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europe's shift away from russian gas

Europe’s emphasis on energy security
has clear implications for the energy
transition. Europe’s decarbonisation
timeline is ambitious, and doubts ALEXANDROS MICHAILIDIS / SHUTTERSTOCK.COM
around whether targets could be met
were raised even before the current
crisis. Under the additional pressure to
substitute Russian gas, governments
are likely to prioritise securing supply
over their decarbonisation targets and
may turn to more carbon-intensive
alternatives; Germany, for instance,
is considering reopening certain coal
plants. Alternatively, a reversal of
attitudes towards nuclear energy as a
viable, low carbon supply of energy is
supported by its recent inclusion in
the EU’s Green Taxonomy. However,
expanding capacity would take time,
and the technology is still hamstrung by
safety and security concerns.
GOVERNMENTS ARE UNDER PRESSURE TO REPLACE RUSSIAN GAS
UTILITIES RECKON WITH
VOLATILE CIRCUMSTANCES operations being hedged for 2022, they the instalment of electric heat pumps to
The rapid rise in energy prices is are now not benefiting significantly replace gas-fired home heating systems.
unsustainable for the European from elevated prices. However, the success of this initiative
economy, with direct consequences Several key market players have hinges on the expansion of green power
for other key industrial sectors and for improved their financial situation generation capacity.
economic growth. Indeed, S&P Global with measures to support their credit For utilities, which will be
Ratings now forecasts Europe’s GDP will quality in the first quarter of 2022 increasingly expected to accelerate their
decline by about 1.2 per cent in 2022. – renegotiating contracts, limiting decarbonisation efforts, this represents
High prices may make some European- margin calls with key counterparties, an encouraging signal for future growth.
based companies less competitive than using letters of credit (LCs) to manage But with lower gas volumes and the
their rivals elsewhere, leading to plant related cash risk with key core banks, EU’s willingness to accelerate the shift
shutdowns in energy-intensive sectors and securing additional credit lines to electric heating, the business models
such as fertilisers, steel and paper to manage liquidity. As winter ends in of some gas infrastructure networks
production. To mitigate these risks, EU Europe, utilities’ hedging positions are may need to evolve. Crucially, if Russian
member states can provide short-term unwinding and the related collateral gas no longer flows to Europe, some gas
support to companies affected by high is being returned. Nevertheless, large infrastructure transit routes will likely
energy prices and help reduce their working capital swings are likely to be less utilised, potentially putting
exposure to energy price volatility in continue as volatility persists. infrastructure owners at risk.
the medium to long term. At the same time, the EU will
Social risks and affordability The EU will double down on double down on projects to increase
concerns are also rising – especially in projects to increase capacity capacity for decarbonised gas, such
markets where energy bills represented as biomethane and hydrogen. Europe
a large share of disposable income even for decarbonised gas, such as is now aiming to produce 35bcm
before the energy crisis. Households biomethane and hydrogen. of biomethane by 2030, and to add
may struggle to pay bills, increasing Europe is now aiming to 10 metric tonnes (mt) of imported
pressure on network operators’ cash renewable hydrogen in addition to
flows, even though regulation generally produce 35bcm of biomethane 5mt of domestic renewable hydrogen
allows for cost recovery in such cases. by 2030, and to add 10 metric by 2030 as well. This will encourage
As social concerns mount, the risk of tonnes (mt) of imported investments in new infrastructure
political intervention to reduce network renewable hydrogen in addition faster than currently anticipated.
operators’ profitability will persist. Ultimately, however, there is more
But, owing to the legal hurdles and the to 5mt of domestic renewable downside risk for gas infrastructure
recognition that utilities’ investment is hydrogen by 2030 as well. networks, and as the sector adjusts to
needed to enable the energy transition, a new reality, uncertainty around the
this currently seems unlikely. sustainability of their business models
European utilities’ management ENDURING CHANGES FOR will only increase.
of supply and trading risk – securing NETWORK OPERATORS
prices on both the procurement and Looking ahead, REPowerEU may S&P Global Ratings is an American
sales of commodities – is ordinarily a ultimately accelerate the decline in the credit rating agency and a division of S&P
key strength, enabling utilities to make use of gas. High bills will encourage Global that publishes financial research
a margin without significant exposure households to use less gas, and in and analysis on stocks, bonds, and
to volume or price risk. But in the the long-term, rising prices and commodities. For more information,
current context, with most utilities’ government incentives could hasten visit www.spglobal.com/ratings

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