Deutsche Bank: The energy crisis is only the beginning

By Eleftherias Cortales

Deutsche Bank notes in its expanded report today that much more needs to be done for Europe to close the energy gap created by the recent disruption to Russian gas supplies, challenging emissions reduction targets and long-term structural challenges.

After the invasion of Ukraine, the European Union announced that it would reduce its dependence on Russian gas by two-thirds by the end of this year, to make up for the shortfall in liquefied natural gas (LNG) from suppliers such as the United States, Qatar and renewables. Energy sources (RES).

It looks like the European Union will go through the coming winter with plenty of supplies, buoyed by the natural gas stocks it rushed to build up over the summer.

However, there are at least 10 major obstacles for Europe as it urgently seeks to secure its energy supplies for 2023 and beyond – at the same time as it transitions from coal to natural gas, and from there to cleaner alternatives.

These include long-term “bottlenecks” of current capacity constraints due to limitations in Europe’s current infrastructure and fuel options, and future challenges such as bureaucracy, lack of funding, skills and materials, and public opposition.

In more detail, these obstacles, as Deutsche Bank points out, are as follows:

1. Existing infrastructure

Natural gas accounts for nearly a quarter of the EU’s total energy supply, and fossil fuels in total still account for about three quarters. Larger users cannot easily replace gas with other sources, for example gas is used by half of German homes for heating and industry (eg chemical, petrochemical, metal, paper and food) and as feedstock for chemicals and petrochemicals.

2. Limited LNG

LNG is the closest alternative to natural gas. Europe’s LNG capacity has been nearly exhausted since January. Germany and Eastern Europe largely lack the specialized infrastructure to import and regasify LNG. Germany has planned to build five floating LNG terminals, which will cover 20% of its current imports of natural gas, and the first three terminals are expected to start operating in early 2023.

The main exporters to Europe are the USA, Qatar and Russia, with about 20-25% each. Without Russia, alternative suppliers need time to ramp up liquefaction facilities. LNG exports from the United States to Europe have more than doubled since last year, accounting for three-quarters of LNG exports. Europe has to compete with the world’s largest importers of LNG, China and Japan.

3. Bad year for other sources

Natural gas use has increased this year amid challenges from other sources. France’s nuclear production is expected to fall to its lowest level in three decades due to the maintenance of half of its old reactors. Europe’s largest energy exporter has become a net importer. Germany has postponed its long-term plans to phase out its last three nuclear plants by the end of the year. In terms of hydropower and water transport, the hottest summer in Europe has caused a high demand for cooling, reduced hydropower, and caused the Rhine to fall to almost its lowest levels, disrupting the transport of materials such as coal.

4. Insufficient RES infrastructure

Why can’t we switch to 100% renewable energy? The supply of wind and solar energy is inconsistent, for example in Germany they provide between less than 10% to 100% of the energy demand per hour, depending on weather conditions. Why is this important? Electricity cannot yet be stored on a large scale and at a low cost, so renewables cannot be the main source to meet demand. Germany relies on coal/lignite for 34% of its electricity generation, and is the most dependent large economy. You’ll need to increase natural gas, now by 10%, to fill the gap. The distribution of energy from renewable sources is also limited by existing infrastructure.

5. Small reduction in power consumption

Energy use in general in Europe has changed little in recent decades, as improved efficiency has been offset by increased consumption in areas such as excess heating and cooling. The policies of the 1970s included the legalization of families and industry. This time the policy is focused on reducing currency losses rather than reducing demand.

The industry has reduced consumption in the summer, for example 20% in Germany amid falling demand. Households have made modest, weather-adjusted consumption cuts this year, and the scope for winter cuts is limited.

6. Financing

LNG terminals, gas-to-gas regasification facilities, and distribution network projects are expensive and interest rate sensitive, as are bonds. Yields are rising, economic activity is slowing, and countries are putting pressure on electricity suppliers, which may limit cash flow for needed investments.

The transition to clean energy by 2050 will cost $5.3 trillion (source: BloombergNEF). These expenses will be incurred up front, because renewables have high initial fixed costs and lower operating costs later. In Germany, approximately 200 GW of new renewable energy is targeted by 2030, which means that 25-30 GW of natural gas capacity will be needed to fill the shortfall.

7. Bureaucracy

Long-term, complex, and opaque administrative procedures hinder the development of energy projects. Renewable energy sources are often not integrated into spatial and environmental planning. There are also issues with policy, market structure and grid access, as well as customs delays for imports of materials such as solar panels.

However, many of the EU’s plans revolve around cutting red tape and creating a pan-European market. Germany’s new wind energy law, passed in July, also focuses on speeding up the planning and approval processes. It aims to create binding land use targets and increase the available area to 2% of the land.

8. The shortage of minerals and rare earths

Low-carbon technologies are more metal-intensive than conventional techniques. Europe’s adoption of fossil fuels will shift to minerals and rare earths (REEs) that are concentrated in a few countries. China accounts for more than half of the global market for vanadium, graphite and aluminum. Australia dominates lithium. and the Congo in cobalt.

Why is copper particularly important? Copper, dominated by Chile, is particularly important for wind and solar energy, while an electric car contains twice as much copper as a conventional car. Mines today are on the verge of exhaustion. Global demand for copper is almost twice as much, and demand for nickel is three times that of vanadium, cobalt and graphite.

9. Skill shortage

Renewable energy expertise is concentrated in a few companies and installation requires a workforce. BloombergNEF estimates that Europe imported a third of the number of solar panels from China by July that it could install year-round due to a labor shortage.

Europe will have to manage the job transition for many of the 7.5 million energy workers, or 2.4% of employment, including 700,000 who supply coal, oil and gas and 1.4 million who work in power generation. Separate figures show that 1.3 million people were employed in renewable energy in the European Union in 2020.
Also, to develop its nuclear capabilities and diversify away from Russia, Europe may need to turn to overseas producers including China as one of the major players in nuclear technologies.

10. Opposition to public opinion

More than 85% of EU citizens say they support ambitious renewable energy goals and will support new wind and solar projects near where they live. However, in practice, public opposition to wind turbines and extensive solar farms is one of the main obstacles to expansion on a continent with limited land. Environmental concerns have significantly slowed German facilities.

Is shale gas an option? It is estimated that Europe has more shale gas reserves than the United States, especially in Poland and France. But it has no commercial production, due to high population density, regulations and public opposition to fracking — the same process the United States uses to extract the natural gas it sells to Europe.

Also, storable “green hydrogen” is something that cannot be a solution, as there is not enough renewable energy to produce the required amount, and there are doubts about how easy it will be to lay pipelines to transport it.