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Accelerating energy diversification in Central and Eastern Europe

Many countries in Central and Eastern Europe 1 are working to address the unique challenges caused by their high reliance on Russian natural gas. Significant progress has been made, but accelerated efforts need to continue if governments want to wean their economies off Russian supplies. In 2021, Russian gas accounted for almost half the gas consumed in Central and Eastern European countries compared with just over one-fifth for the rest of Europe. Some countries, such as the Republic of Moldova and Serbia, are almost 100% dependent on Russia for their gas supplies.

As a consequence of the Russia's steep supply cuts, the share of Russian gas in the European Union’s (EU) gas demand fell from 40% in 2021 to 9% so far in 2022. The direct effects are being felt most strongly in Central and Eastern Europe. Gas plays an important role in Central and Eastern Europe’s industry, power generation and space heating. The region’s gas demand could even increase in the coming years as coal fired power plants are phased out.

Following Russia’s invasion of Ukraine, the European Union committed to ending imports of Russian gas. The overall EU response has been framed in the Versailles Declaration of EU Leaders, the REPowerEU package and the EU Winter Plan. 2 Member states are pursuing these efforts at different speeds, and plans vary by country, reflecting the degree of dependence on Russian gas and their degree of preparation for the possibility of an eventual cut-off. For Central and Eastern Europe, a region traditionally highly reliant on Russian gas, any accelerated phase out of Russian gas requires quickly scaling up clean energy investments, including in energy efficiency and renewables, as well as diversifying gas supplies through building liquified natural gas (LNG) import capacity and better integrating regional gas markets. On the demand side, residential, commercial and industrial gas consumers need to boost efficiency, increase their use of biomethane and prepare for the deployment of hydrogen.

Natural gas demand and supply in Central and Eastern European countries, 2021

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The Baltic States and Finland have largely ceased importing Russian gas. Gazprom cut gas deliveries to Finland and Latvia in August. Lithuania is no longer importing Russian gas for domestic consumption (but gas continues to transit pipelines). Estonia stopped importing Russian gas in April. The Baltic States’ strategy is built on three key pillars: (1) increasing LNG imports via shared use of flexible floating storage regasification units at a regional level; (2) enhanced interconnectivity among the Baltic States and Poland; (3) shared use of gas storage facilities in Inčukalns, Latvia.

Poland’s reliance on imports of Russian gas dropped to zero in April when Gazprom unilaterally halted supplies to Poland. Poland had already decided not to renew its long-term contract with Gazprom after its expiry at the end of this year and has been diversifying supplies for several years by investing in an LNG terminal and in gas production in Norway to be supplied through the Baltic Pipe across Denmark.

Landlocked EU countries (Austria, Czech Republic, Hungary, Slovak Republic) and Romania have not announced strategies or targets for phasing out Russian gas, with the exception of Austria, which plans to be independent of Russian supplies by 2027. Hungary renewed gas supply agreements with Russia in 2021.

Across much of Southeast Europe, reliance on Russian gas remains high. The region has very limited storage capacity, which makes it vulnerable to supply disruptions. But the region has options to diversify imports, including via the Trans Adriatic Pipeline and Greek LNG terminals that can feed the Greece-Bulgaria interconnector. Gazprom cut gas supplies to Bulgaria in late April, but the Bulgarian government is discussing a renewal of the gas supply contract with Gazprom for this winter.

Serbia remains entirely dependent on Russian gas imports. The country signed a new 3-year contract with Gazprom in May 2022 for 2.2 billion cubic metres (bcm) a year. The Bulgaria-Serbia interconnector is expected to be completed by end 2023. The new pipeline, with 1.8 bcm a year entry capacity to Serbia from Bulgaria, will significantly improve Serbia’s import optionality and could pave the way to reduce its reliance on Russian gas.

Ukraine has not directly relied on Russian gas supplies since 2015, although procurements are made both via physical and virtual reverse flows. Although the country’s import dependency declined to 30% through the last decade, access to non-Russian gas remains limited despite increased firm reverse capacities. Ukraine has the largest gas storage capacity in Europe, at 32 bcm, but international support is required for gas import payments.

The Republic of Moldova remains 100% reliant on Russian gas and still has limited interconnectivity with the rest of Europe. The country’s power supply largely depends on gas fired generation in Transnistria, which itself is 100% dependent on Russian gas supplies. The Republic of Moldova does not have any gas storage capacity and signed a new 5 bcm a year contract with Gazprom in October 2021. Moldova stored 24 million cubic metres of strategic gas reserves in Romania’s gas storage facilities, enough for just a week of winter gas consumption. Moldova has also been using Ukraine’s storage facilities. Further increasing interconnector capacity between the European Union and the Republic of Moldova could support the country’s diversification away from Russian gas.

An effective phasing out of Russian gas would require enhanced cooperation between the European Union and the member countries of the Energy Community.

To support gas diversification in countries traditionally dependent on Russian supplies, the EU established regional task forces under the EU Energy Platform: one on Central Eastern Europe, involving nine EU countries (Austria, Czech Republic, Germany, Croatia, Hungary, Italy, Poland, Slovenia and Slovak Republic), one on Ukraine and the Republic of Moldova, and one on the Southeast Europe regional group.

Accelerating Ukraine’s integration with the European Union’s broader energy and gas markets would bolster regional energy security. Ukraine is now connected with the EU electricity grid and on 19 July became an Association country of the IEA.

Many Central and Eastern European countries do not yet have a full suite of measures in place to accelerate clean energy investment and bring down gas use. Governments need to support efforts to reduce gas use in buildings and industry by turning down heating and by funding the large-scale replacement of individual gas boilers with heat pumps, renewables-based energy sources or more efficient gas boilers. In addition, they should promote the modernisation of large district heating networks.

Industrial users still have significant potential to reduce gas use. To make markets more flexible and to reduce the amount of tied-up capacity, national or regional auction platforms can be set up to place previously contracted gas back on the market when industry reduces its demand.

Central and Eastern European countries also need to mobilise massive financing to accelerate their energy transitions. A strong gas supply diversification strategy has to be part of a general push to accelerate energy transitions in the region, with a broader range of transition policies, including faster deployment of a broad renewable energy portfolio. EU recovery funding will be essential and should be swiftly made available to support essential upgrades in energy efficiency and the switch to renewable energy in end-use sectors.

Several measures are available in the short term to diversify regional gas supply, including increased domestic gas production, the regional use of gas imports, better access to and trading of gas storage and LNG regasification capacity through joint market mechanisms.

Hungary, Poland and Romania have announced plans to increase domestic gas production. Romania already meets more 70% of its gas demand from local production, although it relies on Russian imports to cover seasonal swings in consumption. Gas production is set to increase from the Midia Gas Development project and from the Doina and Ana offshore fields, which started up in June. With an estimated 10 bcm of gas reserves, Midia will be providing 0.5 bcm in 2022 and 1 bcm a year during 2023-2026. Romania plans to explore the Neptun Deep offshore field (with an estimated 42 to 84 bcm).

Hungary announced plans to increase its domestic gas production to 2 bcm in 2022 (or about 20% of total demand), up from 1.5 bcm in 2021. Poland has limited prospects to increase domestic gas production, with an estimated output of up to 6.5 bcm a year (equating to over 25% of total demand) over 2022-2024 from domestic and Norwegian fields owned by Polish gas company PGNiG.

Supporting the uptake of biomethane and biogas and preparing for hydrogen deployment in the coming years should be priority. Domestically produced biogas and biomethane can reduce CO2 emissions, enhance market resilience and significantly ease reliance on fossil fuel imports. Biomethane and hydrogen can also be blended across a wider market using existing gas infrastructure and heating systems.

Central and Eastern European countries lack financing mechanisms and projects for biomethane production or low emissions hydrogen despite their huge potential. Regional cooperation could focus also on low emissions infrastructure (e.g., hydrogen-ready interconnectors).

As of 2022, Central and Eastern Europe has four LNG terminals (in Croatia, Greece, Poland and Lithuania) with a combined capacity of about 20 bcm a year, or 10% of the region’s gas consumption.

Central and Eastern European countries are investing in new LNG import capabilities, notably floating storage regasification units, which have shorter lead times and can be chartered for shorter periods. Should all planned projects be realised, Central and Eastern Europe’s regasification capacity could more than double to over 50 bcm a year by the end of 2023 and could reach 100 bcm a year by 2026 – equal to the region’s total imports of Russian gas in 2021.

Poland plans to increase the capacity of its Śwonoujście LNG terminal from 6.3 to 8 bcm and to invest in a new floating unit with capacity of 5 bcm and in new and enhanced existing interconnectors with Lithuania, Slovak Republic, Czech Republic and Germany. The new Poland-Slovak Republic gas interconnector came online this month. Estonia and Finland are each investing in new floating units and imports from both of those units can supply the regional gas market through the Baltic Connector.

Liquified natural gas import capacity in Central and Eastern Europe, 2022-2026

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Existing LNG terminals can provide market access for landlocked countries and for markets with no import terminals. This model is working in the Baltic States, with both Estonia and Latvia importing LNG via Lithuania’s Independence floating unit. Since the opening of Croatia’s Krk LNG terminal in 2021, Hungary can import LNG from the global market. Similar cooperation is emerging between Bulgaria and Greece, with Bulgaria seeking to import LNG via Greece’s Revithoussa LNG terminal. In August, Bulgargaz opened a tender to import 0.5 bcm of LNG in the fourth quarter of 2022. In July, Czech utility CEZ and Shell contracted a combined 7 bcm a year of regasification capacity in the Netherlands’ Eemshaven LNG import terminal. Formerly highly dependent on Russian gas imports, Germany has seen a major decrease of these imports since 2021 and as of 31 August 2022 no longer directly receives Russian gas, following the shut-down of the Nord Stream pipeline. Germany has adopted a strong diversification strategy to phase out Russian gas imports, and is building five new LNG terminals, with several floating storage and regasification units (FSRUs). Market players from Germany, Poland and neighbouring countries were asked to express their interest in long-term regasification capacity as a first step towards launching market tenders to build new LNG terminals along the North Sea and Baltic coasts of Germany and Poland.

To connect LNG regasification capacity at a regional level, Central and Eastern European countries have to build additional interconnectors or reinforce existing capacities. An example of a new interconnector is the Stork II pipeline project between Poland and Czech Republic, while existing capacities are in the process of being reinforced between Croatia and Hungary, Romania and the Republic of Moldova, and Hungary and Austria. The enhancement of the Latvia-Lithuania interconnection will double gas transmission capacity both ways, while the Poland-Lithuania Interconnector is now connecting the Baltic States to other EU gas markets. Hungary is working with Romania to increase the interconnector capacity to 3 bcm a year, which would allow imports from Greece, Turkey and Azerbaijan, as well as access to Romanian gas. Simplifying the tariff structures for transporting regasified LNG around the region would help reduce the barriers to increasing the region’s LNG imports.

Exploring joint procurement of LNG can ease the financing of terminals, increase bargaining power and improve trading expertise on competitive global LNG markets.

Any investments in new gas infrastructure, increased gas production, new LNG supplies and pipelines need to ensure that methane emissions from these activities are minimised. And careful investment planning should also explore opportunities for new LNG terminals to facilitate imports of hydrogen or ammonia in the future.

Common gas storage platforms can increase regional energy security. Hungary, Slovak Republic and Ukraine could offer storage capacity for other countries in the region, which would help integrate regional markets.

Gazprom had control over some of Europe’s largest gas storage facilities, notably Jemgun, Rheden and Haidach (Germany/Austria). Ahead of winter 2021, Gazprom emptied its gas storage facilities to unusually low levels. Processes are now under way by European government authorities to gain physical access to these gas storage facilities to refill them and make the gas available to local and regional gas markets. Germany and Austria signed solidarity agreements on the gas supplies from Haidach storage, which is fully linked to the German gas system despite its location in Austria.

Several countries are now implementing ‘use it or lose it’ rules across the EU to free up gas storage capacity for new entrants. Regional entry-exit systems can improve access to storage, like the common Finnish, Estonian and Latvian gas transmission entry-exit system. New rules will enter into force in Latvia for booking and using storage capacity, which will improve the transparency of gas storage to prevent congestion and hoarding.

Distribution of gas storage capacity in Central and Eastern Europe, 2022

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In the Baltic region, important gas storage capacity at Inčukalns in Latvia supplies Estonia and Lithuania in the winter. Latvia has further modernised the facility to allow for more flexible gas use. Similarly, storage facilities in Slovak Republic, Czech Republic and Ukraine could be used as a joint gas reserve for Central and Eastern Europe.

The EU is taking a more strategic approach to gas storage at a regional level, providing a 100% tariff discount on entry and exit points into storage facilities, with voluntary joint procurement / release by member states of strategic gas stocks and solidarity measures. The EU requires the certification of gas storage system operators, thereby reducing the potential for control by third-country entities.

In mid-September, natural gas storage levels in the EU were almost 84% full, meeting the new EU-wide target of 80% by 1 November ahead of time. However, IEA analysis suggests that EU gas storage facilities would need to be 90-95% full to survive a complete interruption of Russian gas flows from the start of the European heating season. Even in this case of high storage levels, gas supply curtailments would remain a significant risk in the second half of the winter.

References
  1. In this commentary, Central and Eastern Europe includes: Albania, Austria, Bosnia and Herzegovina, Bulgaria, Czech Republic, Estonia, Finland, Germany, Greece, Hungary, Kosovo, Latvia, Lithuania, Moldova, North Macedonia, Romania, Serbia, Slovak Republic, Slovenia, and Ukraine.

  2. Council Regulation (EU) 2022/1369 of 5 August 2022 on coordinated demand reduction measures for gas.