IEEJ：September ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (654)September 15, 2023

Is the European Energy Situation in a Lull?
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, Japan
From September 11 to 14, I visited the United Kingdom and had the opportunity to exchange
views on the energy situation in Europe with various energy experts in London and Oxford. Europewas hit directly by the international energy market turmoil caused by Russia's military invasion ofUkraine. In 2022, Europe faced a significant surge in energy prices. Then, concerns about energy
shortages in winter became a serious problem, leading energy security to suddenly emerge as the mostimportant issue in Europe. On the other hand, Europe has been actively playing a leading role inenhancing climate change countermeasures not only regionally but also globally. Therefore, achieving
both the enhancement of energy security through the phaseout of dependence on Russia anddecarbonization has become the most important challenge in Europe. To this end, Europe has promoted
the REPowerEU Plan, as known well.
More than 18 months after the outbreak of the Ukraine crisis, various changes have been
seen in the international energy market. Crude oil prices are still around $90 per barrel, with Europeangas prices remaining in a range of $10-15 per million British thermal units. These levels cannot becalled “cheap” from a historical point of view. From last year's levels reflecting extraordinary spikes,
however, oil and gas prices have declined, indicating a relatively calm energy market. We discussed
the status of the European initiative to achieve both energy security and decarbonization in such anenergy situation. As a result of the discussions, I feel that Europe (or the entire world) is in a kind oflull. In the following, I would like to present my awareness of the lull from two different perspectives.
First, the lull is related to the energy market stability. As noted above, the European energy
market has restored stability as price hikes have calmed down. Some attribute this to the successfulnessof European energy policy. Regarding the gas market, which had faced the most severe situation, there
is a kind of euphoric sense that the crisis is over. In fact, gas prices are hovering in the $10-15/MMBtu
range, with inventories reaching extremely high levels earlier than usual ahead of the winter season.
Through my talks with energy experts, however, I have realized anew that the supply-demand balancein the international energy market cannot restore the traditional equilibrium unless the loss of energy
supply from Russia is covered.
Before the Ukraine crisis, Russian gas exports were huge, accounting for one-quarter ofglobal gas exports. Russian pipeline gas supply to Europe, which accounted for the majority part ofRussian total gas exports, has declined sharply through the crisis to about one-fifth of the earlier level.
Russian oil exports, though subjected to a Western embargo, have been maintained in volume as adecline in exports to Western countries has been covered by an increase in those to India, China andothers. Since destinations of Russian gas exports via pipelines are difficult to change over the shortterm, however, global gas supply has declined by the equivalent of the lost volume of Russian pipelinegas exports to Europe. As global energy demand as a whole tends to increase moderately, any largescale supply decline is significant. The net supply decline occurred in the gas market, but its impact
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spread globally to various energy markets through the substitution of gas demand. For instance,developing countries have become unable to procure gas due to price spikes and expanded coalconsumption. The net decline in Russian gas supply has created a major distortion in the supplydemand balance of the international energy market, which has not yet been resolved.
In order to remove the distortion in the supply-demand balance, supply must be expanded
to cover the decline. While expanding the use of coal and nuclear power is important for the removalfrom a global point of view, what has been important for increasing energy supply in Europe is theexpansion of renewable energy supply and LNG imports mainly from the United States. However,
LNG imports from the United States to Europe have been increased through changes in destinations
for existing U.S. LNG export facilities, which has led to a rise in international LNG prices. What ishappening in the world now is that U.S. LNG project investment decisions are coming in response toprice hikes in a manner to anticipate an expansion in U.S. LNG supply. While renewable energy andU.S. and other LNG supply is expanded, the supply loss problem may not be resolved until the loss ofRussian pipeline gas exports to Europe is covered fully. Through my talks with European energy
experts, I have felt that the Russian pipeline gas supply loss may be fully offset by the renewableenergy and LNG supply expansion around 2026 and beyond. Until then, the market may remain
vulnerable to sharp price surges to be triggered by risk events such as lower winter temperatures,increased demand from China, and unforeseen supply disruptions. In this sense, the seemingly calm
market is in a sensitive lull while remaining vulnerable until the supply loss is covered.
Second, a lull may be emerging in the much-awaited expansion of renewable energy supply.
This point was frequently raised at my talks in the United Kingdom, leaving a particularly strong
impression on me. The expansion of renewable energy supply is viewed as extremely important forpromoting both the phaseout of dependence on Russia and decarbonization. As symbolized by therecent failure of U.K. offshore wind farm auctions, however, there are moves in Europe that seem tobe affecting the expansion of renewable energy supply, which has progressed smoothly until recently.
For instance, it has been pointed out that capital investment and operating costs forrenewable energy are rising amid continued high inflation, undermining the profitability and economic
attractiveness of renewable energy projects. Of course, if renewable energy electricity prices are highenough to make up for cost hikes and secure profitability, there may be no problem with profitability.
Amid the Ukraine crisis, however, soaring energy prices have become a serious social, economic, andpolitical problem in Europe, prompting the region to introduce energy subsidies ahead of otherdeveloped regions. The European economy is still struggling, with inflation lingering. The social
sensitivity to energy price affordability has changed. In addition, the implementation and enhancementof various economic and social measures since the COVID-19 outbreak has greatly increased fiscal
costs in each country. Under these circumstances, I heard the view that the profitability of renewableenergy projects is declining, affecting the promotion of these projects. The promotion of renewableenergy, though expected to continue over the medium to long term, might have come to a lull now.
If the promotion of renewable energy fails to make progress as originally planned for theimmediate future, the phaseout of dependence on Russia, as well as decarbonization, may be affected.
In particular, any lull in the expansion of renewable energy supply may affect greenhouse gas emission
reduction goals for 2030 to some extent. For governments responsible for promoting energy policies,
it is politically difficult to easily tolerate higher energy prices or costs. Political parties, which hadraced to enhance climate change commitments in elections until recently, are apparently required now
to pay attention to the impact of policies on costs and economic burdens. As Europe is considered tobe in a lull in various ways, its future energy policy developments may attract much attention.
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