Europe’s new dirty energy: the ‘unavoidable evil’ of wartime fossil fuels
In July last year, EU commissioners set out a range of green policies to put the continent on a path to becoming climate neutral by 2050. “The fossil fuel economy has reached its limits,” said Ursula von der Leyen, the commission president.
Little more than a year later, those commissioners are now overseeing tens of billions of euros of spending on fossil fuel infrastructure and supplies, amid severe cuts to gas supplies from Russia and record high prices.
Data analysed by the energy think-tank Ember Climate for the Financial Times suggest that European governments will spend at least €50bn this winter on new and expanded fossil fuel infrastructure and supplies, including gas shipped in from overseas and coal to fuel previously mothballed power plants.
The EU, which previously relied on Russia for about 40 per cent of its gas and more than half of its coal, seems to have little choice. Industries from fertiliser manufacturers to zinc smelters have had to close, unable to pay the cost of fuel. Energy bills are pushing consumers to near poverty.
The bloc is now preparing for a bailout to rival the response to the 2008 banking crisis. Figures from the economics think-tank Bruegel suggest that EU governments have already allocated €280bn between September 2021 and July this year to protect consumers from skyrocketing energy prices, providing cuts to fuel tariffs, paying for shipped gas, and giving handouts to vulnerable households.
The situation worsened on Monday, when the Kremlin said that gas supplies through the critical Nord Stream 1 pipeline would be suspended until western sanctions are lifted, pushing Europe another step closer to recession. EU energy ministers are to gather for an emergency meeting in Brussels on September 9 to discuss a co-ordinated response.
The EU’s reaction to Moscow’s so-called “weaponisation” of energy supplies has been to propose a levy on non-gas power generators, including renewables, which are benefiting from the high prices, as well as to ramp up alternative fossil fuel supplies to stop citizens freezing this winter.
Seven floating terminals to process liquefied natural gas from non-Russian sources are due to come online in Germany, the Netherlands and between Estonia and Finland in time for winter at a minimum total cost of €3.7bn between October and next March.
At least 19 more are planned across the EU with overall project costs reaching almost €10bn not including outlay for necessary additional infrastructure such as pipelines and jetties. Together these will allow for an additional €30bn in imported gas, based on current estimates.
At the same time several countries, including Germany and the Netherlands, have permitted the restart of operations at coal power stations that had either gone into disuse or were due to close — allowing the burning of an additional 13mn tonnes of coal costing about €4.5bn, Ember estimates.
Officials in Brussels caution that these are only stop-gap measures which will not dent the bloc’s ambition to be climate neutral by 2050. Europe’s climate targets “are not postponed or cancelled”, says Virginijus Sinkevičius, European commissioner for the environment. “It is important to combine use of coal as a last possible alternative with a speeding up of energy efficiency projects and development of renewables.”
The EU is making efforts to cut demand, ranging from limits to heating to turning off public lights at night. And the European Parliament is due to vote on proposals next week to increase its overall goal for renewable energy from 40 per cent of power generation to 45 per cent by 2030.
But analysts fear some of the bloc’s investments in coal and LNG could yoke it to fossil fuels for longer than planned, putting future emissions targets at risk.
Sarah Brown, senior energy analyst at Ember, describes the number of LNG terminals coming online as “a knee-jerk reaction that could result in long-term lock-in that is expensive and unnecessary”, particularly as supplies through existing terminals in the EU could have been increased.
“Once that infrastructure is in place, the companies owning those assets will want to make sure they utilise them as long as possible to make sure they get a return on investment,” says Jan Rosenow, director of European Programmes at the Regulatory Assistance Project, a non-governmental organisation focusing on the clean energy transition.
“The challenge for policymakers is to manage that risk and find a balance to deal with a real short term crisis situation.”
Repowering the EU
Brussels may have underestimated how much dirty energy will be needed for more than just the short term.
The European Commission said in its “RePowerEU” proposals in May that €210bn was needed both in public and private financing to wean the EU off Russian energy supplies by 2027, much of it for renewable energy. Only €12bn was earmarked for gas and oil infrastructure and fuel to supply it.
Ember’s analysis, however, suggests that more than four times that will be spent this winter. That figure could rise far higher, as governments contemplate further support to help companies and households keep the lights on.
The unusually hot and dry summer has worsened the energy outlook. Dried up hydropower resources have resulted in greater demand for gas in countries from Spain and Portugal in the south to Norway in the north.
In France, nuclear power plants, already under pressure due to widespread maintenance closures, have been forced to lower capacity due to a lack of water to cool the reactors. Plants in Belgium, Switzerland, Germany and Finland have also been affected.
All the while, Gazprom has continued to reduce natural gas exports to the bloc. According to S&P Global estimates, gas flows from Russia are now around a quarter of what they were in the first half of 2021, meeting only about one-twelfth of average European demand.
“The perfect storm is an understatement for what is going on,” Brown says.
Ember’s numbers rely on projections of prices for gas and coal over the winter — which have already risen to record levels — and estimates of project costs based on publicly available information and lease costs for gas terminals.
Coal was not mentioned in the May announcement. But at least four countries including Germany, the Netherlands, Greece and the Czech Republic have either permitted coal plants to increase production or restarted mining operations.
EPH, the Czech-based energy company that has fired up mothballed coal plants such as Mehrum in Germany, says it was “pleased” to have its plants back up and running to help solve “Germany’s difficult energy situation” — until the war, Germany was among the EU countries most reliant on Russian gas — but adds that “it’s extremely difficult to make any kind of estimate” for how long they would be needed.
Emmanuel Dubois-Pelerin, head of utilities for Emea at S&P Global, says he had expected more coal power stations to restart given the demand. But several operators have been deterred by uncertainty over future pricing and difficulties transporting the fuel up waterways such as the Rhine, which have dropped to unusably low water levels during the summer’s drought, he says. “They were not sure they could restart and make their money back.”
The more popular replacement for Russian piped gas has been liquefied natural gas, a compound vapour cooled to -162C and transported in hyper-refrigerated containers on large tanker ships.
Between May and July, Brussels announced LNG deals with the US, Qatar, Azerbaijan, Egypt and Israel to increase supplies. The EU agreement on imports of LNG from the US, for example, targeted an extra 15bn cubic metres this year and an increase to at least 50 bcm each year by 2030. In total, Russian natural gas supplies to the EU were about 155 bcm in 2021.
Exporting countries are eager to lock in long-term deals, meaning that the EU could be reliant on gas for longer than it intended, says Ana Maria Jaller-Makarewicz, Europe energy analyst at the Institute for Energy Economics and Financial Analysis.
“We are in a sellers market right now. The seller knows that the EU is desperate for more LNG deals,” she says, adding: “The worry that we see [is] that while the contract will be in place for 20 years, what is going to happen with the demand of gas?”
Ember figures also show that 19 temporary regasification units known as FSRUs, which use seawater to reheat the liquid and convert it back into gas, are planned across Europe in the long term, coming online between October this year and 2028, as well as seven permanent onshore terminals.
Many policymakers and those investing in LNG assets argue that the infrastructure can be adapted to green hydrogen, a way of storing and transporting energy generated through renewables, and there are promising projects testing the possibility such as one run by the German group Eon in North Rhine-Westphalia.
“Most pipe operators are consistently confirming that a high teens percentage of hydrogen” mixed with natural gas is now feasible, says Dubois-Pelerin at S&P. Once efforts to pipe hydrogen “get to the first critical mass, then the market will grow exponentially”, he says.
But several analysts and climate experts warn that it is disingenuous to suggest that this is an easy solution. There is not enough renewable capacity to create the levels of green hydrogen required, and it is yet to be proven that gas infrastructure can be easily retrofitted for transport of pure hydrogen, which is highly volatile.
“The story that gas infrastructure can be converted to hydrogen or biomethane later is risky,” says Rosenow.
Not easy being green
In the rush to build up fossil fuel resources, climate lobbyists, think-tanks and NGOs fear that the credibility of Europe, the world’s third-largest emitter of greenhouse gas emissions behind the US and China, as a climate leader has been put under threat.
At the UN’s COP27 climate summit in Sharm-el-Sheikh, Egypt, in eight weeks’ time, global leaders will again debate the thorny question of how far richer nations — typically the heaviest polluters — will go to support developing countries in the climate transition.
A pledge in 2009 for wealthier countries to raise $100bn every year in climate financing for vulnerable countries between 2020 and 2025 has not been met. And the war has complicated matters further for Europe, which has ambitions to be a global leader on climate.
Since Russia invaded Ukraine, the EU has rubber-stamped more in state aid to support energy intensive industries and power sector players — about €27bn, according to an FT analysis of Commission figures — than it paid in climate finance to poorer nations in the whole of 2020.
The optics for Europe have not improved this week. Only two European leaders attended a climate finance summit in Rotterdam despite seven African presidents making the trip.
Klaus Röhrig, EU climate and energy policy co-ordinator at Climate Action Network Europe, says that while there is positive news that Europe’s long term climate goals are still intact and not yet under threat, the war has introduced “elements that could undermine the EU’s leadership on climate”.
Röhrig points to how the EU waived its “do no significant harm” principle, which sets out that no investment should harm any of the bloc’s core environmental objectives, to allow more funding of fossil fuel projects in its May “RePowerEU” proposals.
He also notes that to help finance the programme, Brussels plans to sell €20bn of additional carbon permits, normally bought by polluting companies to cover the cost of their emissions.
“It would be using climate policy to generate [additional] income, which is a dangerous precedent,” Röhrig says. Member states such as Denmark are already pushing back on the idea.
When the idea to use revenues from the sale of the permits was first reported, the carbon price dropped almost 8 per cent, according to Ember’s carbon price tracker.
Environmental groups and green parties were especially vexed by the European Parliament allowing gas and nuclear, under certain constraints, to be labelled as green in the EU’s so-called financial taxonomy, a classification system aimed at directing investment to climate-friendly projects.
Laurence Tubiana, an architect of the Paris climate agreement and chief executive of the European Climate Foundation, says: “With gas in the taxonomy, the European Union has missed its chance to set a gold standard for sustainable finance. Instead, it has set a dangerous precedent. Politics and vested interests have won over science.”
Turning crisis into opportunity
Yet there is hope amid the smog.
Mohammed Chahim, a Dutch socialist member of the European Parliament involved in negotiations on the EU’s climate proposals this autumn, says that even if burning more coal was an “unavoidable evil” in the short term, in general the crisis had pushed European capitals to increase targets for renewable power production and energy efficiency targets.
The politics was now a question of “we take one step back [but] we want to take two very quick steps forward,” he says.
In July, European energy ministers signed a hastily agreed deal to voluntarily cut gas use by 15 per cent between October and March in an effort to limit the need for expensive additional gas supplies. In France and Spain, rules have been introduced limiting air conditioning in businesses and ordering that advertising signage and shop lights be turned off at night.
Germany has enacted a plan starting September 1 that bans heating leisure pools with energy from the grid and prevents corporate offices being warmed above 19 degrees.
Ember’s analysis suggests the decline in emissions resulting from cuts to gas usage should be enough to cancel out the level of increased coal use suggested in RePowerEU.
The wake-up call for better domestic energy security has also pushed countries such as Poland, which previously resisted emissions targets, to come on board.
Eastern European countries that had opposed elements of the EU’s climate goals when they were first presented, passed its 2030 targets without opposition at a council in June, one senior EU official notes. “This is where the energy crisis has helped us.”
Poland, for example, is now one of several countries pursuing renewable power generation with more concerted effort including the installation of its first offshore wind farm in the Baltic Sea.
Whether the current energy crisis affects climate targets “all hinges on whether we can unleash the renewable revolution”, says the EU official. “If we are talking about burning coal for five to six years it becomes more tricky.”
Sinkevičius, the EU commissioner, says that if European policymakers look beyond the current crisis they will realise they have “no choice but to make the green transition”.
“EU leaders cannot afford to be complacent about climate change when citizens are being evacuated from their homes due to wildfires and floods.”
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