European Energy Policy after the Crimean Crisis: Focus on Flexibility

With Russia‘s taking of Ukrainian territory in a way reminiscent of the times before the 1648 Peace of Westphalia set the current order in international relations, the focus in Europe is shifting from admonishing Russia for its behavior towards diplomatic and economic sanctions.  The "dependence of Europe on Russian gas" is moving into focus, and Europe is contemplating how to live with little or no Russian gas.  Russia exports fossil energies: coal, oil, and gas; but gas dominates discussions; for background, see http://www.eia.gov/countries/cab.cfm?fips=rs). 

In the wider picture, the following changes are likely:

• The little coal Russia exports will simply go elsewhere; the world market geometry will adapt.  Total cost will go up slightly because of "dislocation" from the current market equilibrium.  No great impact,
• Oil will be redirected in part, as far as possible given the pipeline and shipping infrastructures in place.  In the short and medium term, expect lower exports from Russia, slightly higher world market prices.  Over the long term, as additional infrastructure may be built, more oil might flow East and South from Russia; Russia will want to reduce its dependence on the European market and develop its markets in Asia.
• Gas is the most interesting, because it is largely pipeline-bound.  (Russia has increased export of LNG notably to Japan, and this may increase in importance.)  In the short run, expect significantly lower gas exports from and revenues going to Russia.  This will cause some general economic dislocation in Russia as well as more limited adjustments in the European energy systems.

Nuclear Nonsense

In Germany, the prospect of lower gas supplies from Russia has already resulted in calls to reconsider the nuclear phase-out.  That was to be expected from the nuclear die-hards, but their arguments are nonsense:  Nuclear power and gas occupy very different parts of the energy market and -- with very few exceptions -- cannot substitute one another. Nevertheless, European utilities and policy-makers will not focus on the costs and risks of nuclear power as much as their attention is drawn towards gas.

Reflexive Focus on Gas

Europe will develop responses in the gas market, and in its policies on energy transition. The short to medium-term response in the gas market can be to: 

• Use strategic reserves to cushion market effects and avoid panic, and prepare to change gas flow directions to provide "Western" gas to countries in Central and Eastern Europe, and the Baltics;
• Expand supplies from indigenous sources, but that is limited;  
• Import more gas from Norway (as first choice) and other neighbors, notably Algeria (second choice, because of Abdelaziz Bouteflika‘s regime and Russia‘s role in the Algerian gas industry); 
• Save gas; use it more efficiently, and substitute gas with (renewable) power wherever and whenever possible (which requires marginal retrofits in many gas-using installations);
• Build up the biogas industry (which has limited potential but still some room to grow);
• Try to frack Europe while events in the Ukraine may muffle opposition to fracking for fossil methane for a while, even if it is a deviation and distraction from rational energy policy; 
• Invest in power-to-gas conversion as a domestic source of synthesized gas.

The impact on energy transformation policies can be significant.  Policies needed for reducing dependence on gas have not been in focus so far, but they are essentially the same as for phasing out nuclear and coal power.  The EU and the Member States might accelerate the rollout of policies modeled on Germany‘s Energiewende.  (It is worth noting that Germany is not a leader here, neither in technologies across the board, nor in terms of growth or market share of renewable energies.  Yet, Germany is seen as the trailblazer in the development of effective policy frameworks.)

From Gas to Flexibility …

So far, gas has been billed as a "friend of renewable energies" because gas-fired power plants can ramp up and down quite quickly and thus compensate for the predictable fluctuation in the supply of some renewable energies, notably wind and solar energy.  (Others, such as biogas-to-power are dispatchable, as is a part of hydropower.)  Together, renewable energies and gas could displace nuclear and coal power more effectively, more economically and quicker than either could without the other.  With gas as the "flexible friend" of renewable energies taking a smaller role, the flexibility will have to come from 1) storage and 2) demand response:

… through Storage and …

The more storage in the system the easier it can evolve to 100% renewable energy.  Put simply, storage comes as:

• "Pre-power storage" -- for instance of biogas, water head behind hydropower dams (pump and flow), or as heat (in the form of molten metals from concentrated solar energy installations;
• "Power storage" in batteries, for instance in electric vehicles, but utility-scale batteries are also coming onto the market;
• "Interim or side storage" with conversion from power and back to power, such as flywheels, compressed air storage etc.;
• "Post-power storage" -- such as ice (for subsequent cooling) or heat (in hot-water tanks, for instance). 

The legal frameworks for storage have to evolve rapidly to enable new technologies and business models to be introduced.  There is much pent-up invention waiting to be brought to market.

… Demand Response

Demand response has not been used much in any of the EU Member States; the current energy grids and regulatory frameworks are "hard wired" against it.  Yet the potential is enormous when you consider the ease with which power demand can be shifted by a few hours or days. 

Trimet, a German aluminum recycler, has developed the skill of ramping its processes up and down so as to "surf the weather systems bringing cheap wind power to Germany".  It has become a "swing consumer" of electricity with a business model that has allowed it to push a Dutch rival company into bankruptcy.  The process innovation could be replicated in other industries, notably steel and chemicals. 

For households and small businesses, electricity tariffs giving real-time incentives depending on the grid load and supply, could stimulate sufficient flexibility to compensate the loss of gas in the system.  But that requires changes in the tariff and taxation policies: Taxes (and charges) must be expressed in percentages of the basic (market) price rather than as fixed amounts expressed in Euro cents per kWh as is currently the case.  (Tariffs must stop muffling the price signals and rather amplify them.)

Hope from the Ukraine

With the right narrative and conceptual framework, and with principled and forward-looking policies adopted by the European Union and its Member States, the Crimean Crisis might hasten the transformation of Europe‘s energy systems towards 100% renewable supplies in a smart grid, a system that stimulates and provides for dynamic efficiency with many economic and social benefits.  This hope does not belittle or excuse anything Russia is doing in its neighborhood, but Europe should still make the best of a bad situation.