How will Europe spend this winter and the next few winters?

On October 28, 2022, European Commission President Ursula von der Leyen said that dealing with the energy crisis is the current top priority for EU countries. If the response is not effective, the energy crisis may become a social crisis.

Since 2021, inflation in EU countries has been high, and energy prices, especially natural gas prices, have skyrocketed. Under the conflict between Russia and Ukraine, the European Union has imposed multiple rounds of sanctions on Russia, forcing Russia to cut off or reduce natural gas supplies to many countries. After Russia’s two “North Stream” pipelines that supply natural gas to many European countries were damaged, the energy crisis facing European countries has intensified.

In order to reduce their dependence on Russian energy, the EU countries have promoted the reduction of energy consumption on the one hand, and on the other hand expanded supply sources to accelerate the transition to renewable energy.

Judging from the data, the EU has made progress in diversifying energy sources and getting rid of Russia’s energy dependence. At the beginning of the Russia-Ukraine conflict, the EU’s natural gas imports from Russia accounted for 41% of its total imports. At present, this figure has dropped to 7.5%. Before winter, the EU’s natural gas storage capacity has also reached 90%.

Behind the high gas storage capacity is Europe’s global procurement of energy, pushing up the price of liquefied natural gas (LNG), and forcing many less developed natural gas importing countries out of the market, and these countries have also regarded natural gas as a transitional energy source.

Europe has long played the role of the vanguard of energy transition. The conflict between Russia and Ukraine is only the external cause and accelerator of the energy crisis, while the internal cause is various contradictions and problems that have not been resolved during the transition process. Europe’s energy transition is facing a big test this winter. How to ensure energy security in the journey against climate change?

Is natural gas enough for the winter?

In order to survive the winter smoothly, Europe purchased a large amount of natural gas.

According to EU statistics, as of October 17, 2022, the EU’s average gas storage capacity has exceeded 92%, far exceeding the target set in the middle of the year to reach 80% by November 1. Germany hoards about 30% of its annual natural gas consumption, while countries such as Austria have more natural gas storage than they actually need.

Wang Nengquan, chief economist of Sinochem Energy Co., Ltd., told eo that the current natural gas inventory in Europe is close to the highest level in history. Many energy experts predict that in the winter of 2022, Europe will import liquefied natural gas (LNG) while mobilizing stocks.

With the conflict between Russia and Ukraine, the price of natural gas in Europe has been rising all the way in 2022. Known as the “weather vane” of European natural gas prices, the TTF benchmark Dutch natural gas futures price reached a high of 339.2 euros/MWh on August 26.

The natural gas market analysis report for the fourth quarter of 2022 released by the IEA shows that from January to August 2022, European LNG imports will increase by nearly 70% (35 billion cubic meters) year-on-year. Expansion of the regasification facility.

Local energy practitioners in Europe told eo that due to limited LNG receiving terminals, many LNG ships “drifted” and lined up outside Spanish waters, which also caused record high freight rates and a shortage of ships.

As for the source of LNG, Kepler data shows that from January to September 2022, LNG from the United States will dominate, accounting for 43% of Europe’s total LNG imports.

In addition to record imports of LNG, EU member states are also committed to importing gas from non-Russian pipeline suppliers. The Baltic Sea Gas Pipeline was inaugurated on September 27, 2022. This pipeline has an annual transportation capacity of 10 billion cubic meters from Norway to Poland and 3 billion cubic meters from Poland to Denmark.

Guan Wenlin, manager of intraday power spot trading at EnBW Energy Group, one of Germany’s four major energy groups, told eo that the current supply of natural gas in Europe is still in a tight balance. Natural gas dynamic supply, usage and weather changes.

On the demand side, according to the agreement reached on July 26, EU member states agreed to take measures to reduce the average consumption of natural gas in the past five years by 15% from August 1, 2022 to March 31, 2023. To achieve this goal, EU member states must save 45 billion cubic meters of natural gas, and Germany, a “big gas user”, should save about 10 billion cubic meters of gas. In August 2022, an agreement among EU member states to reduce natural gas consumption by 15% will come into effect. The reduction is based on the voluntary basis of countries, and in the case of serious supply shortages, the reduction may be upgraded to mandatory measures. Reducing natural gas use will mainly focus on the industrial sector.

European gas demand in September was nearly 11% below the average for the past five years, according to data intelligence firm ICIS.

British consultancy Timera Energy pointed out that weather is likely to be the biggest factor affecting the European gas market, with cooler temperatures likely to increase European gas demand by 70.6 billion cubic feet (bcf).

Guan Wenlin said that special attention should be paid to the possible “triple” La Nina phenomenon. At that time, not only will the northern hemisphere be colder, but the southern hemisphere will also be rainy, which will affect Australia’s coal production and logistics.

More than one energy practitioner said that if the winter of 2022 is extremely cold and Russia’s “gas cut-off” is superimposed, even if Europe can barely survive this winter, natural gas will become more scarce around March 2023, and there may be even greater shortages in the future. crisis. “After all, when there is a large amount of gas storage in Europe in 2022, the supply of natural gas from Russia has not been cut off.”

who is bearing the consequences

The tight supply of energy and rising prices are affecting Europe and the whole world through the industrial chain.

According to data from the German statistical company Statista, the average natural gas bill for each household in Germany in 2021 will be 1,734 euros. Now the price of natural gas for residential use in Germany has tripled from 6.83 cents/kWh in the second half of 2021 to 21.75 cents/kWh. kilowatt-hours, the average gas bill for a German household in 2022 could exceed 5,000 euros at most.

Guan Wenlin said that according to his observations in Germany, most households are not very worried about heating in winter, but they generally complain about higher energy bills. In addition, in order to save energy, the indoor heating temperature is lowered in winter, and there will be a certain sacrifice in comfort.

Natural gas is the most important source of energy for European industry. Anouk Honoré, deputy director of the gas research program at the Oxford Institute for Energy Studies, told local media that industrial consumption accounts for 27%-28% of the EU’s total gas supply.

Eurometaux, a metals trade organization, told local media that almost all zinc smelters in the EU are reducing their production capacity or even shutting down completely. was archived.

Natural gas is also an important raw material. Used in the chemical industry, the fertilizer industry especially relies on natural gas as a raw material for the production of ammonia. According to European fertilizer company data, 70% of the industry’s production capacity is at a standstill.

Goldman Sachs estimates that 40% of Europe’s chemical industry could leave permanently unless energy prices are brought under control.

According to the interviewed experts, the most affected by the energy crisis may be small and medium-sized enterprises and energy-intensive enterprises. From the perspective of public policy, protecting residents is a value orientation, but industrial transfer will bring unemployment, which may change residents’ attitudes towards energy transition and affect the smooth development of energy transition in Europe.

Europe’s aggressive purchases have also pushed up global natural gas prices. LNG spot prices in Asia rose to record highs, while U.S. natural gas prices hit their highest levels since 2008.

Industry experts have reminded us to pay attention to the spillover phenomenon of the European energy crisis, which will not only drive up energy prices, but also affect the process of energy transformation in other regions. Some regions that originally wanted to use natural gas as a “bridge” for energy transition like Europe will be forced to return to the cheaper coal market.

India’s consumption of natural gas for power generation will drop by almost 30% in the first eight months of 2022 due to rising global LNG spot prices, with coal-fired power plants filling most of the gap, the IEA report said. India’s total natural gas demand in the first eight months of 2022 fell by 4% year-on-year, while coal power generation increased by 9%.

The situation in some less developed countries is even more pessimistic. Pakistan is deeply involved in an energy crisis. From January to August 2022, due to the inability to pay the soaring LNG spot price, Pakistan’s LNG imports fell by 19% year-on-year, and the fuel-fired power generation increased by 5 times. The IEA said that this is not enough to eliminate the power shortage.

Bangladesh also experienced widespread power outages in the third quarter of 2022. Because it could not afford the high price, the country stopped LNG spot purchases from July to August. At the height of the energy crisis in mid-July, almost 20% of Bangladesh’s electricity load was cut due to fuel shortages.

Li Junfeng, director of the Sequoia Carbon Neutral Research Institute, also reminded that the rise in energy prices will increase the price of chemical fertilizers, leading to an increase in food costs. Africa is often short of food, and now the food crisis there is further fermented.

Rapid transition under the climate roadmap

Before this crisis, Europe had been playing the role of “vanguard” of the energy transition. In December 2019, Europe proposed the goal of being the first to achieve carbon neutrality globally by 2050, and then proposed to increase the proportion of renewable energy to 40% by 2030.

Subsequently, EU countries successively announced climate goals, planning to phase out coal from the energy supply system as soon as possible. The “top student” Germany has further increased its emission reduction goals, announcing that under ideal circumstances, the coal exit time will be advanced to 2030.

The interviewed experts generally believe that it is inevitable for Europe to be the “vanguard” of low-carbon energy transition. The level of economic development in Europe is relatively high, and the low-carbon energy transition has a popular foundation. The goals are highly consistent from top to bottom.

There were also criticisms of the transformation. At that time, a large number of coal power projects still in operation in Europe were forcibly shut down. Many people accused the EU and its member states of advancing climate action plans too aggressively.

The EU’s energy independence roadmap “European Joint Action on Cheap, Safe and Sustainable Energy” (REPowerEU) was conceived before the escalation of the situation between Russia and Ukraine, and was announced shortly after the outbreak of the Russia-Ukraine conflict in March 2022. REPowerEU seeks to wean itself off imports of energy from Russia by 2030, starting with natural gas.

The EU plans to reduce two-thirds of Russian gas imports by the end of 2022, and take measures to reduce dependence on Russian energy by accelerating the development of renewable energy and hydropower, diversifying energy supply, and improving energy efficiency.

The EU increased the original target of 40% renewable energy in 2030 to 45%, and proposed to double the installed capacity of photovoltaics by 2025, to reach 600 GW in 2030, to produce 10 million tons of green hydrogen and to import 10 million tons of green hydrogen. tons and a series of new targets.

The EU’s renewable energy targets are more aggressive than ever. However, far hydrolysis cannot quench near thirst. Renewable energy has its construction cycle, but also faces a series of problems such as environmental impact assessment, water conservation, and grid connection.

Rystad Energy, an energy research institution, pointed out in a research report that rising electricity costs have affected Europe’s plan to upgrade solar manufacturing capacity, and European photovoltaic capacity plans may be put on hold.

Funding is also an issue. The European Commission estimates that from 2022 to 2027, an additional investment of 210 billion euros will be required to achieve the REPowerEU target. However, in the reality of rising inflation and sluggish economic growth, there is great uncertainty about where this huge sum of money will come from.

Vigorously developing renewable energy is “far away”, and what can “quench near thirst” is coal power and nuclear power, which were originally to be retired.

Agora Energiewende, a German energy think tank, believes that REPowerEU pays little attention to specific measures to reduce demand for fossil fuels in the short term, failing to balance energy security and climate goals. In fact, many EU member states have made compromises and started to use energy sources that were originally planned to be phased out.

The German government said it would pass emergency laws to restart shuttered coal plants and temporarily restore up to 10 gigawatts of idled coal plants for two years, increasing Germany’s coal-fired power generation by a third.

Germany has been preparing for “abandoning nuclear power” for many years, but in order to avoid energy shortages in winter, German Chancellor Scholz said that the government will create a “legal basis” to allow the country’s last three nuclear power plants to continue to operate after December 31. The time is “extended until April 15, 2023 at the latest”.

neglected energy security

Energy crises are often supply crises, but this European energy crisis is different from the past. Shi Xunpeng, chairman of the International Energy Transition Association and professor of the Australia-China Relations Institute at the University of Technology Sydney, said that the consumer side is also “shooting itself in the foot”, and has not fully considered the issue of energy supply security in extreme cases during the energy transition process.

More than one energy expert said that there is definitely nothing wrong with setting a carbon-neutral goal, but the choice of the path should not be too radical. There are still some deviations in Europe’s specific energy policies. It is overly dependent on natural gas, and urgently withdraws coal and denuclearization. Fully consider that the new energy that depends on the sky “has not grown up yet”.

Natural gas plays an important role in Europe’s energy transition. Because it can reduce carbon while taking into account flexibility and affordability, it is regarded as a bridge energy for the transition from fossil energy to renewable energy. But because natural gas is also a fossil fuel, its contribution to the energy transition has been downplayed. “Natural gas exists in Europe just like air. Everyone cannot do without it, but its importance is often overlooked.” Shi Xunpeng said.

Europe has considerable gas-fired power generation capacity. From 1980 to 2018, the share of coal use decreased and the share of natural gas use increased, but the natural gas used in Europe is highly dependent on imports. More than one energy practitioner told eo that Europe does not pay enough attention to self-sufficiency in natural gas strategically. In 2021, Russian pipeline natural gas will account for 40% of European imports.

Germany, which holds high the banner of energy transition, is the destination country for most of Russia’s natural gas pipelines to Europe. Germany imports 93% of its natural gas supply.

Some energy experts believe that it is inevitable for Europe to choose natural gas in the energy transition. In the big test of “double carbon”, all countries are crossing the river by feeling the stones. But more people believe that Europe should pay more attention to energy security, energy independence, and diversification of energy supply.

Shi Xunpeng recalled the history of discussions on energy security in the academic circles, saying that the academic circles often use the natural gas pipeline between Russia and Germany as an example, because even during the Cold War, the gas supply between the two countries has not stopped, in order to illustrate the “return of energy”. Energy, politics to politics”. The status quo of energy supply in Europe after the Russia-Ukraine conflict has made people think about energy security a step further.

Nuclear power is also controversial in Europe due to factors such as safety. Some experts believe that nuclear power is reliable and cheap. If Germany had not urgently shut down the nuclear power plants that have been built, it would not be so embarrassing to face the shortage of imported natural gas in 2022. But more experts believe that nuclear power has no public opinion base in Europe, and the safety of nuclear power has always been controversial. The insecurity has been exacerbated by the conflict between Russia and Ukraine, which has put some nuclear power plants at risk of leaks.

In addition, nuclear power plants are also unstable. In 2022, 26 of France’s total 56 nuclear power plants will be closed due to maintenance or corrosion problems in pipes cooling the reactor core. France went from being one of Europe’s biggest electricity exporters to a net importer because of a nuclear plant failure.

Faced with many situations, renewable energy, which has high hopes, finally ran out of “acceleration” in Europe.

A recent research report released by think tanks E3G and Ember shows that from March to September 2022, wind and solar power generation accounted for 24% (345 TWh) of the EU’s total power generation, and 21% in the same period in 2021, a year-on-year increase. 39 TWh. Nineteen EU countries set records for wind and solar generation, including France, Italy, Poland and Spain. The record growth in wind and solar saves around €11 billion in gas import costs compared to 2021.

As summer drought hits much of the northern hemisphere in 2022, with rivers and reservoirs running low, wind and solar offset a 21% drop in hydropower generation and a 19% drop in nuclear power generation, the study reported.

Although renewable energy power generation has grown considerably, there is still a large gap to meet the needs of ensuring energy security.

Practitioners in the energy industry pointed out that the fundamental reason why Europe’s energy transition is in trouble is that there is currently no technology in the world that can guarantee the security of power supply with only new energy.

Zhao Junhua, director of the Energy Market and Energy Finance Laboratory of the Chinese University of Hong Kong (Shenzhen) Institute of Advanced Finance and associate professor of the School of Science and Technology, said that at this stage, neither market mechanism nor technology is ready for new energy to be the main power source. Some countries are looking forward to breakthroughs in technologies such as energy storage, hydrogen energy, and CCUS. This transformation may take five, ten, or even longer.

As for whether the fossil energy that has already left the market will return, Zhao Junhua said that the entire energy industry has formed the expectation that fossil energy will gradually leave the market. Under such circumstances, rational investors will not invest in fossil energy on a large scale, unless it is National behavior, or relying on temporary government subsidies to restart the previous coal power units.