EU draws up gas reduction plans on fears of a Russian gas embargo
The European Commission has drawn up a plan detailing a rationing mechanism and rules to pass price increases on to consumers that can be imposed should Russia cut Europe off from gas deliveries, according to leaked documents seen by Euroactiv, the publication reported on June 19.
Europe has become increasingly alarmed at the prospect of being cut off from Russian gas deliveries before it can fill its storage tanks ahead of the heating season. Gazprom reduced flows of gas to Europe by 60% in mid-June and may not restart gas deliveries again after maintenance work on Nord Stream 1 pipeline is completed this week. Europe’s tanks were 64% full as of June 19, still well shy of the 80% full Brussels mandated by November 1 at the start of this year.
German Vice-Chancellor Robert Habeck has already put Germany on “alert”, the second in a three stage EU energy crisis warning system that among other things allows Berlin to pass gas price increases along to consumers. Heating tariffs in most EU countries are regulated and in normal circumstances companies are not free to pass increases to consumers. As the cost of gas soars on the European spot market Germany’s energy company Uniper, the biggest European importer of Russian gas, has already been forced to ask the German government for a bailout.
Gazprom has blamed the reduction in gas deliveries on “technical problems” and declared a force majeure on July 19 that lays the legal groundwork for the Russian energy company to ignore its contractual obligations to deliver gas to Europe for the rest of the year.
Habeck has dismissed these claims as a ruse and says that the reduction in gas flows is a “deliberate attempt to use energy as a political weapon.”
Russia has already cut off the Baltic States, Poland, Bulgaria and Finland after those countries refused to participate in the Kremlin’s gas-for-rubles scheme introduced by presidential decree in May. Since then, in addition to supplies to Germany, those to Denmark, the Netherlands and Italy have also been reduced, which all rely on the Nord Stream 1 pipeline.
Euractiv reports the new policy document is due to be published today and sets out more detailed plans for coping with a gas shortage crisis, under the title: “Save gas for a safe winter”.
Stage two alert
Most of the EU is currently at the early warning stage, the first of the three-stage energy crisis warning mechanism, but on July 20, the remaining countries will move to the “alert” stage, the document says.
During the alert stage countries must reduce gas demand, increase daily monitoring and information, measures for industry to reduce demand, switching from gas to other fuels and oblige public buildings to limit heating to 19°C and cooling to 25°C unless not technically feasible.
Hungary has already moved to the third “emergency” stage on July 13 and banned exports of gas to neighbouring countries. As bne IntelliNews reported, Hungary is the most exposed to a cut in gas deliveries and could see its economy contract by as much as 6% if Russian gas flows are stopped altogether.
According to the draft policy document, the EU gas system has “more than compensated” for the 25bn cubic metres of reduced Russian gas imports, with 35 bcm of additional liquefied natural gas and pipeline gas imported from elsewhere. LNG imports to Europe are currently running at record levels, but at a very high cost.
But a Russian gas embargo would “likely result” in the EU falling short of its 80% storage target, possibly “as low as 65% to 71%”, leading to a gap of 20 bcm during the winter, according to simulations by European gas transmission system operators (ENTSOG), Euroactiv reports.
This means several EU countries would risk “running very low by the end of winter,” making it challenging to replenish supplies for the following year.
The essence of the EC plan is to reduce demand for gas, as well as switch, where possible, to alternative sources of energy. Germany has already introduced plans to restart mothballed coal-fired power stations.
“Co-ordinated action now will be more cost-effective and less disruptive to our daily lives and to the economy than impromptu action later when gas supplies could be running low,” reads the leaked draft as cited by Euractiv.
Under the EU’s Gas Security of Supply Regulation framework set up in 2017, vulnerable consumers who “do not have the means to ensure their own supply” are protected under EU law.
There has been a debate between those that want to protect consumers and put the onus of covering the shortfall between revenues earned from consumers and the soaring cost of energy, and those that want to pass on rising energy costs but provide support to those consumers that can’t afford higher gas bills. In the latter case the idea is painful cost increases will most effectively force consumers to make energy savings.
The regulation also introduced a solidarity mechanism whereby EU countries “must help each other to always guarantee gas supply to the most vulnerable consumers” even in severe gas supply situations. The dependence on Russian gas varies widely across the EU, with Hungary, Slovakia, Czechia and Italy being the most exposed. Germany is less exposed thanks partly to its heavy investment in renewables but could still suffer a 2-3% GDP contraction if Russian gas flows cease.
The large part of the plan is to appeal to households to reduce their energy consumption and turn down thermostats by 1°C as well as mandating the reduced heating of public buildings, offices and commercial buildings to 19°C.
As bne IntelliNews reported, experts assess that Europe can make it through the winter using gas already in storage and gas supplies from other sources such as LNG and the EU’s indigenous gas production. But in this case the EU needs to reduce gas demand by 15%, according to a recent study.
A switch to using coal as a fuel is a major plank of the plan, but will increase emissions as the EU’s drive to implement its green deal and the “Fit for 55” plans have become secondary to coping with the looming energy crisis.
The IMF reported this week that greenhouse gas (GHG) emissions have risen to a new record level and erased all the gains made during the coronavirus (COVID-19) pandemic lockdowns.
Emissions of carbon dioxide and other GHGs plunged 4.6% in 2020, as lockdowns in the first half of the year restricted global mobility and hampered economic activity. But the latest data dashed hopes the gains would be permanent and annual global GHG emissions rebounded 6.4% last year to a new record, erasing all the gains made during the pandemic.
The EC admitted that temporarily switching from gas to coal “may increase emissions” but stressed that boosting renewable energy capacity remains the top priority. Industrial emission rules will be relaxed as part of the EC’s emergency energy plans.
Reducing gas consumption by industry will also play a leading role. In Germany 35% of gas is used for heating, making it very difficult to replace, with another 25% used in industry, both as a fuel and as a feedstock for industry, and only 15% for power generation.
The EC proposes introducing a tender system for industrial gas supplies to incentivise industrial consumers to reduce consumption, possibly at the cross-border level. German industry has warned that if prices continue to rise many companies face the risk of bankruptcy, or at least will have to drastically reduce production in order to contain gas related cost rises.
Another measure is the introduction of “interruptible contracts” that allow companies to suspend gas purchases if prices rise too high, that includes pre-determined financial compensation for gas volume reduction – a flexible tool to allow companies to better cope with a volatile market for gas.
The EC also called on governments to continue to invest in alternative energy supplies in the background this winter. Germany, which until now has been heavily reliant on Russian piped gas supplies, has already launched construction of four new LNG terminals that could start coming online as soon as next year and will significantly reduce its dependence on Russian gas.
In the worst-case scenario, the EC warned that countries also need plans to selectively reduce energy supplies to consumers and that supplies should be prioritised for the most needy or socially significant that should be identified under the “emergency” stage of the energy crisis system.
Social objects in healthcare, food production, emergency services, the environment, and the defence sector should be prioritised in each state’s emergency plans, the leaked document says, which lays out four criteria for deterring the priority objects, Euroactiv reports.
“Societal criticality”: how important the sector or product is to society, particularly when it comes to health, safety, environment and security.
“Cross-border supply chains”: to what extent the product is part of cross-border supply chains and would disrupt the smooth provision of essential societal services at the EU level.
“Substitution and reduction possibilities”: whether fossil gas can be replaced or energy savings measures can be used.
“Damage to installations”: what damage could be caused to industrial tools in the case of a temporary shut down and the cost of repair.