Energy Monitor: A Russian marriage of convenience

by: Hans van Cleef

140404-Energy-Monitor-Apr.pdf ()
  • European gas prices under pressure due to weak demand and high inventories
  • Stronger European call for less dependency on Russian energy…
  • … but near-term alternatives result in (too) difficult moral quandaries for EU politicians
  • Extension of renewable energy is of some (expensive) help, but only in the longer term



European gas price stuck in downward trend

The conflict between Russia, Ukraine and Western countries only had a short-lived impact on European gas prices. The market was confident that the conflict would not have a dramatic effect on Russian gas deliveries to Europe. The impact on the spot market was limited to an appreciation of only 10%. In the weeks thereafter, the rally was unwound. In fact, TTF gas prices even declined further, reaching a low of EUR 20.00/MWh, the lowest point since the end of 2010. The drop in both spot and future markets are the result of weak demand for gas following mild weather conditions, in combination with large supplies. Only when temperatures become so high that demand for cooling will increase, a price effect could occur. Interruptions in gas deliveries from Russia to Europe if the current conflict intensifies, might lead to price developments we are not taking into account here.

Call for less dependency on Russian energy

As a result of the conflict regarding the Russian annexation of Crimea and the imposed sanctions against Russia, the call to reduce Europe’s dependency on Russian energy came to the fore again. There are enough alternatives for Russian gas. However, all alternatives come with a burden. However, there is a price tag attached to that. It is either expensive, dirty, or risky. It seems that Europe is stuck in a marriage of convenience when it comes to an important part of our energy supply.

Alternatives for the near term

ABN AMRO believes that LNG’s limited availability makes it expensive. On top of that, there is a lack of infrastructure. Coal supplies are immense, making coal a cheap alternative. However, an increase in the use of coal would interfere with European carbon reduction targets. Expanding nuclear energy is possible, but from a social perspective undesirable. Finally, expanding the capacity of renewable energy further in the very near term is not possible. To focus on energy efficiency and invest more in innovation on behalf of renewable energy (increase performance, develop storage of solar- and wind-energy, as well as reducing the usage of rare metals such as lithium and indium) seem the most logical solutions to reduce Russian gas imports in the near term.