Wednesday, September 28, 2022

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CEE energy sector challenges beyond Russophobia and COVID-19

The energy policy discourse in Central and Eastern European countries in the last decade has been focusing on energy security, especially what to do with a historical reliance on the energy supplies from the Russian Federation. In the meantime, Western and Southern Europe were pushing forward with a rather aggressive Energiewende, the roll-out of variable renewable energy sources and an accelerating coal phase-out. The energy policy discourse between the old and new EU members has been so far apart that many times it led to parallel deliberations instead of genuine dialogue.

Turning on the 2020s, regardless of the COVID-19 situation, the energy discourse in the CEE region has to adapt and be able to argue its regional position in the framework of EU discussions. The European Green Deal and the increased 2030 emission goals – not to mention the 2050 climate neutrality – would put the CEE countries’ energy sectors under significant technological and financial strain. This is a much bigger challenge than the often-claimed strategic meddling of Russia with its energy weapon in the region.

The Russians are reading the EU policy documents and they know that natural gas is going to lose ground in the EU energy system (but not worldwide) as we approach 2050. Even if a coal-to-gas switch will gain ground in the V4 countries, Romania, Serbia and probably even in Bulgaria, that will not significantly increase the import quantities of these countries. Even in that case, the Romanian offshore production never materializes, Poland refuses future Russian gas imports and a declining heating demand (due to the dual effect of a warming climate and a declining population) and energy efficiency gains in the building sector would offset most demand increase in the gas-based electricity-generation. In the meantime, North-Western Europe will gradually move towards electrification and the increasing blending of natural gas with renewable gases. Declining natural gas demand is offsetting declining EU domestic production and thus Moscow cannot expect any significant increase in European gas exports.

Russian experts know this very well, thus the new Russian energy strategy and decarbonisation strategy does not count on any new infrastructure development in Europe, neither foresees increasing gas exports. The Nordstream-2 and Turkish Stream will be most likely fully operating by the end of 2024 when the new transit contract with Ukraine expires. The new pipes’ capacities were booked for 20 years mostly by Gazprom and any operational profits after 2040-2045 will make them profitable geopolitical investments. After their completion, the Russian gas sector will increasingly focus on the growing Asian markets and LNG. The late 2020s and 2030s will be more about Russian gas export diversification than about European import diversification.

The real challenge for the CEE countries is to retain their economic, especially industrial competitiveness vis-à-vis North-Western Europe in the new post-COVID European Green Deal era. Energy prices are an important element of economic competitiveness and energy innovations can become a huge source of extra domestic added value or a basis for technology export. North-Western Europe (Germany, Austria, Netherlands, Scandinavia) as net contributors of the EU budget are already setting the new rules for growth: offshore wind and green hydrogen should be the backbone of the new green European economy, deserving public funds for support. The most suitable geographic area for this is the North Sea and Baltic Sea, mostly shared by these countries.

Bearing in mind these developments, what can CEE countries do, who have little wind and limited hydro potential, with solar PV never being able to replace conventional generation with a roughly 10-15 per cent capacity factor – while offshore wind can reach 40 per cent? They have to argue the case for zero-CO2 nuclear baseload energy, unless they want to become net importers of bulk North-Western wind and Southern PV-based electricity imports, paying for the long-distance transmission costs and losing even the remaining electricity sovereignty and domestic generation capacities. A technologically and geopolitically balanced nuclear sector in the future with high-capacity traditional baseload – most likely Russian – nuclear reactors and the potential integration of more flexible American small modular reactors into the electricity system would enable CEE countries to stay competitive even in a low-emission environment.

CEE countries should lead the way in nuclear-based green – or yellow – hydrogen production, to efficiently compete with offshore wind clusters in North-Western Europe. The lack of hydro-based frequency regulation capacities and the high-costs of grid electricity storage solutions also entail the use of gas-based electricity generation capacities even beyond 2050, which does not contradict climate neutrality bearing in mind that carbon sinks can offset the limited natural gas emissions stemming from frequency regulation.

My main argument is therefore that CEE countries should join forces to argue the case of nuclear-based baseload and natural gas-based flexible electricity generation in the EU climate neutrality context, regardless of differing views as regards the Russian Federation. Pro- and Anti-Russian feelings in the nuclear or the gas sector should not distract the CEE countries from a much bigger challenge stemming from the North-Western direction concerning the security and affordability of CEE electricity supplies soon.

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