- Europe's renewables revolution will be boosted
- Two-thirds of Russian gas imports could be replaced this year
The European Union (EU) has unveiled plans to end its dependence on Russian fossil fuels by 2027, as the invasion of Ukraine has led the bloc to swiftly reconsider its energy policies and shore up its energy security. Details are still scarce, however, and gas prices only relented slightly this week thanks to warmer weather, better wind output and continued Russian exports.
But even a high-level plan is a major development for the region. Russia provides almost half of the gas that the EU imports, a quarter of the bloc’s oil imports and 45 per cent of coal imports, so quick action is needed. The UK, by comparison, depends on Russia for less than 4 per cent of gas supplies and around 8 per cent of oil demand according to government figures.
European leaders met at Versailles at the tail-end of last week to discuss the ongoing energy and geopolitical crises. European Commission (EC) president Ursula von der Leyen said in the "mid term" the bloc would cut its Russia reliance by "massively investing in renewables”. A communique from the meeting also said liquefied natural gas (LNG) imports would be increased.
This is fairly hopeful thinking, according to Stifel analyst Chris Wheaton.
"To replace Russian gas entirely would require the output of circa 20 per cent of the current entire global liquefied natural gas industry just to fill that gap, which is just not possible to deliver, even if there were enough ships and enough facilities to regasify that LNG," he said. LNG is largely sold on long-term contracts, so the spot market only represents around 30 per cent of sales. To make things harder, the market was already in deficit before the war, and to avoid another energy crisis next winter the EU has also demanded gas stores are 90 per cent full when the next frosts arrive, further increasing demand.
US imports will help supply and have made a difference in recent weeks, but Washington's own Russia ban will mean there is greater demand for domestic production there as well.
A more detailed proposal to phase out Russian gas, oil, and coal over the next five years will be released by the EC by mid-May.
In the short term, despite all these challenges, the EC believes that 100bn cubic meters (bcm) of Russian gas could be replaced by the end of 2022. This is a significant amount given the EU imported 155bcm from Russia last year.
Central to REPowerEU, a policy proposal plan which the EC outlined last week, is turbocharging the bloc’s transition into renewables and clean energy. The electrification of the European economy and the use of renewable hydrogen must be boosted, the plan declares, which will quicken the decarbonisation of industry. Wheaton said this would likely only result in new supply from 2025 onwards, given existing challenges in wind and solar supply chains. Bloomberg Intelligence analysts said "an aggressive push" on wind and solar rollout could "practically eliminate power-sector gas use within four years" at a cost of €300bn (£252bn).
EC vice president Frans Timmermans identified rooftop solar and heat pump installation as "low-hanging fruit" that will cut demand, but he also described achieving wider plans as "bloody hard".
There has been disquiet in Germany and other gas-reliant countries at the rapid pace of change being mooted. Vice-chancellor Robert Habeck told TV network ARD there could be “mass unemployment and poverty” if Russian energy was cut off. Russia provides Germany with over half of the natural gas and coal it uses, and a third of mineral oil. Germany does have some options, including keeping three nuclear plants running that were set to close this year.
In the short term, the EC said a “temporary crisis framework” will be discussed within the bloc which would remove state aid blocks so governments can compensate businesses for spiking energy costs. This isn't all good news for business, however: the body said this could be funded by a windfall tax on energy companies.
European renewable stocks could benefit from the EC’s new policy agenda. Stifel’s Wheaton said that Aker BP (NO:AKRBP), Serica (SQZ) and Harbour Energy (HBR) on the UK side, could gain from higher gas prices and the diversification away from Russian supplies.
Bloomberg Intelligence analysts, meanwhile, pointed to Vestas (DK:VWS), Siemens Gamesa (ES:SGRE), and Nordex (DE:NDX1) as examples of European clean-energy companies that could see “significant upside growth potential” as investment in renewables booms and there is a move away from power-sector gas.
There are positives in the immediate future for the energy and electricity sectors, although this will be at the cost of others. "We now see signs of industrial demand destruction taking hold across a number of sectors in Europe – starting with fertiliser, paper, and steel at these prices," said Rystad Energy analyst Kaushal Ramesh.
As one cost comes down – even slightly – this month's extremely high prices will keep rattling down the supply chain.
