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The European Union is seeking to reduce its energy dependency, especially on Russian natural gas, in an effort to enhance the bloc’s energy security and bargaining power vis-à-vis energy suppliers. This is a challenging task, as the demand for imported gas has been rising across Europe. Options to diversify Europe’s energy mix are possible, but this requires investments, market reforms and political will, while consumers and businesses may face higher energy prices in the coming years.

EU’s Total Primary Energy Consumption: 2013

Source: BP Amoco, BP Statistical Review of World Energy.

Note:  The EU includes 28 member states: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom.

  • In March 2014, leaders of the European Union (EU) committed to cut their dependency on Russian gas. The action was taken following rising tension between the EU and Russia over the Ukraine crisis and Russia’s annexation of Crimea. About a quarter of the gas that the EU consumes still comes from Russia. In 2013, the EU’s natural gas consumption reached 395 million tonnes of oil equivalent, accounting for 25.6% of its total primary energy consumption;
  • The level of dependency on Russian gas varies across the EU. While Baltic countries including Latvia and Lithuania rely completely on Russia’s gas supplies, countries like Spain and the United Kingdom do not import natural gas from Russia. Germany, the bloc’s largest economy, still imports more than one third of its gas from Russia. The country’s natural gas import bill amounted to US$52.6 billion in 2013, the highest among EU members.

Implications

Weaning Europe off Russian gas is possible, but this will take time, financial resources as well as political will:

  • To reduce their vulnerable position in relation to Russian gas, EU countries have to diversify their energy mix. They can increase the use of other energy sources such as coal for electricity generation. Using coal imported from the United States is relatively cheap, but it will be against EU’s effort to reduce the levels of carbon dioxide (CO2) emissions. The bloc’s CO2 emissions already dropped by 12.2% between 2008 and 2013 to reach 3.7 billion tonnes by the end of the period;
  • The EU will have to continue to develop renewables and other indigenous energy sources. Renewable energy including hydropower, solar and wind power accounted for 17.2% of Germany’s total electricity production in 2013, while it made up only 1.2% of Poland’s total electricity production. Boosting renewable energy sources will require significant investments, thus creating opportunities for businesses in this sector. Meanwhile, Europe will also need better interconnectors which help substitute one renewable for another and make it easier to export and import electricity from renewable sources within the region;

Electricity Production by Energy Sources in Selected EU Countries: 2013

Source: Euromonitor International from International Energy Association (IEA).

 

  • Some European countries can also embrace shale gas, particularly in countries with remarkable shale gas reserves such as the UK and Poland. Although extracting shale gas should help to cut Europe’s reliance on imported fuels and create more jobs, it still faces strong public opposition due to environmental concerns;
  • Other options for the bloc to diversify its energy sources include gas imports from the US and development of the so-called Southern Corridor for gas from the Caspian region. The Trans-Adriatic Pipeline, which is due for completion in 2018, would bring Europe 10.0-20.0 billion cubic metres of natural gas a year from the Caucasus via Turkey;
  • Consumers and businesses in Europe may face higher energy prices as the region seeks to end its reliance on cheap gas from Russia. This will result in higher production costs, while squeezing profit margins for businesses. For consumers, higher fuel prices will affect disposable income and expenditure. Due to the bloc’s economic slowdown, consumer expenditure contracted by 1.6% in fixed US$ constant terms during the 2008-2013 period.

Prospects

  • Crises in Ukraine in 2006, 2009 and more recently in early 2014 have stressed the need to mitigate Europe’s over-reliance on a limited number of energy sources and vulnerability to external pressure. Lessening Europe’s reliance on Russian gas, however, will remain a hard challenge in the medium and long term, given the region’s growing demand for imported gas. Europe’s imports of gas increased by 18.1% during the 2008-2013 period;
  • The EU expects to come up with a comprehensive plan by June 2014 for the reduction of EU energy dependence and enhancement of the bloc’s bargaining power with energy suppliers. It also plans to urge its member states to step up the integration of electricity and gas markets in order to help reduce prices. Energy prices in some European countries are already double that of those in the USA.

 

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