Europe May Shift Back to Coal as Russia Turns Down Gas Flows

June 20, 2022 8:41 am

Europe’s biggest Russian gas buyers were racing to find alternative fuel supplies on Monday and even looking at burning more coal to cope with reduced gas flows from Russia that threaten an energy crisis in winter if stores are not refilled.

The crisis and sky-high gas prices add to the headache facing policymakers already fretting about surging inflation and a dimming economic outlook.

Italy’s Eni said it had been informed by Russia’s Gazprom that it would receive only part of its request for gas supplies on Monday, pushing the country closer to declaring a state of alert that will spark gas saving measures.

Germany, which has also faced lower Russian flows, announced on Sunday its latest plan to boost gas storage levels and said it could restart coal-fired power plants that it had aimed to phase out.

“That is painful, but it is a sheer necessity in this situation to reduce gas consumption,” said Economy Minister Robert Habeck, a member of the Green party that has pushed for a faster exit from coal, which produces more greenhouse gases.

“But if we don’t do it, then we run the risk that the storage facilities will not be full enough at the end of the year towards the winter season. And then we are blackmailable on a political level,” he said.

Russia repeated on Monday that Europe only had itself to blame for the gas crisis, after the West imposed sanctions in response to Moscow’s invasion of Ukraine, a gas transit route to Europe, as well as a major wheat exporter.

Dutch front-month gas contract, the European benchmark, was trading around 124 euros ($130) on Monday, down from this year’s peak of 335 euros but still up more than 300 percent on its level a year ago, before prices started rocketing higher.

The chief executive of Germany’s largest power producer RWE, Markus Krebber, said power prices could take three to five years to fall back to lower levels.

Russian gas flows to Germany through the Nord Stream 1 pipeline, the main route supplying Europe’s biggest economy, were still running at about 40 percent of capacity on Monday, even though they had edged up from the start of last week.

Ukraine, another transit route for Russian gas, said its pipelines could help fill any gap in supply via Nord Stream 1. Moscow has previously said it could not pump more through the pipelines that Ukraine has not already shut off.

GOING FOR COAL

Eni and German utility Uniper both said they were receiving less than their contracted Russian gas volumes, although Europe’s gas inventories are still filling — albeit more slowly. They stood at about 54 percent full on Monday against a European Union target of 80 percent by October and 90 percent by November.

Germany’s economy ministry said bringing back coal-fired power plants could add up to 10 gigawatts of capacity in case gas supply hit critical levels. A law related to the move goes to the upper house of parliament on July 8.

Alongside a shift back to coal, the latest German measures include an auction system starting in coming weeks to encourage industry to consume less gas and financial help for Germany’s gas market operator, via state lender KfW, to fill gas storage facilities faster.

Austria’s government agreed with utility Verbund on Sunday to convert a gas-fired power plant to use coal should restricted gas supplies lead to an energy emergency.

Germany and Italy are among the most reliant on Russian gas, but other European countries have also faced gas supply shortages while consumption has risen unusually high for the time of year after a heatwave boosted use of air conditioning.

Russia’s state-controlled Gazprom cut capacity last week along Nord Stream 1, a major pipeline supplying Germany and others, citing the delayed return of equipment being serviced by Germany’s Siemens Energy in Canada.

“We have gas, it is ready to be delivered, but the Europeans must give back the equipment, which should be repaired under their obligations,” Kremlin spokesman Dmitry Peskov said on Monday, adding that the infrastructure was hit by EU sanctions.

German and Italian officials have said Russia was using this as an excuse to reduce supplies.

Italy, whose technical committee for gas is due to meet on Tuesday, has said it could declare a heightened state of alert on gas this week if Russia continues to curb supplies.

The move would trigger measures to reduced consumption, including rationing gas for selected industrial users, ramping up the production at coal power plants and also asking for more gas imports from other suppliers under existing contracts.