Europe turns to coal to replace Russian gas amid energy crisis

About 10 gigawatts of coal-fired capacity is expected to be brought back to the market this year, Rystad Energy says

A coal-fired power plant in Peitz, Germany. Most of the coal plants that the country plans to bring back burn hard coal. Bloomberg

European countries are considering switching back to coal to replace the drop in gas supplies from Russia, as the region grapples with an energy crisis, according to Oslo-based consultancy Rystad Energy.

Germany, Austria, Italy and the Netherlands have all indicated they may have to rely more on coal, which has the highest carbon footprint among fossil fuels, as they seek to cater to energy demand, it said.

“After the announcement of reversing policies to burn less coal in the German, Austrian and Netherlands' power sectors due to lower Russian gas supplies, more discussions and decisions on measures to address the European energy crisis are expected,” Zongqiang Luo, an analyst at Rystad Energy, said in a note on Thursday.

“Among these three countries, Germany has more flexibility in fuel-switching and we expect that 10 gigawatts of coal-fired capacity is estimated to be brought back to the market, and this may provide about additional 26 TWh [terawatt hours] electricity from coal in 2022 to compensate the loss of power generation from gas.”

Last year, Russian natural gas accounted for 45 per cent of imports and about 40 per cent of EU gas demand, according to the International Energy Agency.

Late last month, the EU's 27 member countries decided to stop crude oil shipments from Russia, as part of sanctions in response to its military offensive in Ukraine, but agreed to leave pipelines open.

Ukraine and some EU member states have urged the bloc's leaders to tackle the subject of natural gas imports, but the union is particularly reliant on Russia in that field.

With European countries now switching to coal to replace gas, coal prices are set to rise. The main traded thermal coal benchmark is currently trading at around $377 a tonne, up about $250 a tonne since the beginning of the year, Rystad said.

“Most of the coal plants in Germany that are planned to be brought back online burn hard coal, which was traditionally imported from Russia into Germany,” said Carlos Diaz, senior vice president at Rystad Energy.

“With the international seaborne thermal coal market already incredibly tight, the prospect of additional demand from German coal-power restarts will definitely push imported coal prices higher than their current super high levels.”

While the announcement to reconsider coal has raised environmental concerns, Germany's Economy Minister Robert Habeck said earlier this week that the move was “bitter” but “simply necessary” to lower gas usage.

The country has also said that it will stick to its goal of phasing out coal as a source for power generation by 2030.

However, the shift in the energy mix will not come without leaving a “big environmental footprint”, Rystad said.

It estimates that the higher coal power generation would result in an additional 10 million tonnes of carbon equivalent emissions released into the atmosphere.

For the first five months of 2022, total coal-fired power generation in Germany rose to 70 terawatt hours, an increase of 20 per cent or 11.3 terawatt hours, while power from gas dropped 16 per cent to four terawatt hours, compared with the same period last year, Rystad Energy said.

The Netherlands posted a drop of 21 per cent (3.6 terawatt hours) in gas-fired power generation to 13.3 terawatt hours this year and coal-fired power generation also decreased 13 per cent to seven terawatt hours.

Austria produced very little electricity from coal, at only 0.36 terawatt hours from January to May, but gas-fired generation increased 24 per cent annually to 5.8 terawatt hours this year, Rystad said.

Meanwhile, Moscow has been reducing its gas supply to the region since last October, when Russian gas exports to Europe dropped sharply, mostly by constricting flows through the Yamal natural gas pipeline system.

Last week, state-owned energy company Gazprom also said that deliveries through the Nord Stream I pipeline to Germany would be cut, blaming technical issues, although Berlin says the issue could be politically driven.

Exports from Russia to Germany through the Nord Stream pipeline dropped to 67 million cubic metres per day (mcmd) on June 22, from a level of 167 mcmd at the end of May, Rystad said.

There is still “uncertainty over how long Nord Stream I supplies will be capped”. However, the scheduled 10-day maintenance work for from July 11, which will account for a supply loss of about 600 million cubic metres, will “further tighten the European gas market during the summer”, Mr Lou said.

In the meantime, Europe is also seeking to boost its gas supply from other sources.

US gas exporter Venture Global signed its first liquefied natural gas deal with German company EnBW this week. The 20-year deal will supply 1.5 million tonnes of LNG a year to EnBW. The first delivery is expected to start in 2026.

“US LNG exports to Europe this year have already reached about 23 million tonnes for the first five months, and we expect that the total US LNG export to the world will see a historical high level of 85 million tonnes in 2022,” Mr Lou said.

The EU also recently signed a preliminary agreement to increase LNG sales from Egypt and Israel.

As part of the deal, Israel will send more gas through Egypt, which has the infrastructure to liquefy it for export to EU countries across the Mediterranean.