Once upon a time, Europe was on its gallant path towards decarbonization, clearly departing from coal to procure cleaner sources of energy. However, a global pandemic, record high gas prices and Russia’s invasion of Ukraine have created the perfect conditions for the renaissance of coal in Europe’s energy generation.
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.