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Europe may trade Russian natural gas for coal, cause emissions to soar

04 March 2022 Cristina Brooks

European nations facing a loss of natural gas supply from Russia may be forced to restart coal and oil power generation, even though this will increase emissions.

Scenarios laid out in a 3 March report by consultancy Aurora Energy Research and in a 24 February paper by the International Energy Agency (IEA) looked at ways the EU could curb Russian gas consumption due to Russia's war in Ukraine.

None of them will be easy to implement and some even appear to reverse progress towards the EU's net-zero goal, now being pursued through its July Fit for 55 package of policy proposals.

"In the extreme case that Russian gas imports cease, this would leave a large gap in supply to be met by other sources or demand reductions. Most of these measures present significant economic, societal, and technical challenges, but would be sufficient to offset the halt to Russian imports," the Aurora paper found.

Scrambling to prepare for a shortage, the EU's executive body, the European Commission, plans to ask states to raise green taxes on energy suppliers to finance a move away from gas, according to Reuters.

The move follows along the lines of measures states put in place when European wholesale natural gas prices rose 200% year-on-year due to a global gas demand spike.

During the gas price spike in October, the EC encouraged "likely temporary" state measures targeting energy bills and taxes to compensate energy consumers.

Following through with sales tax cuts for consumers after battling utilities over their gas price profits, Spain extended consumer energy tax relief this week.

Russia's attack on Ukraine heralded a new surge in gas prices. Summer futures prices for the European gas benchmark, Dutch TTF hub, had risen to a new record high this week after climbing the week of the invasion, and a baseload power futures benchmark followed a similar course, Aurora found. A 37% rise in gas prices this year is forecast under the current circumstances, according to S&P Global Platts Commodity Insights.

The IEA noted that the EU's net-zero policies still present long-term solutions to fossil fuel dependency, but that they can't address the looming shortage.

"Accelerating investment in clean and efficient technologies is at the heart of the solution, but even very rapid deployment will take time to make a major dent in demand for imported gas," said the IEA.

Dirty solutions to gas crunch

Aurora looked at two scenarios showing the effect of a halt to gas flows via Ukraine, alongside delays to the launch the new Nord Stream 2 pipeline created by Germany in response to Russia's invasion.

If Nord Stream 2's opening is delayed to 2025, Europe could obtain more gas via pipeline from North Africa and LNG suppliers, but an extreme 'no Russian gas' scenario would require Europe to reduce gas demand through urgent measures, Aurora said.

Switching on recently mothballed or underutilized nuclear and coal power plants would take the pressure off Europe's demand for gas, for example.

Restarts for industrial generation using coal or oil instead of gas could save 10 to 15 billion cubic meters (bcm) of natural gas per year, the single most effective gas-saving measure analyzed. Europe has been using about 45 bcm/year of natural gas from 2016 through 2020, according to the IEA.

But those actions would be a setback to EU industrial and power decarbonization policies going back decades. This includes the 2001 Large Combustion Plant Directive, the 2005 EU Emissions Trading System, the 2009 Renewable Energy Directive, and the 2010 Industrial Emissions Directive.

It also flies in the face of national schemes such as industrial carbon contracts for difference, proposed in Germany as well as the UK and already in place in the Netherlands.

Aurora noted that only a limited number of industrial facilities could rapidly switch from natural gas to coal or oil and that a loss of production could dampen economies. "Cost for industry demand reduction assumes production interruption of 1%-3.5% of industry GDP over winter..." Aurora analysts wrote in the report.

In a further blow to Europe's net-zero plans, gas savings could come from a restart to 17 GW of coal power plants across Germany, Italy, the UK, Spain, Portugal, and France.

This will be a setback for the EU as a whole, as well as the individual European countries that joined it in signing a coal phase-out pledge at the COP26 climate summit. Signatories included European coal demand centers Poland and Germany, where utilities are heavily dependent upon coal.

Restarting coal power plants would save more than 7 bcm/year of gas, but pricey coal would have to be sourced from abroad. Increasing European coal-fired power would mean "almost doubling the current level of Russian [coal] imports," Aurora analysts wrote.

Using liquid fossil fuels such as oil within existing gas-fired power plants could displace large volumes of gas relatively quickly and "reduce gas demand for power by some 28 bcm before there [is] an overall increase in the EU's energy-related emissions," said the IEA.

The IEA's paper presented a plan using this and other options, including measures targeting consumers and developing more renewables, that would reduce the EU's Russian imports by a third while still lowering emissions.

Boost for nuclear power, energy efficiency, bioenergy

Further gas savings could come from a delay to the shuttering of 8 GW of European nuclear power plants.

Germany is on track to completely phase out its three remaining nuclear plants in 2022, keeping with a pledge made in the wake of the 2011 Fukushima nuclear disaster, and likewise Belgium will be shutting down plants Doel 3 and Tihange 2 in 2022 and 2023.

German ministers have recently opposed the inclusion of nuclear in the EU's prposed green investment criteria, the EU Taxonomy, on environmental and safety grounds.

In the UK, the Hinkley Point B nuclear power plant has reached the end of its lifespan and will be decommissioned in 2022.

As with coal, nuclear power faces difficulties in obtaining fuel supplies from non-Russian sources by next winter.

The IEA suggested increase the output of biomass-fired power plants, a major source of renewable energy in the EU that NGOs say creates too much carbon. "The large fleet of bioenergy power plants in the EU operated at about 50% of its total capacity in 2021. These plants could generate up to 50 TWh more electricity in 2022 if appropriate incentives and sustainable supplies of bioenergy are put in place," wrote the IEA.

Some of the greener policy solutions outlined in the report target consumption at the consumer level.

Limited gas savings are possible if EU consumers can be coerced through higher energy prices, for example using demand response systems, to stop using as much natural gas. "Household demand reductions offer the most economical option as reduced gas consumption directly translates to savings," the report's authors said.

However, regulators may struggle to obtain "social license" to reduce consumers' household natural gas use.

In another green option, states could increase the pace of building renovations and heat pump deployment, if barriers like a lack of funding and heat pump suppliers are overcome.

"Speeding up anticipated deployment by doubling current EU installation rates of heat pumps would save an additional 2 bcm of gas use within the first year, requiring a total additional investment of €15 billion," found the IEA.

Posted 04 March 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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