Nicholas Crawford
Europe’s energy crisis – precipitated both by the disruption to energy markets caused by the war in Ukraine and European sanctions on Russia – has upended many of the assumptions used in forecasts for the region’s transition to clean energy.
Before the crisis, Europe had planned to raise carbon prices and introduce a border-adjustment mechanism for carbon that would encourage firms to use clean energy. Natural gas was expected to replace coal in many applications, and though total gas consumption was forecast to decrease by around 5% by the end of 2030, the assumption was that pipeline imports of gas from Russia would account for a growing share of this consumption. Instead, due to the crisis, Europe’s pipeline imports of gas will decline dramatically and the region will import more liquefied natural gas. Furthermore, given the increased price of gas, the transition away from coal has slowed and the push for higher carbon pricing has waned.
However, Europe is moving faster towards renewables, despite tightening government budgets and the growing costs of some green technologies. Examined sector by sector, it appears that the net effect of the crisis may, in fact, be an accelerated move towards cleaner energy.
Natural gasEurope’s energy crisis has prompted a flurry of investments aimed at expanding the continent’s capacity to import liquefied natural gas (LNG) to replace piped Russian gas. Such investments could easily lock in higher LNG consumption and thus detract from the region’s net-zero goals, despite the role of gas in replacing higher-polluting coal. But most of Europe’s newly announced investments are in floating storage and regasification units (FSRUs), which go a long way towards solving the lock-in problem. Between 2022 and 2025, the share of Europe’s LNG import capacity using FSRUs will increase from 5% to 30%.
FSRUs are former LNG carrier ships that have been converted into regasification terminals and can be installed more quickly and with lower capital expenditure than more conventional, onshore terminals. After seven to eight years, FSRUs are more expensive to run than onshore terminals. But because they are typically chartered and can be moved elsewhere in the world
, Europe can use FSRUs temporarily without locking in higher LNG consumption.
Proposed European investments in fracking would create a much bigger lock-in problem for Europe’s energy-transition plans. Widespread adoption of fracking remains unlikely, however. Although governments in Hungary and the United Kingdom have rescinded fracking bans, local opposition to new projects is high throughout Europe because of the tremors caused by the process. Compared to regions of North America where fracking is common, Europe is much more densely populated.
HydrogenIn a further effort to make new LNG investments compatible with Europe’s energy-transition objectives, the European Commission, the German government and other national governments have called for new LNG infrastructure to be ‘hydrogen-ready’. Clean hydrogen is expected to become a critical future energy source, especially for industry, in place of coal and gas. When granting permissions for new FSRUs in Wilhelmshaven and Brunsbüttel, Germany also approved the installation of onshore facilities at the same sites for the importation of clean hydrogen (or ammonia, a hydrogen derivative), and it will use piping for the FSRUs that is compatible with both hydrogen and natural gas.
Another effect of the gas-supply crisis is that Europe will probably pursue green hydrogen (produced from renewables) over blue hydrogen (produced from natural gas). Before the energy crisis, blue hydrogen had a cost advantage over green hydrogen, but this is no longer true. And, having been spooked by the current disruptions to gas supply, a return to lower gas prices may not be enough to convince companies that investing in blue hydrogen is worth the risk.
CoalNatural-gas shortages have led to a revival of coal in Europe, which is damaging to net-zero goals. Governments in Austria, Germany, the Netherlands, the UK and elsewhere have paused the decommissioning of coal-fired power plants either to continue operating them full-time or to use them as a backup substitute for natural gas. Likewise, some power plants that planned to switch from coal to gas have postponed their conversion, such as Volkswagen’s plants in Wolfsburg. These are temporary measures, however, and with the European Union banning imports of Russian coal, the rising cost of coal-fired power generation means that the fuel’s disappearance from the continent’s energy mix is likely to resume within a couple of years.
NuclearThe energy crisis has had a positive short-term effect on the nuclear-power industry. Belgium, Germany and Hungary have extended the lives of existing nuclear power plants. But there may also be a more significant long-term effect. The Czech Republic, Poland, Slovakia and the UK have all sought to speed up investment in new plants that will come online in the 2030s, and the crisis has prompted discussion about the potential for new nuclear plants in other European countries, particularly those that currently use gas for electricity generation. For example, in Italy, all three parties in Prime Minister Giorgia Meloni’s right-wing coalition government favour new nuclear-power investments. Little debate on the issue has occurred in the continent’s largest economy, Germany, which is in the midst of a multi-year plan to decommission all its nuclear power plants. But in Germany’s case, nuclear power cannot easily serve as a substitute for natural gas, which is used primarily in industry and for domestic heating rather than for electricity generation.
RenewablesSignificantly, the energy crisis has prompted governments across Europe to push for a faster transition to renewables by expediting regulatory approvals for projects and making additional funds available, which will reduce the continent’s dependence on energy imports. But there is still a lot for governments to do to simplify and speed up regulatory processes. Where changes have been made, the effect of shorter lead times for renewable projects will be felt in roughly three to five years; thereafter, a larger wave of solar and wind projects will likely come online.
The current crisis has also created significant cost pressures for the roll-out of renewables. Wind and solar manufacturers face rising material and manufacturing costs. And there have been, for example, marked increases in steel and aluminium prices as suppliers such as ArcelorMittal cut production to reduce energy consumption. As a result, major wind-turbine manufacturers such as General Electric, Siemens Gamesa and Vestas face falling profits, and their order books are weaker in 2022 to date than in 2021. France faced the possible write-off of six to seven gigawatts (GW) of new solar and five to six GWs of new wind power due to rising costs, leading the government to allow developers to recoup costs by selling electricity at higher prices, among other measures.
Some renewables and nuclear-power operators have made windfall profits by selling electricity on the spot market some 300% above the levelised cost of energy (LCOE) and appear to be well placed to make further large-scale investments in renewables. Other operators, however, have sold electricity under long-term power-purchase agreements or contracts for difference, or they have hedged their electricity sales rather than selling their electricity on spot markets. The EU has introduced a temporary price cap on renewables which will cut windfall profits but ensure that revenues remain above the LCOE, and the UK is exploring a similar arrangement.
The energy crisis has underscored the advantages of renewables and nuclear power in making Europe more energy independent, and the higher cost of fossil fuels has made clean energy more competitive. Therefore, there is certainly the will among European governments to accelerate the energy transition. A constraint they face, however, is the deterioration of public finances due to rising borrowing costs, slow growth and the need to spend large sums supporting businesses and households with soaring energy bills. Efforts to bring budgets under control, in line with advice from the IMF and the European Commission, may put funding for the energy transition and energy-saving measures under pressure. Indeed, many of the measures will not be funded unless governments take a more relaxed stance towards capital expenditure. This may be the critical factor that determines whether the energy crisis accelerates or inhibits the energy transition.
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