"The world has never witnessed such a major energy crisis in terms of its depth and its complexity," IEA Executive Director Fatih Birol said at a global energy forum in Sydney. "We might not have seen the worst of it yet -- this is affecting the entire world."
The complexity and multidimensionality of this conflict do not allow us to fairly reduce it to just a few factors. However, in order to learn a lesson and prevent its repetition, it is worth focusing on one of the most important ones, which in addition we have influence over.
Our greatest energy weakness has been and continues to be the enormous dependence of our economies on imported energy sources.
We saw this already in the 1970s with regard to oil. Today we are also facing a crisis in this market, which is particularly felt in Central European countries. The largest Central European refineries were built on the route of oil pipelines running from Russia to the west and were therefore adapted to process Russian Urals oil. This includes a number of refineries in such countries as the Czech Republic, Lithuania, Germany, Poland, Slovakia and Hungary. With the exception of Slovakia, however, replacing Russian oil is mainly a matter of price and is logistically feasible. A separate case is Hungary, which is the only country in the region that is attempting to do as little as possible to deter Russia's aggressive policy.
Coal dependence is also a major challenge. This is mainly a problem for Poland, which produces about 36% of its primary energy and about 70% of its electricity from this resource. In addition, about 50% of individually heated homes derive their heat from burning coal. For their needs, Poland imports more than 7 million tons of coal annually, of which about 85% has so far come from Russia. Thus, the energy crisis has directly affected residents of small towns and villages. The situation is slightly better in the large power industry, where only about 15% of coal came from Russia. Still, the situation is far from optimal and power plants are reducing operations to save coal for the winter.
Russian coal has to be replaced, which is a major logistical challenge - Polish ports cannot keep up with transshipment. Additionally, the sharp increase in the price of this commodity and its strategic importance in winter for citizens has prompted the authorities to introduce a coal subsidy of 3,000 PLN (about 630 EUR) per household. In total, the subsidy program is expected to cost the state budget about 11 billion PLN (about 2.3 billion EUR).
However, the dependence on imported energy sources is felt most in the case of natural gas. All EU countries were affected, regardless of their degree of dependence on supplies from Russia, and then the crisis spilled over to other industries. Due to rising gas prices, which reached a price of 320 EUR/MWh (until the summer of 2021 they did not exceed 20 EUR/MWh), fertilizer plants began to reduce output, which will translate into higher food prices. Already in Poland, meat companies and breweries, among others, are warning of having to halt production due to the lack of carbon dioxide.
The crisis in the gas market did not start yesterday. We can trace its origins back to the summer/autumn of 2021, when the first price signals began to be felt more and more strongly. On the one hand, we had to deal with supply-side factors - Hurricane Nicholas curtailed LNG production in the US, and the lockdowns affected the suspension of some export infrastructure repair work, which restarted in 2021. On the demand side, on the other hand, the recovery of economies after lockdowns and the resulting increase in gas demand - especially in Asia - had the biggest impact.
The situation benefited Russia, which took advantage of Europe's weakness - its 40% dependence on Russian gas. As a first step, Russia stopped filling European gas storage facilities (Russia's Gazprom owns about 12% of EU storage capacity). Exports of this gas via pipelines running through Ukraine and Poland were also slowly reduced. Eventually, transit through Ukraine dropped to 40% of Russia's reserved capacity, and through Nord Stream 1 and the Yamal pipeline running through Poland to zero.
Russia used the tense market situation to put political pressure on Europe. Russia’s military plan aimed at occupying Ukraine failed due to the heroism of Ukrainian soldiers and the overwhelming support of Western countries, which not only sent weapons as well as humanitarian and financial aid to Ukraine, but also imposed sanctions on Russia to weaken its economy and reduce its ability to wage war.
However, the sanctions will only begin to take effect in the coming years. Moreover, they did not cover natural gas, since EU countries were well aware of their dependence on Russia. In turn, Russia decided to take advantage of this dependence (as it had already done against Ukraine or Poland, in the past) to weaken European economies and force politicians into submission to Russia. So far, however, a high level of European discipline on the issue of sanctions against Russia has been maintained.
There are three pillars in energy policy that can be distinguished, to which we pay attention and which vary in importance depending on the country - security, economics and ecology. Most Western societies put ecology and economics first. This is perfectly evident from Germany's Energiewende policy. Prioritizing the development of RES makes tremendous sense in terms of both ecology and profitability. At the same time, an integral part of the German - but also European - transition is the growing role of gas. In the German variant, it was to come mainly from Russia (Nord Stream and Nord Stream 2) - because of its low cost. The security argument was relegated to the background, which is why no one decided to build an LNG terminal to, for example, diversify supply.
Central European countries, on the other hand, focused primarily on security. Poland was developing the idea of a north-south corridor, connecting the Baltic Pipe pipeline (gas from Norway and Denmark) and the Swinoujscie LNG terminal with the Croatian Krk terminal. Lithuania also built its own terminal, making all three Baltic states completely independent from Russian supplies. Gradually, the region increasingly reduced its gas imports from that country - because it saw dependence on it as a weakness that Russia exploits instrumentally. At the same time, the countries of the region paid far too little attention to the development of RES, for a long time seeing them as expensive and unstable sources.
The current crisis is forcing us to redefine our thinking about dependence on energy sources. This is not time for the triumphalism of the security faction. In the long run, we cannot ignore the issue of ecology. Instead, we should look at energy in terms of resilience. Resilience to future crises that will come.
They may be of a political, climate or economic nature. Some of them are unpredictable, but some of them we can already anticipate and prevent.
Among the most glaring today are political threats, that is, the use of dependence on energy carriers as an instrument of political pressure. In this context, we should invest in new supply routes for the conventional fuels we need to import. At the same time, we need to be careful about where they come from. Algeria, for example, is already using gas as a political instrument by cutting off supplies through Morocco in connection with the conflict over the status of West Sahara. Not to mention the destructive role of Russia. The use of raw materials for political purposes is a major temptation in non-democratic states, and we must be extremely vigilant on this issue.
Therefore, non-reliance of our economies on fossil fuels will give us the greatest resilience. Efforts to reduce its use will make us immune to political (supply cutoffs), economic (commodity price spikes) and environmental (climate change and natural disasters) crises. The natural way to achieve this is to accelerate the transition towards climate neutrality, thus increasing energy efficiency, developing RES or new technologies such as hydrogen. This also finds understanding in Polish society - a country traditionally dependent on fossil fuels. Currently, 73% of Poles support accelerating investment in RES.
However, we must be careful in doing so. Rapid development of RES without attention to supply chains, i.e. local production, may result in technological and raw material dependence on external suppliers that can take advantage of this in the future. China is already the supplier of about 80% of lithium-ion batteries and components for photovoltaic panels and about 50% of wind turbines. There is also a significant dependence on the globe's unevenly distributed rare earth elements. However, it is fair to say that this dependence is less harmful than dependence on the supply of energy sources, the availability of which directly affects energy prices and the security of importing countries.
Also, the development of the hydrogen economy carries the risk of creating further dependencies. The World Energy Council predicts that about 50% of the green hydrogen used in the EU will have to be imported. Countries such as Russia appear among the import destinations. Thus, we predetermine the emergence of another dependency that will undermine our energy resilience. It makes sense to increase efforts to ensure that most of the green hydrogen used in the EU is produced in EU countries. The current gas crisis should be a sufficient lesson for us in this regard. Our investments in hydrogen production infrastructure outside the EU should instead be concentrated in democratic countries aspiring to EU membership. Following this line, it makes sense to develop green hydrogen production infrastructure in Ukraine - as part of that country's post-war reconstruction in a zero-carbon spirit. Similar investments can also be made in the Balkans, for example.
However, the most effective way to increase the EU's energy resilience is to reduce energy consumption. Therefore, we need to painstakingly review our economies in terms of energy efficiency. Restrictions on cooling and heating in public buildings should stay with us for the long term. District heating can be reformed so that utilities do not profit from the energy delivered, but from the thermal comfort delivered, which would mobilize them to invest in energy efficiency. Smart energy demand management is also becoming a necessity.
The most difficult part, however, may be revising our policy on natural gas. Despite the ongoing crisis, there is still no change in the paradigm of gas power development as stabilizing RES growth. Because of this, natural gas consumption forecasts in European economies are going up. In Poland, gas use is projected to increase from about 20 bcm per year to as much as 30 bcm per year. Today we can see that this is a dead end that will hamper our economies and reduce their competitiveness, pushing up production costs - through high electricity and gas prices.
Therefore, we should consider a policy of “Gexit” - an accelerated shift away from the use of natural gas in European economies. We need to do this today, using current technologies, without waiting for the spread of, for example, the use of hydrogen in the energy sector. The solution may lie primarily in stepping up investment in biogas produced from waste or energy storage.
The ongoing energy crisis will be very severe for our economies and societies, and its scale is still difficult to predict. It can also be said with a high degree of certainty that it will be with us for the next two to three years. Governments are clearly focused on protective emergency measures, aimed primarily at mitigating the effects of the crisis on the most vulnerable groups, and on securing energy supplies. This is why old coal-fired power plants are being turned on, energy prices for residential customers are being frozen and windfall taxes are being introduced. However, it is important to separate the short-term from the long-term perspective. A devastating crisis - if we take steps early enough to accelerate the energy transition - can strengthen our systems and economies and accelerate our march toward zero-carbon.
We should start thinking about it in terms of strengthening our resilience - economically, climatically and politically. The current energy landscape exposes us to very severe impacts on all three levels. As we build the energy of the future, we must strengthen each of these elements.
With the support of the European Commission's Representation in Italy.