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The strategic case for joint EU gas demand reduction

- By Marco Giuli

 

The war in Ukraine has significantly affected Europe’s energy security predicament. The EU has so far managed to weather the sharp reduction of Russian gas supplies that started in 2021 by tapping into alternative supplies – especially of liquefied natural gas. However, against the context of a tight global market and alternative capacity stretched to its limits, further unanticipated reductions or cut-off of Russian supplies may trigger worrisome scenarios for the next winter. By further reducing supplies, Moscow can compromise European efforts to replenish storage facilities ahead of the winter[1] – therefore enhancing its power position vis-à-vis European countries by imposing on European citizens the perspective of an economic recession, spiraling inflationary pressure, energy rationing and factories shut-downs. While a complete cut off would be extremely costly for Moscow, there is no reason to exclude that the Russian leaders might recur to continued supply reduction if they deem it strategically advantageous. Sizeable revenues from oil exports still give Russia a certain room for further manipulation of gas flows.


Failure to reach sufficient storage by the winter and adverse meteorological conditions imply considerable political risks. As EU member states are set to be unevenly impacted by a major supply event,[2] EU unity in the response risks unravelling. Member states might retrench into energy protectionism, in the attempt to shield their consumers from skyrocketing energy prices and their industries from rationing – at the cost however of amplifying the collective magnitude of the crisis. Hungary has already announced an export ban on energy carriers and firewood.[3] The intra-EU solidarity provisions adopted in 2017[4] – and still subject to bilateral agreements on compensations that are still not finalized on most cases – might be put to a test. If Russia perceives that further supply cuts will be able to disrupt intra-EU energy solidarity – arguably causing political fallouts – it might see a compelling strategic case for not resuming supply or continuing manipulating flows.


A joint response including enhancing solidarity and reduce demand is essential to support countries that are most exposed besides signaling to Russia that weaponizing gas supply will be ineffective and will carry negligible benefits for Moscow compared to costs. The European Commission issued in July a plan for a coordinated approach to energy conservation.[5] The plan has the merit of recognising the magnitude of the crisis and the necessity and value of demand-side response – which many EU governments have downplayed so far. By saving gas now, Europe will provide signals to the market – potentially exerting some containment of prices – and reduce the magnitude of emergency curtailments in the winter.


An underrated aspect of a credible solidarity and demand-reduction plan is that it constitutes a necessary precondition for capping the prices of Russian gas supplies, as suggested by some EU countries. In the intentions of the promoters, a cap is intended to reduce revenues for Russia while avoiding a complete cut off of supplies.[6] Such a cap would require including sanctions on Russian supplies, which would be conducive to EU firms invoking force majeure on Russian supply contracts: all of this would be in order for the EU to engage in a joint renegotiation of supply terms with Russia by way of the recently established common purchase platform.[7] Such course of action might reverse the current asymmetry in bilateral gas dealing - but it requires member states to be sufficiently and jointly prepared to cope with the risk of an anticipated supply interruption.


[1] https://www.bruegel.org/2022/07/european-union-demand-reduction-needs-to-cope-with-russian-gas-cuts [2] https://www.imf.org/en/Publications/WP/Issues/2022/07/18/Natural-Gas-in-Europe-The-Potential-Impact-of-Disruptions-to-Supply-520934?cid=em-COM-123-45139 [3] https://www.euractiv.com/section/energy/news/eu-solidarity-tested-as-hungary-bans-gas-exports-in-emergency-move/ [4] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.280.01.0001.01.ENG [5] https://www.politico.eu/article/brussels-plans-emergency-gas-rationing-for-eu-countries/ [6] https://www.bloomberg.com/news/articles/2022-06-21/italy-says-proposal-to-cap-gas-prices-is-gaining-support-in-eu [7] https://energy.ec.europa.eu/topics/energy-security/eu-energy-platform_en



Marco Giuli is a scientific advisor at the Istituto Affari Internazionali (IAI) and Member of the Editorial Committee of the International Spectator; Researcher at the Institute of European Studies of the Free University of Brussels and Associate Analyst at the European Policy Center (EPC).

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