Emergency plans and solidarity: Protecting Europe against a natural gas shortage

By Jörg Haas, Tomasz Kozluk, Giuliana Sarcina, OECD Economics Department

The dramatic decline in Russian gas exports to Europe threatens to create a natural gas shortage this coming winter (Birol, 2022; European Commission, 2022a). In a recent paper (Haas, Kozluk and Sarcina, 2022), we argue that filling storage will be insufficient to eliminate that risk. Unless European countries reduce demand now, they might have to ration gas this winter. The emergency plans and solidarity provisions in place in case of a shortage offer strong protection for households and social services but would leave firms bearing the brunt of the burden of adjustment. The economic and employment costs could be severe, which underlines the need to reduce demand across all sectors of the economy now in order to prevent the risk of rationing during the winter. Moreover, solidarity between EU members is well-established on paper but may prove challenging to implement. It needs to be made operational by putting the necessary bilateral agreements in place or agreeing on EU legislation to this effect.

Storage and supply are limited

Replenishing gas storage levels to prevent a shortage in winter is a salient approach in the public debate, but it offers only a partial solution. EU gas storage levels currently stand at above 90%, with most member states well in excess of the 80% target set by the European Commission for November 2022 (GIE, 2022). This equals about 100 billion cubic meters (bcm) of gas, while the European Union typically consumes about 290 bcm between November and April. In most countries, gas reserves are seasonal rather than strategic: they decline in winter amid continued imports. If imports from Russia cease completely and the European Union does not reduce its gas consumption, it risks a shortage in early 2023. Consumption would have to shrink by between 10 and 20%, depending on gas flows from Russia, deliveries from alternative suppliers, and winter temperatures (Figure 1) (Kennedy, 2022; McWilliams and Zachman, 2022). A further consideration is the fact that the United Kingdom typically imports substantial amounts of gas throughout winter and may need to rely on EU storage due to its very limited own storage capacities. Finally, even if consumption is reduced sufficiently at the aggregate EU level, individual countries could still face shortfalls as the EU internal gas grid has limited transmission capacity between member states.

Figure 1. Without demand reductions, Europe risks gas supply interruptions

Stylised scenarios of EU and UK gas storage level developments, %

Note: Assuming 90% storage levels at the end of September 2022, no imports from Russia, imports from other sources at 30 bcm/month, and domestic production at average 2019-21 levels. “No change” assumes consumption at the average 2017-21 levels. “Cold winter” assumes consumption at the maximum 2017-21 levels. “10% reduction” is relative to the 2017-21 average consumption.
Source: Bruegel; Eurostat; GIE; IEA; ONS; and OECD calculations.

National emergency plans

What happens if demand reduction turns out to be insufficient and gas must be rationed? National emergency plans define which consumers will lose access (European Commission, 2022b). As a last resort, the gas supply to certain customer groups can be reduced, while “protected customers” should still be supplied in full. EU countries typically protect households, social services, essential infrastructure, and district heating systems from cuts (Figure 2) (European Commission, 2019). By contrast, firms would have to bear the brunt of the adjustment. The order in which unprotected customers are supplied is not specified in emergency plans, although the European Commission suggests prioritising customers that provide socially critical products like food or medicine, as well as those that could have large downstream effects on value chains (European Commission, 2022c).

Figure 2. Households are protected against gas cuts, but most firms are not

Share of EU member states with regulation that protects customer groups against gas cuts, %

Source: OECD calculations based on national gas emergency plans.

EU solidarity

EU solidarity provisions aim to provide additional protection across borders. They oblige EU members to ensure that households, social services, infrastructure and heating systems everywhere in the European Union are able to access gas, even in the worst-case scenario of a severe shortage (EU Council Regulation 2017/1938). If an EU member state requests solidarity, connected member states are obliged to reduce gas supply to non-protected customers and pump the gas that has been saved to a member state in need. In return, natural gas providers are entitled to financial compensation. Flows must be ensured until the demand of protected customers in the requesting member state is satisfied (Fleming, 2019).

The details of gas-sharing under the solidarity mechanism have to be specified in bilateral agreements between neighbouring countries. However, as of now, only six such agreements have been concluded. The list includes Germany and Denmark; Germany and Austria; Estonia and Latvia; Lithuania and Latvia; Italy and Slovenia; as well as Finland and Estonia (European Commission, 2022b). The European Commission has therefore proposed harmonised clauses that would be directly applicable in the absence of bilateral agreements, but these have not yet been signed into law.

As long as the coverage of bilateral agreements is sparse and there is no additional European legislation to fill that gap, solidarity may face practical and political challenges. An agreement on and enforcement of common standards (e.g. minimum acceptable interior temperature standards) across the European Union may help alleviate this problem. Solidarity could be crucial not just to avoid major disruptions in individual countries, but also to help limit the severity of disruptions in the extreme scenario of widespread shortages.

What can governments do?

While emergency plans and solidarity provisions are crucial in ensuring that citizens and critical infrastructure will not lose access to energy, they can only serve as measures of last resort. Rationing the gas consumption of firms would imply large economic costs and unpredictable cascading effects along supply chains. Governments should thus aim to ensure energy savings now and spread them across all sectors of the economy, rather than risk burdening firms with the costs of a sudden emergency adjustment in early 2023. High prices will and already are incentivising demand reductions. However, some government support policies blur or weaken the price signal. To this extent, they merit a review as they may discourage energy savings and can be fiscally costly. In addition, governments have a wide range of measures at their disposal, including appeals for voluntary reductions and restrictions on certain uses of gas or electricity, as well as investment in energy efficiency.

References

Birol, F. (2022b). Coordinated actions across Europe are essential to prevent a major gas crunch: Here are 5 immediate measures. Available at: https://www.iea.org/commentaries/coordinated-actions-across-europe-are-essential-to-prevent-a-major-gas-crunch-here-are-5-immediate-measures.

EU Regulation 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of gas supply. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02017R1938-20220701.

European Commission (2019). Commission’s opinions on the preventive action plans and emergency plans submitted by EU countries in 2019. Available at: https://energy.ec.europa.eu/topics/energy-security/secure-gas-supplies/commissions-opinions-preventive-action-plans-and-emergency-plans-submitted-eu-countries-2019_en.

European Commission (2022a). Opening remarks of Commissioner Simson at the press conference of the Extraordinary Energy Council of 26 July 2022. Available at: https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_4727.

European Commission (2022b) Secure Gas supplies. Available at: https://energy.ec.europa.eu/topics/energy-security/secure-gas-supplies_en.

European Commission (2022c). A European gas demand reduction plan. Available at: https://ec.europa.eu/commission/presscorner/detail/en/fs_22_4611.

Fleming R. (2019). A legal perspective on gas solidarity. Energy Policy 124, pp.102-110. Available at: https://doi.org/10.1016/j.enpol.2018.09.037.

GIE (2022). Aggregated Gas Storage Inventory. Available at: https://agsi.gie.eu/.

Haas, J., Kozluk, T., and Sarcina, G. (2022). Emergency plans and solidarity: Protecting Europe against a natural gas shortage. OECD Policy Spotlight, October 2022. Available at: https://read.oecd-ilibrary.org/view/?ref=1160_1160374-3tkm8gj0xp&title=Briefing-Note-Gas-Emergency-Plans-and-Solidarity.

Kennedy, C. (2022). IEA chief: Europe must cut gas usage 20% to survive winter. Oilprice.com, 21 July 2022. https://oilprice.com/Latest-Energy-News/World-News/IEA-Chief-Europe-Must-Cut-Gas-Usage-20-To-Survive-Winter.html.

McWilliams, B., and Zachmann, G. (2022). European Union demand reduction needs to cope with Russian gas cuts. Bruegel Blog Post, July 2022. Available at: https://www.bruegel.org/2022/07/european-union-demand-reduction-needs-to-cope-with-russian-gas-cuts.