The Big Picture

Europe’s New Energy Map: A Scorecard

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  • A year on from Russia’s invasion of Ukraine, the EU has largely delinked itself from its previous lifeline of affordable piped Russian gas supplies and built out LNG import capacity — but not without economic pain.

  • As focus on accelerating the energy transition heats up, competition with the US and China over clean tech supply chains and state support is now front and center.

  • Europe’s funding and regulatory response could further cement its transition, but energy challenges will linger and some changes to Europe’s economy will be permanent.

After Russia's invasion of Ukraine, energy security concerns instantly became a key driver of Europe's energy transition, on top of the climate crisis. German Chancellor Olaf Scholz said the invasion showed that “responsible, forward-looking energy policy is decisive not only for our economy and the environment. It is also decisive for our security." French President Emmanuel Macron and European Commission President Ursula von der Leyen echoed those views, equating a renewables buildout with energy power and independence.

A year into the war, Energy Intelligence assesses Europe’s new energy map. Are EU leaders making good on early pledges to turbo-charge the transition? Could the US’ own climate offer — and EU efforts to tilt away from Chinese clean energy supply chains — drain momentum from Europe’s transition? What price has Europe paid for overhauling its gas reliance on Russia?

Russian President Vladimir Putin, in a speech Tuesday, argued that the West's sanctions response meant it effectively shot itself in the foot. “They sent prices soaring in their own countries, destroyed jobs, forced companies to close, and caused an energy crisis.”

European data show a more nuanced story. Gas prices are now hovering at around $16 per million Btu, down from around $100/MMBtu last summer, as Moscow squeezed supply and European companies raced to fill storage facilities ahead of winter; levels remain remarkably high for this time of year. EU gas consumption fell 19.3% between August and January, exceeding the EU’s target of a 15% reduction against the five-year average, according to Eurostat. That said, overall higher energy prices have fueled sticky inflation. Heavier reliance on LNG points to higher costs, while supply constraints, among other factors, could see gas prices surge next winter.

Gas Shift

Moscow’s effective severing of the gas relationship cannot be underestimated as a driver behind Europe, both reducing its gas consumption and diversifying supply. Absent any sanctions targeting Russian gas, EU reliance on Russian piped gas fell from around 40% to under 20% over the span of a year. Europe is set to install an additional 50 billion cubic meters per year of LNG import capacity by end-year and now draws cargoes away from Asia.

In a frozen conflict scenario, increased flows of Russian pipeline gas — most likely via Turkey — can’t be ruled out. But volumes and dependency are unlikely to approach the past trade relationship — with politics, legal uncertainties around contracting and the EU’s own transition goals at play.

Deindustrialization: No Doomsday?

Deindustrialization risks in this higher-cost environment — from the tight LNG market to expensive electricity — can’t be ignored but must be put into context. Most affected are energy-intensive industries that use gas as an input rather than a fuel source for operations. But with Europe advancing its energy transition prewar, such industries already faced an uncertain future against rising carbon prices. When German chemicals giant BASF in October announced it was downsizing its European presence, pointing to higher energy prices, it also cited weak growth in the European chemical market for about a decade.

Other warnings of permanent closures of European industrial capacity have largely failed to materialize. Still, according to German government data, production in energy-intensive industries — albeit accounting for only one-fifth of the industrial sector — “fell significantly” from February 2022. But non-energy intensive industrial output fell only slightly, and German car production was up 11% in 2022 over 2021, according to industry body VDA. In the EU as a whole, industrial production was up 2% in November 2022 over the previous year, Eurostat data show.

Transition Tempo Up

Europe’s scramble for LNG is not a sign that it is falling in love with gas again but partly reflects the problem of sequencing. When Russian supplies were cut off, renewables were not ready to replace gas’ role in the economy (gas, alongside nuclear, also helps fill a need for non-intermittent baseload capacity). But policies and targets being pumped out by Brussels are aimed at accelerating renewables deployment, most recently with a focus on building up domestic capacities — the ultimate in energy security.

The RePowerEU plan announced last March targets increasing the share of renewables in the energy mix to 45% in 2030, up from a previous target of 40%, and set out more ambitious hydrogen, biomethane and energy efficiency targets. To support a faster rollout, emergency measures are being taken to get rid of unnecessary permitting red tape, and state aid rules relaxed temporarily. Rules governing the production of renewable hydrogen were released last week. Last year saw near-record installations of wind and solar photovoltaic (PV) assets, although both sectors say they are off track to meet RePowerEU targets.

Fightback Against the US and China

The US’ Inflation Reduction Act (IRA) — offering a wide range of tax credits to support renewables buildout in the US, including US manufacturing — has prompted the EU to respond with its own plans support the development of a low-carbon manufacturing base in Europe. The fear is that European investment will otherwise head to the US.

The goal is to make the EU self-sufficient or widely sourced in the many aspects of the energy transition — from mining and processing critical raw materials, to producing batteries and solar PV panels — that now mostly take place outside the EU, with China often dominant. Toward this end, Brussels has introduced a Critical Raw Materials Act, a Green Deal Industrial Plan and a Net-Zero Industrial Act.

For Europe, the main surprise may not have been the US’s choice of mechanism in the IRA — tax credits — but that the US had a climate policy at all. The EU itself has used subsidies across various new energy sectors. But the IRA clearly marks out a new level of competition in clean energy: Players in Europe’s green industry now have more of a choice.

For Europe, the US challenge also comes at a sensitive time — amid a Russian supply shock that’s layered in a still-higher gas price environment, and as EU concern about its reliance on Chinese supply chains grows. In the short term, the IRA poses some problems for Europe — how significant might hinge on how effective Europe’s latest policy initiatives are. But longer term, US competition should spur the EU to up its game, with both ultimately moving in the same direction.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Ukraine Crisis, Policy and Regulation, Sanctions, Gas Supply, Gas Prices, Gas Pipelines, LNG Trade, LNG Prices
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