States like Germany must use less natural gas in climate plans: EC

The European Commission (EC) has asked member states to cut back on the natural gas some are using in their national decarbonization plans.

Commissioner for Energy Kadri Simson explained the move in a speech delivered remotely for the 14 March Energy Transitions event hosted by UK policy institute Chatham House.

The EU has Russian natural gas imports, threatened with disruption by the Russian-Ukrainian war, in its crosshairs. "The diversification and market reform policies that were launched after 2009 when Russia stopped gas deliveries to Ukraine last time have been helpful, but fall short of what now appears necessary," said Simson.

Under a previously proposed package of measures called Fit for 55, EU member states must not only cut gas consumption by 30% bloc-wide. Now they must also keep more gas in storage under a set of policies proposed to cut EU dependency on Russia, REPowerEU. The policies are yet to be approved by the EU's co-legislators.

As part of proposals, the EC plans to work with states to identify the most suitable projects and reforms nationally and regionally to "build on National Energy and Climate Plans (NECPs)," existing Recovery and Resilience Plans (RRPs), interconnection projects, and "any other relevant plans and climate resilience needs," it said in the REPowerEU communication.

Latvia, Poland, and Lithuania pushed for a bloc-wide ban on Russian gas imports during a meeting of heads of state to discuss Ukraine in Versailles on 10 March, and a preliminary agreement was reached to phase-out imports of Russian coal, gas, and oil.

Denmark has independently pledged a future ban on Russian natural gas imports.

Change of plans

In 2019, EU states were required to submit NECPs outlining national energy system decarbonization plans for 2021-2030, and in 2021 they made additional green pledges as part of RRPs to gain EU pandemic recovery funding.

In her speech, Simson suggested member states relying heavily on gas would "have to revisit their plans" under the REPowerEU proposals.

Germany had planned to ramp up its use of natural gas for power generation by 2030, according to analysis of NECPs by the anti-coal think tank Ember.

Germany receives 55% of its gas from Russia and used an increasing amount of natural gas (15%) for power generation in 2021.

Under Germany's plan that foresaw a phase-out of coal-fired power, natural-gas-fired power was set to play a bigger role in the medium-term, alongside renewable energy and network flexibility.

EU states relying on natural-gas-fired power in their plans included Belgium — which was set to increase consumption — Italy, Spain, and the Netherlands, Ember found. The total gas-fired electricity generation for the rest of the 27 EU nations was also set to increase.

However, Germany's response to the Ukranian crisis has already changed its approach to energy. On 6 March Germany's Finance Minister Christian Lindner announced a $220 billion green spending package to boost "charging infrastructure, hydrogen technology, and the modernisation of industry," as well as reducing the impact of high energy prices on consumers. One state, Lower Saxony, plans to increase the use of shuttered coal power, and Finance Minister Christian Lindner said that the Government should consider removing Germany's ban on North Sea oil and gas production.

Bulgaria has already cancelled a gas-fired power plant that was part of its plans due to the war. The country plans to increase coal-fired power generation, alongside Romania and Italy.

Renewable PPAs take center stage

REPowerEU would require states to boost energy efficiency, add renewables, and switch to industrial technologies that use natural gas to run on electricity or other fuels, decreasing natural gas consumption. One aim is to increase developers' wind and solar deployment rate by 20%, saving 3 billion cubic meters of gas bloc-wide.

Under REPowerEU, renewables are also set to grow. "Renewables are homegrown, they create jobs, they spur innovation, and they are a strategic investment in Europe's security and independence," Simson said in her speech.

"Of course, to scale up renewables at an accelerated pace that we envisage, we need to take some steps that we have not taken before, so I will propose ways to simplify and shorten permitting and authorization."

Renewables would be spurred, for example, by REPowerEU measures promoting more corporate power purchase agreements (PPA) and easier power grid network and permitting procedures for developers, Simson said.

Wresting supply chain from China

Simson referenced the REPowerEU plan's ambition to "re-create a European solar energy supply chain." It suggests states monitor raw materials production and inventories, and state and industry partnerships that can consider "strategic stockpiling" if needed.

REPowerEU proposes measures "that tackle strategic dependencies" in solar, wind energy, and heat pumps through more EU and member state financing. These technologies are expected to take up the slack left by lower gas use.

Simson's proposal to develop domestic renewable supply chains echoes an update to the EU's existing industrial strategy last May.

In the industrial strategy, the EC identified about 20 products for which it depends on China, comprising a 2.8% share of total EU imports by value. Regarding renewables, it has been dependent on China in particular for the permanent magnets used to generate power in wind turbines, as well as for distribution cables, it said.

The EU has for some time accused Chinese companies of selling cheap renewable energy components to EU buyers, to the detriment of its manufacturers.

Most recently, the EU imposed an anti-dumping tariff on imports of optical fiber cables originating in China in November before it imposed them on producers of steel wind turbine towers.

In February, the EU imposed a tariff on fasteners used in the electrical industries that the asia-based body China General Machine Components Industry Association deemed "abuse."

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.