EU’s Energy Crisis amid Conflict

Cui Hongwei

The European Union is facing a severe energy challenge unseen in decades. The EU， out of consideration for sanctions against Russia and for fear of geopolitical competitions implications on the energy market， has set a timetable to end its dependency on Russian energy. It is speeding up energy transition， and scaling up investment in renewable energy and the green industry in a bid to be energy independent. To make this a reality， the EU has taken multiple measures， and engaged in energy diplomacy in search of alternative oil， gas and coal suppliers. However， achieving energy independence remains an arduous journey. The EU may face a cut-off in gas supplies following Russias strategic countermeasures. Spiraling natural gas prices have pushed up electricity rates， and soaring energy cost is holding back economic recovery in Europe.

ACCELERATED EFFORTS TO END DEPENDENCE ON RUSSIAN ENERGY

Ending heavy dependence on Russian energy is an important target for the EU regarding energy security， albeit its energy diversification strategy has been rather unsuccessful. In the wake of the outbreak of the Russia-Ukraine conflict in February 2022， the West has escalated economic sanctions against Russia. The U.S.， Canada and the UK which are less dependent on Russian energy issued statements on banning Russian energy imports one after another. On March 11th， it was decided at the Versailles Summit to wean off Russian energy. Ursula von der Leyen， president of the European Commission， presented proposals to reduce the EUs dependence on Russian gas by two thirds before the end of 2022， and to phase out Russian fossil fuels by 2027. EU Member States agreed in principle to phase out dependence on Russian fossil fuels as soon as possible， but did not see eye to eye with her shock therapy. Poland and Baltic states voiced their support out of anxiety over geopolitical security， while countries with close energy links with Russia like Germany， Hungary and Italy opposed a hasty approach.

After several rounds of negotiations， the EU decided to target coal and oil first in its sanctions. On April 7th， the European Commission issued a coal ban， suspending any new coal supply contract with Russia from that very day and banning coal imports from Russia from the second week of August. On May 18th， the Commission presented the REPowerEU plan to phase out Russian fossil fuels， and to strengthen the EUs energy security through energy savings， diversification of energy supplies， accelerated roll-out of renewables and investment in trans-European gas infrastructure. On June 2nd， the EU adopted the sixth package of sanctions against Russia， targeting Russian crude oil and petroleum products. According to the Commissions statement， the EU will end purchases of Russian seaborne crude oil within 6 months， and ban 75% of Russian oil imports immediately， 90% by the end of the year and all within 8 months. On top of that， the EU took measures to restrain export of Russian oil to third countries. Specifically， European companies are prohibited from insuring and reinsuring the transport. Existing insurance contracts would be terminated in six months.

On natural gas infrastructure， a mandatory certification scheme for gas storage operators was tabled by the Commission， warning that companies posing risks to Europes energy supply security will be required to relinquish ownership or control of storage facilities. This new scheme， in effect， targets Gazprom which has gas storage facilities in Germany， the Netherlands and Austria.

The EUs unprecedented sanctions have hit the global economy. The EUs tough oil ban restraining Russian oil exports have pushed up international oil prices and undermined global economic stability. It was discussed at the G7 summit on June 26th 2022 to have a price-capping mechanism on Russian oil exports， which sets a price ceiling on Russian oil exports rather than restrain exportation itself， in an effort to ensure the international flow of oil while curbing Russias oil revenue. This rather unfeasible scheme shows how damaging the EUs oil embargo is to the world.

Meanwhile， the EUs energy sanctions against Russia can also backfire. On July 11th 2022， Gazprom shut down the Nord Stream 1 pipeline， which pumps gas from Russia to Germany， on the ground of annual maintenance. Even before that， the pipeline had been running at 40% of its capacity. Amid fears of a cut-off of natural gas by Russia， the European Commission released the Save Gas for a Safe Winter plan.

A MULTI-PRONGED APPROACH TO ENERGY SUPPLY CRISIS

The sanctions and counter-sanctions have further driven up energy prices in the EU， which takes a toll on various economic and social sectors across the continent. The European economy is trending downward. The European Commission has trimmed down its forecast for 2023 economic growth. To cope with the energy crisis and realize energy independence， the EU has laid out emergency， short-term and medium-to-long-term measures from both the supply and demand sides.

On emergency measures， the EU adopts energy storage rules to cope with the potential severe energy shortage. On July 1st 2022， the regulation on gas storage came into effect， requiring member states to fill their gas storage sites to at least 80% of capacity by November 1st 2022， and to 90% in the winter. The strategic oil reserve will be released， and member states have the obligation to cut demands in case of emergency. On July 20th， the Commission proposed an emergency plan for a potential gas supply cut-off by Russia， setting out measures， principles and criteria for gas demand reduction. According to the plan， all member states shall reduce gas demand by 15% on a voluntary basis between August 1st 2022 and March 31st 2023. If things get worse， the Commission may impose a mandatory gas demand reduction on all member states. It aims to safeguard supply to households and essential users like hospitals， but also industries that are decisive for the provision of essential products and services to the economy， and for EU supply chains and competitiveness. Households and businesses are encouraged to save gas. Auction or tender systems could be launched to incentivize energy reduction. In addition， member states must have in place a solidarity mechanism to help neighboring countries in a severe emergency.

For the short term， the EU has taken measures to diversify energy supply and explore new sources of import. First， it will increase gas import from the U.S.， Qatar， Norway， Azerbaijan and Kazakhstan， and oil import from Saudi Arabia and the United Arab Emirates. During President Joe Bidens visit to Europe， the EU and the U.S. reached a gas cooperation deal on March 25th under which the EU will buy pricey gas from the U.S.. According to the deal， the U.S. will supply an additional 15 billion cubic meters （bcm） of liquefied natural gas （LNG） to Europe through the remainder of the year， and supply 50 bcm of LNG each year by 2030 to reduce Europes dependence on Russian gas. Second， the EU Energy Platform， a collective purchase mechanism， established in April 2022 leverages the collective weight and market of the EU to secure voluntary common purchase of pipeline gas， LNG and hydrogen at competitive prices for member states. In addition， the EU will scale up investment in gas infrastructure including LNG terminals. Some projects co-sponsored by the EU such as the Gas Interconnection Poland-Lithuania and the LNG terminal in northern Greece have been launched or completed. Furthermore， the European Commission has agreed to increase coal supply in the short term， delay phasing out nuclear power and approve national subsidy plans for energy-intensive industries in EU countries.

For the medium-to-long term， the EU will give greater importance to renewable energy. Over the past decade， the bloc has been leading in technology innovation on clean energy such as offshore wind power， solar power and hydropower. Thanks to technological progress and heavy investment， the share of renewables in the EUs energy consumption has been steadily increasing from 8% in 2007 to 15.5% in 2019. Currently， one third of power consumed in the EU comes from renewables. The European Commission has noted that the case for a rapid clean energy transition has never been stronger and clearer. The Union is setting higher targets concerning renewables and energy efficiency， vowing to raise the share of renewables in energy consumption to 45% by 2030. That means solar photovoltaic energy production will more than double. The Commission also proposes to produce 10 million tons （mt） of renewable hydrogen in the EU by 2030， import 10 mt of renewable hydrogen from third countries， and increase home-grown biomethane production from 3 bcm to 35 bcm per year.

The European Union takes energy conservation and efficiency as important means to reduction in fossil fuel consumption and an essential part of its clean energy transition. The Commission believes that energy saving and higher energy efficiency can make the European economy more resilient and protect its competitiveness from the impact of high fossil fuel prices.

On the whole， the EUs policies in response to the energy crisis are specific and comprehensive， with strategic considerations to speed up the green transition and maintain its lead in green technology. However， these measures are not without problems. Infrastructure overcapacity is one problem. Since the outbreak of Russia-Ukraine conflict， the EU has restored or launched over 20 gas infrastructure projects including LNG terminals， and scaled up investment in gas infrastructure facilities abroad. Experts in Europe advise against investment in long-term and pricey projects. Another problem featuring green groups in Europe criticizing purchases of expensive LNG and electricity generated by coal in place of natural gas as inconsistent with decarbonization targets. Taking these into account， the EU needs to tread carefully in balancing energy demands， carbon neutrality and affordability.

ENERGY INDEPENDENCE IS EASIER SAID THAN DONE

With the impact of the changing geopolitical landscape， the EUs internal challenges and the energy supply-demand structure， achieving energy dependence is easier said than done despite the EUs multi-pronged measures.

For starters， the bloc needs to weigh energy independence from Russia against its energy demand. The close energy interdependence between Europe and Russia dates back to the Middle East Oil Embargo in the 1970s， and has gradually stabilized under market forces. According to Eurostat， oil imports from Russia accounted for 27% of the EUs total imports， gas 41%， and coal 47% in 2019. According to the International Energy Agency， the EU imported 155 bcm of natural gas from Russia in 2021， accounting for 45% of its total imports. Given how global and fluid the oil and coal market is， even if being independent from Russian oil and coal is possible， it will be rather difficult to decouple from Russian gas in the short term. Advantages of pipeline gas lie in convenient transport and low cost. For instance， the Nord Stream 1 pipeline transports 55 bcm of natural gas each year from Russia to Germany through the Baltic Sea， and further to neighboring countries.

Second， achieving energy independence largely relies on a coordinated energy market within the EU. Currently， the EU gas market is rather segmented， as member states face varying impacts from a cut-off of Russian gas. France and southern EU countries such as Spain， Portugal and Italy rely more on North African suppliers instead of Russia for gas. Nordic countries have a low level of reliance on Russian gas， as they either hold oil and gas resources or import gas from Norway， and the share of renewables in their energy consumption is rather high. Germany and central and eastern European countries are more dependent on Russian imports. In particular， Germany enjoys a special energy relationship with Russia. It not only engages in the exploitation and production of Russian oil and gas， but also serves as a regional hub for the distribution of Russian gas. For quite some time， the European Commission has been working for an integrated EU energy market. However， there is a lack of political will among member states. National electricity policies vary from one another due to different national preferences. France regulates the electricity market as public utilities. On July 19th 2022， the French government announced plans to fully nationalize the French energy giant EDF （Electricité de France） to get electricity production out of the market logic. It also plans to scale up investment in innovation on nuclear power， and sees it as a decarbonized， sovereign and competitive energy policy. By contrast， Nordic countries and Germany prefer a market-oriented energy policy and support the phase-out of nuclear energy.

Furthermore， major countries politicize and overstretch the concept of security on energy trade amid geopolitical competition， leading to market disorder and threatening global economic recovery. The Russia-Ukraine conflict has hit the global energy market hard. The Wests sanctions and Russias counter-sanctions have driven up global energy prices and disrupted the energy supply-demand structure. Market restructuring comes with uncertainties. The energy supply-demand relationship is an important part of economic globalization and international trade. The EUs policies to achieve energy independence is full of challenges and far from the optimal choice for energy security.

Cui Hongwei is Research Fellow at the Institute of International Relations， Shanghai Academy of Social Sciences