The invasion of Ukraine has caused various EU governments to focus on the need to reduce their dependency on Russian gas. In a plan released in March 2022 (REPowerEU), a blueprint was laid out to gain energy independence from Russia while, at the same time, strengthening and accelerating the transition to net-zero. European policy officials affirm that the move toward energy independence will take effect at “lightning speed.”
EU’s current dependence on Russia is demonstrated by the fact that Russia accounts for 40% of EU’s gas consumption as well as 46% of coal imports and 27% of oil imports. Dependence on Russian gas varies significantly by country, with some eastern European countries like the Czech Republic, Slovakia, and Hungary 100% reliant on Russian gas supplies. The current high energy prices are hurting the economy. For example, even before the Ukraine invasion, Europe was facing shortages in aluminium; this was due to production cutbacks caused by high energy costs. After the invasion, the situation was exacerbated to such an extent that China, the world’s largest importer of aluminium, recently exported aluminium to the EU. However, there are some positive aspects to the situation. According to the EU, gas supplies are sufficient until the end of this winter, even in the event of full disruption of supplies from Russia.
In this article, we discuss REPowerEU and its impact on the future power generation scenario in the EU. Aside from REPowerEU, EU State Aid rules also offer Member States options to provide short-term support to companies affected by high energy prices.
REPowerEU: Joint European Action for more affordable, secure, and sustainable energy
The plan outlines several steps that can be undertaken to eliminate EU dependence on Russia for its energy supplies while promoting sustainability.
EU gas storage policy: The commission will make a proposal to ensure annual adequate storage capacity and will require existing storage infrastructures to be filled to at least 90% of capacity by October 1 each year.
Diversifying gas imports: The plan proposes to increase LNG (Liquified Natural Gas) imports (from Qatar, Egypt, West Africa, and the United States) and piped sources (Azerbaijan, Algeria, and Norway).
Increase production of biomethane: The plan proposes to double the objective set in the “Fit for 55” plan for biomethane production by 2030. Biomethane would be produced from sustainable biomass sources like agricultural waste and residues.
Hydrogen Accelerator: The plan proposes to increase the supply of renewable hydrogen by an additional 15 million tons over and above the 5.6 million-ton objective set for 2030 under the “Fit for 55” plan. This will include 10 million tons of imported hydrogen from diverse sources and 5 million tons of increased production in the EU. Interestingly, the plan states that “other forms of fossil-free hydrogen, notably nuclear-based, also play a role in substituting natural gas.”
The plan does not say from where the huge target of 10 million tons of imported hydrogen will be sourced. The commission said that it will support pilot projects on renewable hydrogen production in the EU neighborhood – in particular, a Mediterranean Green Hydrogen Partnership. The EU Commission will work with partners to “conclude Green Hydrogen Partnerships and with the industry to establish a Global European Hydrogen Facility, boosting Member States’ access to affordable renewable hydrogen.”
Reducing dependence on fossil fuels: The proposed plan accelerates various targets set for solar, wind, and heat pumps to be achieved by 2030 under “Fit for 55.” Land acquisition for net-zero power projects is a big bottleneck. The document acknowledges this, stating: “Member States should swiftly map, assess, and ensure suitable land and sea areas that are available for renewable energy projects, commensurate with their national energy and climate plans, the contributions towards the revised 2030 renewable energy target, and other factors such as the availability of resources, grid infrastructure and the targets of the EU Biodiversity Strategy.”
Decarbonizing industry: The plan also states, “The REPowerEU plan could accelerate the deployment of innovative hydrogen-based solutions and cost-competitive renewable electricity in industrial sectors.” Details are not provided on what this would involve beyond the accelerated implementation of the Innovation Fund to support a switch to electrification and hydrogen and an EU-wide scheme for carbon contracts.
What does this mean for sustainability and finished lubricants?
If implemented, the REPowerEU plan could lead to new opportunities in green hydrogen, natural gas, and wind energy.
Green hydrogen
Green hydrogen becomes a central plank of the EU net-zero ambition. The proposed plan builds on previous plans of building a hydrogen economy in the EU and will promote EU-wide availability of green hydrogen. This, in turn, will make hydrogen the main route for decarbonizing long-distance trucking, mining, construction, agriculture, and hard-to-decarbonize industrial sectors like primary metals. In the short to medium term, this is likely to drive natural gas engines retrofitted to run pure hydrogen as technology becomes commercialized. In the longer term hydrogen fuel cells may take over, which, in turn, will drive a reduction in lubricants used in the commercial automotive segment.
Gas economy
The gas economy (natural gas, various forms of biogas, green hydrogen) will see robust growth. This will help the development of dual-fuel turbines and engines. It could potentially accelerate growth in natural gas engine oils (NGEO) and turbine oils and drive new technology in NGEO to cope with these new fuels. Biogas use will drive consumption of higher-ash NGEO, whereas hydrogen fuel may require an engine oil more suited to handle water contamination.
Wind energy
The production of green hydrogen requires renewable power generation. The development of renewable energy sources like solar and wind will be accelerated. This will help the development of offshore wind energy due to a lack of suitable on-shore sites and opposition from consumers near wind farms.
The plan could promote the development of renewable energy projects among EU neighbors like North Africa, which could export green hydrogen to EU.
It should be noted that wind energy installations were already growing rapidly due to EU’s Next Generation EU program, launched after the COVID-19 lockdowns. In 2021, Europe installed 17.4 GW of capacity – an all-time high, as per WindEurope, an industry body. How much faster will the wind industry grow with this added incentive? It is possible that the wind energy capacity addition will be limited by industry capacity.
On the positive side, the race is on for developing wind turbines of larger and larger capacity. This is, in part, due to the paucity of suitable sites (wind profile, consumer resistance, permits, etc.) for new wind farms.
While volumetric growth opportunities for lubricants used in wind turbines are increasingly limited to new installations (see Kline’s blog on Biden’s Plans For More Wind Turbines Won’t Increase Lube Demand), new technical challenges posed by supersizing turbines and remote off-shore installations provide lubricant marketers many opportunities to develop high-value-added products to cater to the performance challenges experienced by remote off-shore installations in terms of extreme temperatures and hostile operating conditions.
Conclusion
It must be emphasized that there is a shifting emphasis in EU policy from sustainability to energy independence. But that does not mean that sustainability objectives have lost relevance. Major oil companies in Europe have already started a process of reorienting their business toward clean energy. These companies will be watching how the plan is modified as it is negotiated by EU members and will be ready to capture opportunities as they emerge.
For more information, check out two of Kline’s recent studies covering the power sector. Natural Gas Engine Oils: Global Market Analysis and Opportunities provides a comprehensive independent appraisal of the non-transport NGEO market in the context of improving gas engine technology, changing environmental regulations, growing demand in key applications, and the impact of various developments in the natural gas market. Meanwhile, Lubricants for Wind Turbines: Global Market Analysis and Opportunities provides a comprehensive analysis examining the market for lubricants used in wind energy production in the leading global markets; it will focus on key trends, developments, technology changes, and identifying challenges and opportunities for lubricant marketers.
