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Russian-Ukrainian war may derail Europe’s net-zero course on coal
European net-zero plans, which include swapping coal for natural gas-fired power, could be under threat after Russia invaded an EU gas transit country, Ukraine.
Last year's European shortage of gas due to the post-pandemic recovery and competition with Asia led to record-breaking wholesale prices. Those prices coincided with a slower pace of planned shutdowns for coal-fired power plants. Ireland and Poland increased their use of coal plants in the period, anti-coal think tank Ember said in a report.
After a dip in January, gas prices are on the rise again following Russian President Vladimir Putin's decision to send troops into Ukraine.
Gas prices in Europe rose 55% on 24 February, and are expected to be volatile at elevated levels, according to IHS Markit analysis. "Hopes for a summer decline in gas (and thus power) prices in Europe will be dashed. This will contribute to inflation and create political stresses as high prices pass through to customers," wrote IHS Markit analysts.
Just under 10% of Europe's gas demand in 2021 was met by two major pipelines carrying Russian gas through Ukraine to Western Europe, the Bratstvo (Brotherhood) and Soyuz (Union) pipelines.
In the past, 80% of Russian gas exports to Europe transited through these systems, but disputes with Ukraine and the launch of competing pipelines have allowed Russia to cut flows.
Disputes over gas contracts between Ukraine and Russia go back to the 1990s and have continued since Russia's 2014 annexation of the Crimean peninsula. The pair settled a number of multi-billion-dollar court disputes in 2019.
That year, the Trump administration green-lighted sanctions targeting Russian firms constructing one of the competing pipelines, Nord Stream 2, citing the European security threat.
The CEO of Ukraine's gas transmission system operator Naftogaz, Yuriy Vitrenko, believed Russian gas company Gazprom withheld gas supplies to Ukraine last year to force-start the delayed Nord Stream 2 project.
The question that remains is whether the various disputes will lead to not only higher gas prices, but any pause in the flow of gas supplies from Russia to Europe running via Ukraine.
If this happens, power, carbon, and coal prices will rise even more, according to analysts at S&P Global Platts.
In advance of a halt to any Russian gas supplies, the EU's executive, the European Commission (EC), and the US said last month they would work with oil and gas producer states to find alternative gas sources to Russia, which now supplies about 38% of the bloc's gas.
European energy transition at risk
The EU is striving to power Europe using mostly renewables by 2050 as part of its Paris Agreement-aligned net-zero push, unveiled last year in its Fit for 55 package of policy proposals.
EC President Ursula Von der Leyen said the EU was "doubling down on renewables" to decrease its dependency on Russia in a 19 February speech.
But natural gas is still seen as a crucial "transition fuel," particularly when mixed with hydrogen and biogas, under the EU's proposed investment criteria aligning with its greening policies, the EU Taxonomy.
EU Financial Services Commissioner Mairead McGuinness emphasized that during the energy transition, the EU needed gas-fired power to replace high GHG emitting coal-fired power. The EU was also a signatory to a pledge to accelerate a transition away from unabated coal power at COP26.
Wary of its dependency on natural gas amid the price surge, the EC in December proposed a Gas Decarbonization Package to enable the mixing of more natural gas with supplies of hydrogen and biogas in the future.
Long-term gas demand debacle for Russia
The EU's proposed gas policy could formalize the trend of its member states buying less gas under long-term contracts. It would prohibit such contracts extending beyond 2049 "to avoid lock-in for fossil fuels."
In August, Putin requested greater guarantees from European gas buyers in order to renew Russia's supply contract for transit through Ukraine after the current contract expires in 2024.
"We cannot sign any transit contracts unless we have supply contracts, or delivery contracts taken into account. The green agenda, the green energy agenda, has been a top priority for Europe. The question is, how much of our gas will [the EU] buy from us?" he asked.
An analyst at IHS Markit, Laurent Ruseckas, has said agreements between Ukraine and Russia on interruptible gas supply had left Russian gas company Gazprom without guaranteed European markets.
In October, Hungarian Prime Minister Viktor Orban leveled accusations that the EU's Green Deal, the political agreement behind the EU's carbon neutrality push, will increase energy prices. Hungary gets cheaper gas from Russia than the rest of Europe because of long-term contracts of the type that other EU countries have mostly abandoned, Putin said on 1 February.
Ana Maria Jaller-Makarewicz, a European energy analyst for the Institute for Energy Economics and Financial Analysis, explained to Net-Zero Business Daily that this demand shift is happening as the EU is transitioning away from gas. "Some mechanisms are planning to be implemented to reduce gas demand in the future," she said.
"Gas demand in various European countries has not been growing for the last 10 years, and in some of them it has been declining. And looking at the future, the European Green Deal is planning to deliver a significant reduction in gas demand by 2030," she added.
Germany's coal phase-out continues
Germany's Chancellor Olaf Scholz reacted to Russia's invasion by putting the brakes on the certification process that would finally launch the Nord Stream 2 pipeline.
The project is completed, and IHS Markit says that the testing protocol could be finished to allow for startup in September or October, just in advance of next winter's heating season.
The risk is that lower gas supplies could impact Germany's transition whereby coal power is being replaced with gas-fired power, though government officials are downplaying the potential for this at the moment.
Germany is the EU's largest CO2 emitter. It has the second-most gas-fired power in the EU-27 after Italy. But it has been attempting to align its emissions targets through its conversion of its power sector to using more renewables.
The country is ahead of many other industrialized nations in its transition to using mainly renewables, and has done so without the availability of hydropower enjoyed by certain Nordic countries. It has recently tightened its emissions targets.
Germany is also transitioning to renewables with unusual pressures. Not only has it ramped up the pace towards a total phaseout of coal power by 2030, but it will also shut down its last three nuclear power plants by the end of 2022, fulfilling a pledge formed in the wake of the 2011 Fukushima disaster.
Last year, the German power sector continued switching from coal to gas due to the higher price of carbon. Compared with 2020, gas-fired power generation rose 18.6%, according to a blog by Bruno Burger of the Fraunhofer Institute for Solar Energy Systems.
Germany's coal generation also increased slightly between 2020 and 2021, not only due to the gas price rises but also additional demand and lower renewable generation. "In spite of this, electricity generation from coal-fired and nuclear power plants in 2021 remained below 2019 levels, so that the long-term downward trend remains unbroken," wrote Burger.
The pace of coal power phaseouts in the EU has slowed as a result of the gas price surge, said Ember. "Some energy analysts believe that the gas crisis will remain until 2025. This significantly increases the risks associated with continued dependence on volatile imported fossil gas for electricity generation as opposed to accelerating the transition to domestic clean electricity," the think tank explained.
On the other hand, International Energy Agency (IEA) has noted that higher gas and coal prices have made wind and solar power more attractive to corporate energy buyers of long-term power purchase agreements in Europe, perhaps hastening the transition to green energy.
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