Winter Doesn't Intimidate
Honest winter has arrived in Western Europe, with temperatures dropping below zero degrees Celsius in the central and northern regions of the continent. A year ago, the onset of winter was clouded by concerns about heating and electricity shortages. However, this year is different. A sincere thanks to the Russian Gazprom, which, a year ago, frightened Europe with a long and cold winter through its propaganda campaign. So, the European Union prepared for the new winter, significantly reducing its gas purchases from Russia and taking various measures to avoid problems this time.
Autumn was unusually long and warm until the cold finally arrived in Europe. However, this year, Russian Gazprom didn't even attempt to scare Europe with prolonged cold spells. Last year's music video "And the winter will be long" made the right impression, but not the one Moscow hoped for. In the opening scenes, a Gazprom uniformed person turns off the gas supply, then the instruments show a drop in gas pressure, and finally, the cities freeze. Europe took this threat more seriously than Moscow expected.
But let's start from the beginning. Almost a year ago, the transit of Russian gas through the Nord Stream 1 pipeline was completely blocked. In September 2022, Russia artificially suspended gas transportation through the pipeline, citing equipment problems. In September, an explosion occurred, destroying two branches of Nord Stream 1. Also, one of the channels of Nord Stream 2, although not yet operational, was damaged by the explosion.
For the European Union, this series of incidents became a serious trial. After all, "Stream" provided up to 15-16% of gas imports to Europe. Europeans were seriously afraid they would have to endure the winter of 2022 freezing and heating their homes with wood. But in the 14 months after this incident, the EU not only managed to find new gas suppliers and reduce its purchases from Russia but also entered the next winter with gas storage facilities filled to capacity.
Was this something new for Europe? For most countries, it wasn't incredibly new. In the early 2009, Russian Gazprom had already engaged in gas blackmail, leaving Balkan countries and their neighbors without gas. So, this time, the corresponding countermeasures were taken in good time.
Breaking the Habit
"We are breaking the habit of relying on Russian gas. And we continue to work on diversifying energy supplies in the future," optimistically stated Ursula von der Leyen, the President of the European Commission, commenting on the preparations for the new heating season.
The European Union is hedging its bets and entering the cold season well-prepared. In August, EU gas storage facilities were filled to 90%. This happened 2.5 months ahead of schedule. By November 1, the capacities were brimming with gas.
A big thanks for this goes to the weather. The entire October and the first half of November turned out to be exceptionally warm. Therefore, European countries were accumulating gas faster than they were burning it even in the autumn. In addition, alternative energy sources help save fossil fuels. Wind power stations in Northern Europe (Germany, Denmark), where it is particularly windy in the autumn, made their contribution.
But even more crucial is that over the past year, a titanic effort has been made to expand new gas supply channels replacing Russia, although they haven't fully replaced it yet.
For example, in the fourth quarter of 2021, before the full-scale invasion of Ukraine by Russia, the EU received 15.7 billion cubic meters of Russian natural gas through Nord Stream 1. In the third quarter of 2022, only 2.3 billion cubic meters of gas from Russia reached the EU through the pipeline. Nord Stream 1 has been shut down since the end of 2022 for reasons that are now clear.
The EU was also pumping Russian gas through the Yamal-Europe pipeline, which originates in the Tver region of Russia and passes through Belarus, Poland, and Germany. However, by the second quarter of 2022, the volumes of gas pumping through this channel had fallen fivefold compared to the fourth quarter of 2021 and ceased entirely from the third quarter of 2022.
Photo: There's a significant increase in liquefied gas. Source: The Gaze Graphics, Data Source: Breugel
Russia Loses Its Edge
The primary source of natural gas by pipelines for the EU today is Norway, satisfying over 40% of Europe's needs every quarter. Approximately 33-35% of supplies by pipelines come from the UK and Algeria. However, there's also liquefied natural gas (LNG) transported to Europe on ships, unloaded at maritime terminals, and then distributed into gas networks.
Nearly half of the liquefied natural gas the European Union purchases comes from the United States. About 12% less LNG is still obtained from Russia, and another 20% from Qatar and Algeria.
The reliable channels for supplying Russian natural gas to the EU remain the "Turkish Stream," transporting up to 4.3 billion cubic meters of gas quarterly, and transit through Ukraine, amounting to 3.2 billion cubic meters per quarter.
Nevertheless, progress in achieving energy independence from Russia is colossal. By winter 2023, the share of gas imports from Russia to Europe has dwindled to 15%. Two years ago, Russia supplied over 40% of the European Union's natural and liquefied gas needs (see infographic).
"The biggest risk was that Russia could manipulate our energy markets. But they no longer have that leverage," stated EU Commissioner for Energy Kadri Simson.
Photo: Who is heating Europe really? Source: The Gaze Graphics, Data Source: Breugel
Will Tariffs Decrease? Sure!
Alongside the stabilization of gas supplies, prices have also calmed down. Gas futures at the Dutch TTF hub, as of the second half of November, were trading at 43-46 euros per MWh. A year ago, these futures were reaching 130 euros/MWh, and after the explosion in the "Nord Streams," they spiked to 200 euros/MWh.
The question is how this affects the cost of gas and electricity for end consumers. In Germany, for example, most gas and electricity providers have announced a 12% and 15% reduction in tariffs for households, respectively. This is expected to take effect in December.
In France, the government is negotiating with the largest state energy-generating company, EDF, which operates nuclear power stations, to lower electricity prices. Preliminary agreements have been reached for a 30% tariff review.
In Poland, the country's president, Andrzej Duda, signed a law in December 2022 imposing a moratorium on gas tariff increases for households throughout 2023. Regarding electricity providers, the Polish government decided in September to obligate them to reduce electricity prices for households by 12%. Importantly, the tariff revision should take place retrospectively, from January 2023.
Why are these countries' examples illustrative? Because they have room for maneuver and reserves, allowing them to "maneuver" energy prices. For instance, Germany covers over 50% of its electricity needs from wind and solar energy. In France, 70% of electricity is generated by nuclear power stations, which are among the most economical sources. Poland actively operates coal-fired power plants that consume domestically mined coal. Poland consistently maintains leadership in anthracite production compared to Germany.
Of course, not all EU members have powerful alternative energy sources that enable them to offer consumers lower tariffs. According to Eurostat data, in October, energy deflation year-on-year in the EU was 11%. This means there is undoubtedly room to reduce gas and electricity prices.
This is only halfway. The EU plans to continue reducing its dependence on Russian gas. According to the REPowerEU plan, a complete cessation of energy imports from Russia should occur by 2027. How? Primarily, through the expansion of supply channels. The European Commission is negotiating with Azerbaijan to double gas purchases from this country to 20 billion cubic meters per year. True, a final decision has not been made yet, but the process is underway.
EU top officials have repeatedly stated their readiness to increase purchases of liquefied gas from the United States. According to the Director-General of the European Commission for Energy, Ditte Juul Jorgensen, the EU needs "American energy."
Additionally, the EU is enhancing its logistic capabilities. During 2022-2023, new gas pipelines began operating in Greece and Poland. Finland, Germany, Italy, and the Netherlands have commissioned LNG terminals.
The EU places significant hopes on "green" energy, which will help reduce the consumption of fossil fuels. According to the Center for Research on Energy and Clean Air (CREA), renewable energy sources have managed to replace over 50% of Russian gas. Overall, Europe plans to derive up to 42.5% of its energy from renewables by 2030.
In the future, European consumers stand to gain from this. The EU will rid itself of the risk of new energy crises. Moreover, there are hopes that energy sources will become cheaper. Analysts from Wood Mackenzie believe that gas prices in Europe could decrease by another 20% by mid-2024. This could be the result of both increased supplies of non-Russian fuel and the deepening of the "green agenda."