Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The EU's emergency plan to address a natural gas supply shortage
due to tensions with Russia may prove challenging for states
obliged to store gas.
The European Commission's REPowerEU communication on 8 March
proposed steps to reduce EU consumption of Russian gas by
two-thirds this year and completely before 2030, for example
through increasing use of electrification, energy efficiency,
biomethane, and green hydrogen.
REPowerEU aims to cushion the impact of continued high gas
prices on companies and consumers if Russia's war in Ukraine curbs
its gas exports to the EU, in particular via Ukrainian
pipelines.
Continuing along the lines of an agreement reached with the US
last month, the EU will seek alternative gas suppliers to Russia,
"ending the EU's overdependence on a single supplier."
But REPowerEU's goals for EU gas markets are not simple.
"REPowerEU is an extremely ambitious strategy. Reaching
independence from Russian gas by 2030 is extremely challenging,"
said S&P Global Commodity Insights' Head of EMEA Gas Analytics
Adrian Dorsch.
The requirement that states fill gas storage facilites to 90% by
1 October each year would see them buying gas at far above autumn
historical average volumes and prices. Legislation on storage will
be proposed by April.
In the meantime, states should encourage gas storage operators
to stock up by increasing tax rebates and guaranteeing gas
suppliers' income under contracts for difference (CFDs), said the
EC.
In the current price environment, gas storage buyers are likely
to be outbid by gas suppliers willing to pay more, unless the
buyers receive state financial support, according to S&P Global
Head of EMEA Gas Analytics James Huckstepp.
REPowerEU's goal to obtain 50 billion cubic meters (bcm) of LNG
annually is also in doubt given global competition for LNG, said
investment management firm AllianceBernstein.
LNG is in high demand in Asia. "Sourcing an additional 50 bcm
per year of LNG in the medium-term will require continued high gas
prices to incentivize gas demand destruction in Asia. Long-term
commitments may be required to secure this gas," said Dorsch.
Explaining further, S&P Global Senior Advisor and Global Gas
Strategy Lead Michael Stoppard added: "There will be a three-way
tug-of-war for scarce spot LNG supply between Europe, Asia, and
Latin America through the year and beyond."
S&P Global Platts Analytics forecasts that if Russian
pipeline gas flows continue at current levels, the EU will need to
reduce industrial gas demand by at least 10% through the summer to
reach REPowerEU targets.
This level of industrial shutdown may not be enough if there is
a supply interruption, however, as Russian pipeline gas flows are
already 25% below five-year averages. "It will be difficult to
reach [the storage target of] 90% with existing Russian flows. If
Russian pipeline flows are suspended, or indeed if Russian imports
are reduced in 2022 by 66%, then significant shutdowns of industry
may be required to ensure storage for the coming winter," said
Stoppard.
Even before the invasion, the EC predicted gas prices would
remain high and volatile until at least 2023. "The requirement to
have European storages 90% full by the start of winter season will
cause a further increase in prices, more than otherwise would have
been the case as both Gazprom's gas bought under long term
contracts and spot gas will become progressively more expensive,"
Katja Yafimava, a Senior Research Fellow at the Oxford Institute
for Energy Studies Gas Research Programme told Net-Zero
Business Daily.
It was "not a given" that states would succeed in reaching the
EU's storage goal, she added.
Consumer impacts
High gas prices are being felt by consumers bloc-wide owing to
the surge in wholesale gas prices last
year, a product of global market tightness and rebounding Asian
LNG demand post-lockdowns.
REPowerEU will seek to assist consumers struggling with the high
gas and electricity prices. For example, it gives states guidelines
on how to roll out windfall taxes on the energy sector and
introduce regulated retail prices.
These build on the October guidelines for states looking
to use taxes to relieve consumers paying more through energy bills.
"Continued high energy prices are likely to increase poverty and
affect business competitiveness," according to the
communication.
The proposals may be a nod to the Spanish government's February
letter urging the EC to protect
electricity bill payers through windfall taxes that "claw back"
high generator profits and reform markets by decoupling wholesale
electricity from gas.
While in October Energy Commissioner Kadri Simson rejected
reforms and said energy markets were "sound" and driving renewable
energy uptake, the EC's lastest communication promised to "assess
options" on market design.
The EC is looking into reforms, such as ways states can legally
cap energy prices temporarily and how to distribute subsidies to
companies, such as gas utilities forced to buy expensive gas to
replace disrupted contracts.
AllianceBernstein expected the REPowerEU windfall taxes to have
a minimal impact on German utilities RWE and Uniper as the clawback
would only apply to unhedged coal and nuclear power volumes.
However, it suggested the windfall taxes could "backfire" on
renewable developers that collected windfall profits on their power
sales during the gas price spike.
Securing gas storage
During the gas price crisis last October, Polish climate
minister Michał Kurtyka accused Gazprom, the Russian state gas
company at the heart of certain Russian-Ukrainian disputes, of
pursuing "illegal practices."
In the communication, the EC Commission said it would
investigate alleged market manipulation, and noted Gazprom was not
filling the storage it operates to the usual level.
The EU's executive has not forgotten storage risks in the
proposals. It offered to help states coordinate gas storage
refilling and lower-risk contracts through a joint European
platform.
Shoring up risks to supplies, each member state will also be
required to certify that foreign gas storage operator ownership
does not put states at risk of loss of supply.
While keeping Fit for 55's 2030 targets for states under the
revised Renewable Energy Directive and Energy Efficiency Directive,
the EC will roll out a new set of short-term targets using many of
the same technologies for the end of 2022.
For example, consumers will also be called upon to participate
in EU-wide energy efficiency "by turning down the thermostat for
buildings' heating by 1 degree Celsius" and agreeing to the
installation of 10 million heat pumps over the next five years,
aiming to save gas.
More renewable energy is also needed, as EC's Executive
Vice-President for the European Green Deal, Frans Timmermans, noted
in a statement. "Let's dash into renewable energy at lightning
speed," he said.
Proposals would speed up the Fit for 55 goal of installing 480
GW of wind and 420 GW of solar by 2030, raising the rate of
deployment of wind and solar by 20% annually.
REPowerEU also adds 80 GW more renewable energy to allow more
green hydrogen. It aims to ramp up green hydrogen production and
imports to 20 million metric tons by 2030, nearly quadrupling the
Fit for 55 target.
To do this, the EC plans to work with industry to establish a
Global European Hydrogen Facility that will boost member states'
access to cheap green hydrogen. It will finance electrolyzer
manufacturing, while accelerating related regulatory and research
projects.
While the EC claims the plans will "drastically accelerate the
clean energy transition" by speeding up the rollout of renewable
gases, AllianceBernstein said the new targets for renewable energy
are only "marginally higher" overall than those laid out in the Fit
for 55 package.
In line with net-zero goals, the EC foresees rolling out more
wind power with the help of long-sought-after revisions to
permitting and network rules, a sensitive topic for states.
Association WindEurope is one of many sector observers who have
been pushing for the EC to address
permitting and network "bottlenecks."
Biomethane brought to the fore
Larger volumes of biomethane and renewable hydrogen, including
both domestic production and imports, are expected to help displace
volumes of Russian natural gas.
Within the year, the EC seeks to ramp up biomethane production
to replace 3.5 bcm of natural gas.
AllianceBernstein was skeptical of the target: "The EU
Commission's expectation of adding approximately 3.5bcm [of natural
gas equivalent] in 2022 could be challenging, in our view."
The EC will also target 35 bcm of biomethane production annually
in terms of natural gas equivalent by 2030, replacing the more
modest Fit for 55 target to produce 17 bcm of gas-equivalent
biomethane annually.
"This target should be viewed as aspirational, as it would be
close to the equivalent of UK [annual] natural gas production
today, and compares to approximately 2 bcm per year [EU] biomethane
production today," said Dorsch.
Some green NGOs have said the EC's proposed target to multiply
biomethane production by about 10 in less than a decade brings
significant sustainability risks, for example of increased carbon
from overseas crop imports. "Boosting biogas production will
exacerbate the competition for land between food, feed, and fuel,
as most biogas plants cannot run only on waste, and require
additional energy crops as feedstock," said Celia Nyssens, EEB
senior policy officer for agriculture and food systems.
Bioethanol trade body ePure and the European Biogas Association
(EBA) praised this goal, but the EBA called for a hike in
biomethane targets within the proposed Renewable Energy Directive.
The Directive's biofuel targets have already been
called ambitious.
Posted 11 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.
{"items" : [
{"name":"share","enabled":true,"desc":"<strong>Share</strong>","mobdesc":"Share","options":[ {"name":"facebook","url":"https://www.facebook.com/sharer.php?u=http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2feu-plan-to-slash-russian-gas-to-cause-global-gas-tugofwar-anal.html","enabled":true},{"name":"twitter","url":"https://twitter.com/intent/tweet?url=http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2feu-plan-to-slash-russian-gas-to-cause-global-gas-tugofwar-anal.html&text=EU+plan+to+slash+Russian+gas+to+cause+global+gas+%e2%80%9ctug-of-war%3a%e2%80%9d+Analysts++%7c+IHS+Markit+","enabled":true},{"name":"linkedin","url":"https://www.linkedin.com/sharing/share-offsite/?url=http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2feu-plan-to-slash-russian-gas-to-cause-global-gas-tugofwar-anal.html","enabled":true},{"name":"email","url":"?subject=EU plan to slash Russian gas to cause global gas “tug-of-war:” Analysts | IHS Markit &body=http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2feu-plan-to-slash-russian-gas-to-cause-global-gas-tugofwar-anal.html","enabled":true},{"name":"whatsapp","url":"https://api.whatsapp.com/send?text=EU+plan+to+slash+Russian+gas+to+cause+global+gas+%e2%80%9ctug-of-war%3a%e2%80%9d+Analysts++%7c+IHS+Markit+ http%3a%2f%2fcleanenergynews.ihsmarkit.com%2fresearch-analysis%2feu-plan-to-slash-russian-gas-to-cause-global-gas-tugofwar-anal.html","enabled":true}]}, {"name":"rtt","enabled":true,"mobdesc":"Top"}
]}