How Europe Is Muddling Through Putin’s Energy War

How Europe Is Muddling Through Putin’s Energy War

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If Vladimir Putin intended to paralyze Europe’s energy system by cutting Russian gas exports to the continent, it hasn’t worked so far. The end-of-the-world scenario of power outages did not materialize thanks to an unusually mild winter, power rationing and a shift to other energy sources. However, the region’s economies are not out of the woods: the crisis left households and businesses grappling with record high electricity prices that fueled runaway inflation and higher interest rates. And as the war rages on in Ukraine and Russian gas supplies slow to a trickle, Europe’s energy security looks more vulnerable than ever to unpredictable global events.

Even before the Russian president launched his invasion of Ukraine in February 2022, Europe’s energy system was under strain. Energy demand had increased as economies rebounded from pandemic lockdowns and a long, harsh winter boosted demand for heating. Power producers scrambled to respond as the natural gas that fuels many power plants was in short supply and unusually low wind speeds cut output from wind turbines that have become a vital part of the continent’s energy mix. The result: energy prices have more than tripled in the second half of 2021. Then, Russia’s military campaign triggered sanctions against Moscow, and Putin retaliated by weaponizing the gas. By September 2022, Russia had stopped all supplies through a key pipeline to Germany. The euro fell as investors assessed the expected blow to the European economy.

2. How did Europe avoid an energy crash?

First, by consuming less. As electricity and gas prices soared to at least four times historical rates, homeowners and businesses cut back on their energy use to make bills affordable. Governments curbed consumption by reducing heating and lighting in state institutions, from municipal swimming pools and gymnasiums to presidential palaces. People took shorter showers, lowered their thermostats and insulated their homes better. The crisis cemented what French officials called “energy clarity,” with Morgan Stanley predicting that gas use in Europe would be about 16% below its five-year average through 2023. Factories in Western Europe were using about a quarter less gas than usual between August and 2020. the end of 2022, according to BloombergNEF estimates. However, production has continued to expand. In November 2022, manufacturing output in the eurozone stood 3% above the 2021 average.

3. How did Europe replace Russian energy?

Norway replaced Russia as the region’s largest gas supplier, with exports gaining 8% in 2022. Germany and the Netherlands installed new facilities to offload liquefied natural gas shipped from Qatar, the US and Australia. According to Morgan Stanley, LNG imports in Europe’s main markets roughly doubled by 2022. Germany also extended the lives of its remaining nuclear reactors and revived some coal-fired plants it had scrapped because of their large footprint of carbon. The use of coal and lignite to generate power in the EU increased by 6% in 2022 from a year earlier.

The lights stayed on and most factories continued to hum. And Europe never came close to running out of gas, thanks in part to a milder-than-average winter that reduced heating demand. Cities from Berlin to Warsaw recorded their warmest ever start to the year in 2023, allowing utilities to fill gas storage sites and giving Europe a vital buffer for the coming winter. Gas prices in January were below their level when the war in Ukraine began, and down 80% from their peak in August – though still well above historical averages. Electricity prices fell by the same amount.

5. So, is the end of the crisis coming?

Not yet. Governments have spent more than $700 billion to protect households and businesses from rising energy prices. And it won’t stop what is likely to be a protracted recession and a sharp decline in living standards across the region. Removing most of Russian gas and oil from Europe’s energy mix has left prices vulnerable to greater price swings, and the resulting risk premium could leave consumers paying more for years to come.

6. Why was Europe so dependent on Russian energy?

Russia has been one of the largest gas exporters in the world and Europe was its main customer. As coal and nuclear plants across the bloc have shut down in recent years, Germany and some other countries have become even more dependent on giant pipelines carrying gas from Siberia. European officials spoke of the need to reduce this dependence. But since both parties benefited, and the gas shipped by pipeline was often cheaper (and cleaner) than other energy sources, little action was taken. When the conflict in Ukraine broke out, it was suddenly unsustainable for Europe to spend up to $1 billion a day on gas, oil and coal imported from Russia – money to finance its war machine.

7. Has Europe stopped using Russian energy for good?

Not enough. Pipeline shipments through Ukraine shrunk to just 3% of demand in Western and Central Europe in the fourth quarter, but Russia was still Europe’s third-largest LNG supplier in 2022, according to Morgan Stanley. Whether the flows will drop to zero, and if so when, is hard to say. While energy analysts are factoring it into their models, neither Russia nor the EU have suggested there will be a complete shutdown anytime soon. EU sanctions on Moscow aim to phase out Russian energy imports, but the timing depends in part on how easily alternative sources can be found – a particular challenge for Eastern European countries. Gas still flows through Ukraine and a pipeline through Turkey to the Balkans is also operational.

8. Are there downsides to giving up Russian gas?

Diversifying energy supplies is generally a good thing, but relying more on the global market for natural gas comes with risks. It is a commodity that is increasingly used across the globe and European companies are competing with buyers from Asia. Any recovery in China’s economy, the world’s largest, could increase competition for fuel and cause prices to rise. LNG is also more carbon intensive than pipeline gas.

9. What does this mean for Europe’s green ambitions?

In the short term, the revival of some coal-fired power plants looks like bad news for the climate. Further, the crisis has made European governments more determined to divest from Russian energy – and fossil fuels in general – and accelerate the adoption of cleaner technologies. Solar and wind power generation increased by 12% in 2022, boosted by more installations and a recovery in wind speed. The International Energy Agency said in December that it sees global deployment of clean energy such as wind farms and solar parks nearly doubling in the next five years. For now, policymakers have stuck with the EU’s main climate policy, the Green Deal, which includes a package of laws to bring greenhouse gas emissions to zero by mid-century. The 27 EU countries got about a fifth of their total energy from renewable sources in 2020 and had planned to double that share to 40% by 2030. After the war in Ukraine, the target was increased to 45% .

• QuickTakes on the role of LNG in Europe, how the continent became connected to Russian gas, why governments want to change the way energy is priced and how energy trading keeps the lights on.

• Bloomberg Opinion’s Javier Blas on how warmth and wind power are helping Europe out of a bind.

• Bloomberg Economics says the energy crisis hit German factories hard, but they are adapting.

• A data visualization of how Russia’s war in Ukraine has choked the world’s supply of natural resources.

• A story from March on Europe’s mission to get rid of Russian oil and gas.

–With assistance from Anna Shiryaevskaya and Kari Lundgren.

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