Europe Is Scrambling to Secure Its Energy in Time for Winter
On July 21st, Russia resumed gas flows through its major pipeline, Nord Stream 1, albeit at significantly reduced capacity, confirming fears that the country will continue to use gas as a weapon against Europe, especially as the energy-starved continent approaches critical winter months.
Europe’s gas storage facilities are nowhere near levels that would avoid disruptions, despite the agreement to set a mandatory storage level of 80% by November this year to be increased to 90% by 2023. In Germany, the situation is particularly critical as current gas storage levels stand at around 65%. The country is struggling to fill up its capacity. In mid-July, Germany’s energy regulator warned that the country was injecting and drawing equal amounts of gas into and from its facilities.
Using Gas As a Weapon
The need to minimize the impact of the energy war Russia is waging on Europe is becoming ever more urgent. The continent is scrambling to adapt, but sticking to a coordinated approach has increasingly become more challenging.
The reduction in supplies is making the targets set at the EU level harder to achieve. It also continues to put upward pressure on gas prices, feeding both inflationary pressures and Russia’s presence in Ukraine. The recent calls to totally shut off Russian gas imports have largely quieted down, replaced by a wary realization that the continent can only afford such drastic measures if it is willing to pay a steep price.
Rationing Is Likely
EU member countries are drawing up contingency plans to minimize the impact on households and companies. Governments are reluctantly beginning to publicly admit that it may well become necessary to ration gas consumption in the coming months.
The fallout of the crisis currently appears to be centered on Germany and Italy, the two biggest EU countries most reliant on Russian gas. Germany is also crucial for reverse gas flows to Poland, the Czech Republic and Slovakia. These are the countries where the fallout of a gas emergency would be felt the hardest.
According to latest polls, the German public consistently signals that it is willing to stand up to Russia’s blackmail, even if it means making sacrifices. However, the German economy is particularly exposed because its big manufacturing sector is so energy-intensive. The International Monetary Fund estimates that a total gas shutoff would send the country into recession, with a total output loss of about 2%.
Italian and German Industry Likely to Be Hit Hard
In its recent study, the IMF highlights that if Russian gas stops flowing “a shortfall of around 15% of consumption would occur.” This is, in part, due to transmission bottlenecks both within Europe as well as within the country itself. The government in Berlin is trying to cushion the possible blow by taking a series of steps, including the reactivation of coal plants and the enforcement of stricter energy-conserving measures. Some are vocally advocating to delay the end of nuclear power. Industry-heavy Bavaria could be hit particularly hard. In the North of Italy, where many companies are closely interconnected with businesses in the South of Germany, the situation could also quickly become difficult.
It is true that Italy managed to reduce its dependence on Russian gas from 40% last year to currently 25%. However, given the fact that much of its electricity generation comes from gas, the IMF concludes that the Mediterranean country would likely suffer even more than Germany. The situation has already infected politics. The government of former ECB banker and prime minister Mario Draghi fell in part because of differences among political parties on the country’s approach to Russia.
The commission managed to reach an agreement on reducing consumption this winter but it is voluntary only, and may well fall apart.
Tellingly, the political forces that withdrew support for the government all advocate a softer approach toward Russian President Vladimir Putin, hoping it would positively affect gas flows.
EU Solidarity Is Fraying
Overall, the patchwork of loosely coordinated national measures across the EU is coming under strain. This is also caused by the fact that, at reduced flows, the pipeline and LNG terminal infrastructure makes the seamless transmission of gas both within countries and from one country to the next almost impossible. The risk that some EU member states wouldn’t be sufficiently shielded from a sudden stop to flows is, therefore, real.
Despite the stated political will to avoid going-it-alone policies, there are already signs that EU solidarity is fraying. The European energy market, in fact, already risks fragmenting — with government bailout of domestic energy providers increasing, beggar thy neighbor policies are more likely. One German energy provider, Uniper, recently needed a partial bailout from the government. The French government de facto nationalized the utility giant EDF. More government interventions may become necessary in the coming months.
The latest attempts by the European Union’s executive arm, the European Commission (EC), to avoid further fragmentation largely rest on cuts to over-reliance on Russian gas imports in the medium term. In the short term, the commission aims to introduce mandatory reductions in gas consumption. Regaining the initiative is proving difficult. The commission signed a deal with Azerbaijan to increase gas imports to Europe, from currently 8 billion cubic meters a year to about 20 billion in 2027, with supplies set to increase to 12 billion by 2023. This is an important step.
France and Spain Are Better Placed
However, the EC’s proposal to force a gas savings target of 15% across the union is facing stiff headwinds. The proposal immediately drew fire from the government in Spain. Madrid reminded Germans that they had not lived beyond their means from an energy consumption point of view and were not willing to pay for Germany’s mistakes. The Spanish reaction reveals scars from the euro crisis a decade ago, when Berlin lectured its Southern partners and forced fiscal austerity on them.
Not all countries face the difficulties of Germany and Italy. Spain’s gas storage facilities are close to full capacity and the country is less dependent on Russian gas than Germany. So is France. Even if the government in Madrid decided to share its gas with its EU partner in the north, there are currently limited ways it could be delivered from Spain to Germany. The commission managed to reach an agreement on reducing consumption this winter but it is voluntary only, and may well fall apart.
For sure, the crisis is exposing some structural weaknesses of the EU energy market that will need to be addressed in order to make the system more resilient in the future. For now, the more urgent aim is to withstand a possible energy shock this autumn and winter. To do so, Europeans will need to, once again, demonstrate their determination to stick together.