As the conflict between Russia and Ukraine continues, questions arise about the sanctions to be placed on Russia if they decide to invade the Ukraine.
A big concern for nations in the EU is whether energy supply will be interrupted, and if so, how badly.
It seems as if there is still some divide between countries on the appropriate sanctions to be imposed on Russia, due to them having a potentially disruptive impact on the whole worlds Energy Supply.
Italian Prime Minister Mario Draghi said on Friday, “We are discussing sanctions with the EU and in the course of these discussions we have made our position known, that they should be concentrated on narrow sectors without including energy. ”
Italy imports 90% of its gas requirements, with Russia a key supplier.
With tensions over Ukraine intensifying, Draghi stated that Russian President Vladimir Putin had requested a meeting with him, and that he planned to arrange a meeting between Putin and Ukrainian President Volodymyr Zelenskiy.
However, this is in contrary to what the European Commission President Ursula von der Leyen told CNBC at the Munich Security Conference in Germany.
When asked about the possibility of imposing sanctions on Russian gas giant Gazprom, von der Leyen said Saturday, “Everything is on the table.”
This is significant since Europe receives almost 40% of its gas supply from Gazprom, according to the EU leader, who told CNBC’s Hadley Gamble at the Munich Security Conference that this is a “unsustainable dependency.”
Von der Leyen said she had reassured Draghi that Europe would source gas from elsewhere and that there was a pipeline network through the continent to “bring the necessary gas to Italy so that Italy is also on the safe side.”
Alternate Supplies
The general consensus from all countries however seems to be that the EU should diversify its energy supply.
Russia is the biggest supplier of natural gas to Europe, which depends on the former for nearly 40% of its natural gas requirements.
As mentioned above, Germany, Europe’s largest economy depends on Russia for 65% of its natural gas needs, while Italy gets 43% of its gas from Russia, and France, a little over 16%. Other smaller countries however, such as Czech Republic, Hungary and Slovakia are almost fully dependent on Russia for their requirements of natural gas, while Poland gets 50% of its gas from the latter.
A couple of proposed options to diversify supply have been put on the table, with one being the introduction of LNG.
”Even in case of full disruption of gas supply from Russia, we are on the safe side for this winter,” said the EU Commission President.
”For the time being we would be able to replace the Russian gas with LNG [liquefied natural gas] deliveries that we get from our friends all over the world.” “In the middle to long-term, we are doubling on renewables. sun, wind and hydropower will increase European independence on energy.”
Nord Stream Pipeline
Another big question currently up in the air is the future of the Nord Stream 2 Pipeline, which is an underwater twin pipeline that would transport natural gas from Russia directly to Germany.
At the same conference, Mateusz Morawiecki, Poland’s prime minister, said that he agreed with Yury Vitrenko, the executive chairman of Ukraine’s gas importer, that the existing Nord Stream pipeline could be sanctioned as well.
The Nord Stream pipeline, which is owned by Gazprom and runs over the Baltic Sea along a similar route to the future Nord Stream 2, was completed in 2012.
After Gazprom dramatically reduced deliveries via Ukraine and Poland, Nord Stream is now the primary provider of Russian gas to Germany and other European markets.
Meanwhile in the US, President Biden has warned that that the Nord Stream 2 gas pipeline would be halted if Russia invades Ukraine.
“If Russia invades, that means tanks or troops crossing the … border of Ukraine again, then there will be … no longer a Nord Stream 2. We, we will bring an end to it,” Biden said.
Despite the fact that the project is under German authority, when asked Biden said: “I promise you, we’ll be able to do it.”
The Impact on the UK
The impact of these sanctions in the UK is being questioned also, with the country already facing an energy crisis. If Russia restricts gas supplies to Europe, wholesale energy costs could rise even further, resulting in higher household bills.
“We think that if Russia invades Ukraine, and let’s suppose there was a sanctions system that blocked Russian gas to Europe, that would drive price increases and yes, it would eventually flow through to customers,” Jonathan Brearley, chief executive of energy regulator Ofgem, told MPs last week.
A number of energy providers have already gone out of business as a result of pre-existing pricing difficulties, with customers expecting annual increases of up to £700 beginning in April. Price pressure is expected to increase as a result of Russian tensions, according to experts.
Thankfully Mr Nixey believes this is an unlikely outcome, given that Europe and Russia are interdependent on each other when it comes to energy. “Russia needs revenues. Russia is doing quite well now, economically speaking. Its coffers and its reserves have been bloated by the rise in energy prices and the demand from the cold winter but if you start withholding the energy, you start withholding the income,” he said.
Ofgem offers new measures to tackle rising energy prices
After increasing wholesale costs caused consumers’ bills to climb by hundreds of pounds, Ofgem has announced two additional measures to help stabilize the energy market.
To combat the loyalty penalty, all suppliers will have to offer existing customers the same deals as new customers starting in mid-April.
The main reason for this is to ensure that as many consumers as possible can benefit from all available tariffs in the market.
When acquiring a new client, suppliers will also have to pay a Market Stabilization Charge to the losing provider. This will only happen if wholesale prices drop significantly below the price cap level.
The measures are designed to be short-term solutions in response to the current energy crisis.
An Ofgem spokesperson said: “The energy market has faced a huge challenge due to the unprecedented increase in global gas prices; a once in a 30-year event. We’re putting in place short-term measures to protect consumers.
“Alongside tougher financial regulation, this will make sure that energy companies do not take disproportionate financial risks and suppliers who have done the right thing by purchasing energy in advance for their customers aren’t penalised, whilst protecting the ability of switching consumers to benefit from cheaper tariffs when prices fall.
“We’ll monitor how effective this is before considering whether it should become an enduring measure in the market.”
The changes will into effect on 14 April, with Market Stabilisation Charge payments only put into place if prices fall at least 30 per cent below the level in the price cap.
Some suppliers welcomed this news, with Simon Oscroft, co-founder of green energy supplier So Energy, who said the move to make all tariffs available to existing customers will ensure loyal customers are not excluded from the best deals and “will encourage more sustainable pricing and in turn improve supplier resilience by preventing suppliers from offering loss leading exclusive tariffs to new customers”.
You have probably seen Ofgem hitting the headlines recently after announcing the price cap level for default tariff customers will rise from the current level of £1,277 to £1,971.
The reason for this is due to the increase in global wholesale gas prices, as these are the driver of retail prices. Gas prices have risen due to a cold winter in Europe in 2020/21 that put pressure on supplies and reduced the the amount of gas stored, a relatively windless summer in 2021 which made it difficult to generate wind energy and then increased demand from Asia – especially China – put pressure on liquefied natural gas supplies.