On 8 March the European Commission outlined a plan to make Europe less dependent on Russian fossil fuels within the next five years. Additionally, the plan proposes a number of measures designed to address rising energy prices in Europe and to enable EU countries to stock up on gas reserves before the new winter season kicks in. Europe has been struggling with mounting energy prices in the recent months. Currently, the unending uncertainty over stable energy supplies is only exacerbating the problem. The REPowerEU plan will seek to diversify gas supplies, accelerate the market uptake of renewable gases, and to phase out the use of gas in heating and power generation. This is expected to reduce EU demand for Russian gas by two-thirds by the end of year. The plan hinges on three main pillars, namely: 1) stabilization of energy prices, 2) replenishment of gas reserves, and 3) reduced reliance on Russian gas. The REPowerEU plan was discussed at the EU summit on 10 and 11 March, but has not yet been officially adopted.

In order to stabilize gas prices, the Commission has proposed such measures as, e.g., imposing taxes on supernormal profits from trading in energy and ETS credits. Putting clamps on spikes in ETS prices has been one of the Polish government’s main demands. The Commission has also permitted interim state aid measures to support industrial consumers facing high energy costs. The Polish government seems to be taking an appropriate course of action. As regards residential customers, the Commission has recommended that temporary caps are put in place to curb retail price increases. That said, this recommendation is irrelevant in Member States where retail prices have not yet been unbundled. The Commission is also working to stabilize wholesale prices. In a merit order system, the current market price of energy per Mwh is set at a level where the demand curve intersects the supply curve. Typically, gas units close the stack, which at the current gas prices results in very high wholesale prices. If a fixed cap is put in place on prices per MWh for gas units, it will be possible to suppress wholesale prices in many markets. That said, considering the Polish energy mix, this type of regulation would seem less consequential.

The Commission has also proposed certain measures to stock up on gas reserves before next winter sets in, for example by introducing bottom limits as of 1 October. Polish gas storage facilities are filled to a relatively high extent and the relevant legislation has been in place for several years, which means that the Commission's initiative will be less important for Polish gas storage operators.

The most significant pillar of the REPowerEU plan is to minimize dependence on Russian gas. To a large extent, this means accelerating the Fit for 55 strategy. The main assumptions are as follows: faster development of RES, including by dismantling administrative barriers (e.g. liberalization of the 10h rule for wind power plants) and ramping up the dynamics of actions taken to increase energy efficiency. Consequently, the sustained downward trend in coal unit generation will be temporary halted for two to three future winter seasons, following which the process of transitioning away from coal is likely to accelerate rapidly. The diversification of gas supplies comes as an additional short-term measure.

As regards individual consumers, REPowerEU means the acceleration of direct electrification by means of solar panels, heat pumps, energy storage facilities and e-mobility. Continued support for gas boilers, which was a significant component of the Clean Air Program, is now called into question. Direct electrification is also feasible to secure energy supplies for industrial consumers. The role of corporate PPAs — with state guarantees for SME entrepreneurs — or energy supplies via a direct line bypassing the public electricity grid, is growing rapidly. However, in the production process, many industrial customers find gaseous fuels irreplaceable. Consequently, the Commission promotes rapid transition from natural gas to green hydrogen produced by electrolysis powered by RES electricity. The other major premise of this strategy is to significantly increase bio-methane production. The role of biomass in heat and power generation will decline rapidly.

However, the REPowerEU strategy will fail unless the construction and industry sectors accelerate energy efficiency measures, including by way of demand-side response. Digitization of households (IoT, smart home, smart meters), commercial buildings and industrial processes is an essential part of the process. Also, one of the key elements of this strategy is the digitalization of grid infrastructure and the enhanced use of incumbent infrastructure, including by means of “cable pooling”, i.e. optimal use of the grid by means of complementary RES generation technologies (wind power and solar) at the same grid connection point, usually using flexible technological backup from electricity storage. The storage facilities could also provide system services, which are scheduled to replace the inefficient and costly power market system in Poland by 2026 at the latest. REPowerEU also questions the strategy of transitioning from district heating systems to gas-fired CHPs. Ultimately, gas will only be a supplementary fuel in district heating; whereas direct electrification of energy sources, i.e. heat pumps, which seem the most effective measure, should become the default solution for baseload heat. That said, if heat pumps are used in district heating, transition to low-temperature grids will be unavoidable, which will entail significant outlays for district heating owners.

This article appeared on businessalert, on March 21, 2022.