Good economic news is thin on the ground these days. But Europe’s success in reducing dependence on Russian gas is one such story.
Before the invasion of Ukraine in February, Russia accounted for 40 per cent of total European natural gas supply and 10 per cent of all energy use. A year ago, weaning Europe off this vital source of energy would have been unthinkable. Yet in recent weeks Europe’s use of Russian gas has been running at around 20 per cent of pre-invasion levels.
Europe has moved swiftly to reduce the need for Russian gas, stepping up imports of liquid natural gas (LNG) from Qatar, the US, Nigeria and Algeria. Pipeline supply of gas from Norway has risen while Germany has brought back idled brown coal production and pushed back the planned closure of nuclear power plants. EU production of electricity from solar and wind rose at record rates between March and September.
Higher prices have encouraged economy in the use of energy and innovation. Renault, the French car manufacturer, has reduced the amount of time it keeps paint hot for a particularly energy-intensive process that accounts for up to 40 per cent of its total gas demand, according to the FT. In Germany public buildings, halls and corridors will generally no longer be heated, and the temperature in offices will be limited to a maximum of 19 degrees. Paper and packaging firm DS Smith has ordered its factories to cut gas consumption by 15 per cent.
Mild weather has helped, but this is also about greater efficiency. The FT reported last week that in recent weeks German industrial use of gas has been running about 20-25 per cent lower than a year ago while industrial production is higher than a year ago. Given the scale of the shock to energy supply and prices this year it is quite an achievement that the German economy posted growth of 0.3 per cent in the third quarter.
Europe has capitalised on higher LNG import volumes and reduced energy demand to rebuild gas stocks for the winter. Storage levels are close to full capacity. Coupled with reduced usage, both in Europe and China, this has led to a sharp fall in the gas price, down 70 per cent from the August peak. Last week the price of gas for delivery within the next hour briefly fell into negative territory as LNG tankers were unable to offload their product.
This swift reorientation of European energy policy has come at a price. Since the start of the energy crisis just over a year ago European countries have allocated almost €700bn – about 4 per cent of GDP – to protect consumers from higher prices. Germany’s use of polluting brown coal will add to carbon emissions. The viability of some energy-intensive industries is at risk. BASF, one of the world’s largest chemical companies, announced that it would “permanently” downsize in Europe, with high energy prices making the region uncompetitive. Soaring energy costs have forced Germany’s major producer of Adblue, a vital additive for diesel engines, to halt production, threatening the country’s freight fleet. Above all, higher energy prices seem likely to push the EU, and the UK, into recession next year.
A cold winter and a complete ending of Russian supplies could take European gas stocks to dangerously low levels, risking power cuts. Avoiding this will require continued economy in energy use and luck. Further out, much reduced Russian gas supply will make it harder for Europe to rebuild gas stocks for the winter of 2023–24. The pricing of gas on futures markets reflects these dynamics, with prices expected to rise significantly by early 2023.
For all the disruption higher energy prices cause, they are a necessary corrective to over-dependence on Russian gas. Higher prices are altering patterns of demand and usage, and driving investment in infrastructure from renewables to gas pipelines. Last week the International Energy Agency said that the crisis caused by Russia’s invasion will accelerate the clean energy transition.
Filling the gap left by Russian gas will not be easy. But the last few months suggest that this crisis could yet give us a more resilient, greener energy system.
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