Climate: goodbye Russian gas, hello coal

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.

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.

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.

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. 

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.

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