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Gas phase-out – threat or blessing in disguise?

The current hike in energy prices and disruptions to energy supply are top concerns of the European Union. The war waged against Ukraine put the spotlight on the future role of natural gas in the European economies, accelerating the need to replace Russian gas with alternative routes and suppliers, however, it is still uncertain whether it will support or set back the decarbonisation efforts.

Industry specialists came together at the annual conference of REKK (Regional Centre for Energy Policy Research) to assess our preparedness for the upcoming winter, review the ramifications of the cut of Russian gas flows towards Europe and discuss the implications of phasing out natural gas in the most energy-intensive sectors.

How we can manage without Russian gas?

What would happen in Europe if Russia would turn off the gas tap overnight? This was the question REKK and Vienna-based energy research institution, E-think tried to answer in their recent study.

“Without further measures on the EU’s part, Europe would be scattered into three price zones based on ability to access to LNG and global markets,” started Péter Kotek, Senior Research Associate of REKK. In our region, this would imply a price increase of almost 300 euros/MWh. The EU’s demand would drop by 900 TWh, while consumers would pay two and a half more for gas than in 2021.

However, the EU could mitigate the impacts of halted Russian gas deliveries by combined supply and demand side measures. On the supply side, that means securing alternative supplies by developing LNG capacities, introducing new pipeline capacity and ramping up production. In fact, some of the region’s planned strategic infrastructure such as the Polish-Lithuanian interconnector and the IGB connecting Bulgaria and Greece already came online this year.

On the demand side, the study considered saving gas in buildings and fuel switch in the power sector finding that in an average winter, all the missing supplies could be saved, while in a cold winter, additional measures would be needed.

The EU also acted timely with the storage targets, with over 82 per cent filled by September, the study found no major threat of supply disruption this winter, although Europe needs to pay more for its gas than the previous winter.

On the mid-term, the full cessation of Russian deliveries may be mitigated completely with combined supply and demand measures, and a new equilibrium could be reached at lower gas consumption levels that would bring lower gas bills, explained Mr Kotek. In the long run, the EU must continue to implement energy efficiency measures, secure alternative gas suppliers, and speed up the deployment of renewables to move away from fossil fuels, the study underlined.

How we manage this in real life?

As Russia indefinitely halted gas flows to Europe through the key Nord Stream 1 pipeline, decision-makers need to come up with swift solutions to tackle the spiralling energy crisis of both supply and pricing. Last Friday, European Union energy ministers agreed to cap the revenues of non-gas energy producers and offer emergency funds to power firms facing soaring collateral requirements but they backed away from more divisive proposals to cap Russian gas prices.

“There was no decision regarding the price cap, but it was not taken off the table either,” said Pál Ságvári, Vice-President for International Affairs, Hungarian Energy and Public Utility Regulatory Authority, underlining that the root cause of the current situation is the gas market imbalances, which has a spillover effects, however, the price cap will not bring a real solution as it won’t bring a new source of supply or reduce demand.

He revealed that there were five versions of the price cap on the table during the EU negotiations, one of these alternatives was to cap Russian gas, which involves a big risk of retaliation from the Russian side, especially for our region, where there is still a huge physical dependance on Russian supplies.

The situation on the market is already tense. Eszter Szekeres, Executive Director of Wholesale Operations and Optimization at international energy company, MET Group underlined that the main problems that energy traders are facing now are liquidity, financing and prices. As energy prices skyrocket more cash is needed to cover positions and energy companies face solvency issues due to the rising amount of cash they must post to guarantee trades when market prices jump.

“With the new gas year on the corner, another big question is which costumers will be able to pay their invoices,” added Ms Szekeres noting that by now everyone asks for prepayment. “If the costumers cannot pay, how much time we should give them until they are switched off. Another issue is who will do this, given that distributor companies don’t have enough resources and then there is also the case of protected costumers,” she pointed out.

Short term challenges, long-term implications

Even if we can survive this winter due to filled up storages, the quoestion is what will happen next spring when the storages will be empty and we face the same anomaly on the market. According to Pál Ságvári in this case additional financial mechanisms will be needed for the traders to get the storages filled.

On a strategic level, the EU is sending mixed messages regarding the future of gas according to Mr Ságvári. “It is not clear if the EU’s priority is to get rid of gas or Russian gas,” he posed the question adding the Russian source in EU’s portfolio decreased significantly, but the last mile will be difficult to make.

“If we look at the infrastructure in the pipeline, in our region 40 bcm is already committed, and 70 bcm is highely likely, which means that the gas phase-out could be done potentially in the next decade. However, we will need non-Russian gas in this infrastructure, that’s why we are keen to learn more on the EU’s joint energy procurement platform.

What the future holds for CEE?

“In Central Eastern Europe we thought that we can be the bridge between Russia and the EU, but in wars bridges as the first to be blown up,” said Andrej Nosko, Energy Policy Expert, Researcher at the Faculty of Political Sciences and International Relations of Matej Bel University in Banská Bystrica.

As he underlined that the liberal market logic is not helpful now, because Russia is clearly not playing by these rules. “We need to remember that the market is just a tool and if it doesn’t work we have to fix it,” he underlined.

“In this situation, we need to focus on demand reduction as alternative supplies can help on the short term, but they cannot offer a solution without decreasing consumption,” pointed out Ms Nosko adding that domestic production with a strong focus on renewables is also crucial to phase out our dependence on Russian fossil fuels.

“Utimately, cooperation both on the EU- as well as on the regional level is of utmost importance, and we shouldn’t fotget that here in the region we have multiple energy synergies, he concluded.

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