Replacing Russian gas in EU is technically possible and economically feasible
| Replacing Russian gas requires looking beyond other sources of natural gas
Following the start of the Russia-Ukraine war in February 2022, gas markets went into turmoil as Russia slashed supply to Europe in response to western economic sanctions. European Union leaders subsequently spent the better part of 2022 scrambling to find alternative sources ahead of the peak heating season from November to April.
The EU’s ultimate response was the REPowerEU plan, a multi-pronged strategy that sought to top up gas storage by mid-2022, diversify gas imports away from Russia, deliver on energy efficiency and insulation ambitions, and accelerate the continent’s energy transition through more ambitious renewable targets compared to the European Green Deal. Importantly, the plan predicted that full implementation would wean Europe off Russian gas imports completely by 2027.
However, the REPowerEU plan would not come without its costs.
〉 First, while diversifying gas importation away from Russia addresses immediate energy security concerns, it merely shifts strategic dependencies to other gas supplying nations, which may well result in unforeseen and unintended consequences for energy security.
〉Second, according to the Energy Monitor, European Member States have not only increased imports from existing pipelines but also tapped liquified natural gas (LNG) markets, resulting in 227.2 billion cubic metres (bcm) of LNG terminals and 60.5 bcm of import pipelines in development. Securing revenue for these investments has also involved signing long-term deals with Middle Eastern nations that locks Europe into gas well into the 2030s. At the same time, gas demand would drop with the implementation of behavioral measures, efficiency gains, and the partial electrification of heating with the increasingly rapid adoption of heat pumps throughout the EU. Beyond Fossil Fuels estimates that by the time these LNG terminals and pipelines come online there may be little to no need for them. While systemic redundancy is fundamental for a resilient energy system, the line between redundancy and wasteful deployment of political and economic capital is a fine one, one which the EU risks crossing without carefully reconciling its multiple priorities.
〉 Third, these projects shift capital away from the bloc’s climate targets. Not only does this policy package contradict the Intergovernmental Panel on Climate Change’s call to halt investment in new infrastructure, but it also commits the EU to path dependencies that limit its ability to phase down gas consumption in favor of renewable alternatives. Heating accounts for over 50% of the EU’s final energy consumption, more than electricity and transport combined. Reaching net zero by 2050 will demand significant and prompt action from EU leaders if the continent is to reach its ambitious climate targets, including 55% reductions in emissions by 2030.
Thus, the EU’s preference for diversification versus elimination raises earnest questions about its commitment to addressing climate change, its exposure to risks associated with energy security, and the cost- of-living crisis faced by EU citizens.
| We examine the economic implications of replacing Russian gas by green technologies
Researchers at the Oxford Sustainable Finance Group recently investigated the economics of a different energy future where the EU uses the crisis to accelerate renewable deployment as quickly as technically possible to eliminate gas in commercial and residential heating and electricity generation. The report, The Race to Replace: the economics of using renewables to free Europe from Russian gas, found that it is entirely possible to replace gas with green technologies by 2028, only one year later compared to the REPowerEU plan. It estimates that up to 90% of the additional investment required on top of currently planned European Green Deal spending could be recovered over the next thirty years by eliminating the need to buy gas. Given that Russia accounted for 40–50% of the EU’s gas supply in 2021, this would have a significant positive impact on energy security and decarbonization efforts.
The report estimates that a total of €811 billion (in 2023 terms) will be required over the next 5 years to replace gas for heating and electricity in the “Race to Replace” scenario, a challenge that can only be overcome with both private and public capital.
The report estimates that a total of €811 billion (in 2023 terms) will be required over the next 5 years to replace gas for heating and electricity in the “Race to Replace” scenario, a challenge that can only be overcome with both private and public capital. On the supply side, this will require over 1,303 GW e of renewable electricity comprised of utility-scale and rooftop solar, onshore wind, and offshore wind, at 65%, 30%, and 5%, respectively, of the total. To use renewable electricity, gas boilers would be replaced by heat pumps, a far more efficient technology that on average requires 40% of the energy needed by gas boilers to maintain similar internal temperatures. Remarkably, the switch to heat pumps accounts for 32% of the decrease in gas consumption, with the bulk provided by renewables at 61%, followed by renovation at 7%. In fact, heat pumps are the most economically efficient intervention since the EU can save 2.72 TWh of gas per billion euros spent, much higher compared to renewable electricity at 0.76 TWh/billion euros and renovation at 0.29 TWh/billion euros.
|Replacing Russian gas by green technologies will require ambitious policy
Solar PV will demand the largest investment (at 59%, €302 billion), followed by offshore wind (at 16%, €81 billion), and onshore wind (at 5%, €24 billion). Heat pumps will require about a fifth of total investment (at 21%). Given the sizable investment requires, the Race to Replace scenario will only be possible if the EU creates an ultra-supportive policy environment standing on four pillars. Conveniently labelled FAST, the policy package includes sections on finance, ability, supply, and transmission.
For finance, policymakers can unlock private capital for renewable technologies by extending current renewable energy schemes, providing a schedule of planned auctions, allocating greater volumes, and improving auction designs to reflect the climate and energy security benefits of renewables. Regulatory mandates can also drive demand, as well as remuneration for self-consumers that supports residential adoption of solar PV. Permitting challenges must necessarily be addressed for the period to 2028 to unlock the full potential of renewables, which is already a priority under REPowerEU. Most importantly, consumer support in the form of grants will be critical for the uptake of heat pumps, as phasing out gas is limited by how quickly EU citizens replace gas boilers. Italy’s “Superbonus 110%” that funded energy refurbishment actions including heat pumps provides an example of best practice.
According to estimates, Europe will need 1.1 million workers at minimum to install over 750GW e of solar by 2030, let alone 2028. Therefore, the EU needs to ensure that it can keep up with demand for solar and heat pump deployment. The Race to Replace scenario requires a deep and sweeping scaling of workforce trades such as electricians, engineers, and certified installers.
Just as Russia exposed Europe’s energy insecurity, the EU will need to manage strategic dependencies and ensure secure supply chains to meet the required material throughput under the Race to Replace scenario. Logistical support for supply chains tied to partners in Asia-Pacific, including favorable trade relations, is a prerequisite for rapid deployment of green technologies over the next 5 years. Over 90% of mass-manufacturing capacity for many strategic clean energy technologies is concentrated in China and the Asia-Pacific. Even for industries like wind technologies, where the value chain is concentrated in Europe, depend on China for over 70% of components found in Western wind turbines.
Finally, policymakers need to ensure that the EU possesses sufficient capacity in the grid to accommodate the incoming wave of renewable energy. Indeed, underinvestment in transmission has been very costly for taxpayers in countries such as the UK where regulators have paid renewable energy operators to not feed energy into the grid. Investment in storage capacity will also be necessary to accommodate intermittent renewable energy sources. While REPowerEU and the EU Green Deal do not specify a storage strategy, the authors acknowledge this could be part of future research as provisions for renewable energy storage have been included in the EU Green Deal Industrial Plan.
The decisions made by EU policymakers today will have multi-decadal impacts on Europe’s energy system. Russia’s weaponization of its gas supply represents a critical juncture for EU energy policy, one in which the Single Market’s leaders can take bold strides in shoring up the continent’s long term energy security, addressing a critical source of emissions, and cost of living crisis. Rather than pursuing diversification, the Race to Replace shows that gas elimination is entirely possible along a similar timeline if and only if policymakers utilize ambitious investment policies to unlock the full potential of private capital and a European green economy capable of realizing a thriving renewable energy future.
Originally published at https://investesg.eu on May 24, 2023.
