How Europe breaks its dependence on Russia

The energy crisis sparked by the war in Ukraine has forced Europe to rethink energy policy. Germany neatly encapsulates the wider predicament. The continent’s biggest economy allowed itself to become far too dependent on Russian imports, particularly gas, for its own use. Germany was also a driving force behind Nord Stream 2, the now-stranded pipe that would have locked northern Europe into Russian gas for the foreseeable future.

A pivot to imported LNG and a doubling-down on renewables are at the core of the new energy policy agenda. In essence, the war has acted as a catalyst for Germany to accelerate its domestic energy transition, revitalising the Energiewende. How the plan is executed has huge implications for global gas markets, the fledgling hydrogen market, power markets across Europe and the renewables supply chain.

How dependent is Germany on Russia?

Gas is the biggest immediate challenge. Germany is Russia’s largest market for pipeline exports, consuming 51 Bcm of Russian gas in 2021, one-third of the EU’s total gas imports and more than twice as much as second-placed Italy. Russian volumes met 55% of Germany’s gas demand in 2021.

Imports from Russia have been sharply reduced since the end of February to around 40%. In their place are increased pipeline supplies from Norway and LNG via neighbouring countries.

Russian crude (0.5 million b/d) and diesel/gasoil imports (0.15 million b/d) satisfy around 30% of Germany’s total oil consumption of 2.2 million b/d. Russian coal imports of 19 Mt were just 13% of Germany’s thermal coal supply.

What does Germany intend to do about it?

The government has yet to come up with a comprehensive policy plan. The so-called “Easter Package” of April 2022 proposes extremely ambitious targets to substantially reduce reliance on Russian gas (and coal) imports and develop LNG regasification infrastructure to diversify away from pipeline imports. Most importantly for medium-term energy security and decarbonisation is the goal to dramatically increase the share of renewables in the energy mix. The core elements are:​​​

• Renewables: the longstanding Renewable Energy Act (EEG) will be reformed to deliver a step-change in wind and solar growth. It will accelerate additions of onshore wind to 10 GW per year by 2025 (reaching 115 GW installed by 2030) and lift growth in solar PV to 22 GW annually by 2026 (reaching 215 GW by 2030). Renewables are targeted to supply 80% (or around 600 TWh) of electricity in 2030, and 100% by 2035
• Gas: cut Germany’s share of Russian gas from 55% to 30% by the end of 2022 and 10% by 2024. The government has acted swiftly to kickstart LNG infrastructure from scratch, procuring four new FSRUs (Floating Storage Regas Units) just this month. Available capacity could reach 7.5 Bcm in winter 2022/23 and 27 Bcm by summer 2024, roughly half the level of current Russian pipeline imports
• Oil: to be virtually independent by the end of 2022.

What are the implications for gas?

Germany can run down its Russian imports but it’s unclear whether it can find a legal way to eliminate them entirely any time soon. Some long-term contracts will last through to the mid-2030s and have ‘take-or-pay’ obligations – if the gas isn’t taken, it has to be paid for anyway.

Building out FSRUs, though, is a critical step toward diversifying the country’s gas supply. But Germany will have to pay a high price for the pivot to LNG, having shunned the opportunity in the past as it locked into Russian pipe gas instead.

Material incremental LNG volumes only become available to the market after 2026. Until then, Germany joins an all-in scrap with other buyers to secure limited volumes, tightening the market further. It’s already a sellers’ paradise so Germany’s belated entry to the market as a big buyer threatens to keep spot LNG prices at sky-high levels in Europe (and Asia) over the next four years. If Russian sanctions announced yesterday on its old subsidiaries result in reduced Russian imports the market will tighten further.

Many questions are yet to be answered. Given Germany’s ultimate goal to phase gas out of the energy mix, will utilities want to commit to long-term LNG contracts? Will there be sufficient capacity bookings to finance the land-based capacity needed to augment the 10-year charters of the FSRUs? Will players run scared of the risk of stranded assets?

LNG may just be a stopgap measure for Germany until hydrogen is commercialised. The government continues to push the strategic importance of hydrogen-ready infrastructure, prompting German utilities to pour resources into opportunities across the hydrogen value chain. Hydrogen-ready land-based regas terminals might be seen as a bridge. A traded market in hydrogen could emerge, most likely through imported low-carbon ammonia.

What about power?

Ambitious wind and solar growth targets (potentially 250 GW of additional capacity by 2030) are not the only moving part in Germany’s power mix. Nuclear is being phased out and imported hard coal and indigenous lignite removed from the system. As the system decarbonises, sufficient flexible resources are essential to balance the increasingly variable supply base. In addition, the sizeable heat load currently served by coal and, in some cases, gas will need to be supported by alternatives.

The faster roll-out of renewables will double the rates achieved so far in onshore wind, and near triple those for solar. The big question is whether it’s deliverable. For a start, the Byzantine planning and permitting process which has so far held back the progress of renewable power growth must be sorted. As capacity additions gather pace, grid infrastructure and energy storage will need bolstering.

Germany is far from the only country with plans for a sustained ramp-up of renewables capacity. The global supply chain is already tight and further cost inflation in wind turbines, solar PV and related equipment looks inevitable.

And oil and coal?

Most imports of both are seaborne and replaceable with alternatives within a year. But logistical challenges remain in replacing Russian crude delivered to eastern Germany by pipeline. Germany will also need to address Russian asset ownership across its energy network – Rosneft currently owns almost a quarter of its national refining capacity.

Finally, all of Europe is watching. Germany’s success in disentangling itself from Russia is central to boosting Europe’s energy independence.

Thanks to: Massimo Di-Odoardo (Gas), Alan Gelder (Oil), Peter Osbaldstone (Power), Murray Douglas (Energy Transition) and Natalie Biggs (Coal).