EU seeks 15% cut in gas use on Russian supply squeeze
Bloomberg July 20, 2022
The European Union proposed that the bloc cut its natural gas consumption by 15% over the next eight months in a plan that would affect all households, power producers and industry.
The move reflects mounting concern that Russia will halt gas exports to the region in retaliation for sanctions following its invasion of Ukraine. A cutoff would threaten EU efforts to replenish stockpiles ahead of winter, potentially jeopardizing security of supply to key sectors and crippling the region’s economy well into next year.
The EU’s suggested demand reductions equate roughly to the annual gas consumption of France, though at this stage remain voluntary. Measures put forward by the European Commission on Wednesday include a mandatory trigger should the supply situation deteriorate significantly.
“The European Union faces the risk of further gas-supply cuts from Russia due to the Kremlin’s weaponization of gas exports,” the European Commission said in a statement. “Taking action now can reduce both the risk and the costs for Europe in case of further or full disruption.”
European gas prices rose Wednesday after Russian President Vladimir Putin warned that the major Nord Stream pipeline could return from maintenance at lower rates of flow unless a spat over a key piece of equipment is resolved. Curbs to Russian shipments have already affected 12 member states, and prompted Germany to raise its gas-risk alert to the second-highest level.
With persistent doubts over supply, the European Commission recommended gas-saving steps that include reducing heating and cooling, switching to other fuels and market-based measures.
“I’m confident we can master this Russian-engineered energy crisis by staying together,” Commission President Ursula von der Leyen said Wednesday at a press briefing.
The commission is working under the assumption that Russia won’t resume full deliveries via Nord Stream, which has been closed since earlier this month, Budget Commissioner Johannes Hahn said on Tuesday. Putin said later that day that if a pipeline part caught up in sanctions isn’t returned to Russia, then the link will only work at 20% of capacity as soon as next week -- as that’s when another part that’s now in Russia needs to go for maintenance.
A halt of Russian gas supplies to the EU could potentially reduce its gross domestic product by as much as 1.5% if the winter is cold and the region fails to take preventive measures to save energy, the commission estimated. In the event of an average winter, a cutoff may lower GDP by between 0.6% and 1%.
In skittish European markets, the Stoxx 600 index dropped during the briefing, losing as much as 0.6%. European gas futures traded little changed as of 3:06 p.m. in Amsterdam, after earlier jumping 6.4%.
If member states act to meet demand-reduction targets, “Putin’s attempt to manipulate us will fail,” EU climate chief Frans Timmermans said at the press conference. “Europe as a whole is under his attack. A strong European response is the only response.”
A Russian gas cutoff in July would mean that EU stockpiles would be 65% to 71% full at the start of November, below the 80% target, the commission estimated. That indicates a gap of 30 billion cubic meters during the winter under normal weather conditions and continuously high liquefied natural gas supply, it said, warning that storage could empty out in several member states by next April.
Replenishing reserves next summer may also be challenging, with stockpiles in October 2023 potentially only reaching around half full, according to simulations run by the commission.
The plan unveiled on Wednesday goes in the right direction, according to Simone Tagliapietra, a researcher at the Bruegel think-tank in Brussels.
“EU member states must now adopt the proposed gas demand-reduction targets and make comprehensive efforts to reduce demand wherever possible,” he said. “Governments must ask people to consume less and should have the courage to tell their citizens that Europe is in the midst of what possibly represents the greatest energy crisis in its history.”
The proposed regulation on demand-reduction targets would grant the commission the right to declare a union-wide alert when there’s substantial risk of a severe supply shortage or a demand spike.
The measure will need approval from member states, which the EU’s executive arm may seek as soon as next week during an emergency meeting of energy ministers. A large group of countries opposes mandatory cuts, arguing that national governments already have emergency plans and will reduce demand regardless of whether they are obliged to by the EU, according to three diplomats familiar with the matter.