Russia’s war with Ukraine offers critical lessons for global energy markets

Environment

A solar energy field stands next to the Lippendorf coal-fired power plant on May 10, 2021 in Lippendorf, Germany.
Jens Schlueter | Getty Images News | Getty Images

The Ukrainian people are bearing the heaviest weight of the war they are fighting with Russia, but the war has had grave consequences for global energy markets as well.

The European Union relies on Russian natural gas and that dependence has forced the United States and Europe to, so far, maintain loopholes in their otherwise tough economic sanctions on Russia.

On Wednesday, White House spokeswoman Jen Psaki indicated the Biden Administration was considering energy sanctions on Russia, but that’s a very tough call in the face of high oil prices in both the U.S. and Europe.

The Russian-Ukrainian war is one wrench in global energy markets, and another is climate change. As Monday’s highly anticipated report from the U.N.’s Intergovernmental Panel on Climate Change made urgently and desperately clear, global warming is an urgent threat to human welfare.

“Nearly half of humanity is living in the danger zone – now. Many ecosystems are at the point of no return – now,” U.N. Secretary-General António Guterres said on Monday. “Unchecked carbon pollution is forcing the world’s most vulnerable on a frog march to destruction – now.” 

Teetering on this precipice with climate change while simultaneously surviving the Russian and Ukraine war is generating a new framework for understanding the global energy markets.

Energy independence is not the same as energy security

A nation’s national energy policy is a cornerstone of its national security policy.

In Europe’s case, “it was staggeringly irresponsible to outsource gas storage to Gazprom,” said Steve Cicala from the National Bureau of Economic Research. Cicala focuses on the economics of regulation, and specifically on environmental and energy policy. Gazprom is the Russian energy giant that’s majority owned by the state.

Going forward, the EU “should be moving at the maximum possible speed to get themselves off of Russian gas,” Cicala said.  

That does not mean energy independence is the benchmark.

“The goal is security,” said David Victor, a professor of public policy at UC San Diego. “And security is not the same thing as independence.”

Energy independence means relying on national or local sources of energy. But even there, flexibility is limited if one of those sources is interrupted or runs out. A well-functioning global market is a better solution.

“Security comes from diversity and diversity alone,” he said.

For Europe, being overly dependent on pipelines of Russian natural gas is the problem. The EU meets about 10% of its demand for natural gas domestically and all the rest is imported, making it the largest importer of natural gas in the world, according to to the Directorate-General for Energy for the EU. Natural gas imported into the EU comes from mainly from Russia (41%), Norway (24%) and Algeria (11%).  

In the short term, the European Union is looking to increase its imports of liquid natural gas by tanker ship from the United States and Qatar, Victor said.

Europe is “actually raising important imports from different countries. And by having those imports available, that’s an option to them that improves security,” Victor said.

Scaling up renewables takes time and political will

The EU has been reducing its dependence on coal to reach its climate goal of achieving carbon neutrality by 2050 and cutting emissions by at least 55% by 2030.

In 2020, the most recent year data is available for, 32% of the EU’s energy came from oil and petroleum products, according to Eurostat, the statistical office of the European Union. About 25% of the EU’s energy came from natural gas, 11% from solid fossil fuels, 13% from nuclear energy and 18% from renewables.

The focus on building out renewables is already significant, according to Aaron Praktiknjo, head of the energy systems economics at the E.ON Energy Research Center at RWTH Aachen University in Germany.

“I don’t think that the EU should be faulted for not ramping up renewables faster,” Praktiknjo told CNBC. “Take Germany: In just about 20 years, the share of renewables in electricity consumption has risen by a factor of about 10 from about 5% to 50%. At the same time, electricity prices for final consumers have doubled mainly because of subsidies for renewables.”

A draft of a government policy obtained by Reuters on Monday found German leaders are looking to accelerate their transition to renewables, aiming to meet all its electricity needs with supplies from renewable sources by 2035.

Transitioning the EU’s energy grid will take physical upgrades and international coordination.

And also, it will require governmental intervention, a pill many current political regimes don’t want to swallow, according to Sir David King, a former U.K. climate change official who now chairs the Centre for Climate Repair at Cambridge University.

“Some governments, and the current British government is one of them, don’t like regulatory behavior. We want to deregulate everything and allow the private sector to operate on a free basis. You can’t get this transition without regulatory behavior,” said King.

Lobbying from incumbent energy providers may contribute to the reluctance to regulate the energy industry, King said.

“The United States has the biggest lobby system for the fossil fuel industry in the world,” King told CNBC. “The power of the lobby system in the United States has influenced other countries as well. So I think the incumbent is terrified of being put out of business.”

Another problem: Politicians don’t prioritize energy policy because many of their constituents have more pressing concerns, said Benjamin K. Sovacool, a professor of energy policy at the University of Sussex Business School.

“While energy costs seem large in total, they are still a small percentage of overall household spending per month,” Sovacool told CNBC. “So, not as important a priority as mortgages, or university fees, or paying for cars. We spend thousands of pounds or euros on these every year, but only hundreds of pounds or euros on energy.”

Public surveys and polls have found that voters prioritize issues like immigration, Covid-19 response, military spending, health, and the war in Ukraine, above climate policy and energy issues, according to Sovacool.

“And no politician wants to be seen to increase energy prices in the short-term by investing in low-carbon alternates, even it pays for itself in the long-term, or benefits society later,” Sovacool said.

Nuclear could be part of the solution

Nuclear energy production emits no greenhouse gases, but some constituents voice concern about the potential for accidents and the lack of a permanent disposal repository for nuclear waste, which is radioactive.

In a way, the Russia-Ukraine war will be like a Rorschach test for nuclear energy, Victor told CNBC, as Ukraine has 15 nuclear reactors, which the International Atomic Energy Agency (IAEA) has been monitoring during the conflict.

“People who are worried about nuclear will see in all the agitations around the Ukrainian nuclear complex in particular more reasons to be worried about nuclear,” Victor said. “And people who see nuclear as as a part of the overall strategy for dealing with emissions and a way that that also reduces dependence on foreign suppliers are going to see in this a logic for keeping nuclear plants open and for building new nuclear plants in Europe.”

Sentiment about nuclear is often hard to shift, and the current moment is no exception, according to Victor. (He sees nuclear energy as an important part of decarbonization.)

Germany was getting about 25% of its electricity from nuclear energy until March 2011, according to the World Nuclear Association. Then German government passed a law to phase out nuclear power following the Fukushima accident in Japan.

Now, high gas prices and a lack of sufficient energy “should motivate Germany to restart its significant nuclear generation portfolio. Even if only in the short-run, this would help buffer the shock,” Cicala told CNBC.

“The decisions to retire nukes were short-sighted and not enough consideration was given to how the shortfall would be made up. But that would’ve been true even without the risk of a supply interruption from Russia,” he said.

But Germany’s move is not necessarily a bellwether. The Czech Republic, France, Poland and the UK are pursuing new nuclear reactors according to John Kotek at the Nuclear Energy Institute. As Russia falls out of diplomatic favor, that gives American nuclear companies a foot in the door for European customers, Kotek said.

Russia has been “one of the strongest competitors for nuclear export because they would offer aggressive financing packages,” Kotek said. “Russia is really disqualifying itself from many of the opportunities that are going to exist in the in the free world in the over the coming decades because they’re just proving themselves to be an unreliable partner.”

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