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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Europe’s LNG Spending Could Undermine Its Renewable Ambitions

  • Europe is importing record levels of liquified natural gas this year as it attempts to wean itself off Russian energy and keep the lights on this winter.
  • European governments are spending billions of euros on keeping utilities afloat and protecting consumers, money that now can’t be spent on renewable energy.
  • Europe’s LNG import bill could be as much as $90 billion this year, double the amount paid in 2019 and almost triple the 2021 bill.  
LNG

Europe is importing record volumes of liquefied natural gas (LNG) this year, looking to replace pipeline gas supply from Russia and wean itself off Russian energy in the wake of Putin’s invasion of Ukraine.   

The record LNG imports, however, come at a high cost for European governments, which are spending billions of euros to help vulnerable customers with soaring energy bills and to save struggling utilities that are bleeding money to procure alternative gas supplies. 

Europe’s LNG import bill—coupled with rescue packages for consumers—could leave the continent with smaller budgets for renewable energy, Reuters columnist Gavin Maguire notes.

Sure, the EU doubled down on renewables in the REPowerEU Plan it unveiled in May. The plan sets out a series of measures to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition, while increasing the resilience of the EU-wide energy system. 

“REPowerEU will speed up the green transition and spur massive investment in renewable energy. We also need to enable industry and transport to substitute fossil fuels faster to bring down emissions and dependencies,” the European Commission says. 

Additional Investments Needed To Cut Off Reliance On Russian Energy

Financing the phase-out of Russian fossil fuel imports will require additional investments of $203 billion (210 billion euros) between now and 2027. Those imports are currently costing European taxpayers nearly $97 billion (100 billion euros) per year, according to the Commission. That comes on top of the billions of euros necessary to roll out more wind and solar power generation capacity.  

While Europe looks to accelerate the energy transition, it is paying billions of euros more to import LNG. 

Its LNG imports are at record highs, at higher prices than in previous years, and are set to become even more expensive this quarter during the seasonal peak in power and heating demand in the winter. 

So far this year, Europe has offset the sharp fall in Russian gas supplies by importing much more LNG and boosting alternative pipeline supplies from Norway and North Africa. 

Energy Security Has A High Price 

Europe’s demand for LNG surged by 65% in the first eight months of 2022 compared to the same period a year earlier, the International Energy Agency (IEA) said in its latest quarterly Gas Market Report. Soaring demand “has drawn supply away from traditional buyers in the Asia-Pacific region, where demand dropped by 7% in the same period as a result of high prices, mild weather and continued Covid lockdowns in China,” the IEA noted. 

In June, for the first time ever, the European Union imported more LNG from the United States than gas via pipeline from Russia, as Moscow slashed its supply to Europe. 

In September, as much as 70% of all U.S. LNG exports were headed to Europe, up from 63% in August, per Refinitiv Eikon data cited by Reuters earlier this month.   

But this influx of LNG supply to secure Europe’s winter comes at a cost

The EU, most of which is now deprived of any gas supply from Russia, is doing relatively well with stocking up on alternative supply. The prices, however, are high, and so is the price that industries, residential consumers, and governments must pay. Gas and energy prices are now so high that energy-intensive industries are shutting down production lines or whole factories, while households are constantly being asked to conserve gas and electricity to avoid rationing and/or blackouts this winter. Governments are splashing billions of euros to help consumers with the soaring prices and avoid the collapse of energy firms. 

Europe’s LNG import bill could be as much as $90 billion this year, assuming all purchases are made at Brent-indexed prices, according to estimates by Reuters’ Maguire. The bill would be double the one Europe paid for LNG imports back in 2019, and almost triple the sum paid in 2021.  

Demand destruction due to high gas prices has helped the market somewhat, but its cost is deindustrialization in the longer term as energy-intensive industries struggle to keep production going.  

“Europe’s gas consumption declined by more than 10% in the first eight months of this year compared with the same period in 2021, driven by a 15% drop in the industrial sector as factories curtailed production,” the IEA said in its quarterly report. 

Revenue Cap On Power Producers Could Cap Clean Energy Rollout 

The EU’s recently proposed market intervention policies, as well as high energy prices, risk stalling the efforts to accelerate renewable energy capacity buildout, according to research from Rystad Energy.

The proposed temporary revenue cap on inframarginal electricity producers sends out a negative signal to the sector, the energy research firm said last month. 

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“The renewable industry is Europe’s best shot at producing affordable and secure power, but this policy reduces the private sector power providers ability to invest,” said Victor Signes, analyst renewables at Rystad Energy.

“If renewables are to take their proper place in Europe’s power mix, they will need support in turn in the not-too-distant future,” Signes added. 

In addition, Europe’s soaring electricity prices “are damaging the continent’s attempts to build a reliable low-carbon supply chain and reach its decarbonization targets, as solar and battery manufacturers face mounting costs,” Rystad Energy said in separate research earlier this month.

As much as 35 gigawatts (GW) of solar PV manufacturing and more than 2,000 gigawatt-hours (GWh) of battery cell manufacturing capacity could be mothballed unless power prices quickly return to normal levels, according to the analysts. 

“Building a reliable domestic low-carbon supply chain is essential if the continent is going to stick to its goals, including the REPowerEU plan, but as things stand, that is in serious jeopardy,” said Audun Martinsen, Rystad Energy’s head of energy service research.  

By Tsvetana Paraskova for Oilprice.com

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