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Industry, shortages, diplomacy: the ripples of war in Ukraine

Climate: goodbye Russian gas, hello coal

On May 25th, 2022 |
3 min reading time
david Benatia
David Benatia
Assistant Professor of Economics at ENSAE (IP Paris) and HEC Montréal
Key takeaways
  • In the short term, reducing our dependence on Russian gas would inevitably mean a return to coal.
  • This would put policies to reduce greenhouse gas emissions on hold, as coal emits about four times more CO2.
  • The demand for Russian gas in Europe can be reduced by 18-20% by using coal-fired power plants. As it accounts for 11% of total energy consumption in Europe, there is talk of replacing around 2% of the energy consumed in Europe today as gas with coal.
  • In the long term, a complete halt to Russian gas imports will require massive investments, especially in renewables and liquefied natural gas infrastructure.

At the Versailles summit on 10th-11th March, EU heads of state and government decided to reduce dependence on Russian gas. What does this mean for the European energy mix?

In the short term, this inevitably means replac­ing Russ­ian gas with coal for part of the ener­gy mix and replac­ing anoth­er part of the mix with liq­ue­fied nat­ur­al gas (LNG) import­ed by sea. The imme­di­ate con­se­quence of the war in Ukraine is that poli­cies to reduce green­house gas emis­sions are put on hold, as coal-fired pow­er gen­er­a­tion emits about four times more CO2 than gas-fired gen­er­a­tion. In the long term, this means build­ing infra­struc­ture to increase LNG imports and devel­op renew­able energy.

How much coal does this represent?

In 2021, about 45% of the gas import­ed into Europe was of Russ­ian ori­gin. This depen­dence does not have the same weight in dif­fer­ent coun­tries. France imports 17% of its gas, Ger­many 50%, while Fin­land and Latvia, for exam­ple, import over 90%. Break­ing this depen­dence in the short term will there­fore require very dif­fer­ent efforts from one coun­try to another.

The demand for Russ­ian gas in Europe can be reduced by 18–20% by using coal or dual-fuel pow­er plants. Russ­ian nat­ur­al gas accounts for 11% of total pri­ma­ry ener­gy con­sump­tion in Europe. So, we are talk­ing about replac­ing around 2% of the ener­gy con­sumed in Europe today in the form of gas with coal. That’s about the annu­al ener­gy con­sump­tion of a coun­try like Aus­tria, or 10% of Ger­many’s ener­gy. An impor­tant detail: we could go fur­ther and start up old coal-fired pow­er sta­tions again. This is prob­a­bly what will hap­pen if we do not reduce the demand for heat­ing and elec­tric­i­ty sufficiently.

Can you provide more details on the exit strategy for Russian gas? 

An exit from Russ­ian gas can be estab­lished through a three-pronged strat­e­gy. The first is the replace­ment of gas by LNG. The Unit­ed States and Qatar account for 26% and 24% of EU imports and are mas­sive exporters. How­ev­er, there are tech­ni­cal con­straints. Europe, espe­cial­ly Ger­many, lacks gas port ter­mi­nals and LNG regasi­fi­ca­tion plants. The world tanker fleet is 600 ships. This will not be enough to meet the rapid­ly grow­ing demand. Final­ly, once the gas is deliv­ered, it must be trans­port­ed across Europe. The sec­ond is the use of coal (import­ed from South Africa). Final­ly, it will be nec­es­sary to reduce the con­sump­tion of indus­tries and house­holds. It is through the com­ple­men­tar­i­ty of these three axes that Europe can reduce its depen­dence in 2022, even if the two-thirds sce­nario seems rather unre­al­is­tic. A reduc­tion of 50 to 60% is more like­ly. A com­plete halt to Russ­ian gas imports in 2027 will require mas­sive invest­ments, par­tic­u­lar­ly in renew­ables and LNG infra­struc­ture. Nuclear pow­er requires longer devel­op­ment times.

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What would be the impact of a decrease in gas consumption?

The Inter­na­tion­al Ener­gy Agency esti­mates that if every­one in Europe reduced their heat­ing by one degree, this would rep­re­sent a sav­ing of 6% in the vol­ume of gas import­ed from Rus­sia. In order to reduce French con­sump­tion as a whole, it would there­fore be nec­es­sary to reduce the tem­per­a­ture to heat build­ings in Europe by more than 3 degrees. This remains the­o­ret­i­cal, as some of this gas is con­sumed by industry. 

How can this difference in dependence between France and Germany be explained?

Ger­many uses 25% coal, 22% wind pow­er and 17% nat­ur­al gas to pro­duce its elec­tric­i­ty. France, on the oth­er hand, has invest­ed less in nat­ur­al gas, as 70% of its elec­tric­i­ty comes from nuclear pow­er. Gas is used in par­tic­u­lar for heat­ing, for indus­try and for pow­er sta­tions used dur­ing peak peri­ods. In addi­tion, a large pro­por­tion of the gas import­ed into France comes from Alge­ria and Nor­way, trans­port­ed by pipeline. This sit­u­a­tion should rein­force France’s nuclear strategy.

What can we expect from price developments?

An obser­va­tion of futures mar­kets indi­cates that we will not go back to nor­mal before the third quar­ter of 2023. This seems a long way away, but does not mean a con­stant increase in gas prices until then. It is impos­si­ble to pre­dict the price of gas, but sta­ble and high prices are like­ly. In this increase, the effect of anx­i­ety and self-sanc­tion­ing, caused by the announce­ment of the Amer­i­can and British embar­go on Russ­ian gas and oil, are unde­ni­able. Banks and com­pa­nies are refus­ing to con­clude con­tracts with Rus­sians for fear of reprisals. The mini scan­dal sur­round­ing the com­pa­ny Shell, which has not put an end to its activ­i­ties in Rus­sia, illus­trates this well. To avoid attract­ing atten­tion, and thus dam­ag­ing their rep­u­ta­tion, traders apply sanc­tions them­selves, which leads to high­er prices.

The way we store this resource is there­fore strate­gic. Espe­cial­ly as we are just com­ing out of a dif­fi­cult year for this sec­tor, due in par­tic­u­lar to the health cri­sis. Nor­mal­ly, Euro­pean coun­tries start the spring with about 40% of their stor­age capac­i­ty, where­as this year, this 40% had already been reached in mid-Jan­u­ary. It is there­fore impor­tant to restock gas, but doing so at high prices is a risk for buy­ers. Espe­cial­ly since, if this is the strat­e­gy cho­sen, it pro­vides Rus­sia with an addi­tion­al weapon that it could exploit to push prices down.

Interview by Pablo Andres