Shock and awe of energy war

Ukraine’s decision on 11 May to stop some Russian gas flows to Europe has sent shivers down the markets.

This happened at an entry point on Ukraine’s eastern border called Sokhranovka, which normally handles about 8% of Russian gas supplies to Europe.

Gazprom said that it continued to supply gas through Ukraine, but it was about a quarter less than the previous day on Wednesday – down from about 96 million cubic metres (mcm) to 72 mcm.

Prices at the Dutch gas-hub TTF for delivery next June immediately jumped from just over EUR 90/MWh to 97/MWh.

With Russia imposing sanctions against Gazprom ex-subsidiaries in Europe and further gas supply falls expected, at one stage, TTF prices increased to over EUR 113/MWh – up 25% since Tuesday.

These price jumps demonstrate the extreme sensitivity and instability that prevails in the markets.

If the dilemma of paying for gas in Europe in roubles - as President Putin demands - worsens or the EU imposes new sanctions, or Russia or Ukraine cut-off gas supplies, these prices will rise even more.

The Gas Transmission System Operator of Ukraine (GTSOU) said that it took this action because Russians were interfering and endangering the safety of the Ukrainian gas transportation system.

Russia denied that and said Gazprom remains committed to supplying gas to Europe.

Whatever lies behind this, what matters is that it is the first time anything like this has happened since the war started. The concern is that as the war becomes protracted, this may prove to be the beginning of further unexpected disruptions. Ultimately, the concern is a cut-off of Russian gas flows to Europe.

In 2021, about 41.6 billion cubic metres (bcm) of Gazprom’s gas supplies to Europe transited through Ukraine out of 155 bcm.

So, unless Russia takes the drastic action of cutting gas supplies all together, what is at risk is about 25% of Gazprom’s gas supplies to Europe.

However, this and the earlier suspension of gas supplies from Russia to Poland and Bulgaria increase the risk of further disruptions and reinforce Europe’s plans to implement emergency measures.

The European Commission will be publishing proposals next week to stop EU dependence on Russian oil and gas and accelerate the transition to green energy.

The plan is to reduce Russian gas imports by two-thirds this year and stop these completely by 2027.

Carbon reduction

According to the FT, the cost of these proposals will be close to EUR 200 bln, on top of plans to boost spending on carbon reduction.

The EC will be proposing a 13% cut in total energy consumption, compared to a 9% cut previously, and a 45% renewables share of all energy demand, compared with a target of 40%, all to be achieved by 2030.

This will require renewables capacity to be increased by close to 2.5 times current levels.

Once approved, these new targets will have a huge impact on Cyprus’ National Climate and Energy Plan for 2030 – an impact for which we are not prepared.

To facilitate this, the EU is considering loosening green standards by allowing companies to build wind and solar projects without the need for environmental impact assessments.

The EU is planning to publish several energy-related proposals on 18 May.

Mindful of the cost impact of these proposals, Frans Timmermans, EC vice-president, said: “It’s essential not just to reduce our carbon footprint, it’s essential to keep our economy competitive.

“We need a new energy source for difficult to abate sectors. And hydrogen is that energy source.

“It’s clear that we need to make sure that hydrogen is as competitive as possible.”

But despite the words, energy affordability remains a challenge.

Measures taken so far by the EU have had little effect on containing prices.

The priority appears to be energy security – prices appear to come second.

The Mediterranean region could benefit from these proposals. Already Egypt is putting together a hydrogen strategy with the help of EBRD.

It has also entered into several agreements to build hydrogen and ammonia plants, targeting exports to Europe.

But the new EC proposals are likely to face resistance in European states on various fronts, including their impact on prices, public acceptance, local communities who oppose having wind turbines or solar farms close to their homes, and environmentalists objecting to the loosening of standards.

The EU is also considering emergency measures, likely to be announced by 18 May, in case of a complete cut-off of Russian gas supplies.

These will reduce gas consumption, prioritise households and public services, reduce thermostat levels, home-working, and share gas resources among states.

Nevertheless, a complete cut-off of gas supplies could risk blackouts, closure of factories and industries, increase in unemployment, runaway prices, out of control inflation, and recession – something Europe is trying hard to avoid.

But with events in the Ukraine worsening, this is becoming a real risk.

Dr Charles Ellinas is Senior Fellow at the Global Energy Center, Atlantic Council