Tuesday

4th Oct 2022

Russian coal embargo kicks in, as EU energy bills surge

  • EU countries, including Germany, are planning to replace gas with coal power (Photo: Marcel Oosterwijk)
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An EU embargo on Russian coal imports came into effect at midnight on Thursday (11 August) as part of the fifth package of sanctions designed to starve Moscow of fossil-fuel revenue.

The coal ban is the first measure to hit Russian energy supplies directly and was agreed by EU leaders four months ago.

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Under the rules, EU countries will no longer be allowed to buy Russian coal, which will result in an €8bn loss per year for Russia, the EU Commission estimates.

But the embargo comes at a sensitive time, as much of Europe is already facing an energy crunch amid fears the Kremlin will stop gas exports entirely over the winter — the most important source for heating households.

In July, Russia cut back on natural gas supplies via key export pipelines, including Nord Stream 1, which connects the German gas infrastructure to Russia under the Baltic sea.

This led to a new price rally of Dutch front-month gas contracts, the European benchmark for gas prices, which increased from €78 per megawatt-hour at the start of June to €204 at the beginning of August.

Energy bills have also surged across Europe.

According to the Household Energy Price Index, an average household in the UK pays €305 per month. Belgium and Dutch households pay €213 and €358, respectively.

EU leaders agreed last week to reduce natural gas use by 15 percent this winter to dampen or even lower energy prices.

In Germany, many towns have opted to switch off street lights and turn off the hot water at public swimming pools.

But this is unlikely to be enough to stabilise prices.

More coal

Some countries have decided to reopen coal-fired power plants to deal with supply insecurity and surging energy bills.

The Netherlands has amended legislation to allow coal plants to run at full capacity until the end of 2023. France and Austria are both planning to reopen coal-fired power units before winter.

Germany plans to restore 10 gigawatts of mothballed coal capacity to the grid to cushion a potential gas shortage, accounting for just under 5 percent of total German power production — a move environment and economy minister Robert Habeck described in June as "bitter but necessary."

Coal imports from the US, Australia, and South Africa are expected to increase to help power the freshly reopened plants.

But replacing Russian coal imports will not be easy and will require the "lightspeed deployment of new supply chains to bring the right coal to where it is needed," Georg Zachmann and Simone Tagliapietra, two energy researchers at Brussels-based think tank, wrote in a study published in March.

In 2021 the EU depended on Russia for around 45 percent of its coal imports, according to EU Commission data, with the Netherlands, Germany and Poland as its biggest buyers.

Almost 70 percent of its thermal coal, which is used in power and heat generation, came from Russia.

Higher coal demand, lower coal supply due to the ban on Russian coal, and more complex logistics are likely to increase the cost of coal imports further.

The EU's subsequent ban on Russian oil is slated to come into effect at the end of the year.

Russia cuts Nord Stream 1 gas to 20% capacity

It comes a day after EU governments approved a watered-down plan to curb gas demand by 15 percent, aimed at lowering consumption, building storage, and sharing supplies if Russia in future cuts all exports.

EU ministers struggle over 15% gas-cut plan

The meeting comes as the Russian state-controlled Gazprom announced that supplies through the Nord Stream 1 pipeline to Germany would drop to just 20 percent of capacity, starting Wednesday.

Germany expects coal supply problems this winter

According to a document drawn up by the German economy ministry low water levels have reduced domestic shipping to the point that Germany's temporary shift to coal may be disrupted this winter.

Exclusive

EU officials were warned of risk over issuing financial warning

The European watchdog for systemic economic risk last week warned of "severe" threats to financial stability — but internal notes show top-level officials expressed "strong concerns" over the "timing" of such a warning, fearing publication could further destabilise financial markets.

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