Nord Stream 2 could provide Europe with cheaper and greener energy; What stands in the way? – Club Valdaï

The politicization of energy often prevents decisions from being made based on facts rather than misperceptions. Instead of blaming external actors, regulators should start tackling factors that they are able to correct in a relatively short period of time, for example, by softening their attitude towards the administration of energy markets and by restoring investor confidence in a stable and predictable regulatory environment, writes Valdai Club expert Danila Bochkarev.

The recently completed Nord Stream 2 pipeline has once again found itself in the center of media attention. In October, the German Federal Network Agency suspended the certification process on the grounds that the project was not compatible with current energy legislation. Swiss company Nord Stream 2 AG plans to open a subsidiary in Germany to comply with EU and German energy regulations. While it is too early to speculate that this move could further delay the start of Nord Stream 2, it has given rise to numerous statements about the (negative) impact of the project on the European gas market and the future. of the transit of natural gas through Ukraine. The polarization of public opinion on the impact of the pipeline has fundamentally altered the purely technical discussions about the project. This had led to a misunderstanding of the main business reasons for starting the project and the future impact of the pipeline on European consumers.

Cost reduction and optimization of natural gas transport

Nord Stream 2 offers the shortest route between Russia’s gas-rich Yamal Peninsula and the main gas centers of northern Europe. It is 2,000 km shorter than the transit route through Ukraine. Transporting gas through shorter and newer infrastructure is faster and cheaper than through Ukraine. Gazprom does not disclose exact transmission rates for the infrastructure it owns and operates. However, the company’s financial reports allow us to assess approximate gas shipping costs. Data for transport via third party networks is published by the gas network operators – in this case by Ukraine GTSOU and Slovakia Eustream. The cost of delivering 1 billion cubic meters (Gm3) from Gazprom’s gas fields in Western Siberia via Ukraine and Slovakia to the Baumgarten gas hub in Austria reaches $ 41-42 million, while the cost of transporting 1 bcm from the Yamal peninsula to Germany via Nord Stream 1 amounts to barely 23 million dollars, making it more than 60% cheaper. The costs of Nord Stream 2 are likely to be of the same order of magnitude.

Environmental problems

The introduction of the EU Carbon Border Adjustment Mechanism (CBAM) could in the future lead to direct and indirect taxation of carbon emissions, including gas transport activities. Consequently, reducing the carbon footprint of energy transport is a key issue for Gazprom. New pipeline infrastructure will help reduce the company’s carbon footprint. According to Frontier Economics models, the carbon footprint of gas transported through Ukraine is over 60% higherthat along the Nord Stream route. Nord Stream 2 also has a role to play in the EU’s energy transition. Europe will remain dependent on hydrogen and other imported low-carbon gases to meet its climate policy goals. Supplying hydrogen through the pipeline network is not science fiction. Nord Stream 2 CEO Matthias Warnig anticipated that the pipeline would be ready to transport hydrogen in 10 years. Previously, Andreas Schierenbeck, then CEO of German energy company Uniper, confirmed that potentially, the proportion of hydrogen in the mixture transported via Nord Stream 2 could reach 80% (with methane constituting the remaining 20%). There is also a direct link between Nord Stream 2 and the European energy transition, a link recently recognized by the EU’s top diplomats. In an opinion piece published by RBC, the German and French ambassadors in Russia portrayed a future “green” Russia supplying hydrogen to Europe via the Nord Stream 2 gas pipeline.

The project is not expected to derail the EU energy market and will benefit consumers

There is a lot of misunderstanding in the media and in political circles about the function of EU energy markets and the ability of external actors to derail existing market mechanisms. EU LNG expansion plays an important role in mitigating any potential security of supply risk, while existing regulations ensure (with rare exceptions which prove the rule) a safe, secure energy supply. and affordable to customers and are shaping the behavior of energy companies. . In this regulatory context, energy companies have an interest in respecting the rules because those who do not want to comply simply lose their market share and their customers. Each official metric used by the European regulator (ACER reports) and the relevant infrastructure association (ENTSOG security of supply simulation) has shown that market integration, security of supply and resilience are improving dramatically, even as Russian gas imports have gradually increased. In addition, a study by the Oxford Institute of Energy Studies also noted that new Russian gas arriving in Germany might be the best option to compensate for a possible supply shortfall from alternative sources. Last but not least: a study by Frontier Economics / Institute of Energy Economics stress that gas prices in Europe, in the case of Nord Stream 2, are 0.77 EUR / MWh lower than when the pipeline is not in use.

The transit of gas through Ukraine is not finished

Pipelines aren’t just about annual flows – daily capacity is of equal or even greater importance. The demand on the coldest day of the year can be more than three times the demand on the hottest day. Therefore, with full use of non-Ukrainian roads during peak periods, Ukraine will remain “the only transit route with reserve capacity during peak winter demand ”. The energy transition in Europe and the shutdown of nuclear power could increase the demand for gas in the medium term in Europe. For example, German Chancellor Olaf Scholz notedthat Germany needs to build new gas-fired power plants to ensure energy security as it plans to phase out nuclear and coal-fired power plants. This trend will intensify the use of several routes, including the Nord Stream pipelines and the Ukrainian network. However, the rate of use of the Ukrainian route will depend on the demand for gas in Europe and the transport conditions offered by the Ukrainian network operator. Currently, Ukraine’s transit charge ($ 2.66 / 100km / 1000cm) is 60% higher than Nord Stream 1’s cost ($ 1.67 / 100km / 1000cm).

The pipeline has also received unwarranted negative publicity due to high energy prices in Europe. Many politicians in the EU and the US have accused Gazprom of market manipulation, suggesting that it was a move linked to pressure from Russia to proceed with Nord Stream 2. Objectively, the surge in price was from to a whole range of market and regulatory factors that have come together to form this perfect storm, but the politicization of energy often prevents decisions based on facts rather than incorrect perceptions. Instead of blaming external actors, regulators should start tackling factors that they are able to correct in a relatively short period of time, for example, by softening their attitude towards the administration of energy markets and by restoring investor confidence in a stable and predictable regulatory environment.