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    Breaking free of Russian energy easier said than done


    May 22, 2022 - Dr Charles Ellinas

     

      The EU’s €210bn plan is far-reaching but Cyprus is woefully behind

      In addition to its plan to stop using Russian oil, the EU has gone further, trying to grasp the nettle of stopping the use of Russian gas.

      The EU’s latest proposals were published on May 18 and they are far-reaching. But the key questions are will they succeed in weaning Europe from Russian energy, by when and at what cost? And what are the implications for Cyprus that, like the rest of Europe and the world, is already grappling with runaway energy prices – and prices in general – high inflation and a rapid slow-down in economic growth.

      The main elements of the new proposal are:

      REPoweR strategy

      A solar energy strategy

      Electricity market recommendations

      Guidance on siting and permitting of renewables

      A renewable energy directive

      Raising EU’s climate targets.

      Stung by accusations that it helps fund the Ukraine war, the ultimate aim of these proposals is to end dependence on Russian energy and to accelerate EU’s transition to green energy. Whether these proposals are achievable within the prescribed timeframe is questionable – but for now that’s what Europe is aiming for.

      Last year the EU imported 155 billion cubic metres Russian gas, 40 per cent of its needs, and 3.2 million barrels/day oil and oil products, 27 per cent of its needs. Getting rid of these and replacing them by non-Russian alternatives is easier said than done.

      After years of under-investment, global oil and gas supplies are tight. That means that if substantial quantities of Russian oil and gas are taken out of the market, as a result of EU’s plans and US sanctions, competition to secure a share of the reduced market will be fierce, leading to high prices for at least a few years, something we are already experiencing.

      And as EU’s plans are put into effect and – with the war prolonged – sanctions against Russia are intensified, prices will increase further. Even Kadri Simson, the European Energy Commissioner, admitted that energy prices will stay high until 2025. The Futures Markets show oil and gas prices remaining higher than pre-crisis levels way beyond that.

      Cyprus is already suffering from high oil prices and their impact on electricity and transport costs, and of course through their general impact on the economy. Switching electricity generation next year to natural gas – at least as planned – will expose it to the consequences of very high gas prices, leading to much higher electricity prices than now.

      REPoweR Strategy

      The focus of EU’s REPoweR strategy is on increasing use of renewable energy, improving energy efficiency and securing non-Russian oil and gas supplies.

      This is central to ending dependence on Russian gas by 2027, and certainly before the end of the decade. The total cost of this plan over the next five years is estimated to be €210 billion, out of which €113 billion will be invested in renewables and in building a new hydrogen infrastructure.

      In order to facilitate this, the strategy introduces measures to speed-up permitting for solar and wind farms. It will also require solar panels to be installed on all new-building roofs.

      Central to the strategy is energy saving by reducing energy losses in buildings, and in heating and cooling, and by convincing consumers to become more conscious of the energy they consume and use less energy by changing lifestyles.

      The emphasis is on security of energy supplies and, at least in the short-term, this takes priority at the expense of energy prices, that are expected to remain high most of this decade.

      A side effect of high prices is a reduction in Europe’s energy demand. As a result of their impact in slowing down Europe’s economic activity, high energy prices are expected to reduce energy demand by 3 per cent by next year.

      In addition to ending reliance on Russian energy, the European Commission’s (EC) plans include reducing use of fossil fuels. This includes a target to reduce natural gas consumption by 30 per cent by 2030 and more-or-less completely by 2050. Something that does not support development of new long-term gas projects for export to Europe, including from the East Med. Only developed projects, such as Israel’s Leviathan gasfield and Egypt’s LNG plants, can benefit, by being able to increase gas exports to Europe now.

      Raising climate targets

      Increasing the renewables target from 40 per cent to 45 per cent and the reduction in energy consumption from 9 per cent to 13 per cent by 2030 will have far-reaching consequences, especially in Cyprus that so far has been quite slow in both respects.

      The EU has achieved an impressive 25 per cent wind and solar energy share of electricity in 2021. But Cyprus is woefully behind. In 2021 the share of solar power to total electricity generation was only 9.8 per cent. In contrast, the Netherlands, with only half the number of sunshine hours and half the solar irradiation intensity of Cyprus per year, achieved 11 per cent share of solar power in electricity generation in 2021.

      It is not surprising – in fact very disappointing – that earlier this week the EC ended-up sending Cyprus “a reasoned opinion for not having fully transposed EU rules on the promotion of the use of energy from renewable sources.”

      This belies the rhetoric that Cyprus is a leader in renewables implementation. The target for renewables in Cyprus 2030 ‘National Energy and Climate Plan’ is to achieve a 23 per cent share in gross final energy consumption and 26 per cent share in gross final electricity consumption by 2030. These are way behind current EU targets, let alone the new targets proposed in the REPoweR Strategy.

      Overwhelming reliance on fossil fuels has exposed Cyprus to high emission costs that switching to natural gas will not overcome.

      In fact, switching to natural gas in the second-half 2023, as currently planned, despite a 25 per cent reduction in emissions in comparison to mazut, will lead to more than 25 per cent increase in the electricity price due to the very price of LNG.

      Cyprus must embrace renewables at a much bigger scale than now, in combination with electricity storage, and competitive bidding to bring prices down.

      Our neighbours, Israel and Egypt, rely on using their own natural gas and by doing so have managed to keep gas prices down to about $5/mmBTU (per thousand cubic feet), in comparison to about $30/mmBTU in Europe. Combining this with cheaper renewables is keeping their energy costs down. There is no reason why Cyprus should be different.

      There are still many unanswered questions on how the EU will achieve these plans, but Cyprus must fully embrace them and work with the EU especially in upping its green energy ambition, going from words to action.

      Dr Charles Ellinas is a Senior Fellow at the Global Energy Centre, Atlantic Council

      @CharlesEllinas

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