IEEJ： May 2014

ｃ○ IEEJ 2014

Special Bulletin
A Japanese Perspective on the International Energy Landscape (170)

May 7, 2014

Emerging Challenges in the European Energy MarketKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
I visited London from April 29 to May 4 to participate in an international conference hosted by
the Royal Institute of International Affairs, known as Chatham House, and discussed challenges in
the recent international and European energy situation with energy experts. The discussions,although covering a wide range of problems, indicated the most important energy challenges forEurope. I here would like to take up two of the challenges.
The first challenge is Europe's energy mix. Energy mix discussions in Japan focus on the futureof nuclear energy and how far renewable energy's share in total energy consumption should beexpanded. On that front, Europeans are also conscious of nuclear and renewable energy in regard tothe energy mix. In my view, however, European energy experts are now greatly interested in therelationship between coal and natural gas as indicated by my discussions with them.
European energy demand has generally remained slack amid a prolonged economic recession.
Even despite the slack energy demand, coal demand has increased remarkably. Behind the coaldemand growth, cheap coal has flown into the European market as the global coal supply-demandbalance has eased. Slowing coal demand growth in China and other emerging countries and the U.S.
shale revolution have caused surplus coal supply in the United States, leading the surplus coal to beimported into Europe. Stagnated carbon dioxide prices in the European Union Emissions Trading
Scheme have also accelerated an increase in coal consumption.
While consumption of cheap coal has expanded in the power generation sector, that of lessprice-competitive natural gas has declined. As a result, natural gas fired power plants, including evenefficient and advanced ones built recently, have been shut down in Europe. Also affecting natural gas
consumption has been a policy-driven increase in renewable energy consumption. Natural gas fired
power plants had been expected to serve as an electricity supply buffer when intermittent renewableenergy supply increases. In fact, however, natural gas has plunged into a difficult position in theEuropean energy market.
Expectations on natural gas have grown sharply in the world since the International Energy
Agency's World Energy Outlook 2011 carried a special chapter titled, "Are we entering a golden ageof gas?" As the shale gas revolution has made progress, with rich unconventional gas resources
endowment proven in the world, natural gas has been expected to serve as "bridge energy" during along-term shift to the far future featuring non-fossil energy's dominance or even as "destination1

IEEJ： May 2014ｃ○ IEEJ 2014

energy" continuing to play a key role for an even longer period of time. But the actual development
has run counter to the expectations at least in Europe. I felt that European energy industry people,particularly natural gas market players, are frustrated with the gap between the expected role ofnatural gas and the reality.
In my latest discussions with European energy experts, a dominant opinion was that thecompetitiveness of natural gas should be enhanced to eliminate the gap. To this end, many Europeanexperts called for appropriately pricing each energy source's externality with regard to not only
energy security and global warming but also environmental loads including air pollution (or forinternalizing coal's externality for environmental loads). The opinion is theoretically correct. But thepast European efforts indicate that the challenge may be difficult. In a wider context, how toappropriately treat the externality could be related to how far market principles should be left tosolve energy problems. The best energy mix represents how to address energy security,environmental conservation, competitiveness and other challenges (externality) and will eventually
be subject to policy intervention.
The second challenge is related to the Ukraine situation and energy. The Ukraine situation has
remained tense since before my visit to UK. In eastern Ukraine including Donetsk, Russia supporters
have occupied major facilities and the interim government’s use of force against them has resulted indeaths and injuries. Tensions have also grown in southern Ukraine including Odessa. The Ukraine
situation is being destabilized. As doubts exist about whether the planned May 25 Ukraine
presidential election would be successful, geopolitical tensions over Ukraine have triggered great
concern over security in Europe.
Under such situation, energy security has become a major problem in Europe. Europe, Russia
and Ukraine have close interdependent relations through energy trade in which Europe receives
natural gas supply from Russia via Ukraine. Therefore, growing tensions in Ukraine have led Europe
to grow more conscious of security risks accompanying its dependence on Russian energy supply. As
far as they have interdependent relations, they might have fully understood that using energy as astrategic leverage could amount to a double-edged sword that could have adverse effects on the user
as well. But European energy experts were dominantly concerned that the level of priority given toenergy security policy could increase further depending on future developments in Ukraine and theirimpacts on the energy or natural gas market. The impacts could widely affect the energy situation in
Eurasia and the world beyond Europe.
On May 6, energy ministers from the Group of Seven Western industrial countries met in Romeand issued a joint statement calling for providing energy assistance to Ukraine and reducing
Europe’s dependence on energy supply from Russia. Particularly, the reduction of Europe’sdependence on Russian energy supply is a long-term challenge with various problems. We will haveto closely watch future energy situation developments, energy policy implementation and its
impacts.

2

IEEJ： May 2014ｃ
○ IEEJ 2014

Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html

3