Does Europe need new gas infrastructure?
According to an Artelys study, “Does phasing-out Russian gas require new gas infrastructure?”, published in May 2022 and carried out through a simulation model of the European energy system, all that would be needed to do without Russian gas is an increase in regasification capacity in the Baltic countries and Finland, or just the controlled management of limited rationing.
Nevertheless, much of the response provided by governments to the price crisis so far consists of a rush to new investments in gas infrastructure, without any concern for their economic efficiency. This response, presented as necessary to avert blackout scenarios, ignores both business and private consumer reactions to high prices and the effects of climate policies already undertaken by the EU.
Regarding consumers’ reactions, many customers have no interest in consuming the same amount of pre-crisis energy at a wholesale price that has quintupled in the meantime. Consumers, especially after having time to organize, save energy in reaction to exceptionally high prices. In other words, it is irrational to put in place costly policies to allow a level of consumption that is no longer desirable at current prices. Short-term savings will be complemented by structural savings from increased efficiency achieved through investments triggered precisely by high prices.
Regarding policies on climate and energy transition, new capacity from renewables – in parallel to the progressive electrification of consumption – will bring gas consumption in the EU down to about 400 bmc in 2025 compared to about 480 in 2019, according to Artelys.
This reduction alone is worth about half of Russian gas imports in 2019 and will be compounded by lower consumption, additional policies and diversification of gas supplies. We estimate that actions under the European Fit for 55 and REPowerEU plans, aimed at meeting the 2030 climate targets, will reduce European gas demand by 40% by 2030.
Who would pay for new infrastructure and gas supplies?
What percentage of the cost of energy is paid for in bills and what with taxes is a political question. In general, the higher the share in the bill, the greater the empowerment of consumers, the greater the incentives for efficiency, and the greater the chances of making effective pricing policies to discriminate between fossil and non-fossil energy.
What can certainly be said is that taxpayers or consumers will pay every last euro, for decades. This includes both the costs of the infrastructure we decide to build today in the wake of the emergency and the long-term commercial supply commitments guaranteed in any form by the state.
Further, as consumption decreases, the weight of these charges per unit cost of gas — and thus its function as a “transition fuel” — will become less and less sustainable. All these costs moreover would add to those of decarbonization, whose process risks slowing down.
Governments in Europe are considering support for new long-term gas supply contracts. What are the consequent economic and climate risks?
First, there is an issue of transparency. Since gas is purchased by companies and not by governments, whenever a government provides guarantees to commercial deals, it exposes itself to risks of state aid and general opacity and conflicts of interest – all the more so if that government is a shareholder in the companies involved.
In terms of climate risk, any commitment – whether on a long-term contract or infrastructure – can make it artificially convenient in the future to prolong gas dependence. This would slow down decarbonization policies, thus leading to a negative double dividend.
Would new domestic gas production in Italy serve energy security goals?
The potential impact of new investment in domestic gas production would on the one hand be insignificant, and on the other — it would be late when it comes to Italy weaning itself off Russian gas. For more details see: ECCO Q&A: Is it worth developing Italian fossil gas?
Is new domestic and international gas production compatible with Europe’s climate goals?
No. As the International Energy Agency (IEA) states in its guidance on the global pathway to climate neutrality, new upstream investments are inconsistent with climate policies, all the more so in richer countries. A study by Oil Change International argues that to stay within the 1.5°C carbon budget, even a portion (40%) of the world’s already developed reserves should not be used.
In other words, committing to almost completely abandon fossil fuels in just over two decades while developing new wells is nonsense — and the costs would weigh on our economies.
Consistently, on the sidelines of COP26 in Glasgow, Italy and 38 other countries pledged to avoid new international investments in fossil energy sources from the end of 2022.
What guarantees of stability do alternative gas supplier countries offer to Russia?
If we look at the geographical location of the countries considered key to supply diversification, with the exception of the United States, they are all located in the Mediterranean region and Africa. These regions are characterized by situations of fragility and risk, even where the appearance is one of stability.
Indeed, behind enduring political leadership, such as that of Algeria, or military leadership, like in Egypt, lie numerous elements of economic, political, and social fragility that risk giving rise to new instability.
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But more relevant than the element of stability is that of dependency. Even where these regimes manage to survive new waves of dissent and/or systemic shocks, such as food insecurity or the looming debt crisis, the key element that Italy and Europe should reflect upon is that of creating new relationships of dependence.
By becoming dependent on these countries for gas supplies, Italy and Europe implicitly give up pressure on them to respect the norms of international law (as in the case of Israeli settlement policy) and human rights (as in the case of arbitrary detentions and enforced disappearances in Egypt). This attitude diverges from the European approach of conditionality towards adopting a principle of non-interference.
What is a strategy for secure, affordable, and sustainable energy?
Secure energy comes first and foremost from supplies where we don’t need to worry about serious negative side effects. Fossil energy in a planet grappling with the need to solve the climate crisis is therefore inherently unsafe.
But security is also the reasonable possibility of trusting the continuity of supply and its affordability. And here, again, the history of fossil fuels (oil first, gas today) is littered with scarcity shocks (and hence high prices) typically followed by severe recessions in the affected economies.
The most widely used indicator of affordability today for comparing energy costs from different sources is the LCOE (Levelized Cost Of Energy), a measure of total costs divided by the expected energy output over the life of the plant. All international observers identify renewable sources (PV and wind primarily) as having the most favorable LCOE.
The good news is that renewables are sustainable not only in terms of costs, but also when it comes to predicting these costs because they mostly relate to construction, depreciation and maintenance, with positive impacts on employment and the trade balance of today’s fossil-importing states. In addition, they are sustainable in climate and health terms.
Does getting off gas generate employment problems?
Transition in any industry involves the need to relocate resources, human and otherwise, from shrinking to growing activities. At the same time, the best way to sustainably secure future jobs and prosperity is to encourage public and private investment in sectors that hold promise with respect to the community’s strategic goals (such as climate-proofing) and certainly not in those that are declining or incompatible with those goals.
Specifically, in the transition from a gas-based energy system (with a rather centralized supply chain) to one based on renewables (with a plurality of smaller capacity), it is likely that labor intensity will increase and new opportunities will be more distributed across the state, with virtuous distributional and social effects.
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Editor’s note: The original article, first published on the ECCO website, features more questions and answers than are displayed here. You may find the full Q&A here.
Editor’s Note: The opinions expressed here by the authors are their own, not those of Impakter.com — In the Featured Photo: Gas pipeline in Europe. Featured Photo Credit: Wikimedia Commons.
