EU, UK see different paths through transition trilemma

The Russia-Ukraine conflict has prompted European governments to reaffirm their commitment to urgently speeding up their countries' transition to renewable energy and to reassess the role of natural gas in that transition.

European countries have set out various plans to cut their dependence on Russian fossil fuels since the conflict in Ukraine began. The EU plans to reduce its consumption of Russian gas by two-thirds by the coming winter, while the UK will phase out imports of Russian crude and oil products by the end of this year. But against the background of a gas and power price crisis that began last autumn, European policy makers are facing a trilemma over the availability, affordability and sustainability of the continent's future energy supplies, as geopolitics forces them to reassess energy security alongside decarbonisation goals, while the fear of disruption to Russian gas supply exacerbates gas and power price volatility.

The UK has led the argument that hastening the energy transition is the answer to all three problems, while the EU has taken a more cautious near-term approach, although it does envisage increased uptake of renewables such as solar, wind and biogas taking the place of Russian gas to some extent. The EU has presented concrete plans to move away from its reliance on Russian hydrocarbons. But while the UK's green rhetoric has strengthened, the government has yet to set out a timeframe for delivering the energy supply strategy that it promised this month.

Europe needs to secure energy supply in the short term — and it is difficult to see a solution beyond existing sources of fossil fuels. "This isn't a renewables crisis, this is a gas price crisis," and "in the short term, we will need increased energy imports," Carbon Tracker Initiative senior analyst Jonathan Sims told the FT Climate Capital Live conference. Russian supply makes up around 40pc of the EU's gas consumption, and the bloc has been clear about the difficulty of reducing its dependence on Russian energy in the short term while matching its transition commitments.

"We cannot let any third country destabilise our energy markets," EU energy commissioner Kadri Simson said last week at the Chatham House Energy Transitions 2022 conference. The European Commission's plans to slash Russian gas imports to the EU rely heavily on consumers turning down their thermostats and on best-case scenarios for additional biogas output, as well as on known quantities such as wind and solar. But the region will still need to increase gas supplies from non-Russian sources, which will require Europe to import more LNG.

‘A step to the side'

Even allowing for these measures, the commission's REPowerEU plan sees any near-term shortfall as likely to be made up by coal-fired power generation capacity. "We do have member states who produce coal domestically and this is one of the options," Simson said. German utility RWE is "currently reviewing which coal-fired power stations can go back on the grid in an emergency", chief executive Markus Krebber says. But he insists that "this does not change the coal phase-out path. It is not a step backwards, but at most, a step to the side for a limited period." And "beyond the short term, ultimately, the best and the only lasting solution is the Green Deal", the commission says, in reference to the EU's transition plan.

But the UK — which is less dependent than its continental neighbours on Russian oil and gas supplies, thanks largely to its own production from the North Sea — is more positive about the benefits that the energy transition can bring to the country's security of supply. "Energy security and energy transition is not an either or... they are inextricably linked," UK minister for energy, business and clean growth Greg Hands says. "Net zero is the solution," Hands says.

But the UK's relatively low reliance on direct supply of oil and gas from Russia — which the government has pointed to repeatedly — has had little effect on shielding it from sharply higher energy prices. And the need to fill a prospective oil and gas supply gap in the immediate future looks to be the government's immediate concern. "We must keep all of our energy options open," Hands said last week, shortly before UK prime minister Boris Johnson visited Saudi Arabia and the UAE in an attempt to persuade two of Opec's biggest producers to increase oil output.

The UK government has championed its North Sea oil and gas production, arguing that it aligns with the path to energy security and a lack of dependence on imports. Johnson told oil and gas companies this week that he wants to increase investment in domestic resources. But the government has not provided any firm details of an impending supply boost from the North Sea.

The Russia-Ukraine conflict could act as a "reset" for investment in domestic production, UK oil and gas industry group OEUK's energy policy manager, Will Webster, tells Argus. While the scope for increased domestic gas output in the short term is "marginal", UK domestic supplies can play a vital role in the medium to long term in cutting Europe's dependence on Russian energy, alongside other measures such as an expansion of renewable production and greater energy efficiency, Webster says.

But the government must continue to provide a stable tax regime if it is to foster stronger investment in domestic gas and oil reserves, Webster says. Johnson on 9 March dismissed calls from the opposition Labour Party to impose a windfall tax on gas and oil company profits and use the extra revenue to help consumers struggling with rising energy bills. Such a tax could cause "irreparable damage to the industry", OEUK warns.

Scotching the solution

Scotland's first minister Nicola Sturgeon argues that increased North Sea oil and gas production is not the solution to the high cost of energy. Timing is a key factor in her argument. "New fields take years if not decades to plan and develop," she says. And Hands used the same argument this week to reason against the UK reconsidering its objection to hydraulic fracturing for shale gas in the UK. "It would take years of exploration and development before commercial quantities of shale gas could be produced," he said.

But clearer policy support for renewables is vital to guide the massive investment that the transition will require. "The private sector has to do a lot of the actual delivery," the chair of industry lobby group the Energy Transitions Commission, Adair Turner, told the FT conference.

Renewables such as offshore wind can take as long as fossil fuel projects to develop, and the industry is increasingly vocal about the challenges presented by the level of bureaucracy in the UK.

"Planning and permitting is a real issue that is slowing down the pace" of renewable development, the head of Europe and the UK at Australian bank Macquarie's Green Investment Group, Ed Northam, told a UK parliamentary economic affairs committee this week. "Investment in the grid and distribution networks is fundamental," Northam added.

Danish energy firm Orsted's senior vice-president of sustainability and public affairs, Filip Engel, voiced a similar concern at the FT conference, noting that planning is a challenge, particularly for wind power. UK firm Octopus Energy's chief executive, Greg Jackson, concurred, stressing that the UK's grid is inefficient and that the renewables transition has not been well managed.

By Georgia Gratton