Cutting the Cord: Eliminating Europe’s Energy Dependence on Russia

Author:  Luke O Callaghan-White, Senior Researcher

Introduction

This blog examines the EU’s approach to the phasing-out of Russian energy sources, following the invasion of Ukraine on 24 February 2022. It first addresses the importance of Russian imports in the EU’s energy mix before analysing the European Commission’s proposal to make Europe independent from Russian fossil fuels. The blog concludes by analysing policy responses to high energy prices and security of supply constraints in Europe.

Europe’s Reliance on Russian Energy Imports

Russia is an energy behemoth. In 2021, it was the world’s largest exporter of natural gas, the second largest exporter of crude oil, after Saudi Arabia, and the third largest exporter of coal, after Indonesia and Australia. In recent years, Russia has used energy revenue to accumulate $630 billion in foreign exchange reserves. In 2019, oil and gas accounted for 39% of federal budget revenue and made up 60% of total Russian exports, much of which satisfied energy demand in Europe.

In 2021, more than 50% of Russia’s oil exports went to Europe where Germany, the Netherlands and Poland were the three largest buyers. Overall, Russian oil accounts for approximately 27% of Europe’s energy demand.

The European Commission has classified natural gas as an environmentally sustainable economic activity in the Taxonomy for sustainable activities, which came into force in July 2020. Under the Taxonomy, the Commission has indicated that natural gas will play an important role as the EU decarbonises its energy mix and transitions to cleaner energy sources. Russia is the largest supplier of natural gas to the EU and in 2021, it accounted for approximately 45% of the EU’s total gas imports.

Not all EU Member States have an equivalent reliance on Russian natural gas imports. For example, in 2021, ten EU Member States – Austria, Bulgaria, Czechia, Estonia, Finland, Hungary, Latvia, Romania, Slovenia and Slovakia - relied on Russia for more than 75% of their natural gas imports. In contrast, Ireland is not dependent on Russian gas to meet its energy needs. Approximately 25% of Irish gas is supplied from indigenous supplies, while the remaining three-quarters of comes from the UK, which, itself is not reliant on imports of oil or gas from Russia.^[1]

Russia’s dominant energy position has provided the country with its most potent economic leverage in Europe. While the EU seeks to undermine the Russian economy through sanctions, European payments to Russia for energy imports exceed €27.9 billion since the Russian invasion of Ukraine on 24 February 2022.
 

The EU’s Plan to Wean Europe off Russian Oil and Gas

In the weeks following the outbreak of war in Ukraine, the EU froze the assets of hundreds of Russian political officials and oligarchs; banned transactions with the Russian Central Bank; excluded seven Russian financial institutions from the SWIFT banking system; closed EU airspace to Russian planes; and extended a suite of sanctions aimed at compromising the Russian economy.

As part of these restrictive measures, the EU also introduced a ban on new investments in the Russian energy sector. However, the Union has not followed in the footsteps of the US by banning the import of all Russian energy sources. An outright ban on the purchase of Russian oil and gas would have severe ramifications for the Russian economy. However, this European-Russian energy relationship is one of mutual dependence. Given the EU’s reliance on a single supplier to meet its energy needs, an immediate ban on the import of Russian gas and oil would have drastic implications for Europe’s energy security - the uninterrupted availability of energy sources at an affordable price. Instead, the European Commission has proposed a framework to phase-out Russian energy imports over the course of this decade.

On Tuesday, 8 March 2022, the European Commission published a Joint European Action Plan, entitled REPowerEU, which aims to increase the resilience of the EU-wide energy system. The proposal is based on two pillars:

1. The diversification of gas supplies through higher imports of liquefied natural gas (LNG) and imports from non-Russian pipelines, and the acceleration of the roll-out of renewable hydrogen and biomethane.
2. A steeper reduction in the use of fossil fuels through enhanced energy efficiency measures, greater use of renewables and increased levels of electrification.

Through these actions, the EU expects to reduce European demand for Russian gas by two-thirds before the end of 2022. The Commission will present a legislative proposal in April 2022 aimed at shoring up underground gas storage across the EU and will assess options to improve the design of the European electricity market.

 

Responding to Price Hikes

As the EU promotes a shift away from fossil-based energy sources and towards renewable alternatives to enhance European energy security and meet its decarbonisation objectives, the bloc will still rely on Russian gas to fulfil energy demand on the continent, at least until the end of this decade. However, this import dependency threatens Europe’s security of supply.

Analysis from the Bruegel think tank finds that Russian gas will be necessary to run the European economy for several years to come. Meanwhile, Eamon Ryan, Irish Minister for Climate Action and Environment, remarked that any disruption of Russian gas supplies would maintain upward pressure on European gas prices, and would have knock-on effects on electricity prices.

Consumers are already seeing the effects of energy price shocks in their utility rates. In February 2022, Eurozone consumer prices rose by 5.8%. Energy is the main component of current euro area inflation, and, over the last 12 months, the retail prices of natural gas and electricity have been steadily rising. While the current period of price volatility has several origins, it has undoubtedly been exacerbated by Russia’s invasion of Ukraine. In February 2022 alone, for instance, prices in the energy sector rose by 31.7%.

National governments across the EU are implementing various measures to insulate consumers from the impact of rising energy prices. Most governments in the EU27 now provide transfers to vulnerable groups; many have cut energy tax or VAT; some governments have introduced regulations to cap energy prices.^[2] However, these measures will not address long-term price stability nor the broader, and more fundamental, question of energy security.
 

Addressing Security of Supply: LNG In Ireland?

Understandably, many governments in Europe are also considering state investment in projects to shore up domestic energy security. In Ireland, the Department of Environment, Climate and Communications is carrying out a review of the security of supply of Ireland’s electricity and gas systems, which is expected to be published later in 2022. One consideration under deliberation is the construction of a state-owned non-commercial liquefied natural gas (LNG) terminal. LNG is natural gas that has been cooled to a liquid state which allows it to be shipped rather than transported by pipeline. Importantly, LNG can be kept in storage tanks before it is transported to customers.

The proposal of developing an LNG terminal in Ireland has generated controversy. This is for two main reasons. Firstly, LNG terminals in Ireland could receive imports from the US in the form of fracked gas. Fracked gas has significantly higher greenhouse gas emissions than natural gas and it poses substantial risks to the environment.^[3] The Irish government does not support the importation of fracked gas and is actively promoting the phasing out of fracking at the international level. However, at present, it would not be possible to prevent the import of fracked gas should the construction of an LNG terminal in Ireland proceed.

Secondly, there is a live debate in Ireland regarding the need for further investment in fossil fuel infrastructure in the context of the state’s commitment to the Paris Climate Agreement and its own emissions reductions targets for 2030 and 2050. In an appearance before the Joint Oireachats Committee on Environment and Climate Action on Tuesday, 29 March 2022, Commissioners of the Commission for the Regulation of Utilities (CRU), emphasised that they do not advocate for fracked gas in Ireland but argued that LNG terminals could play an important role as Ireland seeks to improve its energy security position. The Chairperson of CRU, Aoife MacEvilly, highlighted that, with its current pipeline connections to the UK, Ireland does not have the requisite levels of energy security, as mandated by EU law.

There are concerns that, if developed, an LNG facility could become a stranded asset.^[4] If Ireland meets its climate targets over the coming decades, the share of fossil fuels in the Irish energy mix should drop significantly. If the Irish government departed from its current position of opposition to LNG and approved the development of a state-owned LNG terminal in Ireland, taxpayers would be pay for such a facility until 2062, given the economic lifespan of such facilities.

Importantly, the development of an LNG terminal in Ireland would not address the immediate concern of energy security. It would take between five-to-ten years before imports could enter through Irish LNG terminals if development began in 2022.

In the short-term, gas will be a necessary transition fuel as Ireland and the EU pursue the objective of carbon neutrality by 2050. In the long-term, however, the volatility of international gas and oil markets indicate that Europe will not be able to achieve greater energy security through the continued reliance on fossil fuels.

Over the last decade, there have been drastic price reductions in the cost of solar and wind power. Indeed, today, renewables are not just cost-competitive with fossil fuels but are in fact cheaper whenever new electricity generation is required. Large-scale capital investment in clean energy will help to increases security of supply, lower the cost of electricity, and eliminate the present reliance on energy markets which are subject to capricious price fluctuations and geopolitical tensions.

There is a high opportunity cost in delaying the transition to net zero emissions. The measures taken in this decade will determine whether global warming can be limited to 1.5^oC. The decarbonisation of the European energy mix and the transition to net zero emissions will be complex and will inevitably involve disruption to energy supply. As such, in the wake of the Russian invasion of Ukraine, policymakers in Europe now have an opportunity to implement a long-term strategy to enhance Europe’s energy resilience. To bolster security of supply, this approach could consider response mechanisms to both short-term energy disruptions and to the existential threat of climate change.