How is the high price of natural gas going to affect the EU’s green ambitions?

Published on: 10 March 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: equity investor Martijn Olthof talks about the consequences of the high price of natural gas for the EU’s green ambitions.

The increase in the price of natural gas, which started last fall, due to increasing demand from industry, has become much more critical because of the war in Ukraine. The war and the high price of natural gas are reasons for the EU to quickly become less dependent on natural gas from Russia. Brussels therefore announced on Tuesday that the EU is going to have to be able to manage without natural gas from Russia before 2030. This REPowerEU plan is a tightening of the so-called Green Deal and the Fit for 55 plan, which aims to reduce carbon emissions by 55 percent by 2030. An even more ambitious climate plan, therefore, and a turning point in European energy policy.

“The Fit for 55 plan was already very ambitious, especially in these times of high energy prices, high inflation and a shortage of labor and materials,” Olthof said. So, is an even tighter target realistic? “It is realistic in the sense that the need is there, and need supersedes law. Such a tightening is also necessary because Moscow can decide to turn off the natural gas tap at any moment. The situation in Ukraine and the high natural gas prices are all the more reason to implement the Green Deal and the Fit for 55 plan more quickly and to focus even more on renewable energy.”

One of the concrete measures in the REPowerEU plan is to shorten procedures for the construction of wind farms and solar panels. A welcome measure, according to OIthof. “But this will only succeed if the bureaucracy around permits is reduced, because companies that want to invest in this often run into that. If, for example, a high-voltage cable has to be laid, especially on land, it often takes years before all the required procedures have been completed. In and of itself this is a good thing, because people do need to have a say in the matter and not everyone wants a high-voltage pylon in their backyard. But one way or the other, this type of infrastructure is necessary, especially if we want to move away from fossil fuels, and particularly from natural gas from Russia, even sooner. It is therefore important that, where possible, without losing sight of the interests of local residents, procedures of this kind are actually relaxed so that investments in the energy transition can get off the ground more easily.”

Accelerating the green ambitions alone will not get Europe off Russian natural gas this year

The REPowerEU plan increases the likelihood that the European Commission will achieve its green ambitions. But accelerating green ambitions alone will not get Europe off Russian natural gas this year. “That really requires emergency measures, and certainly to keep energy bills somewhat affordable,” Olthof argues. “For example, the plan provides for the coordinated and mandatory rapid replenishment of stocks in natural gas storage facilities in Western Europe. There is also talk of temporarily re-regulating energy prices. Countries could pay for this by imposing additional taxes on high profits of some electricity companies that are not dependent on natural gas. And by using the high revenues from the sale of carbon emission rights.”

Another emergency measure could be to keep a coal plant open longer, even though the intention is to close it down as soon as possible, Olthof says. “After all, the targets for reducing carbon emissions have to be met one way or another. If in Europe, we were to keep the coal plants open a year longer, the extra emissions would have to be compensated for in some other way in order to keep global warming to a maximum of 1.5 degrees. And that was already an ambitious goal before the war in Ukraine. In addition, 46 percent of Europe’s coal imports also comes from Russia, so that may not reduce our dependence either. So, the REPower EU plan does not explicitly provide for keeping coal plants open longer, nor does it propose an easing of the issue of emission allowances. So, it seems that the European Commission at least wants to prevent the short-term emergency plan from jeopardizing the green ambitions, in order to, at the same time, push the realization of the ambitions closer in the longer term.”

In conclusion, Olthof sees the high price of natural gas as a clear incentive for Europe’s green ambitions. “The fact that this sharp rise in the price of natural gas is partly the result of our dependence on Russia, naturally increases the urgency of getting rid of fossil fuels immensely. And particularly from Russia. That urgency is very clear. In the short term, with fairly distributed burdens, so as to avoid problems if Moscow turns off the tap. But also in the longer term, so that we will never again have to depend on Russia for our energy.”