Nathan Goode on the potential consequences of Russia's annexation of Crimea
The geopolitical aftershocks from recent events in Crimea appear to have some way still to run, but in the longer term, one impact of the crisis may be to shift thinking in the European energy sector.
Russia currently provides around a quarter of the EU’s gas needs, rising to more than a third in Germany, three-fifths in Poland and 100% in the Baltics. Around half of this gas passes through Ukraine. Oil and gas exports account for more than half of Russia’s federal budget and Europe is its largest gas market. Cutting Europe off would be very painful for Russia.
So no doubt the politicians will come to some sort of mutually beneficial deal to keep the gas flowing to Europe, whether through Ukraine or around it.
But this has clearly given European leaders food for thought about where they should get their energy from in the future. One outcome could be a revived focus on renewables as a way of shaking off Russian influence over European light switches, as well as helping to meet emissions targets. The crisis may also instil a further sense of urgency around existing plans for inter-country connections and regional smart grids. Those countries that haven’t turned their backs on nuclear may also be quietly applauding their decision to keep the faith with this controversial and expensive technology. Europe could of course look to other sources of gas, such as the Middle East and North Africa, but it would currently have to pay around double what gas from Russia costs.
The renewables sector could certainly do with a boost. Attitudes to EU emissions and renewables targets have become increasingly ambivalent in the face of rising business and consumer pressure for lower prices. Globally, the recent UNEP/Bloomberg New Energy Finance report suggests investment in renewables declined by 14% in 2013, although, frustratingly, this comes at a time when the cost of renewables is coming down; because of cheaper technology, the renewable share of the energy mix actually increased to 8.5% (up from 7.8% in 2012). And this comes at a time where the case for investment in renewables becomes ever clearer: the IPCC believes that the world needs to triple the energy it gets from renewables, nuclear reactors and power plants that use emissions-capture technology to avoid dangerous levels of global warming.
Our most recent IBR study was undertaken before the Ukraine situation flared up, but the results show a renewables sector under pressure in Europe. Just 32% of EU cleantech businesses expect to raise profits over the next 12 months, compared to 47% of sector peers globally. Similarly, 39% expect to invest in plant and machinery in the year ahead, below the global sector average of 53%.
The situation in Ukraine is complex and disturbing; but if it provides the kick needed for European policymakers to focus on energy security then some good may have come of it. New clean energy investment rose 14% globally in Q1 from a year earlier which is positive. In an uncertain world, making locally generated renewables a larger share of the energy mix is simply common sense.
Nathan Goode is global leader for energy & environment at Grant Thornton