Ending reliance on Russian Energy will not come without short-term pain

– The need to reduce reliance on Russian energy adds to the sense of urgency in Europe to accelerate the green transition. The new EU Commission plan calls for EUR 300bn of investments into energy efficiency, diversification of energy supplies and accelerated rollout of renewable energy by 2030.

– Green transition has the potential to boost innovations and productivity, and investments in green transition should support growth going forward. Efforts to improve energy self-sufficiency could buffer economies also in a scenario where a new cold war and loss of confidence would otherwise hamper economic activity.

– Inflationary impacts from green transition are ambiguous. While green energy is more affordable in the long run than fossil energy, potential supply-demand mismatches in raw material markets could, at times, contribute to volatility in headline inflation.

The war in Ukraine is speeding up the European green transition. Russia supplies approximately 40% of the EU’s gas and 27% of its imported oil. Massive investments in green transition were already in the pipeline before Russia started its war on Ukraine, and in late May, the EU commission announced a REPowerEU plan where it intends to mobilize up to EUR300 billion by 2030 for the EU to become independent of Russian energy imports. The measures will focus on 1) energy efficiency, 2) diversification of energy supplies, and 3) accelerated roll-out of renewable energy to replace fossil fuels in homes, industry and power generation.

The EU plan consists of approximately EUR72 bn in grants and EUR225 bn in loans targeting up to EUR10 bn investments into gas infrastructure, up to EUR2 bn investments into oil infrastructure with a view to stopping the shipment of Russian oil. According to Commission President von der Leyen, all the rest of the financing will go into speeding and scaling up clean energy.

A complete transformation of an energy system can typically take decades, as there is a multi-year lag between an investment decision and having new capacity in use. Hence, energy savings are the fastest and most affordable way to tackle the current energy crisis. In the new EU plan, the bloc’s energy efficiency target for 2030 will be increased from 9% to 13%, and the 2030 target for EU renewable energy from 40% to 45%. In this context, the Commission also recommends behavioural changes for citizens in member states and encourages fiscal measures such as reduced VAT rates to promote the deployment of energy efficient solutions. Reducing heating temperatures at home, driving more economically and shifting to more public transport, using household appliances and air-conditioning more efficiently and switching off the lights can deliver substantial, shortterm savings. According to IEA, such measures could cut oil and gas demand by 5% over a year.

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Source: Danske Research Team – Danske Bank A/S

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