Background

Given the current global scenario interrelated to the Russian-Ukraine-NATO crisis, many are mindful of the possible implications of disruptions in Russian gas for Europe’s balances and economic output. Nevertheless, according to an International Monetary Fund (IMF) working paper from July 2022, alternative sources could replace up to 70% of Russian gas, allowing Europe to avoid shortages during a temporary disruption of around 6 months. However, a longer full shut-off of Russian gas to the whole of Europe would likely interact with infrastructure bottlenecks to produce very high prices and significant shortages in some countries, with parts of Central and Eastern Europe most vulnerable. With natural gas an important input in production, the capacity of the economy would shrink.

According to the working paper, it’s suggested that in the short term, the most vulnerable countries in Central and Eastern Europe (Hungary, Slovak Republic and Czechia) face a risk of shortages of as much as 40% of gas consumption and of gross domestic product shrinking by up to 6%.

The effects on Austria, Germany and Italy would also be significant, but would depend on the exact nature of remaining bottlenecks at the time of the shutoff, and consequently the ability of the market to adjust. Many other countries are unlikely to face such constraints and the impact on GDP would be moderate, possibly under 1%.

The IMF also encourages that immediate policy priorities center on actions to mitigate impacts, including to eliminate constraints to a more integrated gas market via easing infrastructure bottlenecks, to accelerate efforts in defining and agreeing solidarity contributions, and to promote stronger pricing pass through and other measures to generate greater energy savings. National responses and RePowerEU contain many important measures to help address these challenges, but immediate coordinated action is called for, with specific opportunities in each of these areas. REPowerEU is the European Commission’s plan to make Europe independent of Russian fossil fuels well before 2030.

National and integrated efforts to mitigate risks

The IMF suggests that addressing bottlenecks to increase import capacity and transport gas from different sources (e.g., enabling reverse flows from Western to Eastern Europe) would support gas storage accumulation over the summer and reduce the risk of shortfalls in the winter. Furthermore, securing solidarity across countries would help mitigate the impact of a shut-off in the most vulnerable countries. The European Union (EU) and national responses have been swift and comprehensive to date, and many countries have also already begun to source alternative energy supplies and to develop contingency plans. Immediate policy priorities center on stronger actions to eliminate infrastructure bottlenecks and other constraints to an integrated gas market, accelerated efforts in defining and agreeing solidarity contributions, and stronger efforts to reduce demand, including by pursuing greater energy efficiency initiatives and allowing pricing mechanisms to work to a fuller extent than has been the case so far.

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Short-Term adjustment to a potential gas supply shock

As stated by the IMF, the market would adjust to gas supply disruptions by accessing new supplies where feasible, using alternative sources of energy, and via demand reductions. In 2021, the EU imported around 155 billion cubic metres of gas from Russia, while Turkey and the United Kingdom imported around 16 billion cubic metres and 3 billion cubic metres, respectively; in aggregate, there is scope for Europe to reduce its reliance considerably in 2022, with further gains likely beginning in the first half of 2023.

At the maximum, and assuming gas prices remain at current levels, the IMF estimates suggest that alternative sources of energy could replace around 80 billion cubic metres of Russian gas in 2022, (and even more over the next 12 months), largely through higher LNG imports. Moreover, higher non-Russian pipeline flows could provide some additional gas, perhaps 15 billion cubic metres during 2022. According to the International Energy Agency (IEA), “while there is substantial excess capacity in non-Russian pipelines, production constraints would limit the magnitude of additional flows from Norway, Africa, and Azerbaijan to about 10 billion cubic metres in 2022 (assuming modest increases in production). The scheduled completion and early operation of The Baltic Pipe, linking Norway and Poland, in Q4 2022 will bring an additional 10 billion cubic metres in 2023”.

Also, sustained high LNG imports could provide around 55 billion cubic metres more in gas in 2022. A recently announced agreement between the EU, Israel and Egypt could modestly increase EU LNG imports in 2022-2023 with more significant volumes expected thereafter. Nevertheless, expansion in LNG export capacity would require long-term contracts with customers.

Export capacities of key LNG producers

The United States is committed to provide Europe with an additional 15 billion cubic metres of LNG in 2022. Export terminals this year have been operating at 95% capacity. In early June 2022, a fire at an export processing terminal in Texas forced a temporary closure, but it’s expected that new terminals later this year will increase export capacity by 14-21%. Additional engineering measures could also increase capacity of existing terminals by 10%  in the short-term.

Qatar has signaled that it can lift its exports to Europe by perhaps 10-15% (or 8-12 billion cubic metres), but it has not reported whether this would be achieved via increased production, or by diverting existing non-Europe exports towards Europe.

On the other hand, Australia’s export capacity utilization is high at over 90%, and is not expected to significantly increase in 2022.

Easing consumption and the Italian strategy

Countries that already encourage households and businesses to save energy include Italy, where the government mandates minimum and maximum levels for heating and cooling. REPowerEU also contains measures to conserve energy and reduce dependence on Russian fuels.

The Italian government reported that it plans to turn down the heating in homes and businesses over the winter to help cut the amount of gas it uses and reduce the risks linked to a total halt of Russian gas flows. Italy imported around 40% of its gas from Russia before the crisis, but has moved rapidly to seek alternative supplies and reduce its reliance on Moscow. Under a government plan announced in September 2022, the temperature in apartment blocks and other public buildings will be regulated at 19 Celsius (66 Fahrenheit), one degree Celsius lower than previously. The figure will be set at 17 Celsius for industrial premises. The heating will be on for an hour less each day. The government is also in talks with industrial lobby Confindustria to agree to a further reduction in gas consumption on a voluntary basis.

Italy hopes the curbs will cut its gas consumption by 3.2 billion cubic metres in the period from August-March and aims to cut a further 2.1 billion cubic metres by using alternative fuel supplies to generate electricity. Among a raft of measures, the government also contemplated an increase in the output from existing coal-fired and oil-fired power plants, which would lead to a reduction in gas consumption of around 1.8 billion cubic metres.

The savings could be augmented by other measures encouraging individual users and businesses to reduce consumption, meaning that overall demand could fall by 15%, or at least 8.2 billion cubic metres, in line with broader EU plans. Italy has filled its gas storage tanks to 83% of capacity as of the start of September, stocking up ahead of the colder months.

Other options

According to the IEA, increased nuclear power production could provide the equivalent of 7 billion cubic metres of gas in 2022, reflecting a new nuclear plant in Finland (Olkiluoto 3) that began operations in March 2022.

Moreover, the EU’s output of power from wind and solar was expected to increase by 15% compared to 2021, equivalent to about 17 billion cubic metres. The IEA argues that a concerted policy effort to install new solar and wind power facilities could replace another 6 billion cubic metres of natural gas in 2022, although there are strong indications that manufacturing bottlenecks could prevent this.

The REPowerEU plan sets out a number of measures to rapidly reduce dependence on Russian fossil fuels and bring forward the ecological transition, while increasing the resilience of the EU-wide energy system. It is based on the following:

Diversification: the EU is working with international partners to find alternative energy suppliers. In the short term, Europe needs alternative sources of gas, oil and coal as soon as possible and, for the future, it will also need renewable hydrogen.

Saving: any citizen, business or organisation can save energy. Small changes in behaviour can make a significant difference. Contingency measures will also be needed in case of supply disruptions.

Accelerating clean energy: renewable energy is the cheapest and cleanest energy available and can be produced domestically, reducing European import needs. REPowerEU will accelerate the ecological transition and stimulate massive investment in renewables. To reduce emissions and dependency levels, industry and transport must also be able to substitute fossil fuels faster.

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