Will Gas Crisis Lead to European Policy Overhaul?

The gas price crisis has created obstacles for achieving the EU's long-term climate and energy targets for 2030 and 2050. Pushback has formed against many policies, from energy market rules and green subsidies to the rising price of carbon. Some EU member states have softened their stance toward gas in the energy transition, and in some ways, Brussels too is suggesting that gas may play a bigger role over the coming decades. Although the crisis is a short-term phenomenon, it has triggered debate on a range of fixes — not only over the near term but further into the future to prevent similar issues down the road.

Short-Term Fixes

In the short term, there has been a switchback to coal and lignite at the EU level to replace more expensive gas — and, ironically, the lion's share of incremental coal demand in the EU has been supplied by Russia, a country many blame for the high gas prices in Europe. Gas-fired generation becomes less profitable than these dirtier fuels when the price of gas and carbon permits combined outstrips the cost of buying coal. Short term, this switch to coal has driven up carbon emissions in the power sector — up 1% in the third quarter of 2021. Rising emissions mean greenhouse gas (GHG) savings have to be made elsewhere in the energy system.

Other short-term measures include trying to secure more LNG cargoes from suppliers such as the US and Qatar, alongside increased utilization of the bloc's LNG terminals and trying to overcome bottlenecks in gas networks so gas can flow to where it is needed. The problem with this is that the EU is looking for spot LNG cargoes in a tight market, so it is difficult to see where these cargoes could come from and at what cost, especially as some producers in the US and Qatar have upped term deliveries to some customers in Asia.

Medium Term

A medium-term solution would be to increase gas storage capacity in the EU to cushion the impact of future price spikes or supply disruptions. Brussels also supports collective buying of gas volumes by some EU members grouped together on a voluntary basis. This solution makes sense on paper — but lingering questions include where the gas would come from and on what price or contractual terms.

Long Game

Long term, the gas price crisis has highlighted that the EU is too reliant on Russian pipeline gas and too sensitive to a global gas market based around a pricing system in which the highest bidder wins.

On one hand, policymakers in Brussels have made some concessions to gas and nuclear in taxonomy rules designed as a guide for energy projects to comply with the ESG criteria of private-sector investors. Today, Brussels released taxonomy rules classifying gas and nuclear as transitional technologies if they meet certain, strict criteria. Still, there is a clear message from Brussels that the EU's long-term energy future lies along a low-carbon path trod by green European-owned companies, rather than non-EU fossil fuel players like Russia. After all, the EU is aiming for net-zero GHG emissions by 2050, and under its triumvirate of energy policies — affordability, energy security and environmental sustainability — increased reliance on Russian gas doesn't appear to fit as a long-term answer. Brussels made this clear in a Jan. 28 joint statement with the US, which emphasized "clean energy, in particular renewables, energy efficiency, and technologies" to "provide a path to energy security and reduced dependence on fossil fuels." It added that "the current challenges to European security underscore our commitment to accelerating and carefully managing the transition from fossil fuels to clean energy."

For now, Brussels is pushing ahead with its green plans and hasn't proposed any measures that would veer it off track. And member states have made commitments to GHG reductions in their national energy and climate plans or NECPs — 10-year plans that detail how each member will achieve its 2030 GHG reduction target, updated every two years to monitor progress. The EU Parliament is pushing for tougher rules and financial penalties to make sure EU members reduce their GHG emissions, as set out in their NECPs, to ensure 2030 and 2050 targets are achieved.

While some countries are pushing back, others such as Germany have vowed to double down on GHG reduction efforts. For example, the new German coalition government has raised its offshore wind target to 30 gigawatts for 2030 — Merkel's government had sought 20 GW — which is roughly four times the current operational level of 7.7 GW. Poland, by contrast, is pushing back against the pace of emissions reductions required under the EU Green Deal. Warsaw says the Emissions Trading System carbon price is too high and argues that it is being unfairly burdened with high electricity prices due to its reliance on coal.