Seminar presentation

Solution of EU vs. Russia imports

Europe might not be able to fully replace the 130 billion cubic metres it imported in 2013 at sufficiently low cost. But the Russian economy would be severely hit. At an average sale price of US$350 per thousand cubic metres, the annual loss in Russian revenues would be in the order of US$70 billion or three percent of GDP. With this step, Europe would defuse Russia's gas weapon at a stroke. Most importantly, when normal economic relations are re-established, the long-term impact of this episode would be minor. Russia will remain an important source of gas for Europe, simply because it is so uneconomic for Russia to diversify its gas exports. Finally, it is much more powerful for Europe to stop imports, compared to a scenario in which Russia stops exports of natural gas. Stopping gas imports is an expensive signal – but a high price is the precondition for demonstrating determination. Such a bold strategy could obviously only work if energy solidarity inside the EU is ensured.

http://www.bruegel.org/nc/blog/detail/article/1279-the-cost-of-escalating-sanctions-on-russia-over-ukraine-and-crimea/

Security of Supply

Diversification of Suppliers:

The questions are:

1. How can the total volume of Russian gas – about 130 billion cubic metres (bcm) in 201- be replaced?

2. Would the alternative supply be available at the right time?

3. Can Europe get the alternative supply to where it is consumed?

For example, because of the lack of alternative infrastructure, virtually all gas consumed in the Baltics comes from Russia.

2. and 3. are very relevant for the central and eastern European countries that currently depend mostly on Russia.In principle, two technical solutions, which would require substantial engineering, legal and commercial preparation, could be:

replacing gas consumption in district heating systems by fuel oil;

filling the large west-Ukrainian storages (up to 30 bcm) with western European gas during summer.

If properly implemented these measures could alleviate the dependence on Russian gas in the region and in winter substantially.

Regional demand reduction and optimising the infrastructure (and its usage) to enable more inflows from alternative gas sources can also be considered, but we will not look at them in depth here. We want to focus on the question of whether 130 bcm of Russian gas per year can be replaced within the coming year (in the longer term, investments in alternative energy sources could make redundant any import dependency), and what the cost of the alternative supply might be

Import from North Africa:

Currently 8% of the EU consumption.

Increasing imports from North Africa by 15 bcm will be difficult, as existing pipeline capacities to Italy are fully used already, while increasing exports to Spain will not be helpful, as no additional gas can be brought from the Iberian Peninsula to the rest of Europe.

North Africa has proved an unreliable supplier, beset by terrorist threats and other unrest.

Italy’s imports from Libya, once a reliable supplier, were down by 11.9% in 2013; supplies from Algeria (where local demand is booming) were down by 40%.

Increasing natural gas imports from North Africa by at least 5 bcm also seems feasible.

Imports from Norway:

Currently 23% of the EU consumption.

Increasing pipeline imports from Norway (102 bcm in 2013) is possible up to about 120-130 bcm. There is certainly spare capacity for importing more in the summer months to fill the European gas.

Increasing natural gas imports from Norway of around 520bcm also seems feasible.

Increase production in Netherlands:

In 2013, the largest natural gas field in Europe – the Dutch Groningen field – for example produced significantly less gas than it is able to deliver. Production was restricted to 43 bcm, but temporarily up to 60 bcm seems feasible.

Increasing production in the Netherlands is technically possible, possibly much more than the 20 bcm we put. However, the Dutch government might be quite reluctant to allow even 20 bcm of additional production, as it just issued legislation to reduce production in order to control the gas-production induced seismic activities. So it is a question of political will and compensations.

Hence we stick to the 20 bcm/y.

Imports from US of shale gas:

 American ones (which benefit from cheap shale gas)

Switching energy consumption from natural gas to other fuels

Liquefied natural gas (LNG):

Currently the one from other suppliers than Russia is of (9%) of EU consumption.

Import capacities were underused in 2013.

The LNG production centres in Africa, the Middle East and South America.

There is about 180 bcm/year of existing re-gasification capacity in the European Union, plus an additional 35 bcm under construction. But only 46 bcm was used in 2013 (versus 65 bcm used in 2012).

The question here is where the LNG tankers should come from:

Certainly there are some spare capacities that could be rerouted to Europe for modest price premia. If we could really get additional 30 bcm at above $500/tcm is hard to tell. If we are competing with Asian prices (US$710/tcm), however, significant amounts of gas can be attracted to Europe, which is closer to the LNG production centres in Africa, the Middle East and South America.

There is still some 60-80 bcm of gas used for generating electricity. About half of this might be produced from other sources. Obviously, a full switch might not be possible because some of the gas-fired power plants might be pivotal for meeting peak demand in some import-constrained countries such as Italy.

The problem here is inelastic supply. The countries which export LNG cannot simply churn out more of the stuff; the plants which liquefy the gas cost billions of dollars, so they tend already to be running at full blast. And most of what they make they are already selling, at high prices, in Asia (see chart 1). Japan needs LNG to keep the lights on, having shut down its nuclear power plants after the Fukushima disaster. China is trying to burn less coal because of public anger at air pollution. Europe might be able to find another 10bcm of LNG, analysts reckon, but it would pay about twice what Russian pipeline gas currently costs.

Source: The Economist

There is also the option of generating electricity from coal instead of gas. But a knock-on effect of America’s shale-gas revolution is that it now exports cheap coal to the EU (this is in part why LNG imports have declined). Europe is already running most of its coal-fired stations at high capacity. There might be some slack, and there are also some mothballed stations that burn fuel oil, but there is no large pool of underused generating capacity.

District heating systems could switch from natural gas to fuel oil.

Up to 10 bcm of corresponding natural gas consumption might be replaced this way. Obviously oil is much more expensive. The current crude oil price is equivalent to about US$750/tcm. Finally, also industry might switch away from using gas. If 10 percent of industrial gas consumption (150 bcm) can be switched to coal, electricity or oil, another 15 bcm of gas can be replaced in the short term.

Short-term constraints

Switching district heating from gas to oil in the import constraint countries Finland, Latvia and Estonia is, however, possible.

Switching in Lithuania seems to be more difficult. Here, in the short term other options need to be developed. In the medium term Lithuania will install a floating LNG regasification terminal to allow gas imports from international LNG markets.

Technological change:

Technological change may help matters. The cost of import terminals that turn LNG into usable gas has fallen sharply, with customers now able to rent floating facilities when they need them, rather than building costly ones on land.

Shale-gas:

Europe could also develop its shale-gas reserves (see map), though these are not the panacea enthusiasts would like to believe.

The EU’s Joint Research Centre puts Europe’s technically recoverable unconventional-gas resource at 11,700bcm, about a quarter of America’s. But law, public opinion and a lack of drilling and exploration kit make European shale gas harder to get out.

IHS, an energy consultancy, expects that by 2020 European shale production will only be 4bcm a year, compared with over 70bcm in America today. Conventional-gas production in Europe and its neighbouring seas could drop by ten times that over the same time.

Political excitement about the idea of America’s shale gas helping Europe out tends to overlook the practical difficulties. For a start, there are not yet any export facilities. Sabine Pass on the Texas-Louisiana border, with a capacity of up to 2bcm, will start pumping LNG only in 2015. Two dozen export applications are pending, though, and IHS reckons that a burst of projects coming online in 2018–20 will bring America’s total LNG export capacity to 66bcm by early in the next decade. That is appreciable, but hardly overwhelming in a world LNG market that might be 540bcm a year by that time, according to the International Energy Agency. And a significant part of that gas would be headed to high-price Asia, not just from plants on America’s Pacific coast but also from the Gulf, since from 2015 the new locks on the Panama Canal will enable it to take large LNG carriers.

All this depends on investors coming up with the money. But private-sector investors may be chary of putting money into costly terminals that risk not being used if Europe slips back into accepting more cheap Russian gas. And although the crisis in Ukraine has stoked America’s willingness to help allies, there is a domestic lobby that thinks restricting exports will keep prices at home low.

Nuclear energy:

Nuclear power plants generate about 30% of the electricity produced in the EU. There are currently 132 nuclear reactors in operation in 14 EU member countries. Each EU country can decide whether it wants to include nuclear power in its energy mix.Through the Euratom Treaty, the EU can ensure the safe and sustainable use of nuclear energy across Europe and help non-EU countries meet high standards of safety, security and non-proliferation.The European Commission looks at nuclear activities from three angles: Nuclear safety is about the safe operation of nuclear installations. It is complemented by

radiation protection and radioactive waste management.

Nuclear safeguards are measures to ensure that nuclear materials are used only for the purposes declared by the users.

Nuclear security relates to the physical protection of nuclear material and installations against malicious acts.

European nuclear policy is governed by the Euratom Treaty. Therefore regular EU policy, on for example environment or the market does not apply to issues in the nuclear field. The nuclear policy is mainly in the competence of the member states. In the EU level, DG ENER is the main authority for EU nuclear issues.

Nuclear power in the European Union accounted for approximately 15% of total energy consumption in 2005. The energy policies of the European Union (EU) member countries vary significantly. As of January 2010, 14 out of 27 countries have nuclear reactors. The countries with reactors are: Belgium, Bulgaria, Czech Republic, Finland, France, Germany, Hungary, Netherlands, Romania, Slovakia,Slovenia, Spain, Sweden, and the United Kingdom.[1] Advanced new reactors under construction in Finland and France, which were meant to lead a nuclear renaissance, have been delayed and are running over-budget.[2]

Following the Fukushima nuclear disaster, Germany has permanently shut down eight of its reactors and pledged to close the rest by 2022.[3] The Italians have voted overwhelmingly to keep their country non-nuclear.[4] Switzerland and Spain have banned the construction of new reactors.[5] Belgium is considering phasing out its nuclear plants, perhaps as early as 2015.[5] France, frequently heralded as a nuclear commercial model for the world, is today locked in a national debate over a partial nuclear phase-out.[5]

Reduce gas consumptionMost of the natural gas consumed in 2013 was for residential and commercial heating and industry. Some of the gas-intensive industries produce products that are traded on the global market and are quite abundant at the moment (steel, aluminium).

As a last resort, curtailing consumption in some of these industries will have limited knock-down effects. Again less costly, reducing ambient temperature by 1.5 °C during heating season (or similar energy efficiency measures at the residential level) would reduce corresponding natural gas consumption by about 10 percent, or 20 bcm.

Increase production of renewable energy

 Given the continent’s 117 gigawatts (GW) of wind-turbine capacity, which has been growing at 10% a year, windy weather would improve matters.

Since Europe uses 31% of its gas to make electricity (see chart 2), it is also possible to reduce reliance on Russia by changing generating technology. To some extent Europe’s push for renewables is already doing this. But at the moment renewables need fossil-fuel-fired capacity for backup, and gas is the fuel of choice. Better electricity interconnectors could reduce that need for gas by making it easier to export electricity from renewables-rich markets like Germany on sunny or windy days and to import it on dark or still ones. As with gas interconnectors, forging such links requires a pan-European push. And to make it work on a large scale will require new pricing strategies to recompense the owners of fossil-fuel plants pushed off the grid when renewable energy from other countries flows in.

Interconnectors can also help substitute one renewable for another. Hydro-power, like gas-fired power stations, can be turned on easily when the wind falters, but it is not evenly spread: Sweden and, particularly, Norway have a lot of it, Germany and Benelux not so much.

There are currently plans for up to five new interconnectors from Norway to the EU to be built by 2020, with a capacity of up to 5GW (providing 5GW from gas plants would take around 10bcm a year). Norway could generate much more hydropower, given a market. And with better interconnectors, a lot more solar power could come up from the south—perhaps including north Africa.

ENERGY and green policies should be ideal for common European action. Pollutants know no borders.

The cost of renewables such as wind turbines and solar panels can be cut, and their drawbacks mitigated, if they are linked across Europe. When the wind stops blowing in Germany the sun shines in Spain; if both sources die down, French

nuclear plants or Swiss hydroelectric stations can take up the slack. A proper European-level emissions-trading scheme should minimise the cost of reducing greenhouse gases. And a successful low-carbon transition should reduce dependence on imported fossil fuels.

Europe’s confusion is due, in part, to conflicting national priorities. Germany is giving up nuclear power and betting heavily on solar and wind energy (all while burning more coal). France remains heavily committed to nuclear and bans shale-gas exploration. Britain is going all-out for shale gas (and nuclear), being a laggard in renewables. But it also does not help that Brussels has too many commissioners with overlapping responsibilities. The latest package was agreed on only after an 11th-hour battle between Ms Hedegaard and Günther Oettinger, the German energy commissioner who, unlike the German government, wanted only a modest emissions-reduction target of 35%.

Integration of energy markets Gas market:

For market integration to occur, sufficient available connecting infrastructure between markets is necessary, in combination with the supporting regulatory and political conditions to foster trade. Additional connecting infrastructure reduces the dependency of markets on a limited number of sources of supply, and can therefore improve a market’s security of supply. We have assessed the impact of such an improvement in security of supply in terms of a reduction of GDP at risk caused by a significant supply outage. We find this differs significantly across countries, and is dependent on a market’s dependence on gas and the absolute levels of GDP.

We assume that when the European market is fully integrated, all EU27 countries should enjoy an “N-1” security of supply situation. To achieve an “N-1” security of supply across all EU27 member states, an estimated investment of €1.5-3bn in supply infrastructure is required, on top of the €10bn+ investments up to 2022 reported by ENTSO-G for which a financial investment decision has been taken.

Energy market:

During the period from 2004, the main integration initiative in the electricity market has been the implementation of the Target Electricity Model based upon market coupling, which is intended to be extended to the entire European electricity market by 2014, although there may in practice be some delay. We have estimated that the benefits of the integration due to market coupling, once market coupling is fully implemented across the EU, will be of the order of €2.5bn to €4bn per year, or about €5 to €8 per capita per year. About 58%-66% of this benefit has already been achieved due to the level of market coupling already present, especially in the large electricity markets of NW Europe and the Nordic region.

A fully integrated market would facilitate the short and long term trading of energy, renewables, balancing services and security of supply without regard to political boundaries. We have found that much larger gains can be obtained if the market is truly integrated, which

would require the adoption of much deeper market methods of integration, such as the use of Financial Transmission Rights.1

Explaining the table

1. The first line of the table shows the net benefits of achieving basic market integration.

2. It can be seen that integrating the market delivers the largest benefits, in the range of €12.5bn to €40bn per year by 2030.

3. At the upper end, around 90% of the net benefits will be achieved even if the increment in transmission capacity is only half of what is optimal.

4. A similar reduction in benefit would apply if countries seek to achieve security (adequacy) of supply at a national level. Some modest benefits would come from sharing balancing reserves.

5. And material gains of the order of €4bn could come from using smart grids to facilitate demand side response at the consumer level.

6. Large gains of €16bn-€30bn are available if there is a true common market for renewable energy as envisaged by the Renewables Directive. This will be achieved by making it commercially desirable to locate renewable generation capacity in locations that are most effective for it. If this in fact happens, the transmission required to support it will be in substantially different locations from otherwise, and increased

quantities are required.

Figure 5.3: Market coupling in Europe 2011

Source: ACER (2012, figure 16)

Figure 5.5 A reduced model of European Electricity Transmission System

A transmission system operator (TSO) is an entity entrusted with transporting energy in the form of natural gas [1]  or electrical power on a national or regional level, using fixed infrastructure.

 European Network of Transmission System Operators for Electricity (ENTSO-E) is an association of Europe'stransmission system operators (TSOs) for electricity. It is a successor of ETSO, the association of European transmission system operators founded in 1999 in response to the emergence of the internal electricity market within the European Union.

The integration of European electricity markets can bring about major efficiency gains in welfare terms to European consumers and industries. Through a process of market coupling electricity markets can be further integrated.

Efficiency gains result, as market coupling uses generation capacity more efficiently and, thus, reduces the necessity of large idle generation capacity. The potential for savings is indicated through the share of diverging high-peak periods between member states. The larger the

share of divergence, the more generation capacities could gain in utilization. This holds in particular for an integration of European capacity and reserve mechanisms (CRM). Given that

CRM are subsidies paid to safeguard security of supply better exchange and further market integration could reduce the required subsidy leveks by (a) inducing more competition and (b) reducing the absolute levels of additional capacity needed.

Hence, while market coupling theoretically increases market efficiency, issues such as market design or other regulatory interventions have a significant impact on the performance of market coupling. Therefore, it is important to align the different existing national regulatory frameworks across Europe or to set up a new common framework altogether.

A major benefit of further market integration would be the increased level of competition in European electricity markets. Based on simulations published by ACER (2012), the CWE region alone has achieved gains from trade worth more than 250 million Euros in comparison to isolated national markets now. Major trade gains are still left unrealized, however, between Italy and France (about 19 million Euros per year), Germany and Sweden (about 10.5 million Euros per year) and the Netherlands and Norway (about 12 million Euros per year). Significant gains can also be expected from increasing transmission capacities between Spain and France as well as between Sweden and Poland.

The different support schemes for renewable energies have induced major inefficiencies if viewed from a European perspective. Most importantly, since all support schemes only support renewable energies within their own national territory massive gains from trade and from market integration are forgegone. These gains from trade could easily result, as climate and weather conditions vary heavily across and even within member states. For example, conditions for wind power are typically superior in Northern Europe while the conditions to produce solar-based electricity are much better in Southern Europe. Hence, Benefits of an integrated European Electricity Market enormous gains from trade could be realized by focusing on solar power in Southern Europe and on wind energy in Northern Europe. However, since almost all RES support schemes (with the particular exception of Sweden and Norway) are based on national frontiers so that only domestic production is supported, these benefits are foregone, resulting in according inefficiencies. A cautious calculation reveals that the efficient allocation of solar energy plants between Germany and Spain alone would have resulted in additional electricity worth about 740 Million Euro within a single year. Additional savings could easily be generated by considering (a) more countries than just these two and (b) considering other technologies such as wind.

References:

http://www.economist.com/news/briefing/21600111-reducing-europes-dependence- russian-gas-possiblebut-it-will-take-time-money-and-sustained

http://www.bruegel.org/nc/blog/detail/article/1283-can-europe-survive-without- russian-gas/

http://www.economist.com/news/europe/21595018-storm-over-new-european- union-climate-change-targets-europes-energy-woes

http://www.econstor.eu/bitstream/10419/83499/1/769038514.pdf

http://ec.europa.eu/energy/infrastructure/studies/doc/ 20130902_energy_integration_benefits.pdf

http://ec.europa.eu/energy/nuclear/index_en.htm

Overview of LNG projects in Europe: Challenges and opportunities; Marion Nikodym; LNG Construction Summit, Amsterdam, 30 April 2014