An associate researcher at the Energy Research Institute, said in an interview that the EU is currently unable to accept the consequences of a complete cut-off of Russian gas supply. He said: “The EU is going through the process of energy transition, the carbon emissions of natural gas are only equivalent to 1/3~1/2 of coal, so a large amount of natural gas is used as a substitute in its process of retreating from coal. Many EU countries, including Germany, are already using a significant proportion of natural gas.”

Limited scope for practical action.

According to data compiled by the Bruegel Institute, in 2021 Russia delivered 1,550 TWh of gas to Europe via pipeline and export around 120 TWh via LNG, which means that the EU would need to find a replacement for around 1,700 TWh of Russian gas to Europe in the event of a supply cut-off.

In theory, this is not impossible: currently Europe’s regasification terminals are able to handle an additional 1100 TWh of LNG imports, while the potential scope for unused EU imports from Norway, North Africa and Azerbaijan is around 650 TWh in terms of pipeline gas deliveries.

However, this is difficult in practice, with data compiled by the Bruegel Institute showing a total global LNG trade of 5,400TWh in 2021, with China, Japan and South Korea being the main global importers; the main exporters being Australia, Qatar and the US.

In 2021, US exports increased by 340 TWh, by far the largest increase among exporters. The report predicts that the US will be the largest LNG producer by the end of 2022. Meanwhile, global production is expected to increase by 63-300TWh year-on-year in 2022. Meanwhile, Europe has been the main beneficiary of the US’s growing share of the LNG gas market, with Europe importing 23% of its total US LNG exports and US exports to Europe increasing from almost zero in 2016 to 232 TWh in 2021. This trend accelerates further in January 2022, with the EU buying 37% of total US exports of LNG in that month.

However, it is important to note that the contractual structure of the global LNG market limits the possibility of redirecting LNG to Europe. The LNG business has developed under long-term contracts of 20 to 25 years, which is necessary for buyers and sellers to justify the substantial investments required to build liquefaction plants and receiving terminals. As mentioned above, China, Japan and Korea are the main global importers of LNG and the main market for LNG producers is Asia, with limited scope for European buyers to be able to bargain and compete.

Who will pay the bill?

According to the Bruegel Institute’s scenario calculations, in order for the EU to survive the winter of 2023, the EU’s energy storage system would need around 700 TWh, a job that would be very expensive: at current prices, this would cost at least €70 billion, compared to €12 billion in previous years.

What’s more, Europe would have to find not only a trader to sell the gas, but also someone willing and able to buy it. Normally, this is the business of European gas companies, but private companies seek to maximize profits and avoid risk. At a time of rising geopolitical risk, buying gas at record prices is seen as a gamble with limited upside but plenty of downside.

The Bruegel Institute reports that imagine what would happen if, by the summer of 2022, EU gas companies managed to accumulate close to 1,000 TWh of gas and Gazprom suddenly decided to release a large amount of its stock. Prices would fall sharply and all the companies that have helped Europe prepare would suffer huge losses.

The policy advice from the Bruegel Institute is that one way to solve this problem in the short term is to introduce a ‘storage obligation’, but this can only work if it is organized at a European level, otherwise EU member states may bid against each other to replenish their storage space in the face of limited supply, and risk sharing between gas companies and EU member governments so that companies do not need to bear the policy-driven volatility of gas prices when storing gas.

In theory, therefore, it would not be difficult to find an alternative to Russian gas next winter if the EU is willing to bear the cost, but in practice the EU would have to change dozens of regulations and spend a lot of money and make tough decisions quickly. “In many cases, time is too short to get a perfect answer.” The Bruegel Institute wrote in its report.

Under the EU mechanism, once one country disagrees with a proposal, that legislation cannot be passed in the European Parliament. For example, the EU wants to propose energy independence, but assuming that a country like Poland, which can use coal, does not agree to replace it with a certain percentage of hydrogen or renewable energy, there is nothing the EU can do. Even if a large country like Germany or France wants to increase its energy independence, it does not produce energy itself and cannot solve its energy needs by relying on renewables alone.

EU’s energy structure is locked.

A senior person working in the field of new energy in an international organization told that, considering that the EU has taken a big step in “retreating from coal” and that the current new energy sources are not mature, it is not possible to carry out supply-side reforms in terms of energy mix, as natural gas is currently used in large quantities for heating, power generation and industrial production. The Bruegel Institute report shows that in these areas it will be difficult to reduce gas demand in the short term.

Firstly, in electricity generation, the EU used a total of around 900 TWh of natural gas for electricity generation in 2021. The only way to quickly save more than 200 TWh of natural gas is to switch to coal-fired power generation. At the same time, increasing solar photovoltaic generation from around 15TWh to 30TWh per year and postponing the closure of some German nuclear power plants until the end of 2022 could replace 120TWh of natural gas generation.

However, the above-mentioned person told that the possibility of the EU returning to coal-fired power generation is very low, as natural gas does not emit sulphur dioxide nor dust, which is cleaner, while the technology of new energy generation such as wind power is not stable, and in wind power, for example, when the wind is particularly strong, its blades are in a stop state because of internal locking, fearing that the wind will blow the blades out. For his part, the EU’s willingness to find other alternative energy sources is very obvious, such as the proposed hydrogen development.

“But so far, there is no sufficient and cheap alternative energy. The EU is vigorously building renewable energy sources such as photovoltaic power and offshore wind power, in order to solve the problem of energy independence. However, if there are uncertainties such as extreme weather and unstable output, they still need to end up relying on fossil energy to cover the costs.” an expert said. The EU was also pushing an agenda for greater energy security, such as “mutual aid for electricity”, but had not been able to reduce its dependence on Russian gas.

The Bruegel Institute pointed out that in the industrial sector there could be production cuts or shutdowns if gas use needed to be reduced. Recently, the Association of German Industries (BDI) has warned that further increases in energy and gas prices “threaten the economy” and that “the situation is so serious that even medium-sized German companies wishing to be deeply involved in the various industries in their region will have to consider relocating abroad”.

By Sherry Song