Tag: CO2 emission

Exploring the Impact from the Russian Gas Squeeze on the EU’s Greenhouse Gas Reduction Efforts

20220727 Hedging EU Winter Risk 02

Throughout 2022, the reduction in Russian gas imports to the EU and the resilience of European energy markets have been subject of significant public discourse and policy-making. Of particular concern has been the EU’s ability to maintain its environmental goals, as substitution from Russian pipeline gas to liquified natural gas and other fuels such as coal, could result in increased emissions. This brief aims to reevaluate the consequences from the loss of Russian gas and the EU’s response to it on greenhouse gas emissions in the region. Our analysis suggests that the energy crisis did not result in a rise in emissions in 2022. While some of the factors that contributed to this outcome – such as a mild winter – may have been coincidental, the adjustments caused by the 2022 gas squeeze are likely to support rather than jeopardize the EU’s green transition.

Energy markets in Europe experienced a tumultuous 2022, with the Russian squeeze on natural gas exported to the region bringing a major shock to its energy supply. Much attention has been devoted to the effects of the succeeding spiking and highly fluctuating energy prices on households’ budget and on the production sector, with numerous policy initiatives aimed at mitigating these effects (see, e.g.,  Reuters or Sgaravatti et al., 2021). Another widely discussed concern has revolved the consequences of the gas crisis – such as switching to coal – on the EU’s climate policy objectives (see e.g. Bloomberg or Financial Times). In this brief, we analyze and discuss to what extent this concern turned out to be valid, now that 2022 has come to an end.

We consider greenhouse gas (GHG) emissions stemming from the main strategies that allowed the EU to weather the gas crisis throughout 2022 – namely the substitution from Russian gas to other energy sources. These strategies include increased imports of liquified natural gas (LNG), a lower gas demand, and an increased reliance on coal, oil, and other energy sources. We also discuss the implications of the crisis for climate mitigation in the EU and try to draw lessons for the future.

Substitution to LNG and Pipeline Gas from Other Suppliers

Prior to 2022, Russian natural gas largely reached Europe by pipeline (92.4 percent in 2021 according to Eurostat). More than half of these pipeline imports, 86 billion cubic meters (bcm), were lost during the 2022 Russian gas supply squeeze, predominantly through the shut-down of both the Yamal and the Nordstream pipelines. 57 percent of this “missing” supply was met through an increase in LNG imports from several countries, the largest contributor being the U.S. Another 27 percent of the “missing Russian gas” was substituted by an increase in pipeline gas imports from other suppliers, with the UK (20 percent) and Norway (7 percent) taking the lead.  A substantial part of the replaced gas was stored, rather than combusted. With this in mind, here we concentrate on the upstream emissions associated with this change – i.e., emissions that occurred during the extraction, processing, and transportation. The change in the combustion emissions is postponed to the next section.

There is an ongoing debate in the literature on whether the greenhouse gas pollution intensity of LNG is higher or lower than that of gas delivered through pipelines – prior to final use. In comparison to pipeline gas, LNG is associated with emissions resulting from energy-intensive liquefaction and regassification processes in upstream operations as well as with fuel combustion from transportation on ocean tankers. For both LNG and pipeline gas it is also crucial to consider fugitive methane emissions, as methane has up to 87 times greater global warming potential than carbon dioxide in the first 20 years after emission, and up to 36 times greater in the first 100 years. One source of methane emissions is leaks from the natural gas industry (both “intentional” and accidental) since methane is the primary component of natural gas. Both LNG and pipeline gas infrastructure are subject to such leaks, and the size and frequency of these leaks during transportation varies greatly depending on the technologies used, age of infrastructure, etc. Further, the risk of these leaks may also be different depending on the technology of gas extraction.

Currently there is limited knowledge about the size of greenhouse gas emissions, including methane emissions resulting from leaks, from specific gas projects. Until recently, most estimates were based partially on self-reported data and partially on “emission factors” data. Modern and more reliable methods, for instance satellite-based measures for methane emissions, suggest that the resulting figures are greatly underestimated (see, e.g., Stern, 2022; IEA; ESA) but the coverage of these new estimates is currently limited.

As a result, there is considerable disagreement in the literature on the emissions arising from Russian pipeline gas imports vs. LNG imports to the EU. For example, Rystad (2022) argues that the average LNG imports to Europe have a CO2 emission intensity that is more than 2.5 times higher than that from pipeline gas from Russia (although they do not explicitly state whether these figures include fugitive methane emissions). On the contrary, Roman-White et al. (2019) suggest that the life-cycle GHG emission intensity of EU LNG imports (from New Orleans) is lower than EU gas imports from Russia (via the Yamal pipeline).

For the purposes of this exercise, we choose to rely on middle-ground estimates by DBI and Sphera, which assess GHG emission intensity along different Russian gas import routes (DBI, 2016) and across different LNG suppliers to the EU (Thinkstep –  Sphera, 2020). This allows us to account for substantial heterogeneity across routes.

We also account for the change in upstream emissions associated with the switch from imports of pipeline Russian gas to pipeline gas imports from Norway and the UK. For this, we approximate the GHG emission intensity of the new flows using the estimate suggested by Thinkstep –  Sphera (2017).

The results of our assessment are presented in the top three rows of Table 1. They suggest that a substitution from Russian gas imports to LNG imports and pipeline imports from other sources resulted in an increase in upstream GHG emissions by approximately 14 million tons (Mt) of CO2eq. Details on calculations and assumptions are found in the online Appendix.

Table 1. Change in EU GHG emissions resulting from Russian gas squeeze.

Source: Authors’ own calculations based on DBI (2016), McWilliams et al. (2023), Sphera (2017; 2020), and IEA (2022). See the online Appendix for more details on assumptions, calculations, and sources. Note: Billion cubic meters (bcm) and terawatt-hours (TWh).

The Decline in Gas Demand and the Switch to Other Fuels

A decrease in gas use in the EU constituted another response to the Russian gas squeeze. Gas demand in the EU is estimated to have declined by 10 percent (50 bcm or 500 TWh) in 2022 with respect to 2021 (IEA, 2022). Part of this decline was facilitated by switching from gas to other polluting fuels, such as oil and coal. The extent to which switching occurred however differed across the three main uses of gas; power generation, industrial production, and residential and commercial use. Below we discuss them separately.

Power Generation

At the onset of the 2022 energy crisis, a prevalent expectation was that there would be significant gas-to-coal switching in power generation. However, gas demand for power generation, which accounts for 31.4 percent of the gas demand from EU countries (European Council), increased by only 0.8 percent in 2022 (EMBER, 2022, p.29), implying that there was no direct substitution from gas-fired to coal-fired generation.

One of the reasons to why there was no major switching to coal in spite of the increase in gas prices is that CO2 emissions are priced in the Emissions Trading System (ETS) program, and the average carbon price has been growing recently, reaching an average of around €80/ton in 2022.  Given that coal has a higher emission intensity than gas, the carbon price increases the relative cost of coal versus gas for power generators.

Instead, the decline in demand came from industry, residential and commercial use, which together account for nearly 57 percent of the EU’s gas demand (European Council).

Industry Use

For the industry, IEA calculations (2022) suggest a demand drop of 25 bcm, which would correspond to approximately 50 Mt CO2eq. However, half of the industrial gas reduction came from gas to oil switching. Based on our estimates, this switch implies an additional 41 Mt CO2eq emissions, considering both upstream emissions and emissions from use in furnaces (assuming this to be the prevalent use of the oil that substituted gas, see McWilliams et al., 2023). The remaining half of the industrial demand decline resulted from energy-efficiency improvements, lower output, and import of gas-intensive inputs where possible (ibid.). These changes are either neutral in terms of life-cycle emission impact (import increases) or emission-reducing (efficiency improvements and lower output).

Residential and Commercial Use

Residential and commercial use represented the remaining part of the 500 TWh gas demand decline. In this case, lower gas demand is unlikely to imply massive fuel switching to other fossil fuels, simply because of the lack of short-term alternatives. For example, European households use gas mostly for space heating and cooking, and albeit both higher use of coal for home-heating (BBC) and a surge in installations of heat pumps (Bruegel, 2023 and EMBER, 2023) have been reported, the net change in emissions resulting from these two opposite developments is likely relatively minor as compared to other considered sizeable changes.

The Rise of Coal

As observed, there was no direct switch from gas to coal in European power generation. However, coal generation in the EU did increase by 6 percent in 2023 (IEA, 2022), to help close the gap in electricity supply created by the temporary shut-down of nuclear plants in France and the reduced performance of hydro. In our calculations we assume that in a counterfactual world with no Russian gas squeeze, gas-fired electricity would have covered most of the gap that was instead covered by coal. Therefore, we estimate that, as an indirect result of the Russian gas squeeze in 2022, CO2eq emissions increased by 27 Mt, specifically because of the ramp-up in coal generation (see the second section in Table 1).

Gas Shortage and the EU’s Climate Objectives

In recent years, the EU has made substantial progress in climate change mitigation. Despite widely expressed concerns, it achieved its 2020 targets – reducing emission by 20 percent by 2020, from the 1990 level. However, its current target of a 55 percent net GHG emission reduction by 2030, requires average yearly cuts of 134 Mt CO2eq, from the 2021 level. This is an ambitious target: while the emission cut between 2018 and 2019 exceeded this level, the average yearly cut between 2018 and 2021 however fell short (Eurostat).

The question is if the Russian gas squeeze can significantly undermine the EU’s ability to achieve these climate goals?

First, based on our assessment above, the changes prompted by the Russian squeeze – namely a move from pipeline-gas to LNG, a decline in gas demand and an increase in coal and oil use – made 2022 emissions decline by 18 Mt CO2eq. This suggests that the energy shock prompted overall emission-reducing adjustments in the short run. One important question that arises from this is therefore how permanent these adjustments are.

The increased reliance on LNG (and other gas suppliers) is likely to be permanent as a return to imports from Russia is hardly imaginable and as the 2022 surge in LNG imports entailed significant investments and contractual obligations. According to our estimates, overall, this shift is going to cause a relatively modest increase in yearly CO2eq emissions, approximately 10 percent of the needed emission reduction outlined above. Moreover, this is accounting for emissions throughout the EU’s entire supply chain – which is increasingly advocated for, but not currently applied in the typical emission accounting. It is, of course, important to make sure that ongoing LNG investments do not result in “carbon lock-ins”, postponing the green transition.

The decline in gas demand is a welcome development for climate mitigation if it is permanent. Part of the decline, from improved energy efficiency or installation of heat pumps, is indeed permanent. However, European households also responded temporarily (to warmer than usual winter and high gas prices (for instance by reducing their thermostats). Their behavior in the near future will therefore depend on the development of both these variables.

Overall, our assessment is that the Russian gas squeeze did force some adjustments in demand that might translate into a permanent decline in greenhouse gas emissions.

The question however remains of how the shortage of gas can be met in a scenario with higher gas demand due to, for instance, colder winters. In terms of climate objectives, it is of paramount importance that coal-powered generation does not increase (which would happen if, for instance, the price of gas continues to raise due to shortages). In this sense some lessons can be learned from the response to the shortage in electricity supply following the exceptional under-performance of nuclear and hydro in 2022. Wind and solar, which provide the lowest-cost source of new electricity production, in combination with declines in electricity demand, were able to cover 5/6 of the 2022 shortage created by the nuclear and hydro shock (EMBER, 2023), thus relegating coal to a residual contribution. We expect this pattern to emerge also in the future in the presence of other crises. However, we also caution that the lower production of electricity was at least partially caused by the dramatic heatwaves and droughts experienced throughout the summer in Europe. These events are likely to happen more often in the face of climate change. European policy-makers should therefore carefully assess the capacity of the EU energy system to address potentially multiple and frequent shocks with minimal to no-reliance on coal, in a scenario where also reliance on gas needs to be in constant decline given the Russian gas squeeze and unreliability.

Finally, the dramatic circumstances of 2022 led the EU to adopt the REPowerEU plan, which outlines financial and legal measures to, among other things, speed up the development of renewable energy projects and induce energy-saving behavior.

The outlined observations lead us to conclude that the Russian gas squeeze is ultimately unlikely to sizably reduce the chances of the EU reaching its climate goals, suggesting that the 2022 concerns in this regard were somewhat exaggerated. Nonetheless, learning from the costly lessons of the 2022 energy crisis is crucial for efficient policy making in the future.

References

Online Appendix

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Will New Technologies Change the Energy Markets?

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With an increasing world demand for energy and a growing pressure to reduce carbon emissions to slow down global warming, there is a growing necessity to develop new technologies that would help addressing demand and carbon footprint issues. However, taking into account the world’s dependence on hydrocarbons the question remains – can new technologies actually change the energy markets? In this policy brief, we highlight challenges and opportunities that new technologies will bring for energy markets, in particular wind energy, smart grid technology, and electromobility, that were discussed during the 10th SITE Energy Day, held at the Stockholm School of Economics on October 13, 2016.

The expanding world population and economic growth are considered the main drivers of the global energy demand. Up to 2040, total energy use is estimated to grow by 71% in developing countries and by 18% in the more mature energy-consuming OECD economies (IEA, 2016). In parallel, many countries (including the world’s biggest economies and largest emitters: USA and China) have signed the Paris agreement – the first-ever universal, legally binding global climate deal that aims to reduce emissions and to keep the increase in global average temperature from exceeding 2°C above pre-industrial levels.

Meeting a growing global energy demand, and at the same time reducing CO2 emissions, cannot be achieved by practicing ‘business as usual’. It will require some fundamental changes in the way economic activity is organized. In this context, the development of new technologies and how it will affect the energy sector is a crucial element.

Wind power, smart grid, and electromobility

With technological progress and support schemes to decrease CO2 emissions, wind energy is now a credible and competing alternative to energy produced from coal, gas and oil. In 2015, wind accounted for 44% of all new power installations in the 28 EU member states, covering 11.4% of Europe’s electricity needs (see here).

This new technology has triggered a downward pressure on energy prices because of a “Merit order effect” (i.e. a displacement of expensive generation with cheaper wind). While consumers may appreciate this development, Ewa Lazarczyk Carlson, Assistant professor at the Reykjavik University (School of Business) and IFN, stressed that the increasing importance of wind energy challenges the functioning of electricity exchange. First, a lower price has reduced the incentives to invest in conventional power plants necessary when the wind is not blowing or when it is dark. Moreover, with the renewable energy intermittency, the probability of system imbalance and price volatility has increased. In turn, this has led to an increase of maintenance costs for conventional generators due to their dynamic generation costs (i.e. start-ups and shut-down costs).

Digital technology has gradually been used in the energy sector during the last decades, changing the way energy is produced and distributed. With smart grid (i.e. an electricity distribution system that uses digital information) energy companies can price their products based on real time costs while customers have access to better information, allowing them to optimize their energy consumptions. Sergey Syntulskiy, Visiting Professor at the New Economic School in Moscow, stressed that smart grids have had at least two effects. They have made the integration of renewable energy to the system easier and have allowed for prosumers, i.e. entities that both consume and produce energy. The next step is to develop new regulatory incentives to optimize energy systems as well as to provide a legal framework for the exchange of information in the energy sector.

One of the main pollutants has long been the transport sector that accounts for 26% energy-related of CO2 emission (IEA, 2016). Electromobility – that is, use of electric vehicles – is often considered the solution for this problem. When this technology is widely adopted, a major switch from oil to electricity is expected for the transportation sector. Mattias Goldmann, CEO of Fores, argued that even if electromobility will improve air quality and reduce noise levels in cities, its positive impact relies on smart grids and locally produced energy. Moreover, the environmental benefits will be ensured only if electric energy is produced from renewable and clean sources.

Toward a carbon-neutral energy system?

The Nordic countries are currently pushing for a near carbon-neutral energy system in 2050. Markus Wråke, CEO at the Swedish Energy Research Centre, emphasized that the Nordic Carbon-Neutral Scenario is only feasible if new technologies allow for a significant change of energy sources and a better interconnected market (see report by IEA 2016 b).

To cut emissions, a decrease in oil and gas consumption in energy production and within the transport sector is needed (see Figure 1). The adoption of electric vehicles (EVs) and hybrid cars is very likely to drastically increase in the next decades (EVs may have a share of 60% of the passenger vehicle stock in 2050, IEA 2016b).

Figure 1. Nordic CO2 emissions in the CNS

slide1Source: IEA, 2016.

There are currently limited technology options to reduce emissions for big industrial energy consumers. Moreover, there is a concern that those industries may choose to relocate if the Nordic emission standards are too strict. It is therefore important to have low and stable electricity prices. This can only be achieved if cross-border exchanges are improved (which means that the electricity trade in the Nordic region will have to increase 4-5 times by 2050). It is unclear however how policy makers will create a regulation that incentivizes energy companies to build interconnections and increase trade both between the Nordic countries, and the Western and Eastern European countries.

Figure 2. Electricity trade 2015 and 2050

slide2Source: IEA, 2016.

Energy producers

Another concern is that energy-exporting and energy-importing countries may have opposing attitudes towards investing and developing new energy technologies. Countries among the biggest energy producers and exporters depend on a stable demand and price for energy. For example, Russian GDP growth depends between 50-92% on the oil price, depending on the variables used for calculations, as mentioned by Torbjörn Becker, Director of SITE. For large exporters of hydrocarbon, new energy technologies may be seen as a threat because of a potentially reduced energy demand and an increased price volatility that will, in turn, create fundamental issues to balance state budgets and improve living standards.

Figure 3. The Relationship between Russian GDP and oil price

slide3Source: Calculations by Torbjörn Becker, October 13, 2016

The challenge of security of supply

To summarize, new energy technologies will drive energy companies towards optimizations and cost cutting, bring previously unseen connectivity to energy markets and make energy markets more complex. Samuel Ciszuk, Principal Advisor at the Swedish Energy Agency, stressed that interconnected, more complex and interdependent energy systems might increase the vulnerability of energy systems to external threats and intimidates to decrease the security of supply. Technological change and increased competition with lower profit margins will force companies to minimize their expenditure on energy production, storage and transmission and to find cheaper financing options. Optimization and searches for cheaper financing instruments will push energy companies towards selling some of the company assets to financial investors. These changes will create a more decentralized energy market, with more players. Such energy systems will become harder to govern in times of an energy crisis and external threats. Policy makers will have to design new and more complex regulations to fit the needs of the transforming energy markets.

References

  • Fogelberg, Sara and Ewa Lazarczyk, 2015. “Wind Power Volatility and the Impact on Failure Rates in the Nordic Electricity Market”, IFN Working Paper 1065.
  • IEA, Annual Energy Outlook, 2016a.
  • IEA/OECD/Norden, 2016b. “Nordic Energy Technology Perspectives” (see here)
  • Speaker presentation from the 10th Energy day, 2016 (see here)

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