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EU plan to slash Russian gas imports 'difficult but doable'

SNL Image

An aerial view of construction work on the Eugal gas pipeline in 2019. The pipeline, which runs through Germany to the Czech border, is designed to carry natural gas from Russia.
Source: Sean Gallup/Getty Images Europe via Getty Images

EU measures to reduce Russian gas imports will provide a welcome boost to Europe's rollout of renewable energy, but introducing taxes on windfall profits could create significant uncertainty for investors, according to analysts and industry groups.

The European Commission is aiming to slash the EU's Russian gas demand by about two-thirds, or 100 billion cubic meters, before the end of 2022 in response to Russia's invasion of Ukraine. Russia accounted for about 45% of the EU's total gas imports in 2021. The EU plans to achieve independence from Russian fossil fuels "well before 2030."

The shortfall will be made up with a combination of higher liquefied natural gas and pipeline flows from non-Russian suppliers, increased production of biomethane and renewable hydrogen, and the accelerated rollout of renewable energy projects, rooftop solar panels, heat pumps and energy efficiency measures.

Analysts at Fitch Ratings said the package — dubbed REPowerEU — "reflects shifting policy priorities as a result of the Russia-Ukraine conflict, balancing concerns over security of supplies with the low-carbon transition."

Kristian Ruby, secretary-general of power sector association Eurelectric, said the plan is "difficult but doable," describing the commission's move to reduce reliance on Russia as "necessary action."

Europe's main renewable energy lobby groups, WindEurope and SolarPower Europe, also welcomed the measures, noting, in particular, a recognition that the permitting of renewable energy projects needs to be simplified to accelerate capacity growth.

The commission estimates the EU can deploy 480 GW of wind and 420 GW of solar by 2030, which for wind is 30 GW higher than previous decarbonization scenarios, according to WindEurope. Analysts at Bernstein noted that the new deployment scenario is "more frontloaded" than the "Fit for 55" package announced in 2021, with existing renewables capacity due to triple by 2030.

Some renewables developers have seen their equity values grow by double-digit percentages since Russia's invasion began Feb. 24, in light of the anticipated ramp-up of green power.

Locking in fossil gas

With higher LNG imports, the commission said the EU can replace about 50 billion cubic meters of Russian gas imports within 12 months. The EU's LNG imports today stand at 10 bcm, and Bernstein analysts said the anticipated higher inflow is "not a done deal given international competition for LNG."

"LNG is part of the solution in the coming months as it opens a world of options," James Watson, secretary-general of lobby group Eurogas, said in an emailed statement, adding that LNG infrastructure will increasingly be used for gases like hydrogen in the "new normal" for the EU energy market.

Climate campaigners questioned the commission's strategy to rely on ramping up LNG purchases, arguing that it is at odds with the EU's goal of slashing emissions 55% by 2030.

Such a plan raises the prospect of building more LNG terminals and pipelines, nonprofit group Global Witness said. Since 2009, eight new LNG terminals have been built in the EU, with Germany's Uniper SE saying Feb. 28 that it is looking to restart plans for its floating LNG import terminal at Wilhelmshaven, in northern Germany.

Relying on LNG, as well as increased production of hydrogen, "would seriously undermine the EU Commission's plans, and ... lock the EU into further dependence on expensive, climate-wrecking fossil gas," Tara Connolly, senior gas campaigner at Global Witness, said in a statement.

Eilidh Robb, a campaigner with Friends of the Earth Europe, added that Europe's dependency on fossil fuels "has shown us to be vulnerable to price shocks, supply constraints, and rising energy precarity."

Clawback concerns

In another measure, the commission said EU member states will be permitted to introduce temporary taxes on windfall profits made by energy companies and redistribute the funds to consumers. This follows on from a series of proposals announced in October 2021 to help shield energy consumers from extraordinarily high electricity and gas prices.

Such measures must be "proportionate, limited in time and ... avoid undue market distortions," the commission said. In addition, the measures cannot be applied retroactively and must not impact energy that has been sold forward through power purchase agreements or bilateral contracts.

WindEurope called on the commission to ensure national governments stick to these conditions, saying that misguided implementation "would create market distortions, deter investment and derail the urgently needed expansion of renewables."

Meanwhile, Ruby said the power sector is "very concerned about the outlook on market interventions," including a plan to allow member states to set regulated retail prices.

"The combination of regulated retail prices and clawback measures could seriously threaten the financial health of the industry and make it less attractive to investors," Ruby said. "Now more than ever, the electricity sector needs investor confidence."

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