A number of trends are likely to reshape the European energy sector, including the continent’s steadily growing dependence on energy imports, the integration of the European energy system into a single market, and the pursuit of a sustained fall in greenhouse gas emissions.
Energy outlook
Europe’s energy map is in a state of flux. This is not a transformation wrought by a single factor but the interaction of demographics, technology and environmental policy. Natural gas is expected to show slow growth for the rest of this decade and pick up after 2020, partially displacing demand for coal in the power sector (see chart).
In absolute terms, renewables – including hydro power, bio energy and wind and solar power – will show the fastest growth. Nuclear power is forecast to remain flat. Concomitantly, oil and coal consumption is declining, with the IEA’s World Energy Outlook predicting a negative compound growth rate of 2.8% for coal and 1.7% for oil annually in Europe from 2011 to 2035, due to improving fuel efficiency in vehicles and a long-term shift in electricity generation to natural gas.
Meanwhile Europe’s domestic oil and gas supply is mainly sourced from the North Sea — with the UK and Norway being the major suppliers. North Sea supplies are slowly dwindling and shale gas has been met with mixed enthusiasm. The UK and Poland are the most active EU states in developing their shale gas resources, with France implementing an outright moratorium.
Supply diversification
The European Union (EU) is a net energy-importing region. In 2011 for example, the EU-27 region imported 85% of its oil supply, 67% of its gas supply, and 62% of its coal supply. Europe’s dependence on Russia for energy imports has been a key energy security issue, especially regarding gas. That being said, dependence on Russia for gas varies greatly between EU member states, with Eastern European markets more reliant on Russia than larger Western European markets. Russia’s share of EU gas imports has actually been declining to approximately 30% in 2011 from 61% in 1995 (although Russia’s share of gas consumption has remained at around 25%) due mainly to greater imports from Norway and Qatar. The construction of the Trans-Adriatic Pipeline – running from Greece to Italy via Albania and the Adriatic Sea – will open up a modest volume of Caspian gas (10-20 billion cubic metres) to Europe from 2018, representing the first step in Europe’s long-held strategy to access gas directly from that region. Further supply could come from Turkmenistan and Iraq, although these are very long-term prospects.
Import dependence can be mitigated by shale gas production, although it may not develop as quickly in Europe as it has in the US due to tighter regulations, mixed public attitudes, mineral rights laws and infrastructure issues. However, the availability of North American liquefied natural gas (LNG) will bring indirect benefit to the European gas market as it will increase the global level of supply overall.
Energy market reforms
Internal reforms to the EU gas and power markets can make the EU’s energy system work more efficiently, bring down energy costs and strengthen energy security. In 2009 the EU’s Third Energy Package came into force, aimed at opening up Europe’s gas and electricity markets. The most significant aspect of this package is “unbundling,” which aims to separate the ownership of gas supply and generation from transmission networks. The package also aims to create a single European market by facilitating competitive energy trading throughout the continent. Efforts at integrating Europe’s gas pipeline network – through reverse flows along routes between countries and the construction of interconnectors – strive to inoculate consumers from the impact of external supply cuts. For gas these are particularly vital changes because without coordination and appropriate infrastructure investment, additional supply will not deliver more robust security. On the electricity side of things, better interconnection should smooth some of the intermittency concerns brought on by the adoption of increased renewables.
Sustainability aspirations
To avoid runaway climate change, the pressure is on European countries to decarbonise their power sector. The EU has set out to achieve this aim by 2020, with a view reducing its greenhouse gas emissions by 20% from 1990 levels. In practice such a large reduction implies increasing the share of renewables in electricity generation, which has already grown from 14.6% in 2000 to 21.3% in 2011, while carbon emissions have declined during the same period.
The long-term trend is that gains by renewables and gas have come at the expense of coal in the power sector, contributing to the fall in emissions. According to the EC, emissions in Europe from energy supply are expected to continue falling over the period 2011-20, mainly due to the expansion of renewables and the EU’s Emissions Trading Scheme, which places a cap on carbon dioxide (CO2) emissions and facilitates a market and price for the trading of carbon allowances.
Going forward
That the EU consumes more energy than it produces is unlikely to change. However, unlike other long-term deficits, this is no cause for alarm. Europe’s current account surpluses leave it well positioned to manage import reliance by diversifying its sources of supply. Meanwhile energy efficiency and renewables can curtail the demand for fossil fuels. Equally important, more unified markets in gas and electricity would better prepare Europe for external supply shocks while bringing down average costs. A key challenge for Europe is to foster more open competition in its energy markets even as it remains a heavy energy importing region. On the domestic supply side, Europe’s unconventional gas resource potential has yet to be truly tested and shale gas extraction is likely to vary significantly across different EU member states.
For policymakers the leading energy objectives remain: diversifying imported supplies, integrating the European energy market more closely, and achieving greenhouse gas emissions targets. Given this context, renewables and natural gas are likely to fare better than other power sources as a share of the energy mix by 2020.
