Europe – The Ukraine crisis has shifted Europe’s energy policy priorities, with a greater emphasis on short-term energy supply security and a focus on new supply routes for fossil fuels, with natural gas supply being particularly challenging.
These new priorities interact with the 2030 and 2050 decarbonization targets, potentially resulting in a strategic shift.
The IRENA World Energy Transitions Outlook delves into hotly debated new geopolitical issues such as hydrogen trade and critical materials supply. The analysis that follows focuses on the role of renewables in an accelerated European energy transition and how to design strategies that combine decarbonization and energy security concerns.
Natural gas prices have risen as a result of the Ukraine crisis, particularly in Europe, where the TTF price (the most liquid pricing location in Europe) for May 2022 is around 100 EUR/MWh, down from a peak of 300 EUR/MWh in early March. Global prices have risen as a result of efforts to purchase more Liquefied Natural Gas (LNG).
Oil prices have been rising for some time, owing to a combination of rising post-Covid demand and recent underinvestment. The price of crude oil is currently above $100 per barrel. Furthermore, coal prices are extremely high, exceeding $300 USD/tonne.
Power prices are determined by the final input required to balance demand, known as pay-as-clear, which is typically natural gas. Half of France’s nuclear power plants are not operating, contributing to high electricity prices, which reached 3,000 EUR/MWh during a crunch hour on a Monday morning in early April. ETS CO2 prices have risen again, reaching nearly 90 EUR/t, which adds about 7 cents to a kWh of coal-fired electricity.
Rising wholesale prices are being reflected in rising consumer prices. For example, the authors’ German utility recently announced that gas prices will rise from 9 cents per kWh to 15 cents per kWh beginning in June. In the year to March 2022, gas station fuel prices in Germany increased by 47 percent on average.
Europe’s plans to phase out fossil fuels are ambitious. The EU-27 already met its target of 20% renewables in final use in 2019, and the Covid crisis in 2020, combined with falling energy demand, increased the share to 22.1 percent the following year. The European Commission proposes raising the renewables target from 32% to 40% by 2030 in order to meet the -55 percent climate target by 2030. (compared to -20 percent by 2020). This reflects, in part, the fact that countries’ National Energy and Climate Plans totaled around 34% renewables by 2030. Already in 2021, renewables accounted for 38% of total power generation.
Coal phaseout is relatively simple because the majority of coal use is attributed to power generation. The cornerstone of coal phaseout is the rapid deployment of renewable energy generation. The European solar industry anticipates 90 GW/yr of new solar PV capacity additions between now and 2030 (more than a tripling from 2021 levels), while the wind industry anticipates nearly a tripling of capacity additions to 27 GW per year. One major issue is the slow approval of new renewable energy capacity. Permitting processes that are simplified will be critical to accelerating deployment to the required rate. Regulatory constraints also impede grid integration. As a result, hydrogen (pipelines) has emerged as a potential solution.
The phase-out of oil is inextricably linked to the transportation sector. Over the last five years, EU sales of electric vehicles have increased tenfold, reaching 1.7 million units last year (18 percent market share). Forecasts predict further growth to 6.7 million units in 2030, with a fleet of 42.8 million EVs. While Europe has built a massive pipeline of new battery plants, rising battery material costs may slow this growth.
These new electric vehicles on European roads will require 113 TWh of electricity to charge, with roughly 60% coming from public and 40% coming from private chargers. This amounts to less than 5% of total electricity demand. The challenge is primarily in the deployment of charging infrastructure and ensuring that electric vehicles contribute to adequate power system management and renewables integration via smart charging approaches. By 2030, the EU will require up to 6.8 million public charging stations. Every week, up to 14,000 public charging points must be installed across the EU – a sevenfold increase from current levels.
Gas phaseout is one of the most difficult aspects of the energy transition. There are abundant gas resources around the world, but the ability to ship this gas to European markets is limited in the short term. According to the most recent IPCC mitigation report, global gas use should peak around 2030 and then decline significantly.
In 2021, natural gas accounted for nearly a quarter of the EU27 energy mix and 14% of electricity generation. The majority of natural gas was used for heating. Figure 1 depicts three major demand categories of similar importance:
Production of electricity
In 2020, the EU consumed 396 billion cubic meters (bcm) of natural gas, with 56 bcm, or nearly 14 percent, produced by EU member states. Natural gas consumption in the EU was 412 BCM in 2021, up 17 BCM or 4% from 2020 levels. The EU’s reliance on imports is growing: in 2021, indigenous production was 50.6 billion cubic meters, or 12 percent of total consumption. The Netherlands is currently the EU’s largest producer of natural gas. Russia provides approximately 155 BCM (38 percent of total supply in 2021).
Fossil fuels sources
The current energy crisis has increased the urgency of the energy transition. Security of supply and diversification have emerged as new priorities. The decision to halt Nordstream II and phase out Russian gas deliveries is part of this reorientation. The European Commission hopes to reduce these imports by two-thirds by the end of this year by increasing supply from other sources and decreasing demand for gas from various sectors of the economy.
Additional 50 BCM LNG imports (roughly a tenth of global LNG trade, or all LNG not covered by long-term contracts) from the US, in particular, can fill a portion of the gap, as can another 20 BCM or so from other sources (Norway, North Africa, increased production in the Netherlands etc). However, insufficient import terminal capacity, combined with a lack of transmission pipeline infrastructure within Europe, may limit actual LNG growth this year. Given supply-side constraints, some experts believe the assumption is too optimistic.
In the power sector, the EU hopes that renewables will replace up to 20 billion cubic meters of gas this year. This would necessitate an additional 100 GW of capacity, a significant increase over the 37 GW of solar and wind capacity added in 2021. Given that much of the replaced gas capacity will come from variable renewable sources, there will be a need for clean dispatchable power that can provide many of the energy non-energy services currently provided by natural gas generators.
Simultaneously, gas power plant investments that secure a permit by 31 December 2030 and emit greenhouse gases equivalent to 270g of CO2 per kilowatt-hour (kWh) of electricity will be labeled as sustainable. Firms operating such plants must provide a plan demonstrating that they will completely transition from natural gas to low-carbon fuels or renewables by December 31, 2035.
Despite record high spot prices, European gas demand has remained resilient through 2021, indicating the limits of demand-side response. Western European demand is expected to fall by 4.5 percent this year, owing in part to lower gas consumption in the power sector, which is expected to fall by 6 percent by 2021, according to the IEA’s quarterly gas market report.
Industrial demand response
The industrial demand response is one aspect that has received little attention thus far. Industrial gas demand was already 12 percent lower than pre-pandemic long-term averages in October 2021. Yara, a fertilizer manufacturer, has announced a reduction in urea-ammonia production units in Italy and France, citing high gas prices. Others may follow suit if current prices remain stable. The EU-27 produces approximately 13.2 Mt of ammonia per year, which equates to approximately 10 BCM of natural gas consumption. Around one-eighth of all ammonia produced worldwide is shipped, and nitrogen fertilizer is shipped even more widely. As an emergency measure, this import option could be considered in order to save gas. More consumers can benefit from demand response. Changes in wholesale prices are almost immediately reflected in retail prices in some European countries, but it can take up to two years in others.
Residential gas use could be reduced by 14 BCM if all households in the bloc turned their thermostats down by 1 degree Celsius. It remains to be seen whether voluntary measures result in significant savings; if the response is weak, this could have serious policy implications. Rooftop PV and accelerated heat pump deployment could add another 5 BCM. Solar water heaters can also save energy. Much more is possible in the long run, but new customers are currently facing long wait times due to a lack of equipment and installers.
The revision of the energy performance of buildings directive, a critical component of the energy transition and a key option for reducing natural gas dependency, faces similar constraints. All of these aspects must be prioritized, but they will not solve the short-term gas dependency issues. Accelerating building renovations, including fuel switching, is a higher priority.
Green gases role
Various studies have been conducted to evaluate the potential of green gases. Biogas and biomethane already account for 4.6 percent of total gas supply. Expansion to 35 BCM is planned for 2030. In 2021, the number of biomethane plants increased significantly, with over 1,000 plants in operation.
The European Commission anticipates 20 million tonnes of green hydrogen production and imports by 2030, which is the equivalent of 85 BCM natural gas.
To put that lofty goal into context, 200 GW of electrolyzer capacity and 400 GW of solar and wind generation capacity are required (at present there is only 0.5 GW of new electrolysers installed in 2021 worldwide).
According to an upcoming IRENA study, the most promising hydrogen market segment, renewable ammonia, currently has the equivalent of around 3-4 Mt hydrogen in new projects planned worldwide for 2030. Several new initiatives are investigating hydrogen and ammonia sourcing, such as from North Africa. However, establishing this capability will take several years. Finally, how carbon accounting is implemented in the context of Carbon Border Adjustment Mechanisms may have a significant impact on future trade flows, which may also affect future gas demand.
Europe’s energy security
The Ukraine crisis has brought renewed and urgent attention to Europe’s energy supply security. The pressing need to reduce import dependency on key carriers such as natural gas and oil has reopened a public debate about European energy policy priorities.
Further diversification of fossil energy sources can improve energy security in the short to medium term. More temporary indigenous natural gas production, such as in the Netherlands, is being investigated, as are more LNG flows and import terminals. It is critical that such new sourcing and infrastructure be developed in such a way that it does not result in stranded assets or delays in the energy transition. Current plans to deal with the gas are not set in stone, but the intended changes are significant. The success will also be determined by the winter temperatures.
Beyond the short term, diversifying fossil fuel sources does not address Europe’s fundamental long-term energy and climate challenges. A strategy based on renewable energy supply, with a decisive push toward electrification of end-use sectors and energy efficiency, can deliver the majority of the emission reductions required to combat climate change in the medium and long term.
This is also the best way for Europe to permanently reduce its reliance on fossil fuel imports. In a fully decarbonized energy system, Europe has vast renewables potential that can supply the majority of its energy needs. The current crisis provides additional reasons to accelerate efforts to pursue a sustainable energy system with renewables at the core as a priority.