Insights for What’s Ahead 

• Russia might be using fossil fuels to hold leverage against Europe at present, but that leverage will fade over time. The UK has said it will end imports of Russian oil by the end of this year, in line with similar plans announced by the US government.
• As EU countries look to reduce their dependence on natural gas from Russia, they will import more from the United States and North Africa. Some countries are likely to increase their coal usage and import more coal. This transition will cause disruptions and we are likely to see greater emphasis on energy reduction and efficiency measures.
• Business executives should expect a sustained high energy price environment for the foreseeable future. The Conference Board’s base-case forecast is for the price of brent crude oil to average US$125 per barrel in 2Q 2022 and gradually retreat to pre-war levels over the course of the next two years.

As the war unfolds in Ukraine, European political leaders are scrambling to find ways to cripple the power and finances of the Russian government. Energy has become a critical issue—buying Russia’s oil and gas helps finance the war, but not buying it will raise energy costs that are already at unprecedented levels.

This is not the first time politicians in Europe have talked of breaking their reliance on Russian energy. In 2014, following Russia’s annexation of Crimea, the European Council backed efforts to slash imports of gas by boosting energy efficiency, and diversifying and developing domestic sources. However, little action has been taken to diversify and modernize energy infrastructure in Europe.

The EU still remains just as dependent on Russian fossil fuels as ever. In 2021, energy was the most imported product by the EU from Russia, accounting for 62% of the region's total imports.

While the latest crisis has united political leaders in wanting to shift away from Russian imports, two schools of thought have emerged in how to achieve this: one that supports shifting energy generation to coal—at least in the short term—delay phase out of nuclear power plants, and expand production of oil and gas elsewhere, and the other that backs an accelerated shift to renewable energy and energy efficiency.

Russia might be using fossil fuels to hold leverage against Europe at present, but that leverage will fade over time. Joining the UK, Germany, which relies on Russia for more than half its natural gas, has announced plans to rapidly accelerate the expansion of wind and solar power, bringing forward a target to generate almost all the country’s electricity from renewable sources by 15 years to 2035. It also halted the approval process of the Nord Stream 2 gas pipeline, that was due to link Russia to Germany via the Baltic Sea.

The French government has signaled its intention to act with Barbara Pompili, minister for the Ecological Transition of France, coming out in support of a plan published last week by the International Energy Agency (IEA) to reduce Russian gas imports by two-thirds by 2030. “My administration is working on a set of measures to ensure the robustness of our energy system, which will certainly echo the propositions of the IEA,” she said.

The EU has announced plans to slash imports of Russian fossil fuels by two-thirds this year. Its REPowerEU strategy includes the installation of more rooftop solar panels, heat pumps and other energy saving technology to make buildings more energy efficient; speeding up the permitting of renewables; accelerating the decarbonization of industry; doubling the EU target for biomethane production to 35bcm; increasing imports of renewable hydrogen and sourcing gas from other countries. “We simply cannot rely on a supplier who explicitly threatens us,” the Commission said.

“Creating your own energy resources is the smartest and most urgent choice to ensure security of supply” – Frans Timmermans, European Green Deal Commissioner 

The IEA’s plan includes many of the elements in its Roadmap to Net Zero by 2050. It notes that there are other options for the EU to wean itself off Russian gas even more quickly, but that these would have “significant trade-offs”. For example, Europe could increase the use of its coal-fired fleet or usage of alternative fuel such as oil within existing gas-fired power plants, which could displace gas imports from Russia by more than a half relatively quickly, it said. However, these options are not in line with the European Green Deal, and the IEA therefore did not back them.

There is precedent for rapid reduction in gas demand after accelerating a push for renewables. The Netherlands cut demand for gas in its electricity sector by 22% between 2019 and 2021, and Spain by 17% in the same timeframe, by doing just this, according to analysis by think tank Ember.

As EU countries look to reduce their dependence on natural gas from Russia, they will import more from the United States and North Africa. Some countries are likely to increase their coal usage and import more coal. This transition will cause disruptions and we are likely to see greater emphasis on energy reduction and efficiency measures.

Renewable energy and energy efficiency have another key advantage over boosting fossil fuels, according to experts. Sam Reynolds, energy finance analyst at IEEFA, pointed out that wind and solar power do not require fuel, meaning that their lifecycle costs can be quoted in one go. They also provide consistently lower costs over time, unlike constantly fluctuating fossil fuels.

Renewable energy and energy efficiency also have the advantage of permanently reducing both gas demand and dependency on imports, noted Jan Rosenow, Director of European programs at think tank Regulatory Assistance Project. “That is what we really should focus on in the discussion to avoid being caught in yet another energy crisis - whilst ensuring of course that especially those of lower incomes are protected from rising energy prices.”

It remains to be seen for how long coal would enjoy its comeback and whether Russia’s war on Ukraine will accelerate clean energy installations. Either way in the long-term Russia will eventually pay a huge price as European leaders, and those in many other jurisdictions, take actions to reduce their overreliance on Russian fossil fuels.