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    Funding gas in Eastern Europe [NGW Magazine]


Negotiations over energy and the demands to attach strings to EU funding will make for tense talks between the European Commission and CEE member states. [NGW Magazine Volume 5, Issue 14]

by: Tim Gosling

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Natural Gas & LNG News, Europe, Top Stories, Europe, Insights, Premium, NGW Magazine Articles, Volume 5, Issue 14

Funding gas in Eastern Europe [NGW Magazine]

The European Commission (EC) has fought hard to keep the Green Deal at the core of its response to the coronavirus pandemic. Most member states in central and eastern Europe (CEE) have dropped early opposition to the wider strategy, but they are still hunting for loopholes for gas.

Under the proposed Next Generation EU scheme, Brussels will put €750bn on the table over the four years starting in 2021 to help member states recover from the pandemic. The plan will expand the EU’s 2021-28 budget to €1.85 ($2.1) trillion.

However, the details, including restrictions on how the money can be spent, are still up in the air. As NGW was going to press, complex negotiations were set to dominate an EU summit July 17-18 as the bloc’s leaders convened in person for the first time since the Covid-19 outbreak.

The Green Deal, which aims to cut greenhouse gas emissions to net zero by 2050, will be in focus for many, not least those CEE states. Within the Next Generation EU package, the Just Transition Fund (JTF) will offer access to €44bn to help countries transition from highly polluting energy sources such as coal.

A large chunk of that cash will go to eastern member states, whose energy mix is generally much more dependent on coal than their peers in the west. In 2018, Poland, the Czech Republic and Bulgaria were all dependent on solid fossil fuels for 30% or more of their energy mix, while renewables trailed at around 10%. The likes of Austria and Portugal on the other hand used fossil fuel for around just 10% of their energy mix and renewables produced 25-30%.

Poland will be the biggest winner from the JTF with €8bn up for grabs. Romania will have €4.4bn available. The Czech Republic could claim €3.4bn.

However, these states want to cut the strings that come attached to this finance. Amid the negotiations going on in the background over recent weeks, CEE states have persistently said that they hope to have the restrictions on the use of that money eased.

They may be in with a chance. The EC’s urge to push the Green Deal through has already proved a fertile hunting ground for concessions. In December, the Czech Republic and Hungary dropped objections to the plan as Brussels eased its stance on nuclear power.

The fallout from the pandemic only increases the urgency for the EU executive and for several CEE states, more gas is the next objective.

However, it will be no easy fight. Brussels also faces pressure from the other side. Critics insist that any support for gas is incompatible with its target of reaching zero emissions, and risks locking the fossil fuel into the EU energy mix.

Mission impossible?

In late May, eight CEE member states signed a letter to the EC that insisted that a role for gas must be found if they are to meet the Green Deal targets without wrecking their economies and labour markets. 

Bulgaria, the Czech Republic, Greece, Hungary, Lithuania, Poland, Romania and Slovakia insist that gas is a vital bridge fuel and should therefore be eligible for support. In short, they claim, the need for widescale development of renewable energy projects and the cost make any idea of achieving the transition without gas mission impossible.

The EU must recognise national and regional differences, the letter states, and open the way for “tailored solutions”.

“EU policies should ensure synergies and system flexibility, while not hampering competitiveness, the stability of energy supplies and affordability of energy to industry and households,” it reads.

The octet assert that since they remain behind western peers in their progress in transitioning their energy systems, they need more flexibility to avert a deeply negative impact on their energy security and economies.

“The key issue,” Poland’s climate minister Michal Kurtyka stated separately, “will be to replace the old coal-fired power stations with zero-emissions power sources installed in onshore and offshore wind power, photovoltaics and low-emission power sources such as natural gas or nuclear power while maintaining energy security.”

The Slovak gas and oil association (SPNZ) is of similar mind. Slovakia will not be able to meet its greenhouse gas reduction targets without natural gas, it insisted to local media in December as the Green Deal was being approved in Brussels.

This stance reflects the fact that CEE states retain large, struggling, mining industries. Hard coal and lignite produce nearly 80% of Polish power, and the size and clout of the country’s mining unions has made the industry a third rail of politics, although coal production is becoming more expensive as the shallower seams are worked out. Bulgaria depends on coal for around half of its electricity generation.

That economic and political sensitivity has held back the transition in the region. Corruption and poor policy-making have also played a role. Badly run state support systems for renewable energy projects have landed consumers in some countries with huge bills to pay, giving green energy a dire reputation.

With the region’s ageing coal-fired plants increasingly unprofitable owing to inefficiency and rising CO2 prices, and clearly not a part of any zero-emissions future, power producers in CEE insist a move to gas is the only viable option for a swift transition. 

The zero-emission technologies that could be developed “at the necessary scale with socially and economically acceptable costs” are lacking in CEE, the letter to the EC warns.

“A transition based solely on renewable energy sources does not consider the need for a diversified energy mix in the EU,” it continues. “Moreover, it cannot be implemented overnight and will be costlier than a combined electricity-gas solution.”

Reaching to implement a more fundamental change is understandably pricey. The hydrogen strategy Germany approved in June earmarks up to €20bn in federal funds just to kickstart the H2 economy, on top of an estimated €75bn to decarbonise industry. CEE states say that they simply lack that kind of cash.

But at the same time, the German plan not only pushes towards decarbonisation but also the “development of technologies viewed as future-proof,” point out analysts at Warsaw-based think tank OSW. By way of contrast, the CEE option to switch from coal to natural gas is nothing more than a stopgap.

A source close to the issue admits that “it is clearly no long-term strategy.” He shrugged when asked why the CEE states do not instead ask Brussels for additional funds in order to support a more ambitious transition programme using more modern technology.

Playing for time

The ambition for gas is grander than for nuclear. While the Czech Republic and Hungary in December won a grudging nod for the use of nuclear towards achieving the Green Deal targets, they know that there is no chance of securing EU funding for such projects.

But gas is a different story. The letter insists that investments in gas infrastructure “cannot be subject to discriminatory treatment from the EU funding perspective.”

“The problem is that there are still gaps in the infrastructure needed to make gas a bridging fuel and then take on a future role in the transition as a distribution system for renewable energy,” says Maciej Jakubik, executive director of Central Europe Energy Partners (CEEP), a Brussels-based lobbyist for the region’s energy industry.

Several projects aimed at filling those gaps in the network remain, for the moment at least, on the EU’s list of Projects of Common Interest. The latest version included 32 gas projects with an estimated value of €29bn, the bulk of it in CEE.

Critics claim that these plans make no sense given the Green Deal targets. The infrastructure risks locking fossil fuel gas into the European energy system, they say, while the projects built will eventually become stranded assets as demand for natural gas dwindles.

Under this pressure, the EC seeks to downplay the support it offers gas. However, Brussels is not yet ready to stem the flow of money entirely.

“The regulatory framework for energy infrastructure, including the TEN-E Regulation, which has served European consumers well by building a shock-proof gas network and improved the security of energy supply in Europe, will be reviewed to ensure consistency with the climate neutrality objective,” an EC spokesman told NGW. “Some existing infrastructure and assets will require upgrading to remain fit for purpose and climate resilient.”

At the same time, gas industry players report that Brussels has become much more demanding.

An official from one of the region’s gas transmission system operators, which has won support for several projects over the years, suggested to NGW that the landscape has now changed. To stay at the Brussels table, he says, companies must seek out innovative projects, in particular those working with green gases.

Likewise, Jakubik is clear that barring the need to fill the infrastructure gaps, natural gas is on its last legs across the EU, and that the CEE push is simply a play for time.

“The Green Deal calls for energy sources with net zero emissions to be developed, not “low” emissions, he says. “There is no long-term role for natural gas.”

Political capital

Despite that bleak outlook, the CEE states do appear to have a chance of extracting new concessions out of the EC. The fallout from the coronavirus pandemic offers that opportunity, suggests one Brussels insider.

Racing to avert a major recession, the EU executive needs to adopt the Next Generation EU package quickly. With the negotiations to hammer out a deal between all 27 member states set to be tumultuous and complex, this urgency backs Brussels into a corner.

But at the same time, the CEE push for gas faces stern opposition from some of the largest member states, who tend to vociferously oppose the use of the bloc’s funds for any fossil fuel. EU ambassadors said on June 25 that they have agreed to block the use of Just Transition Funds for any fossil fuel-linked projects.

In that context, it seems that the nuclear concessions won at the end of last year used up significant political capital.

However, even if the JTF is closed off to gas, the EC has left enough loopholes to allow projects to still seek support from other parts of the EU budget and coronavirus recovery funds.

That means the CEE states could still extract some kind of deal, Jakubik says.

“Under the Just Transition Fund proposal, gas is out, but there’s still an opportunity to push it in,” he says. “It was this opportunity that pushed the letter from the CEE states. I think that, as usual, we’ll see some sort of compromise. Funding for gas infrastructure will be forbidden, expect for projects with very specific benefits like energy security or highly-efficient co-generation.”

Yet there are hints in some parts of the world that commercial decisions could yet make the argument for financial support for gas null and void. Despite the glut on the US market, for instance, utilities are starting to bypass gas as a bridging fuel for economic reasons, heading instead straight to renewable energy to replace the coal-fired plants being closed down.

Green gas ‘key’

The key to securing a compromise with the EU may well be how convincing a case the CEE states can make for the future role of gas infrastructure in the energy transition. 

The Green Deal foresees the decarbonisation of the gas sector. Under the strategy, the industry should switch to green gases and couple its infrastructure with the power sector in order to distribute renewable energy via the huge capacity and wide-ranging coverage of its network.

“While we see the role of natural gas as a transition fuel today, the main focus of support from the EU budget will be on investments in climate proof energy solutions, including decarbonised gases such as hydrogen,” the spokesman said. “Low-carbon gases such as hydrogen, biogas and synthetic gas should progressively replace natural gas. What will be key is that the infrastructure we have or invest in is ready to support these new energy carriers.”

This get-out clause has not escaped the attention of the CEE states. In the letter sent to the EC, they state: “The accelerated development of renewable energy requires massive investments not only into the power grids but also in the gas infrastructure including storage to make sure these additional sources of electricity generation will reach the customers in a cost-optimal way.”

For both sides it is an ambitious goal. Over the next 30 years, production of biogas, biomethane and “green” hydrogen will have to expand by 1,000% in order for the EU to meet its climate goals for 2050, according to EU officials.