Is Europe’s Energy Crisis Self-Inflicted?

by Judy Dempsey*

KRISTINE BERZINA/ SENIOR FELLOW AND HEAD OF THE GEOPOLITICS TEAM AT THE ALLIANCE FOR SECURING DEMOCRACY, GERMAN MARSHALL FUND OF THE UNITED STATES

Europe learned from the 2006 and 2009 gas cut-offs and put in place a series of regulations that make an outright cut-off unlikely today.

In 2021, a cut-off is not the problem. Instead, Europe is suffering from a gas price spike and a drop in the volumes of gas it receives. Russia has learned that it cannot play the 2006 and 2009 game again. But Moscow still has numerous tools it can use to put pressure on Europe and make itself richer.

In 2021, as in 2009, EU member states need to ask themselves how the EU can use Russian gas without falling prey to an energy weapon. Europe is still importing a strategically significant amount of gas from Russia—in recent years around 40 percent. And constructing pipelines like Nord Stream 2 only increases the extent and duration of Europe’s reliance on Russian energy.

So is Europe’s energy crisis self-inflicted? Yes. Rather than taking the 2006 and 2009 crises as signs of the need to dramatically reduce reliance on Russia, Europe adjusted its rules and made states feel they could increase reliance on Russian gas.

Unless Europe moves away from Russian energy, the continent will be put in a tough economic and strategic position yet again.

KRZYSZTOF BLEDOWSKI/ SENIOR COUNCIL DIRECTOR AND SENIOR ECONOMIST AT THE MANUFACTURERS ALLIANCE FOR PRODUCTIVITY AND INNOVATION

To the extent that the EU runs an incoherent energy policy, the current woes are exacerbated by it.

Europe lacks a coherent energy policy for the same reason it is not a geopolitical superpower: EU institutions exclude energy and foreign policy from their executive remit. Member states pursue often conflicting policies toward nuclear, gas, or electricity generation.

That said, the EU has expanded its say in energy policies over the past decade. It advocated for and funded energy security. This includes interconnecting electrical grids and gas pipelines. Both have attenuated supply shocks in the past. The Energy Union project of 2015 is supposed to create a fully integrated energy market, but it is still a work in progress.

Yet the biggest vulnerability relates to gas. Gas consumption is rising because nuclear and coal use is declining. With Russia supplying over 40 percent of all gas consumed in the EU, the union is beholden to the country for access to this vital resource. Even worse, Europe’s main adversary has assiduously thwarted EU projects to diversify the continent’s gas supplies.

Today’s elevated price for gas stems from rising demand in Asia. Today’s energy woes in Europe stem from its short-sighted energy policies toward Russia, which enable Moscow to use this strategic resource as leverage over Europe.

ELISABETTA CORNAGORE/ SEARCH FELLOW IN EU ENERGY AND CLIMATE POLICY AT THE CENTRE FOR EUROPEAN REFORM

Paradoxically, Europe’s main fault is that while it is the frontrunner in climate action, its decarbonization efforts are currently still too slow to beat the pace of changes in global energy dynamics. This has left Europe exposed to the current energy price spike.

The shift from coal to gas for electricity generation observed in the past decade in European power markets is a success story in emissions reduction—only surpassed by the rise of renewables. Liberalization of gas markets has saved European consumers almost €60 billion ($70 billion) in energy bills over the past decade. However, Europe’s reliance on Russian gas imports has increased, which comes with its own geopolitical baggage.

As extreme temperatures become more common and as energy demand in emerging economies steadily grows, Europe will increasingly have to compete with Asia for gas—even if gas is “only” to serve as a transition fuel to kick coal out of the global grid.

In the short term, governments should provide cash transfers to vulnerable households and businesses to weather the price storm. In the long term, decarbonizing the energy sector is the best strategy for Europe to durably reduce its energy prices and improve its energy security.

ANDREAS C. GOLDTHAU/ FRANZ HANIEL PROFESSOR FOR PUBLIC POLICY AT THE WILLY BRANDT SCHOOL OF PUBLIC POLICY, UNIVERSITY OF ERFURT

We are witnessing precisely what was intended by EU energy market reform: a tight natural gas market translating into a clear price signal. Consumers may not like it, and politicians feel the heat from industry and angry voters. But it is the market at work.

Recall the situation two decades ago: long-term contracts bilateralized gas trade and a balkanized European market allowed Russia to divide and rule. This is what EU energy market reforms fundamentally changed. Today, markets are integrated, regulation applies across the board, and gas-on-gas competition sets the price. Ample import infrastructure, including for liquefied natural gas (LNG), provides optionality on sources. Supply shortages can no longer create gas crises like 2009, when entire countries were left out in the cold.

So what went wrong? The economy woke up, driving up post-COVID-19 demand. Asian consumers price out European customers on LNG. U.S. shale did not come back as quickly as many had hoped, while Russia had less capacity for export due to high domestic demand. The result: soaring prices.

Russia may try to exploit the situation, but it is not causal. Market fundamentals will change again in early 2022 and the crisis will ease. Until then, governments should buffer short-term consequences—but stay away from undoing liberal market reforms.

OLIVIA LAZARD/ VISITING SCHOLAR AT CARNEGIE EUROPE

The energy crisis results from structural and conjunctural factors. On the latter, Europe could not predict the pandemic, nor its effects on energy markets worldwide. On the former, Europe walked into a transition loophole, revealing how short-sighted member states have been.

The price hike results partly from having an Emissions Trading System (ETS) in Europe, which is starting to work, making a turn toward coal and other fossil energy sources more expensive. It is an indication that European policies on climate action are coming into effect, and this is good news, even though the ETS is ironically still not leading to high enough carbon prices.

However, having a partially functioning ETS that leads to social and economic backlash for European consumers and producers demonstrates that Europe lacked foresight, preparedness, and boldness in its transition plans over the last decade.

If member states had invested earlier and more actively into renewable and more autonomous sources of energy before the ETS came into effect, they would have been in a better position to mitigate fossil-related shocks and generate greater democratic support for the transition.

Seen from this angle, the energy crisis is indeed self-inflicted and points to what the EU still lacks in its transition: a strategic analytical and planning capacity that posits the transition as the determining factor of Europe’s regional, foreign, and security policy.

For all of its efforts on climate action, the EU still functions with a short-term outlook that takes it from crisis to crisis. Climate change and ecological transitions are tests to the EU’s collective risk approach and capacity to turn short- and long-term objectives into coherent trajectories.

AGATA LOSKOT-STRACHOTA/ SENIOR FELLOW IN ENERGY POLICY AT THE CENTRE FOR EASTERN STUDIES, WARSAW

The short answer is not quite. The current crisis is largely the result of changes around the world. This includes a surprisingly strong rebound of demand and a relative decrease in the availability of gas and coal.

These changes particularly affect Europe. This has to do with the way Europe is structured. Firstly, because of the shape of its gas market. It is liberalized and exposed to global market fluctuations, with prices based primarily on gas-to-gas competition. Secondly, because of the markedly reduced flexibility this year. There is falling internal production, record low storage levels, and reduced liquified natural gas (LNG) outflow.

Then there is Russia’s role. This year, Europe’s biggest supplier has changed the way it operates in the European market.

Gazprom is fulfilling its long-term contracts, but it has practically stopped selling gas on the spot market. It is neither reserving additional capacity in the pipelines nor fully using those already reserved. And finally, it has hardly filled its gas storage facilities in the EU.

Russia, the only actor that could currently increase, at least to some extent, its supplies to Europe is using this situation as leverage to further its own interests, including the rapid commissioning of Nord Stream 2. All this increases nervousness on the market, which also contributes to price increases.

Adding to the uncertainty of the situation are ongoing European energy transitions. Such transitions are costly. Renewable energy sources are unpredictable.

STANISLAV SECRIERU/ SENIOR ANALYST AT THE EUROPEAN UNION INSTITUTE FOR SECURITY STUDIES

The energy sector remains Moldova’s “soft underbelly.” The Cuciurgan power station, located in the separatist region Transnistria and owned by Russian Inter RAO, covers 70 percent of the country’s electricity consumption.

At the same time, Gazprom, which controls the local subsidiary Moldovagaz, was until recently the only source of the country’s gas imports. This equipped Russia over the last three decades with a tool to corrode Moldova’s statehood and shape its politics.

Thus, Russia’s attempts to leverage the energy issue in Moldova in 2021 is not an exception but a norm.

Gazprom argues that the question of extending the gas supply contract to Moldova is purely a commercial issue. There are serious reasons to doubt it.

Firstly, there’s a correlation between the non-extension of the contract and the political color of the government in Chisinau. Last year, when Moldova was run by Russia’s political clients, the prolongation of the contract was relatively easy. Now, with a pro-reformist governing majority in Chisinau, Gazprom turns the entire affair into a drama, with threats of gas cuts ahead of winter season.

Secondly, Russia’s gas monopoly in Moldova reveals double standards. On the one hand, Moscow demands Moldova’s government recognize and repay in three years $709 million of historical debt (an amount disputed by Chisinau) accumulated by consumers residing in the part of Moldova controlled by the central authorities. On the other hand, Russia demonstrates incredible patience and tolerance toward the $7 billion debt accumulated by Transnistria.

Thirdly, one of Russia’s preconditions for the extension of the contract is the postponement of unbundling—a reform Moldova agreed to implement under the EU’s Third Energy Package. In essence, unbundling aims to raise competition in Moldova’s energy market, which weakens one of Russia’s levers used to meddle in the country’s politics. Unsurprisingly, Moscow struggles to preserve it.

Russia has another reason for keeping and using the energy lever. The energy crisis could turn voters away from the governing majority and provide Russia’s local clients—defeated last July—with a chance to regroup and challenge the government’s ambitious reform program.

MARCO SIDDI/ SENIOR RESEARCH FELLOW AT THE FINNISH INSTITUTE OF INTERNATIONAL RELATIONS

Several factors have caused Europe’s current energy crisis: the growing global energy demand as a result of the economic recovery; the temporary decrease in wind power production in Europe; Russia’s limited gas sales on the spot market; limited gas supply from Norway because of maintenance issues; and higher gas consumption at the beginning of 2021 due to cold weather. The latter led to higher prices in the spring and summer, which in turn discouraged traders from buying gas then in order to sell it later in the year. Reductive explanations focusing on one factor only tend to be simplistic.

If one looks for the EU’s shortcomings, its excessive confidence in (spot) markets and in the claim that the gas market is now a buyers’ market stands out.

This belief has long shaped the EU’s stance toward the gas sector and key external suppliers. However, it would be wrong to blame—let alone revise—the EU’s focus on renewable energy: the energy transition remains an essential priority to avoid catastrophic climate change.

Moreover, improving energy efficiency helps reduce energy demand and hence price spikes. In the medium and long term, implementing the energy transition remains the best guarantee for Europe to avoid further energy crises.

*nonresident senior fellow at Carnegie Europe and editor in chief of Strategic Europe
**first published in: carnegieeurope.eu