Red alert for EU: How can Europe prevent a major gas crunch?

Red alert for EU: How can Europe prevent a major gas crunch?

Amid the world besieged by a global energy crisis, the International Energy Agency (IEA) believes that Europe is at the epicentre of the energy market turmoil, thus, coordinated actions across the EU are essential to prevent a major gas crunch, says the IEA boss, who outlines five measures to deal with this crisis.

Illustration; Source: The International Energy Agency (IEA)

Dr Fatih Birol, the head of the International Energy Agency, stated on Monday, 18 July 2022, that Russia’s moves to squeeze natural gas flows – after many months of warning signs – were a “red alert” for the EU. Birol points out that the world is experiencing “the first truly global energy crisis in history,” and as the International Energy Agency has been warning for many months, the situation is especially perilous in Europe, which makes the IEA’s boss “particularly concerned about the months ahead.”

The executive director of the International Energy Agency underlines that the gas crisis in Europe has been building for a while, and Russia’s role in it has been clear from the beginning. Five months before Russia’s invasion of Ukraine, in September 2021, the IEA pointed out that Russia was preventing a “significant” amount of gas from reaching Europe. The alarm was raised further in January, highlighting how Russia’s “large and unjustified reductions” in supplies to Europe were creating “artificial tightness in markets” and driving up prices at exactly the same time as tensions were rising over Ukraine.

Source: The International Energy Agency (IEA)
Source: The International Energy Agency (IEA)

Birol says that after “Russia invaded Ukraine on 24 February, nobody in Europe or elsewhere could be under any illusions about the risks around Russian energy supplies.” A week after the Ukraine crisis started, the IEA released its 10-Point Plan to reduce the European Union’s reliance on Russian natural gas, setting out the practical actions Europe could take.

This stressed the need to maximise gas supplies from other sources; accelerate the deployment of solar and wind; make the most of existing low-emission energy sources, such as renewables and nuclear; ramp up energy efficiency measures in homes and businesses; and take steps to save energy by turning down the thermostat. 

Furthermore, the IEA’s executive director confirms that “some progress” has been seen on this, particularly in terms of diversifying gas supplies but, in his opinion, this is not enough, especially on the demand side, to prevent Europe from finding itself in an “incredibly precarious” situation today. Therefore, Birol claims that Russia’s latest moves to squeeze natural gas flows to Europe even further, combined with other recent supply disruptions, are “a red alert” for the European Union.

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Birol further explained: “In my conversations with European leaders, including at the G7 Summit in Elmau, Germany, and in a meeting last week with European Commission President Ursula von der Leyen and all the EU Commissioners, I have been urging them to do all they can right now to prepare for a long, hard winter. It is encouraging to see the readiness of key European leaders to be proactive on this issue. It will require strong resolve and determination to see it through.”

What can Europe do about this situation?

Birol underlines that Europe is now “forced to operate in a constant state of uncertainty” over Russian gas supplies, and a complete cut-off cannot be ruled out. Due to this, the IEA’s boss believes that it is “much better to take steps now to prepare for winter than to leave the well-being of hundreds of millions of people and European economies at the mercy of the weather or, even worse, to give unnecessary extra leverage to President Vladimir Putin of Russia.”

Moreover, Birol emphasises that flows have been halted through Nord Stream, “the biggest single gas pipeline between Russia and Europe,” for what Russia says is planned maintenance that is due to end on 21 July. As Russia had already significantly reduced the flows coming through Nord Stream in June, the IEA’s executive director underscores that it “remains unclear” whether they will resume and if so, at what level, after 21 July.

To drive home the challenge Europe faces, Birol advises considering a scenario in which gas flows through Nord Stream return after 21 July to the low levels they were at before the current halt. However, at the start of the winter heating season on 1 October, Russian gas supplies to Europe get cut off completely.

According to Birol, the EU would need to have filled its gas storage facilities to above 90 per cent of their capacity by then to get through the coming winter in such a scenario. Although, the IEA’s boss claims that even then, Europe could still face supply disruptions in the latter part of the heating season. 

Evolution of EU gas storage levels

Birol says that achieving that 90 per cent storage level is still possible, but “Europe needs to act now and make every remaining day count.” In lieu of this, the first immediate step towards filling European gas storage to adequate levels before winter, based on Birol’s analysis, is to reduce Europe’s current gas consumption, and to put the saved gas into storage.

The IEA’s executive director confirms that some of this is happening already because of sky-high gas prices, “but more is required.” A new IEA analysis indicates that the extra gas that needs to be saved over the next three months is in the order of 12 billion cubic metres – enough to fill about 130 LNG tankers.

Source: The International Energy Agency (IEA)
Source: The International Energy Agency (IEA)

While Birol agrees that this is “a big ask,” he also highlights that it “does not exaggerate the scale of what is needed or what is possible if the right measures are taken.” In line with this, Birol says that it is “categorically not enough” to just rely on gas from non-Russian sources as these supplies are not available in the volumes required to substitute for missing deliveries from Russia.

The International Energy Agency’s boss is adamant that this will be the case “even if gas supplies from Norway and Azerbaijan flow at maximum capacity, if deliveries from North Africa stay close to last year’s levels, if domestic gas production in Europe continues to follow recent trends, and if inflows of LNG increase at a similar record rate as they did in the first half of this year.” This scenario also assumes that Russian gas flows through Nord Stream will resume at the end of the current maintenance period at the same levels as before it.

Five actions for EU to take

Taking all this into consideration, Birol proposes “five concrete actions” that European leaders need to take for a more coordinated, EU-wide approach to prepare for the coming winter.

This primarily means that the EU should introduce auction platforms to incentivise EU industrial gas users to reduce demand. Birol points out that industrial gas consumers can offer part of their contracted gas supply as demand reduction products for compensation, which can lead to efficiency gains and a competitive bidding process. Such auction models are not new as they are being developed in Germany and proposed in the Netherlands.

The EU should also minimise gas use in the power sector, which can be done by temporarily increasing coal and oil-fired generation while accelerating the deployment of low-carbon sources, including nuclear power where it is politically acceptable and technically feasible.

Birol proposes that the EU should enhance coordination among gas and electricity operators across Europe, including on peak-shaving mechanisms as its third measure, which can help reduce the impact of lower gas use on power systems, including “strict cooperation” on the operation of thermal power plants at national and European levels.

The fourth measure states that the EU should bring down household electricity demand by setting cooling standards and controls with government and public buildings taking the lead on this to set an example while campaigns should encourage behavioural changes among consumers.

The last measure to be proposed outlines that the European Union should harmonise emergency planning across the EU at the national and European levels, covering measures for supply curtailments and solidarity mechanisms.

“To get through the current crisis, the EU needs unified action,” emphasised Birol, adding that “if these types of measures are not implemented now, Europe will be in an extremely vulnerable position and could well face much more drastic cuts and curtailments later on.”

Aside from these measures, European governments need to prepare the people of Europe for what may be coming, says the IEA’s boss, elaborating that public awareness campaigns in the context of an energy crisis have been successful previously in reducing short-term energy demand by several percentages. Birol underlines that “simple steps such as turning down the heating by a couple of degrees in Europe can save the same amount of natural gas that is supplied over the winter by the Nord Stream pipeline.”

Worst scenario: Russia cuts off gas supplies to Europe before winter

After the events over the past year, Birol believes that it would be “unwise” to exclude the possibility that Russia could decide to forgo the revenue it gets from exporting gas to Europe in order to gain “political leverage,” as it has already “capitalised on the current energy crisis to bring in huge amounts of extra money.” The IEA’s boss states that the amount of revenue that Russia has collected from exporting oil and gas to Europe since the Ukraine crisis started has “doubled compared with the average of recent years – to $95 billion.”

Source: The International Energy Agency (IEA)
Source: The International Energy Agency (IEA)

Birol further highlights that the increase in Russia’s oil and gas export revenues in the last five months is “almost three times what it typically makes from exporting gas to Europe over an entire winter.”

Therefore, the IEA’s executive director states that if Russia decides to “completely cut off gas supplies” before Europe can get its storage levels up to 90 per cent, the situation will be “even more grave and challenging.” Such an event would require “cool-headed leadership, careful coordination and a strong degree of solidarity,” based on Birol’s assessment.

“Today, Europe needs to be doing everything it can to reduce the risk of major gas shortages and rationing, especially during the coming winter when its most vulnerable citizens can least afford to go without it. At the same time, it needs to stay the course on its clean energy transition. I look forward to seeing the measures the European Commission will announce on this front later this week,” concluded Birol.

As this winter could become a “historic test” of European solidarity and “one it cannot afford to fail with implications far beyond the energy sector,” Europe may “well be called upon to show the true strength of its union,” underscores Birol.