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Government policies and higher fossil fuel prices will encourage the build-up of renewables, increasing energy security medium term. Only in combination with consistently high energy savings and the procurement and distribution of sufficient gas volumes from the global LNG market can Russian supplies be replaced. It is thus the interplay of supply and demand measures that allowed Central and Eastern Europe to withstand the extraordinary shock of 2022.
Introduction
As part of its war of aggression against Ukraine, Russia, which supplied 45 percent of EU natural gas imports, is weaponizing its gas supplies. Over the course of half a year, the country almost completely cut its deliveries to Germany and Central and Eastern Europe, a region where gas previously made up over 20 percent of energy supply and whose most important supplier of natural gas was Russia. Financial analysts now predict that gas prices in Europe will remain higher for the next ten years relative to other regions and the prewar period. This weaponization of energy by Russia was largely met by a firm response and with few exceptions, the region has not given in to Russian blackmail. Instead, a massive adaptation of the energy system is underway. From a macroeconomic point of view, this energy price shock constitutes a massive deterioration of the EU’s and Germany’s terms of trade. The current account surplus became a deficit in the second and third quarter of 2022, a first since 2008, as Europe had to import energy at much higher prices and its exchange rate weakened.
Central and Eastern Europe is home to a high number of gasintensive commodity producers, which are hit hardest by high gas prices. Many industrial processes rely on gas either directly or indirectly as a source of energy. Industry consumption accounts for 27 percent of the total EU gas usage and this number is higher for Germany and Central and Eastern Europe. German industry consumed 36 percent of the total sales of natural gas in Germany in 2021 and is interconnected with thousands of suppliers in neighboring states. Trade with the Visegrad-group ´ totaled € 186.8 billion between January and June 2022 (€ 167 billion the previous year). This exceeds the € 148.9 billion in trade with China, making them collectively Germany’s strongest trading partner and signaling high economic interdependence.
The initial response to this large shock to energy security and the economic system of Germany and Central and Eastern Europe consisted of two essential elements. First, a major part of the response has been a reduction in the final demand for gas. Contrary to widely voiced fears, this was achieved without major effects on economic activity. In Germany, temperature-corrected gas consumption of households is estimated to have been around 20 to 30 percent lower at the end of 2022 than the average from 2018 to 2021. Industry demand has fallen by similar amounts relative to a period during which demand had already been dampened by the recession induced by the COVID-19 pandemic. Yet this reduction does not appear to correlate with drops in industrial output except for in the chemical, iron, and steel sectors. The ifo Institute documented that three quarters of companies reported to have achieved significant gas savings without cuts to production and the effect on GDP of this shock has been relatively muted. Nevertheless, at one point up to 20 percent of European fertilizer production shut down, most of which is located in Central and Eastern Europe with 13 percent in Poland alone. A similar trend can also be observed in the steel and chemical industries. This demand reduction was achieved through the scarcity signal of high gas prices. It was important that prices were not unduly lowered despite the lively debate about a gas price cap in 2022. Member states with weaker energy ties to the rest of Europe, such as Spain and Portugal, advocated for a price cap and were granted permission for this intervention. The EU-wide debate cumulated in an agreement between EU states on a price ceiling of € 180/MWh on quoted prices on the TTF, which is over four times the current gas price and therefore not in use.
Second, new supply routes were created and, increasingly, existing capacities of alternative supplies are being utilized. Liquified Natural Gas (LNG) and gas from Norway have been particularly important in replacing Russian gas. Some adaptation has come from a change in the energy mix with oil and coal playing a larger role. Coal consumption in the EU is estimated to have increased 10 percent in the first half of 2022. Finally, the build-up of renewable energy has accelerated in response to the price shock to fossil fuels.
The aim of this paper is to describe the changing pattern of gas flows and energy generation in Germany and Central and Eastern Europe in the short- and medium-term response to the energy crisis. We further examine the long-term strategies to reduce dependence on gas from Russia and fossil fuels more generally in this region. We show the double role of markets and governments. Markets have played a crucial role of signaling scarcity, ensuring savings and an efficient allocation of the scarce resource. Meanwhile, governments were crucial players in ensuring build-up of infrastructure and avoiding protectionism. In times of severe energy scarcity, the EU energy market should be allowed to function to ensure cross-border flows. The security of gas infrastructure is critical to replace Russian gas imports. In the medium term the addition of new gas infrastructure including interconnections to facilitate north-south and west-east flows as well as the accelerated expansion of renewables is key. Finally, in the long term, the expansion of renewables should be continued and for some countries, increasing nuclear energy generation as well as hydrogen constitute important methods to diversify away from gas on an accelerated timeline and in all sectors and countries.
Shift of natural gas flows in Europe from west to East
In 2021, Russia exported roughly 1550 TW h (TWh)1 of natural gas to Europe, of which 550 TWh were transported via the Nord Stream pipeline and approximately 300 TWh via the Yamal-Europe pipeline. East to west flows through both ceased in the second half of 2022. Only 19 TWh still reached Europe via Ukraine and the TurkStream pipeline in October 2022– a fraction of total capacity. While from January to October 2022 gas deliveries were half of those for the same period in 2021, the EU in late 2022 received only 20 percent of what it used to. The estimated decrease in Russian deliveries compared to 2021 is 800 TWh. In response to the reduction and near total discontinuation of Russian gas deliveries, gas flows from west to east have increased substantially.
LNG-imports from the United States more than doubled in the first nine months of 2022, and the US remained the main supplier of LNG to Europe ahead of Qatar and Russia. Norway became Europe’s – and Germany’s – primary pipeline gas supplier. Germany relies on these imports of piped gas from Norway and LNG via Belgium and the Netherlands. Simultaneously, gas consumption was reduced significantly, by 33 percent in October 2022. Of the total gas imports in October 2022, 44 percent came from Norway, 28 percent from the Netherlands, and 25 percent from Belgium.
Imports through Norway’s pipeline infrastructure exceeded 1170 TWh in 2022, second only to LNG imports of 1,500 TWh. The volume delivered via Norwegian pipelines in 2022 is four times larger than the volume delivered through the Nord Stream pipeline, which delivered approximately 300 TWh. 95 percent of Norwegian gas is exported via pipelines, the risk resulting from acts of sabotage would therefore be large. Norway’s petroleum safety authority increased the threat level to gas infrastructure after unidentified drones were seen flying near offshore gas facilities. Multiple Russian citizens, including a former Russian intelligence officer, were detained in Norway for drone photography of strategic targets in late 2022.
Given the increased reliance on and threats to gas infrastructure, particularly sites producing or transporting gas from Norway, it appears imperative to increase both the security efforts and level of coordination between the responsible government agencies and corporate entities. Besides ensuring the security of gas infrastructure critical to replacing gas imports from Russia, the EU energy market should ensure crossborder flows to where demand is highest.
Players in the EU’s internal gas market
Germany
As a major gas transit hub, Germany is central to ensuring that the EU’s internal gas market functions (see Fig. 1). In 2021, 46.1 percent of gross German gas imports were exported to neighboring countries.
In 2022, 59 percent of German gas exports were destined for the Czech Republic. While the share of exports destined for the Czech Republic remained constant, less gas was delivered than in previous years (888 GWh/day on average in 2022 so far versus 1271 GWh/day in 2020). German exports to Austria and Poland increased compared to previous years, helping to fill the shortfall of Russian gas deliveries from the east. The replacement of Russian gas with LNG and gas from Norway has increased the importance of Germany to the short-term security of supply of its neighbors. Until new gas infrastructure connections take up operations across the region in the short- and medium-term, Germany’s gas network should fulfill its function of forwarding the gas arriving at LNG terminals and through pipeline infrastructure from Norway as efficiently as possible.
Visegrád countries
While many countries in Central and Eastern Europe are highly dependent on Russian gas imports, their political positions regarding Russian gas are heterogenous. Poland’s proactive efforts to reduce dependence on gas imports from Russia and Hungary’s increase of gas supplies from Russia represent opposing ends of the spectrum.
Poland began operating the Baltic Pipe in the fall of 2022, through which it can import the equivalent of up to 100 TWh of natural gas from Norway. Poland is also expanding its LNG capacity at the Swinouj ´ ´scie Polskie LNG Terminal and a Floating Storage Regasification Unit (FSRU) in the Gulf of Gdansk. Interconnectors between Lithuania and Poland and between Poland and Slovakia have already become operational in 2022, thereby linking the Baltic Sea Region with Central Eastern Europe. Poland has not received Russian gas since April 2022, when it refused requests for payment in rubles. Poland already intended to cease gas imports from Russia at the end of 2022 and was therefore relatively well prepared. Reverse flow gas deliveries to Poland from Germany have increased.
The remaining landlocked countries of the Visegrad ´ Group – the Czech Republic, Slovakia, and Hungary – previously imported over 85 percent of their natural gas from Russia. As in Germany, deliveries to the Czech Republic and Slovakia began to decrease starkly in summer 2022 and then ceased entirely. Both countries relied on LNG and Norwegian supplies (transiting Germany) to fill their gas storage ahead of the winter of 2022/2023. Hungary is similarly reliant on Russian gas and continues to receive deliveries via the TurkStream and TransGas pipeline (Preussen, 2022a). Additionally, Hungary plans to increase its domestic gas production. Hungary, Poland, the Czech Republic, and Slovakia are all relying more heavily on coal and/or nuclear energy to avert shortages in the short-term. The new Polish-Slovak interconnector may help relieve the situation in Slovakia and could be used to provide gas to Hungary and Ukraine in the future via the Slovak transmission system.
The foresightful planning of gas infrastructure projects in Poland, the Czech Republic and Slovakia can contribute to a higher security of supply in the region following the energy crisis and should be accelerated where necessary.
Southeastern Europe
This also applies to Southeastern Europe, which looks to play a crucial role in gas provisioning in the short and medium term. New gas infrastructure in the region, which is supported by the EU, could provide more natural gas from the Black Sea and Caspian Basin (Azerbaijan) to Central and Eastern Europe. The Trans-Adriatic Pipeline, the first phase of the BRUA Pipeline (Bulgaria-Romania-Hungary-Austria), and the Krk LNG terminal all took up operations in 2020 and 2021. Interconnectors from Bulgaria to Greece, Romania, and Serbia enable higher gas volumes to reach the region.
These developments indicate that the north-south axis of gas infrastructure will play a more extensive role in supplying gas to Central, Eastern, and Southeastern European countries in the medium term, establishing a new pattern of supply, thereby decreasing the importance of west to east flows that became vital in the immediate aftermath of the gas supply shock. In the short and medium-term, Germany as a transit country remains in an important position to continue enabling gas to flow to where demand is highest. In addition to new capacity in the north and south, interconnections are central to supplying landlocked countries and to allowing for storage across borders. These additions to the gas network should be accelerated where they are necessary to securing supply to the region. As reverse flows exemplify, using existing infrastructure and increasing the coordination between relevant stakeholders can go a long way. This optimization and coordination in infrastructure usage should be continued to guarantee supply security to the region while avoiding the installation of overcapacity.
Tight gas market demands Alternate energy sources
The EU is rapidly expanding its LNG import capacity in a move to diversify gas supplies. Five floating storage and regasification terminals, each providing a capacity to import approximately 50 TWh per year, are to become operational in 2022 and 2023 in Germany alone. Looking ahead, the combined LNG capacity of Germany, Croatia, Greece, Poland, and Lithuania is set to rise from 200 TWh/year to 500 TWh/year by the end of 2023 and to 1000 TWh/year by 2026. This is equal to the region’s total imports of Russian gas in 2021. The new LNG infrastructure and interconnections have increased the capacity for gas deliveries along the north-south axis to supply Central and Eastern Europe (see Fig. 2). However, the additional import capacity alone does not guarantee more gas imports from non-Russian suppliers.
The gas supply situation will remain tight in 2023. It should be noted that the EU’s efforts to secure gas supplies in 2022 benefitted greatly from decreased LNG demand by China. Should the economy recover in 2023, LNG imports to China are estimated to capture most of the additional global LNG supply in 2023 and buy the 190 TWh it did not demand in 2022. The International Energy Agency warns that Europe would face a supply-demand gap of up to 400 TWh in 2023 under the assumption of a complete cessation of Russian gas deliveries.
Reducing the demand for natural gas further in 2023 to decrease this potential supply-demand gap depends on alternative forms of electricity generation. France, Europe’s largest electricity exporter, became an importer for much of 2022 due to the interruption of nuclear and hydropower generation. The resumption of operations in 2023 could reduce the estimated EU gas demand by 80 TWh. The EU Commission announced an ambitious emergency regulation to accelerate renewable energy projects with the aim of replacing 140 TWh of natural gas through wind and solar capacity in 2023. The relatively low withdrawals of gas from storage in the winter of 2022/2023 can significantly alleviate demand in the next refilling period. In addition to small volumes of continued Russian gas deliveries to select countries and a partial replacement of gas in electricity generation through reinstated hydropower and nuclear, added capacity for wind and solar power generation is needed to further reduce gas demand.
Renewables
Expanding renewable energy capacity is key to shifting away from gas in the medium and long term. In the past two years, just over half of Europe’s new renewable capacity (44 TWh annually) has replaced gas power. In 2021, wind and solar generated more electricity than gas in the EU for the first time.
The extent of renewable expansion in the EU is mixed, however. Together, Spain, the Netherlands, and Greece account for over half of all growth in wind and solar output in the EU since 2019 while Bulgaria, the Czech Republic, and Romania have failed to deploy almost any wind and solar. Hungary and Poland started low but have since recorded high growth in renewable energy.
Member states have responded to a push by the EU to accelerate the rollout of renewable energy and decarbonization of industries in line with its REPowerEU objectives. The Czech Republic, Poland, and Slovakia, among others, have eased regulation or announced new projects to accelerate the deployment of renewable energy sources. Many Central and Eastern European countries have also announced their coal phase-out dates. Germany has set ambitious plans to nearly triple wind and solar capacity by 2030. This would yield approximately 1,200 GWh/day in contrast to the average 440 GWh/day produced from wind and solar in 2021 (of 616 GWh/day from renewables in total). The European Commission plans to bring renewable energy capacity to 1,236 GW by 2030. The expansion of solar and wind alone would save 210 TWh/year in natural gas by 2030 in addition to the 1,160 TWh/year already estimated to be saved under the Fit for 55 measures. By achieving the Fit for 55 and REPowerEU objectives, the EU could reduce gas consumption by 1,550 TWh, which is the equivalent of the EU import of Russian gas in 2021, by 2027, and a total of 3,100 TWh by 2030.
The failure to achieve these ambitious EU and national targets would lead to a prolonged dependence on fossil energy sources in the region. The rollout of renewables has been comparatively slow in Central and Eastern Europe thus far with many countries experiencing a constraint in the means to fund more ambitious programs. More attention should be placed on the constraints Central and Eastern European countries are facing in expanding renewable energy generation, particularly in the development of new mechanisms to access funds on an EU level.
Nuclear Energy
Apart from the expansion of wind and solar energy capacity, numerous countries in Central and Eastern Europe have announced plans to expand nuclear energy capacity. In Slovakia, a new nuclear unit capable of generating almost a quarter of the country’s electricity consumption came online in 2022. Starting in 2024, an additional unit will make Slovakia a net electricity exporter. Two new reactors at the Hungarian Paks nuclear plant are set to be constructed by Russian energy giant Rosatom by 2030. This would double the capacity of the plant, which currently generates 40 percent of Hungary’s electricity. New nuclear units will also take up operations between 2036 and 2040 in the Czech Republic and Poland, which is as of yet without a nuclear power sector. While this expansion of nuclear energy capacity is substantial, most of it will only come online in the long term. Therefore, it will not help reduce the region’s demand for natural gas in the coming years. This underlines the importance of accelerating the rollout of renewables projects in the region, which have shorter lead times.
Furthermore, existing nuclear reactors in the Czech Republic, Slovakia, Hungary, and Bulgaria were built by Russia. Their further operation depends on fuel from Russian suppliers and maintenance services. While the civilian nuclear sector is explicitly exempt from EU sanctions against Russia, this dependence constitutes a further potential target for energy weaponization by the Russian government.
The capacity additions in nuclear energy announced by Central and Eastern European countries can help reduce fossil fuel consumption in the long-, but likely not in the medium term. A dependence on supplies and services from the Russian civilian nuclear energy sector poses the risk of creating new vulnerabilities. Any debate on nuclear energy expansion must include an analysis of these potential new vulnerabilities.
Hydrogen
Neither wind, solar nor nuclear energy have the potential to substitute the use of gas in certain industrial sectors. This is where hydrogen comes into play. The REPowerEU plan foresees the production of 330 TWh of climate-friendly hydrogen in the EU by 2030 and a further 330 TWh to be imported from third countries.
While total demand for gas energy by EU industries was 970 TWh in 2017, not all of it requires substitution with hydrogen. Industrial processes that require temperatures too high to be generated by heat pumps, which account for approximately 60 percent of natural gas used in industrial process heat, could switch to hydrogen or biomethane to decarbonize. Due to the clusters of chemical installations and steel plants in the trilateral region of Belgium, the Netherlands, and Germany as well as in Eastern Europe, hydrogen demand is assumed to be high there.
The European Hydrogen Backbone Initiative, a proposal for hydrogen pipeline infrastructure by European gas and transmission operators, ascribes important roles to Hungary, Slovakia, the Czech Republic as hydrogen hubs and to Ukraine as a potential hydrogen exporter. Despite such ambitious plans, uncertainty over the extent to which gas infrastructure can be repurposed for hydrogen transportation remains.
Recent reports have demonstrated that new LNG terminals have limited potential for being retrofit for future renewable energy carriers. According to some analyses, Portugal and Spain offer the greatest potential to supply green hydrogen within the EU. Outside of the bloc, the EU’s “Hydrogen Partnerships” aim to establish long-term relationships with numerous countries in which hydrogen generation is more efficient to reduce the risk of creating dependency patterns. While Ukraine’s energy security is currently under threat, its potential for renewable energy generation is already shaping plans for a green reconstruction of its energy sector. Ukraine featured prominently in prewar EU hydrogen import plans due to its high potential for generating solar, biomass, and wind energy. The large-diameter gas pipelines from Ukraine to Slovakia, the Czech Republic, and Germany would provide an inexpensive transport route. Ukrainian industry leaders are advocating for a green postwar reconstruction and stronger integration into the European energy system. Hydrogen also featured in the postwar reconstruction plan presented by the Ukrainian government at the reconstruction conference in July 2022.
In the long-term, increasing the capacity for electricity generation from renewable and nuclear sources as well as developing hydrogen supply chains constitute a path for Central and Eastern Europe to become independent not only from energy imports from Russia but fossil fuels in general. The slow pace of renewables expansion and security concerns due to a reliance on nuclear energy supplies from Russia in some countries in the region are identified as potential risks to achieving this aim. Despite being in its infancy, hydrogen is ascribed a central role in reducing dependence on gas due to its potential use in industrial manufacturing – a key pillar of many economies of Central and Eastern Europe.
Conclusion and policy implications
As Germany, Central and Eastern Europe, and the EU adapt to the massive shocks resulting from decoupling from Russia, energy security is of central importance. We describe the potential path forward as the region reduces dependence on natural gas imports from Russia as well as fossil energy sources more generally. Our analysis points to the fact that both the demand and the supply side have major roles to play in ensuring energy security in Europe. Especially in the short-run, risks to energy supply shortages cannot be fully excluded. It is then important to ensure an efficient allocation of the scarce resources across space and industries with gas savings playing an important role. At the same time, the supply side of energy needs to be strengthened. This requires continued build-up of gas infrastructure, the protection of that infrastructure against hybrid threats and the medium-term buildup of renewable energy. Nuclear energy might play a larger role medium to long-term, but security of its supplies is currently not guaranteed. We give six specific recommendations:
1) Maintain the integrity of the EU’s energy market and cross-border flows
Germany should continue to fulfill its function as a transit and distribution hub for global LNG imports and gas from Norway as efficiently as possible. Maintaining the integrity of the EU’s energy market and not unduly distorting the scarcity signal of high gas prices are vital to achieving gas savings and an efficient allocation of gas. An analysis of the economic impact of a Russian gas shutoff by the International Monetary Fund emphasizes the vulnerability of landlocked Central and Eastern European countries to experiencing gas shortages if the integrity of the EU gas market were compromised. As output losses in the region would have repercussions across Germany and the EU due tightly integrated value chains, guaranteeing gas flows is an essential component in maintaining economic stability.
2) Increase security of critical gas infrastructure
Norway’s pipeline infrastructure has become a critical artery for gas supplies to Germany as well as Central and Eastern Europe. Hybrid attacks against it could undermine the energy security of the entire region. Given the evidence of various risks to this pipeline infrastructure as reported in the press, its protection remains necessary. Furthermore, considering the higher reliance on LNG infrastructure, the security efforts and level of coordination between responsible government agencies and corporate entities should also be increased for these facilities.
3) Invest in north-south interconnections
New LNG and pipeline capacity in the Baltics and Poland as well as in Southeastern Europe indicate that north to south and south to north flows will play a more important role in supplying landlocked states in Central and Eastern Europe in the short and medium term. Investment in gas infrastructure along this axis will enable the region to diversify gas supplies by contracting higher volumes of global LNG to various terminals and gas supplies via pipeline infrastructure from Azerbaijan and Algeria, among others. Interconnectors between countries help supply landlocked countries and facilitate gas storage across borders. Where necessary, projects critical to securing sufficient supply to the region should be accelerated. At the same time, the existing infrastructure should be optimized, and usage coordinated to prevent the construction of overcapacity.
4) Accelerate renewables expansion to replace gas imports from Russia
The expansion of renewable energy capacity has gained momentum thanks to the strong price signal resulting from the scarcity of fossil fuels. The EU roughly doubled its imports of solar panels in the first half of 2022 compared to 2021. Several governments have reduced administrative hurdles to building up renewables. Nevertheless, under the assumptions of the REPowerEU plan, a combination of increased renewable capacity, gas diversification, frontloaded energy savings, and electrification could only entirely replace the 1550 TWh of natural gas imported to the EU from Russia in 2027. The slower expansion of renewables in Central and Eastern Europe calls for an examination of the constraints these countries are facing in expanding renewable energy generation. A further difficulty is that Russian gas currently plays a central role in stabilizing electricity grids as a transition fuel that fills gaps when sun and wind are scarce. Thus, building up renewable capacity while increasing smart grid capabilities needs to be a policy priority.
5) Support long-term green energy solutions in the region
Gas-fired power plants could partially be substituted by the nuclear power plants set to take up operations in Central and Eastern Europe in the second half of the 2030s. However, because additional capacity cannot be built in the short term, current policy must focus on powering existing nuclear plants. Critically, many existing and planned nuclear plants in the region depend on Russian technology, making them vulnerable to Russian weaponization. Developing hydrogen capacity to replace natural gas in industrial processes is particularly relevant for Germany and other Central and Eastern European economies in which heavy industry dominates and space for renewables is limited. However, many questions remain regarding the large-scale production of green hydrogen, the establishment of a global hydrogen market and the practicalities of the shift.
6) Ensure EU cooperation
Overall, the current energy situation demands a united response from the entire EU. More than ever, maintaining the integrity of the energy market, building additional interconnectors among countries, and ensuring that gas flows where it is most needed are all crucial for minimizing the economic fallout of one of the biggest shocks the EU economy has ever experienced. Distributional questions are high on the agenda. Fiscal policy responses have been largely uncoordinated across the EU and need to take greater account of their overall consequences for the European energy market.
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