Having spent the past two months injecting storage sites with natural gas, EU countries on 9 September asked the European Commission to propose a raft of further previously inconceivable measures in the face of Russia’s weaponization of energy delivery. These measures will include a tax on the excess profits of energy companies that is redistributed to households and businesses, a cap on the price of gas, capping electricity prices and forcing a solidarity contribution from companies, and reducing the amount of electricity that is used during peak hours.
EU Energy Commission Kadri Simson said the Commission will adopt the proposals of “unprecedented measures for an unprecedented situation” at the next college meeting on 13 September, to be unveiled in President Ursula von der Leyen’s State of the European Union speech on 14 September in Strasbourg.
By the end of August 2022, 80% of the EU’s gas storage capacity had been filled, according to industry body Gas Infrastructure Europe (GIE) – meaning the EU has met its 1 November target well ahead of schedule. That is up from 67% at the end of July, a rapid increase in just one month. GIE expects some countries will go further. France plans to get to 100% by November, and Germany to 95%. The filling in August came much faster than many experts predicted, and the crucial factor was rapid and proscriptive EU legislation. “The new EU Gas Storage Regulation which entered into force in July 2022 was in fact the first mechanism adopted by EU institutions to reduce Europe’s exposure for the coming winter,” GIE told Energy Monitor.
Key to getting rapid agreement on the legislation was recognising the different situation of EU member states. Five countries that have extremely large storage capacity because they provide storage for their neighbours – Austria, Hungary, Latvia, Czechia and Slovakia – were given a different target: 35% of annual consumption over the past five years. Latvia, for instance, provides gas storage for Finland, Estonia and Lithuania. Meanwhile, Luxembourg, Greece, Slovenia, Ireland, Malta and Cyprus were exempt because they have no gas storage and no connection to their neighbours. The end result is that the EU’s storage capacity will be full, although the filling may go slower between now and November as sites are harder to fill after 90% because of a difference in pressure between the storage and the pipelines.
Germany’s economics and climate minister Robert Habeck told the German parliament on 8 September that the past week without Russian gas coming from the Nord Stream pipeline, which has been indefinitely suspended, shows that the gas storage situation is making Europe resilient. “For a week now, we have been independent of Russian gas because of this government’s consistent and forward-looking ability to act,” he insisted. Experts agree that the storage situation is good, but that doesn’t mean Europe is going to be OK.
“In terms of the storage situation, you couldn’t hope for much better,” says Jacob Mandel, senior associate for commodities at Aurora Energy Research. “It is a little bit surprising, for one reason because there is not a tremendous amount of incentive for it. There is not a big amount of information about whether the injections have been driven by private firms using storage as they normally would through economic incentive, or driven by the market players that normally wouldn’t use storage but have been empowered to do so by the new regulations. The problem is more that there are limitations in relying on storage itself; it is just one of the factors that ensure security of supply for Europe.”
Good news, bad news
Energy ministers did not meet in Brussels to pat themselves on the back. The forecasts for the winter are increasingly dire, and over the past week gas prices shot up after Russia announced the indefinite closure of the Nord Stream 1 pipeline delivering gas to Germany. National leaders are becoming increasingly worried about the prospect of widespread civil unrest if energy prices spiral out of control. The cost of gas and electricity has increased by 600% over the past year. The emergency meeting on 9 September was called by the Czech government, currently holding the rotating presidency of the EU Council, which warned in a document circulated earlier in the week that “we also start seeing in Europe an increased number of factories halting production or even closing entirely”.
Several leaders, most prominently Spanish Prime Minister Pedro Sanchez, have been pushing for months for drastic intervention in the energy market. Until recently, that was resisted by Germany, but faced with one of the most extreme upcoming crisis situations in Europe, Berlin finally relented at the start of September. The path is now cleared for major measures to be agreed – but analysts fear it may be too late.
“There is some indication that they will agree a very broad, large change in how EU energy markets function, but I expect such a major change will take a longer time and more discussion,” says Mandel. “Different industry players will have many different views, as will different countries.” On decoupling gas and electricity prices, as called for by Sanchez, he says: “It is difficult – I don’t know if there is any way to do that in the short or even medium term.”
The ministers tasked the Commission to propose demand reduction measures and a levy on energy companies’ windfall profits – a measure already endorsed by France and Germany. They've also asked for a proposal on capping the price of gas from Russia, as the G7 has agreed for Russian oil. Proponents argue the EU is not using the leverage it has over Putin on gas, given that Russia’s pipelines only go to Europe and the country lacks the facilities to liquify the gas and send it elsewhere by ship. Because gas wells cannot be turned off, that has meant Russia has been forced to burn the gas it is withholding from the EU, losing millions in profit. They say the EU should call Putin’s bluff.
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“There is a case to make that Russia might actually increase its exports in the coming months because Russian domestic storage is very close to full – it has to go somewhere and it has nowhere else to go,” says Mandel. “As Russia cuts more supply, there is less of it that it can cut. At some point the threat of a cut loses some of its potency because it has already been incorporated into the price. We may be seeing some of that ability to affect the market somewhat evaporating.”
Some eastern EU countries, led by Poland, are pushing for the EU to release additional emissions allowances in the EU ETS as a way to lower the price of carbon on the market. However, the European Commission has strongly opposed this measure, given that low prices were what made the market ineffective for many years. The price of carbon has not been as volatile as energy market prices, staying stable this year at around €80–90 per tonne of CO2. This may be discussed at the next meeting of EU environment ministers.
The prospect for big action increased on 4 September when Germany’s coalition government agreed on an inflation-busting package that included an endorsement of a windfall levy and energy aid. The subsequent deal for gas and electricity sharing between France and Germany could also provide a blueprint for a larger EU agreement on bi-directional flows. There may also be an agreement to establish an EU-wide merit order for which parts of society will be prioritised for energy rationing, following on from the Commission’s proposal over the summer.
Diving into the unknown
Even if EU ministers decide to embrace the most drastic options for action, the reality is they are at the whim of geopolitical developments, and weather.
“There are many questions,” says Mandel. “For Russian gas, it is very hard to say what the import level will be in the next months. Will the weather be cold? How much further can industrial demand turn down? What is the elasticity of that demand? And there is a big question over LNG [liquified natural gas] imports, because there are not many other flexible sources of supply. There isn’t potential for higher Norwegian or North African imports. There isn’t major capacity coming online that wasn’t already expected and planned a long time ago. So, if the EU needs a lot more LNG it will mean less LNG sent to China, Japan or wherever. The evolution of how demand is changing in other key markets globally will have a major impact on LNG availability. There is no magic source where that gas is going to come from.”
The priority for the 9 September meeting in Brussels was protecting vulnerable consumers, but it also demonstrated a sea change in the way the EU thinks about energy.