As the tragedy of the Russia-Ukraine war continues to evolve, the accompanying European energy crisis is emerging as a major story.
The fundamentals for European energy remain unchanged: European businesses and households need secure, affordable, and sustainable energy—the familiar energy policy trilemma, whereby all interventions must take into account energy security, affordability, and decarbonization.
Europe’s current energy situation
Most of the indigenous fossil fuel resources available within European territories have already been used, rendering the continent reliant on fossil fuel imports and/or “homegrown” nuclear or renewable energy. Most countries have adopted mixed energy supply strategies, with some building these around local resources or capabilities, e.g., France (nuclear), Poland (coal), and UK (offshore wind and North Sea gas). Wind and solar power have steadily increased their share of electricity generation, as costs have reduced steeply while performance has improved in recent years.
Yet fossil fuels continue to dominate supply, as they have since the industrial revolution. The first actions of dependent countries after the invasion were to seek alternative supplies of piped gas, LNG, oil, and coal. Many countries with a relatively modest reliance on Russian energy imports quickly banned them. For countries that are more dependent on Russian energy, banning imports would more significantly impact their populations and economies.
Meanwhile, some European governments are considering fossil fuel extraction, including fracking, on European territory—challenging previous commitments towards net-zero emissions. Investors are considering tapping the remaining Silesian basin coal and North Sea oil and gas resources, while assessing the risk of having their short-term “transition fuels” assets stranded if policy turns against them.
Europe was already facing a cost-of-living crisis, driven by high post-pandemic inflation, before the war caused gas and oil prices to spike. Gas and oil prices have yet to return to pre-invasion levels, despite deals signed with alternative suppliers to reduce dependence on Russian oil and gas—and despite the biggest importers, Germany and Italy, avoiding a ban on Russian oil and gas imports (at time of writing).
Following the initial scramble for alternative supplies, and soul-searching on continuing with current arrangements given the context, some mid-term policy responses are now emerging.
Areas of focus from the International Energy Agency (IEA) and REPowerEU
The IEA ten-point plan to reduce the European Union’s reliance on Russian natural gas provided a recipe that governments are following selectively. The European Union REPowerEU plan highlighted several of these to help the EU phase out dependencies on Russian fossil fuels by 2027.
Reducing demand through energy efficiency initiatives in buildings and industry is an obvious step to reduce gas consumption. So far, however, policy responses in this area seem muted. The German KfW bank announced that existing loan funds will be extended by €4.8 billion to be spent on building energy efficiency upgrades, including insulation and heat pumps. Existing British buildings energy efficiency funds covering low-income households, social housing, and public sector buildings decarbonization have not yet been expanded in response to the war. The Industrial Energy Transformation Fund continues to provide grant funding for deployment of technologies to reduce industrial energy consumption and/or achieve deep decarbonization. The IEA’s simple recommendation to turn down thermostats has not gained much traction after many months of pandemic-induced limitations on the general public.
Accelerating wind and solar deployment has been taken up in several countries. In the new British Energy Security Strategy, the UK has raised its offshore wind target to 50GW by 2030, including 5GW of floating turbines in deeper waters, while reducing permit times. It has expressed ambition for a fivefold expansion of solar capacity by 2035 and is speeding up onshore wind permits and working with supportive local communities. Germany, in its "Easter package" of policy proposals, aims to free up land, speed up permit procedures, and increase wind and solar to achieve nearly 100% renewable energy power production by 2035.
Diversifying and decarbonizing sources of power system flexibility, as a means of reducing reliance on gas, has further energized an area of ongoing industrial creativity—both for seasonal flexibility and short-term peak-shaving. Options include long duration storage technologies (such as compressed gas, or pumped storage hydro), flow batteries, Lithium-ion batteries, thermal stores of different types and capacities, increased electrification of heat and power, demand side response, biomethane, and hydrogen. The UK’s Net Zero Innovation Portfolio provides grants for a wide range of low carbon technologies from advanced carbon capture, usage and storage, bioenergy, direct air capture and GHG removal, energy storage and flexibility, future offshore wind, hydrogen, and nuclear advanced modular reactors among others. The path to achieving net-zero emissions by 2050 will be eased if these technologies can become commercially attractive and socially acceptable.
Low-carbon implementation is now the focus
Over the next several years, the focus for European governments will increasingly be low-carbon implementation:
- Rooftop solar, insulation, and heat pumps for household deployment need customer experience management, grant application and payments processing, anti-fraud measures, and auditing services.
- Speeding up wind and solar deployment requires identification and characterization assessments; siting and environmental studies; stakeholder engagement; permit preparation; construction; and operational compliance monitoring. Related services include due diligence, transaction support, and project engineering.
- Decarbonizing industry, deploying biomethane and hydrogen, and making the power system more flexible all require the support of government incentives including pipeline development, stakeholder engagement, application assessment, review panels, contract negotiation, monitoring, evaluation, and related program communications. For private clients, it requires concept/feasibility studies; business cases; technical, economic, and environmental assessments; permitting support; making grant applications/facilitating access to finance; construction and operation supervision and auditing.
There are many paths forward, but implementation is where efforts will be best spent if we are to capture this moment to catalyze the low-carbon transition in Europe.