Every once in a while, politics exhibits a pull to the rational. This is especially true when voters struggle to pay their bills and heat their homes, and aspiring and ostensibly adversarial powers menace state security. This is what is happening now in Europe. Home heating and electricity prices are up 300 per cent since last winter. To the east, Russia is threatening war in Ukraine and playing politics with Europe’s energy supply. From further afield, new Chinese energy companies are entering European markets and undercutting regional competitiveness.
Though firm believers in the risks of climate change and adherents to their self-penned “Green Deal”, European leaders have seemingly awoken to their complex reality. France, which now holds the rotating presidency of the Council of the European Union, is actively urging the EU to reduce its dependence on foreign sources of energy and raw materials. It has also suggested that new energy technologies like hydrogen should be produced domestically.
The French have also been pushing for the inclusion of nuclear energy in the EU’s green energy taxonomy, a rulebook for economic activities that may be regarded as environmentally sustainable investments. The proposal is not without its controversies. It comes as Germany in December shut down half of its remaining nuclear plants and amid questions over nuclear technology’s cleanliness. Yet, if approved, the EU’s inclusion of nuclear power could ostensibly bolster European energy and regional security in the medium to longer term. 2022 could be the year for Europe’s energy and climate realism breakthrough.
The (Russian) ties that bind
Part of Europe’s troubles stems from a self-inflicted energy reliance on Russia. While the region has made progress in reducing Russia’s Gazprom PJSC’s clout in its energy markets, it continues to rely heavily on Moscow for its natural gas supplies. Europe’s natural gas production has been in decline for years, which has left it more reliant on imports. Natural gas remains the continent’s second-largest energy source, accounting for around 22 per cent of its energy mix. Of this, Russian imports account for some 47 per cent.
Moscow’s “pivot to Asia” could give it notable leverage to turn off and on supplies to Europe, and to potentially hedge against anticipated Western pressures or sanctions.
The construction and, should it transpire, approval of Nord Stream 2, the Gazprom-owned underwater pipeline that would route gas directly from Russia to Germany under the Baltic Sea, would likely only increase the extent and duration of Europe’s energy reliance on Russia. In bypassing critical overland routes, Nord Stream 2 would ostensibly eliminate Ukraine’s independent gas transmission system, concentrating gas exports into a single corridor and undermining the access of most European states to non-Gazprom suppliers.
The history of Nord Stream 1, which terminates in Germany just like Nord Stream 2 is planned to do, also demonstrates that Moscow is more than willing to use energy supplies for political leverage. When, in 2014, Austria, Germany, and Slovakia offered to resell Russian gas to Ukraine amid Moscow’s chiding of Kyiv’s supposed disobedience, Russian President Vladimir Putin threatened to reduce gas supplies to the offending parties. He followed through on this threat in 2015, as in 2009 previously. He did so again last year amid rising tensions with the EU over Ukraine.
Of equal, if not greater, concern for Europe should be Moscow’s ‘pivot to Asia’. Implicit in the burgeoning ties between Russia and China is cooperation in energy, notably in natural gas, on which Beijing relies to achieve its professed climate objectives. China is expected to boost natural gas in its energy mix from 8.7 per cent in 2020 to over 12 per cent in 2030. For Moscow, growing Chinese demand opens a new market and provides an apt opportunity for it to diversify away from Europe, currently its primary export destination.
Moscow’s pivot could spell trouble for Europe. For example, the Power of Siberia 2, a mega-gas pipeline that is slated for completion by 2030, is anticipated to supply China with 50 billion cubic metres of Russian gas annually. The pipeline will complement another project, the Power of Siberia 1, that transports gas from Russia’s Chayandinskoye field to northern China. Yet, the Power of Siberia 2 will use the same gas fields in the Yamal Peninsula that are the resource base for Russian exports to Europe. This will give Moscow notable leverage to turn off and on supplies to Europe and to potentially shift away from Europe and towards China as a hedge against anticipated Western pressures or sanctions.
Europe’s green energy ambitions are turning red
Europe’s primary response to Russian menacing has ostensibly been to hasten the adoption of renewable energy sources and double-down on its drive to net-zero emissions. Its Green Deal sets out ambitious targets that include increasing the region’s offshore wind capacity from its current 12 gigawatts (GW) levels to a minimum of 60 GW by 2030 and 300 GW by 2050; requiring all new cars sold in the EU to be zero-emission from 2035; and, a slew of other regulatory measures that are designed to make Europe climate-neutral by 2050.
Yet, while admirable in its intention and ambition, this approach has inevitable unintended downsides, including dependence on China for raw materials and finished products. In the automotive industry, pressure to deliver clean mobility solutions has left automakers in a growing number of EU member states unable to keep pace as they struggle to shift their vehicle ranges to electric while simultaneously lowering production costs. Persistent global supply chain exigencies and shortages of key raw materials — cobalt and lithium — additionally hamper Europe’s homegrown electric vehicle production.
The upshot has been the expansion of Chinese electric vehicle and battery manufacturers in the region’s markets. Europe is the leading market for China’s electric vehicle exports, with Norway, the world’s most electrified car market, a prime destination. Last year Chinese electric car maker Nio entered Norway with its ES8 electric SUV in what was the company’s first overseas foray. Nio plans to enter five additional European markets by the end of this year. Other Chinese electric vehicle brands, including Aiways, BYD’s Tang, SAIC Motor’s MG, Dongfeng’s VOYAH, and Great Wall’s ORA, share similar ambitions.
These players are able to capitalise on Chinese technological advances, a large domestic pool of skilled labour, and China’s dominance of the pivotal lithium-ion battery supply chain to push past their European counterparts and ostensibly secure a first-mover advantage. BYD is also among the world’s foremost producers of electric vehicle batteries. Its distinct battery technology facilitates the kind of improved storage, safety, and recyclability that is needed to swiftly deploy electric vehicles at scale. With one foot firmly in the Norwegian market, the company intends to build a battery factory in Europe. Chinese electric vehicle battery manufacturers SVOLT Energy Technology and Farasis have similar plans. China’s Contemporary Amperex Technology already operates a USD 2 billion factory in Germany.
The entry of Chinese battery manufacturers into Europe risks undercutting the region’s own, still nascent, battery industry. EU leaders have been championing the development of an EU battery production strategy as a way to propel the region’s electric vehicle sector and dilute dependence on foreign suppliers. The strategy is now under pressure from unfortunate geopolitical dynamics and Chinese tactics. Any ostensible Chinese advantage could also impact the EU’s battery and electric vehicle standards. It is usually the first movers that set the terms.
Parallels emerge in Europe’s wind energy sector. Enticed by the market opportunities borne from the Green Deal, Chinese wind turbine manufacturers are advancing on EU markets — Germany, Portugal, Poland, Italy, Sweden, Greece, as well as the United Kingdom — where they compete with established European players such as Vestas and Siemens Gamesa. Until 2021 these European players delivered the biggest turbines. Today, Chinese makers produce even larger wind turbines at costs nearly 40 per cent less than those of their global competitors.
Last year in Italy, Ming Yang, currently China’s fourth-largest turbine maker, replaced Germany’s Senvion as the supplier for a 30-megawatt wind farm off the Port of Taranto. Ming Yang secured the contract after Senvion was dissolved and its assets sold to Siemens Gamesa. The contract was Ming Yang’s first in Europe.
Ming Yang will now build additional turbine manufacturing facilities in the United Kingdom, where the government aims to add 40 GW of offshore wind power by 2030 and has plans to establish another factory in southern Germany. China’s Xinjiang Goldwind Science, commonly known as Goldwind, is an active player in the German wind market. It has a 70 per cent stake in the country’s gearless turbine manufacturer, Vensys Energy.
Wanted: A realist European energy policy
Chinese firms cannot be faulted for seizing market opportunities as they arise. Still, as the terms of most Chinese commercial agreements are not known, it is impossible to opine on whether they are being made in good faith. Regardless, by failing to diversify its gas sources and pushing hastily for carbon neutrality, Europe now finds itself at the mercy of Russian President Putin and an ambitious China; neither have EU interests in mind.
To make matters worse, Russia presently has over 100,000 troops massed on Ukraine’s border and is threatening war if its political terms are not met. Nearly one-third of Russian gas exports to Europe cross Ukraine. While shipments were not disrupted during Russia’s 2014 invasion of Crimea, there is no guarantee that would remain the case should a war break out now. Meanwhile, Moscow continues to turn eastward as energy ties with China strengthen.
Jan Techau, previously of Carnegie Europe and currently head of speechwriting for the German Ministry of Defence, coined the phrase “sophisticated state failure” for the inability of advanced industrialised societies to reconcile means and ends. Sophisticated state failure is the ostensible unspoken patriarch of Europe’s present condition. Should efforts to reverse course fail — and should energy realism fail to breakthrough — the outlook for Europe is sadly grim. The region is likely to become a playing field for eastern powers hungry for political and military influence, normative power, and economic opportunity. And Europe will have no one to blame but itself.