural gas imports. These factors might combine to drive even stronger action on clean energy deployment, but also may mean that some of the near-term ‘emergency’ measures such as curtailment of certain industries becomes an economic and/or political necessity.”

EU gas rationing: reactions

Industry has so far been receptive to the Commission’s plan, particularly the decision to leave it to national governments to decide which sectors to prioritise, while issuing guidelines based on their importance. There are concerns that without a unified EU plan, rationing will be done in an uncoordinated way in each member state.

“When it comes to demand reduction plans, we agree with the approach proposed by the European Commission to promote market-based instruments, to identify common principles and criteria, and to provide guidance in identifying priority sectors in the extreme event of gas curtailment,” said a spokesperson for European chemicals industry association Cefic. “A value chain and cross border analysis is crucial, as the Commission has indicated.”

There will be intense lobbying in national capitals over the coming weeks by various industries jostling to make sure they are not the first targeted for EU gas rationing. A group of German business associations last week launched a cooperative effort to save energy in order to avoid rationing. “The heating period is less than 100 days away and is approaching fast,” said the nine associations, which include renewable energy association BEE, efficiency advocates DENEFF and the association of energy intensive businesses, VIK. “At the same time, a permanent stoppage of Russian gas supplies remains a realistic scenario.” 

They also had a message for consumers: “Saving energy therefore makes more sense than ever – for your own wallet and warm homes in winter, but also for the preservation of our national economy… Whether in factories and office buildings or in private homes and rented flats – wherever energy is consumed on a daily basis, savings can often be implemented quickly and effectively.”

The climate think tank E3G believes that the Commission’s demand-side approach is “critical” to preparing the EU for the winter and that a rejection by ministers today “risks limiting the bloc’s geopolitical space to navigate the Ukraine conflict”.

The IEA estimates there is a potential 12bcm gas supply gap that could not be closed through additional supplies and must be met with demand reductions. The Commission estimates the gap could be up to 30–45bcm.

To get an agreement today, E3G suggests some countries could make stronger contributions to solidarity, such as with cross-border gas flows, while others such as Germany and Poland could make a stronger contribution to demand reduction. It also says that the analysis of which sectors to prioritise for rationing should be done on an EU rather than national basis: “An EU wide assessment of what sectors in what countries have most potential to make the fastest and deepest emissions reductions and what specific support is needed for that is still lacking.”

Already the draft text that ministers are working on has been watered down to give exemptions to countries that are not heavily dependent on Russian gas, prompting fears that the text may be watered down to the point where it cannot meet the goal of reducing Russian gas use by 45 million cubic metres. However, the ministers were given new impetus to act overnight, as Russia reduced the amount of gas flowing through the Nord Stream pipeline to just 20% of capacity, blaming technical reasons.

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