EU Commission chief Ursula von der Leyen has called for a price cap on Russian pipeline gas to prevent Russia from manipulating the energy market. She also called for measures to extract the windfall profits from energy supply companies during the gas crisis and use it to support vulnerable citizens. Von der Leyen made her remarks at a meeting with conservative German lawmakers in Murnau, Germany.
EU could rely on Russian pipeline gas for 20% of its energy requirement
The Russian invasion of Ukraine uncovered deep fissures in the European Union’s energy policy. After the EU imposed sanctions on Russia, Gazprom cut its gas exports to 20 percent of their current capacity, pushing prices to record highs. In the UK, where energy bills are influenced by international prices, the impact could be severe. By winter 2022, energy bills could be four times the amount they were in January 2019.
The EU has proposed cuts of 100 bcm in its gas consumption this year, most of which would come from Russia. This represents more than a quarter of the EU’s total demand for gas in 2021. But it is unclear whether these cuts will be enough to make the European Union dependent on Russian gas in the coming winter.
Even though it may seem improbable, it is becoming a possibility. After all, the Russian President has repeatedly emphasized his country’s energy leverage, which could push the EU to use his own gas supplies. This is a scary prospect for German officials, who are already planning for the worst. In case of a shortage, the country could rely on Russian pipeline gas for 20% or more of its energy requirement in winter 2022.
While the EU has approved bans on Russian coal and oil, the bloc has not banned Russian gas exports. But the European Commission is worried that Putin will cut off gas supplies and the EU will be left in a dire situation. If this happens, the EU will have to implement measures to keep essential industries running and services running. It will also need to implement measures to encourage people to conserve energy.
While the EU internal gas market is not perfectly connected, some country groups will need to make deep cuts to their gas demands in winter, which would leave them without enough gas to meet their demands. Fortunately, the EU already has three pipelines through which Russian gas is supplied to Europe. One of these pipelines, Nord Stream 1, is expected to reopen this week. In addition, the EU also receives natural gas from Norway, North Africa and Azerbaijan. With spiking prices, Putin is making a lot of money.
One of the most important pipelines linking Russia to the EU is Nord Stream 1, a crucial link between Russia and Germany. But it was temporarily closed due to maintenance issues, and now it is operating at just 40 percent capacity. As the world’s energy needs increase, the EU is scrambling to fill its gas storage in time for winter. This will be the time when demand is at its highest and utility companies have to dip into their reserves to keep the houses and power plants running. The European Union’s gas reserves are currently only 65% full.
Germany could lose around 5% in a Russian energy embargo scenario
The German central bank recently released a very pessimistic economic forecast. It predicted that Germany’s economy would shrink 5% more than it was originally expected. The German economy imports around two-thirds of its natural gas from former Soviet Union states, and a disruption to Russian gas supplies could cost the German economy around 220 billion euros of economic output – equivalent to six percent of its gross domestic product. In fact, the CEO of Deutsche Bank has already predicted that a Russian energy embargo scenario would cause a recession in Germany.
While Germany already has adequate supplies of oil and gas from other countries, a full gas embargo scenario could damage the country’s energy-intensive manufacturing industry, causing around 550,000 jobs to be lost this year and 6.5% of GDP in the following year. Already, fears of a supply shortage have pushed wholesale gas prices skyrocketing, linked to both consumer and producer price inflation.
While the German Bundesbank’s study used advanced models, it is worth noting that its results were still very preliminary and haven’t taken into account business cycle effects. For instance, unemployment and sentiment in Germany could go up if gas imports are stopped. Government intervention might help smooth out the initial shock.
Germany is pursuing alternative fuel supplies while working on reducing its dependence on Russian oil. However, it is still reliant on Russian oil, which is piped through the country to a refinery in Schwedt, operated by the Russian state company Rosneft.
Germany’s decision to curtail Russian energy imports is not a simple one. While it is unlikely to cut off all imports from Russia within a year, it plans to dramatically reduce its gas and oil imports. Although some economists argue that an energy embargo would hurt the German economy, Germany’s finance minister is keen to sound tough with Russia. In any case, a full energy embargo is unlikely to happen immediately as it would halt large parts of the German economy.
As a result of these risks, the German government has taken steps to diversify its energy sources and is increasing its LNG imports. The government plans to reduce its gas imports from Russia to less than 10% by 2024. A Russian energy embargo would hit the heart of the Russian economy, with 74% of its natural gas going to European customers.
Hungary is mitigating the impact of a further reduction in gas supply
Hungary is actively pursuing deeper energy ties with Russia and has signed a 15-year gas supply deal with Gazprom. However, it has objected to the European Union’s embargo on Russian oil and gas imports. The Kremlin has also been limiting the volume of natural gas that it exports to the EU, which has created a gas crisis in Western Europe.
Hungary and other Central and Eastern European countries are coping with the prospect of a further gas supply cut from Russia. A partial cutoff is already affecting economic growth, and a complete shutdown could be even more severe. The Russian invasion of Ukraine has further dimmed the economic outlook. Given the links between the two warring countries, the impact of a total gas supply cut is even more concerning.
In order to mitigate the negative impact, the European Union is taking steps to diversify its sources of gas. While some countries have been able to unilaterally stop Russian pipeline gas imports, a total shutoff would pose a greater challenge. Import capacity and transmission constraints could limit the ability to reroute gas within Europe. A complete shutoff would result in shortages of 15 percent to 40 percent of a country’s annual consumption.
Since the end of the heating season is fast approaching in Europe, actions to ensure sufficient gas storage volumes need to be prioritized and completed by autumn. In addition, additional import pipelines from natural gas production sites along the periphery of the EU are needed to supplement existing import capacity.
The measures taken by the European Commission reflect the state of gas supply in Europe and the limited options available to limit the supply. Although demand reduction has been discussed several times over recent months, it has not received enough attention. Various EU members are considering their options, but they need to take a joint approach to reduce consumption.
The latest gas price volatility in Europe is a result of a lack of gas supply. Gazprom has an extensive network of pipelines linking its gas fields to European markets. Most of its gas goes through the Nord Stream pipeline in Germany and Poland, as well as the UPU/Progress pipeline in Slovakia. A small portion goes to Romania and Hungary.
European solidarity helps mitigate the impact of a further reduction in gas supply
European countries are trying to mitigate the impact of a further reduction in gas supply from Russia by cutting down their gas demand. The European Commission has put together an action plan to reduce the EU’s demand for gas by 15%. This action plan involves reallocating existing gas reserves and reducing the use of gas in households and in public administrations. In addition, the EU is in talks with Poland and Italy to secure additional gas supply in the event of an emergency.
The Commission has also suggested early action to combat the demand for gas and offers best practice guidelines for reducing energy use. Furthermore, it proposes strengthening the solidarity framework to help member states with their gas demand challenges. To this end, the Commission is encouraging energy efficiency and fuel switching in industry and electricity production. It also suggests that the use of alternative fuels be considered for temporary power generation. Furthermore, it proposes to ease environmental regulations for gas and electricity production in some member states.
Several countries have partially diverted their gas purchases to non-Russian sources. These efforts have helped reduce the risk of gas cutoffs. However, the effect of further cuts on gas supply from Russia remains. A full cut off of gas supplies from Russia could lead to a recession in the euro area. While it may not be possible to avoid gas rationing entirely, efforts to diversify the European Union’s gas supplies are reducing the impact of a further reduction in Russian pipeline gas supply for winter 2022.
The EU’s new plan will help EU member states build up gas storage and reduce their consumption of gas. The plan is voluntary and requires EU Member States to report on their progress every two months. However, if Russia stops providing gas, the plan will become mandatory. It is possible that the EU will not meet its 15% reduction target. However, the EU’s new plan may lead to a higher reduction in gas supply than its previous plan.
While the impact of a further reduction in Russian gas supply will be limited in direct terms, the impact of a further reduction on European energy consumption will still be felt by many companies. These include households, small businesses, and essential social services. However, industrial customers would be the first to experience a reduction in supply as they represent a large proportion of the country’s demand for gas.
