A number of factors contributed to the European energy crisis that witnessed a significant increase on coal-fired power generation. On the demand side, energy consumption increased with the post-pandemic economy recovery after nations relaxed most of the Covid-19 restrictions.

Two consecutive colder than average winters since 2020 also added to the increase in demand. On the other side, supply disruptions across the globe and low gas domestic production in Europe concurred with the wind drought and issues with Russian pipeline gas flows.  

Competition for spot LNG cargoes strengthened with Asian economies refilling their gas inventories throughout 2021, resulting in European gas prices soaring to record-highs. Incidentally, Europe’s gas stocks began 2021-2022 winter season at their lowest level for eight years, increasing Europe’s need to procure thermal coal to guarantee energy security in the region.

As coal reclaims its position in the old continent’s power generation mix, national security through energy independence has taken the front seat and seems it has left climate goals temporarily out of the priority list.

In 2021, coal-fired electricity generation in Europe considerably increased to 579TWh, up by about 18% from 2020. This sudden growth interrupted the trend in decline since 2015 and could continue over 2022, especially with the lack of reliability on other sources of energy. For the same year, wind and solar generation declined by 4% and 1%, respectively, amid low wind speeds in the main producing countries.

Although wind has the potential to increase in 2022 since a capacity of 17.4GW was installed last year, it will still account for a modest share in energy generation. On the other hand, nuclear power generation expanded last year, but it’s expected to slightly decrease with aging reactors and scheduled maintenance in France.

Moreover, low renewable and nuclear supply resulted in coal-fired generation becoming essential in meeting national power demand across Europe, where the largest annual rise was seen in France. The country registered about a three-fold increase in coal generation. Most of this was seen in the December quarter of 2021, which coincided with the all-time low availability of its vast nuclear fleet.

Reliance on Russian Supply

While Germany disagrees with the EU initiative to impose a ban on coal supplies from Russia, the EU aimed to demonstrate to Russia the seriousness of the region’s intentions about the energy sector. Import controls seem to be the most discordant topic among the member countries. Although the new set of sanctions includes the embargo on coal, it does not ban other Russian energy supplies such as gas.

In 2021, Germany was the largest consumer of Russian coal in the EU, having imported around 20.3Mt. However, Germany aims to stop coal trade with Moscow by September 2022.

The plan to completely turn away from Russian coal does not seem achievable as Russia remains the largest supplier of energy resources, accounting for around 46% of coal imports. Russia also accounts for 40% of gas consumption and 27% of crude oil imports by the EU.

Consequently, the European Commission has planned an accelerated phase-out strategy for Russian energy by 2030, which will compel all member countries to fill their gas storage facilities to at least 90% of capacity by 1st October of each year.

The REPowerEU plan aims to significantly reduce the dependence on Russian gas supplies by the end of 2022, including measures such as diversifying LNG imports from other countries, increasing renewable energy capacity and hydrogen production, and improving energy efficiency.

However, as demonstrated in 2021 with the rise in energy demand, coal seems to be the main alternative to Russian gas in Europe. Yet the only potential coal available in the market would be of Russian origin as there is almost a total absence of thermal coal surplus anywhere in the world.

With the EU sourcing coal from new suppliers, a switch in trade flows is expected. India leans towards continuing to buy coal from Russia, which is India's sixth largest supplier of coking and thermal coal. Similarly, Moscow could start offering more competitive prices to Indian and Chinese buyers.  

In a longer term, Russia’s invasion of Ukraine represents an opportunity to accelerate the transition to renewables. Berlin affirms a faster expansion of renewables is crucial to reducing Germany’s dependence on Russian fuel supplies, as the country must advance on the growth of its onshore and offshore wind projects.

Nuclear power is considered a clean alternative for energy generation, rising by about 6% in 2021 compared to 2020. Excluding Germany, where the government decided to shut down all nuclear reactors by 2022 amid concerns over technology safety, nuclear power plants have been the largest contributor to electricity generation in Europe since 2014. However, with an operational time of around 40 years, nuclear reactors require intense capital expenditure.

Although coal has headed for a short-term come back in Europe, the region might have to reactivate old decommissioned coal plants to help halt its reliance on Russian gas. Several EU countries are considering putting their coal phase-out plans on hold as they relied on gas imports from Russia to succeed. Opposite to investments in alternative sources such as gas infrastructure or renewables, the extension of coal mining is considered the quickest and most viable immediate solution.

Regardless of the extent of the conflict between Russia and Ukraine, LNG demand is expected to remain high in 2022 as Europe will require to restock their severely depleted storage. With the development of Nord Stream 2 pipeline deferred due to the German government freezing the certification process, pressure to procure supplies from other sources will remain high.