How to convince Europeans that the rise in energy prices is only for the good.

Will Europe have enough safety margin to implement large-scale investment projects aimed at replacing Russian gas? The targets stated in the plans look difficult to achieve, but politicians are counting on the synergy effect: in one fell swoop to solve both the problem of energy security and overcoming catastrophic climate change. It is in such a package that the electorate is now being "sold" the inevitable increase in energy prices and the need to tighten their belts.

"Good" coal and "bad" gas

The choice of the European Union in favor of good old coal instead of "hostile" Russian gas this spring caused an avalanche of reports about the demise of Europe's "green" ambitions. Just yesterday, mines were closing one after another, and the rhetoric has changed dramatically: for Europeans, anything will be better than Russian hydrocarbons. Although coal is several times more "dirty" and dangerous to public health.

But we are not in a hurry to bury the energy transfer yet. Coal will be needed for the period until a sufficient number of wind turbines, solar power plants, electrolyzers, power lines are built, and the hydrogen infrastructure is not scaled. The rejection of Russian gas is primarily tied to accelerating the pace of energy transfer, as well as to intensifying the turn to the East and even to the South (to once-forgotten Africa, which until recently was denied investment in gas projects due to their lack of environmental friendliness). Given that the markets of the Asia-Pacific region are growing faster than the markets of the European Union, it will be necessary to "turn around" to the East very quickly in current realities: now they will try to do this at the pace of the "five-year plan in three years".

Expensive means good

On the one hand, the figures stated in the European plan to reduce dependence on Russian gas supplies (REPowerEU) look, at first glance, little realistic or difficult to achieve. And it is clear that in the short event horizon we will see an increase in electric generation at coal-fired power plants. On the other hand, the European Union's willingness to accelerate energy consumption reduction, electrification of the transport sector and the transition to low-carbon energy sources has only intensified.

Moreover, now there is a wonderful political reason to "sell" the inevitable increase in energy prices to the electorate: if earlier it was served under the guise of "We are fighting for a good planet", now it is something more: "We are fighting for a good planet and our values." Question: What are the limits of the electorate's patience? Won't there come a moment when "our values" will no longer outweigh both the increased costs and the everyday inconveniences that prosperous Europe has long been weaned from?

Alternative "energy transfer fuels"

According to the REPowerEU plan, by the end of 2022, alternatives should be used instead of 100 billion cubic meters of gas imported from Russia, including increasing LNG imports and pipeline imports from other countries, doubling the production of "green" biomethane and purchasing renewable hydrogen while increasing renewable energy production. It is planned to significantly increase the production of biomethane (10 times – from about 3 billion cubic meters to 35 billion cubic meters of natural gas equivalent) and "green" hydrogen (more than three times – from the previously planned 5.6 million tons to 20 million tons) by 2030.

Biomethane is supposed to be used as a substitute for natural gas in the energy system. The goal of producing biomethane seems difficult, but potentially achievable with the right structure to stimulate demand. Given that since September 2021, natural gas prices in Europe have averaged about $30 per million British thermal units (minimum – about $20, maximum – up to $ 60), against their background, the cost of supplying "green" biomethane (usually in the range of $15-30/ million BTU) seems to be very competitive. If investors had sufficient confidence that prices would remain at current levels, a significant increase in investments in the construction of anaerobic digestion plants for biogas production and related biogas-to-biomethane conversion plants could be expected.

Experts do not exclude that consumers would also be willing to conclude long-term contracts for the purchase of biomethane at prices in the range of $25-30 per million BTU, but most likely, quick investments will require governments to conclude contracts for difference (CFDs) to protect private companies from a sudden downward adjustment in market prices for natural gas. Contracts for difference in prices are a relatively simple and effective way to stimulate investment in the production of biomethane compared to the various political levers currently used.

Hydrogen – transport for renewable energy sources

Accelerating the production of renewable hydrogen will be much more difficult. REPowerEU assumes a rapid transition from the use of hydrogen from fossil fuels in the industrial sector to renewable hydrogen (its share should reach 75% by 2030). But critics of hydrogen consider this type of fuel energy-intensive and too expensive. So, Elon Musk called hydrogen storage "the stupidest thing." However, proponents of hydrogen do not insist on its primary use everywhere and always: first of all, it is planned to introduce it in sectors that are difficult to access from the point of view of electrification, such as the chemical industry, steel and ammonia production.

The industrial sector around the world is the hardest to decarbonize: there is a question of energy density, the availability of sufficient low-carbon generation capacity and backup fuel, or some form of energy that can compensate for the inevitable volatility of solar and wind generation on an industrial scale. Electrochemical storage devices will not be able to become a panacea – on an industrial scale, their use is too expensive.

European companies and regulators have high hopes for hydrogen produced from renewable energy sources (RES), used as a way to store energy (or as a low-carbon energy source at times when there is no sun and the wind has died down). These plans have received a new impetus in terms of the development of hydrogen infrastructure within Europe. For example, any gas project that will be implemented now must be compatible with hydrogen: it must be possible to pump hydrogen through a gas pipe under construction (which requires additional investments in the project).

Apparently, the EU's plans primarily involve replacing a significant proportion of non-"green" hydrogen currently used in the refining and petrochemical sectors with low-carbon hydrogen. It is also assumed that of these 20 million tons per year, 10 million will be produced in the EU, and another 10 million tons will be imported (of which 6 million tons in the form of hydrogen and 4 million tons in the form of ammonia or other hydrogen derivatives, presumably by sea). It should be noted that the current (based on the results of 2021) demand for hydrogen (almost all high-carbon hydrogen used mainly in oil refineries and in the production of ammonia) is about 10 million tons. Of these, about 50% is produced as a result of natural gas reforming.

It is not yet clear how the transition to "green" hydrogen will be implemented. For example, will the EU (and/or its member states) impose an obligation on all industrial hydrogen consumers to switch to renewable hydrogen? This would certainly stimulate demand for "green" hydrogen and reduce demand for natural gas, but the increase in costs compared to traditional hydrogen production would be very significant (which creates risks of further closure of industrial enterprises in Europe, as has already happened after the increase in natural gas prices).