Russians are used to celebrating Christmas a little later than their western brothers. Even so, Russia’s president, Vladimir Putin, must have been particularly surprised to receive the Commission’s 31st of December gift. The timing was odd, not just because it was new year’s eve, but also since Europe is facing its worst energy crisis since 1973, at least partially thanks to Putin’s actions. Citigroup, one of the world’s largest banking institutions, estimates high oil and gas prices will cost Europeans a trillion dollars in 2022. That’s more than the entire EU Covid recovery fund.
The current energy crisis is the first big crisis of the energy transition. Whether it’s the first of many ‘hot’ winters will in large part depend on the fight around the Commission’s gift to Putin, the inclusion of gas into the EU’s sustainable finance ‘green list’.
The bear in the room
Oil and gas underpin the Russian economy, accounting for roughly 36-40% of the Russian state’s income. Contrary to popular belief, oil not gas, is Russia’s real cash cow, accounting for 4 out of 5 dollars made on oil and gas exports. In recent years, Russia has amassed hundreds of billions in reserves. It has also invested heavily in its army (check this 2018 T&E graph). Most of this was done with money it earned selling fossil fuels to Europe.
The IEA now confirms Russia is weaponising its energy exports and is deliberately withholding gas supplies from Europe. And yet, despite all the talk about “unprecedented sanctions” targeting Russia’s oil exports – or its conventional oil business as was applied to Iran – this isn’t on the cards. Instead, there now appears to be a plan to place sanctions on new Russian gas projects. Whatever the merit of this plan, it is clear it doesn’t protect European households against record gas prices next winter.
The age of energy disruption
We must all hope war in Ukraine is averted. Yet even if diplomacy wins the day, there will not be a return to a world of cheap and stable oil and gas. We’re going through the first big crisis of the energy transition. This piece focuses on gas but much of what we wrote about oil in 2021 still holds.
The bigger picture is that the US, China and in particular Europe are shifting towards electrification and renewables. In Europe, the energy transition is well underway. Two thirds of power generation is now non-fossil and 2021 was a record year for solar power. Countries like Germany, Spain, the UK and the Netherlands are looking to aggressively expand wind and solar. Yet gas is frequently touted as a flexible and dispatchable source of power to help us through the transition years.
In reality, gas is the achilles heel of the European energy transition. Anglo-Dutch production is declining sharply. At the same time gas demand in Europe has risen since the 2013-14 Ukraine crisis. Despite the Green deal’s ambitions on building efficiency the IEA thinks EU demand will rise further. As the ECF’s Laurence Tubiana wrote this week, the EU needs a much better plan to drastically and rapidly cut gas usage in heating (half of EU gas consumption) or we’ll end up more dependent on imports.
Above all, the EU needs to avoid creating new demand.
Gold or gas standard?
Record gas prices, supply cuts by Gazprom, the threat of war on our borders. One would think EU policymakers would be scrambling to create an emergency plan to wean the EU off (Russian) gas as soon as possible.
No. The opposite in fact.
After months of intense lobbying, on the very last day of 2021, the EU executive slipped gas into its sustainable finance taxonomy, the supposed gold standard for labeling green investments. This means billions destined to renewables and efficiency can now be shifted to fossil gas fired power plants or heating. The taxonomy’s weak and hard to enforce conditions, and laughable assumptions about the prospects of ‘renewable’ biogas, will do nothing to change that.
For example, Italy, a country with 300 days of sun annually, great potential for wind, and a robust hydropower infrastructure, is rushing to build 48 new gas power plants. Thanks to the taxonomy it would be able to access green funds for many of those.
Fortunately, this is not yet a done deal. Resistance is mounting in the Council and particularly in the European Parliament. Despite the Commission’s attempt to bury the story, it refuses to go away. The Commission’s own expert group condemned the decision calling it “incompatible with the Green Deal and the Paris Treaty.”
Even the European Investment Bank has publicly criticised the Commission’s inclusion of gas in the taxonomy. Labelling Putin’s gas green in the midst of a major threat of conflict also contradicts all the tough talk on sanctions, undermining Europe’s credibility.
Despite her deputy’s plea to “stop making Putin rich”, Commission president Von der Leyen seems to have made up her mind. All eyes are now on the European parliament which has the power to block the Commission’s plan.
Crises are moments of great risk but also opportunity. Many of today’s clean energy technologies were invented in the wake of the 1973 oil crisis. If we use today’s unprecedented crisis to accelerate the transition away from oil and gas, it will have been a good crisis. Let’s start by kicking Putin’s favourite fuel out of our “gold standard” sustainable finance law.
