Putin is trying to strangle Europe’s energy supply. Here’s how the continent avoided the trap

If Vladimir Putin intends to paralyze the European energy system by cutting Russian gas exports to the continent, it hasn’t worked yet. The doomsday scenario of rolling blackouts failed to materialize due to an unusually mild winter, power rationing and a shift to other energy sources. Yet the region’s economies are not out of the woods: The crisis has left households and businesses struggling with high electricity prices that have fueled runaway inflation and higher interest rates. And as the war rumbles in the Ukraine and Russia’s gas supplies are slowly leakingEurope’s energy security appears more vulnerable than ever to unpredictable world events.

1. How did we get here?

Even before the Russian president launched his invasion of Ukraine in February 2022, the European energy system was under pressure. Demand for power has surged as economies recover from pandemic lockdowns and a long, harsh winter boosts demand for heating. Electricity producers are struggling to respond as natural gas that feeds many power stations is in short supply and unusually strong winds have cut output from wind turbines that form an important part of the mix. energy on the continent. The result: electricity prices more than tripled in the second half of 2021. Then Russia’s military campaign triggered sanctions against Moscow and Putin hit with a gas weapon. By September 2022, Russia has stopped all supplies through a main pipeline to Germany. The euro fell as investors priced in an expected hit to the European economy.

2. How can Europe avoid an energy crisis?

First, by consuming less. As electricity and gas prices have risen to at least four times higher than historical norms, home and business owners are cutting back on their energy use to make bills affordable. Governments curb consumption by dialing down the heating and lighting in state institutions, from municipal swimming pools and gyms to presidential palaces. People took shorter showers, lowered thermostats and insulated their homes better. The crisis is rooted in what French officials call “energy sobriety,” with Morgan Stanley predict that gas use in Europe will be about 16% below its five-year average throughout 2023. Factories in Western Europe use almost a quarter less gas than usual between August and the end in 2022, according to BloombergNEF estimates. However, production continues to expand. In November 2022, manufacturing production in the euro area stood 3% above the 2021 average.

3. How does Europe replace Russian energy?

Norway has replaced Russia as the region’s largest gas supplier, with exports gaining 8% in 2022. Germany and the Netherlands are installing new facilities to unload liquefied natural gas shipped from as far away as Qatar, US and Australia. LNG imports in key European markets will almost double by 2022, according to Morgan Stanley. Germany is also extending the lives of its remaining nuclear reactors and reviving some coal-fired power stations it mothballed because of their large carbon footprint. The use of hard coal and lignite to generate power in the EU increased by 6% in 2022 from a year ago.

4. Does it work?

The lights remain on and most factories continue to hum. And Europe has never been close to running out of gas, thanks in part to milder-than-average winters that cut demand for heating. Cities from Berlin to Warsaw recorded their warmest start to the year in 2023, allowing utilities to refill gas storage sites and giving Europe a vital buffer for the next which is winter. Gas prices in January were below their level at the start of the war in Ukraine, and 80% from their peak in August – although well above historical averages. Electricity prices fell by the same amount.

5. So the crisis is almost over?

Not yet. Governments have spent more than $700 billion to protect homes and businesses from rising energy prices. And that will not prevent what is likely to be a long-term recession and a sharp decline in living standards across the region. Removing most of Russia’s gas and oil from Europe’s energy mix leaves prices hostage to larger price swings and the resulting risk premium could leave consumers paying more in the future years.

6. Why is Europe so dependent on Russian energy?

Russia is one of the largest gas exporters in the world, and Europe is its main customer. As coal and nuclear plants across the bloc have been shut down in recent years, Germany and other countries have become increasingly dependent on giant pipelines that bring gas from Siberia. European officials are talking about the need to reduce this dependence. But because both sides benefit, and gas delivered by pipeline is often cheaper (and cleaner) than other energy sources, little action is taken. When the conflict in Ukraine erupted, it suddenly became impossible for Europe to spend as much as $1 billion a day on gas, oil and coal imported from Russia – money that funds its war machine. .

7. Has Europe stopped using Russian energy for good?

Not much. Pipeline deliveries through Ukraine fell to just 3% of demand in western and central Europe in the fourth quarter, but Russia will still be Europe’s third largest LNG supplier by 2022, according to Morgan Stanley. When the flows will drop to zero, and if so when, is hard to say. While energy analysts have factored this into their models, neither Russia nor the EU is suggesting a complete shutdown anytime soon. EU sanctions on Moscow aim to eliminate Russian energy imports but the timing depends in part on how quickly alternative sources can be found – a particular challenge for eastern European countries. Gas still flows through Ukraine and a pipeline through Turkey to the Balkans is also in operation.

8. Are there setbacks to the Russian gas freeze?

Diversifying energy supplies is generally a good thing, but relying more on the global market for natural gas has risks. It is a product that is widely used around the world and European equipment competes with buyers from Asia. Any rebound in China’s economy, the world’s largest, could increase competition for fuel and drive up prices. LNG is more carbon intensive than piped gas.

9. What does it all mean for Europe’s green ambitions?

In the short term, reviving some coal-fired power stations seems like bad news for the climate. In addition, the crisis has made European governments more determined to reject Russian energy – and fossil fuels in general – and accelerate the adoption of cleaner technologies. The output of solar and wind power jumps to 12% in 2022, boosted by more installations and a recovery in wind speed. The International Energy Agency said in December that it sees global deployment of clean energy such as wind farms and solar parks nearly doubling over the next five years. For now, policymakers are sticking to the EU’s flagship climate policy, the Green Deal, which includes a package of laws to reach zero greenhouse gas emissions by mid-century. The 27 EU countries get about a fifth of their total energy from renewables by 2020 and plan to double that share to 40% by 2030. After the war in Ukraine, the target was raised to 45 %.

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