The Russian-Ukraine War is wreaking havoc on European energy markets, and while the oil and gas markets have drawn the most attention, European coal demand and imports are likely to be affected as well. At first glance, European electricity supplies appear to be well-diversified, with 23% of 2021 power generation coming from renewables; along with 22% from nuclear; 20% from natural gas; 16% from coal; 16% from hydropower; and 3% from other sources.
However, the region’s natural gas supplies are not well-diversified, as Russian supplies accounted for 32% of European gas consumption, and nearly 40% of the region’s gas imports. Russian pipeline shipments accounted for 90% of these supplies, with LNG accounting for the remainder. With European countries pledging to reduce their imports of Russian gas over the coming year (and with Russia already moving to cut supplies to some countries), we expect Russian pipeline shipments to be slashed by 70% from 2021 to 2023, falling from 170 bcm to just 55 bcm.
In response, Europe will turn to LNG (largely from the US) to fill as much of this gap as possible, but the region’s LNG import capacity is limited. After totaling 107 bcm in 2021, we see European LNG imports rising to 160 bcm in 2023, but this will offset less than half of the lost pipeline supplies. As a result, total European gas supplies are expected to decline by 8% between 2021 and 2023, leaving a shortfall in the region’s total electricity supply of nearly 2%.
As Europe looks to make up for the loss in gas supplies, the region will be forced to turn to coal to at least some extent, despite environmental concerns, as the ability to increase supplies of other energy sources, such as nuclear and renewables, is limited in the near-term. Indeed, several European countries, such as Germany, the Netherlands, and Austria have already announced plans to boost their use of coal in the coming year.
In our Base Case scenario, we assume that increased coal use makes up for more than half of the lost gas supplies, with coal imports making up the majority of new coal supplies, along with some increase in domestic coal production. Specifically, we see coal imports rising by 25-30 million tonnes over the coming year, in response to cutbacks in Russian pipeline supplies.