Catalyst with Shayle Kann - Can Europe quit Russian fossil fuel by next winter?

Episode Date: March 31, 2022

Europe imports about 45% of its natural gas from Russia. As the conflict in Ukraine escalates, pressure is mounting for Europe to wean itself off Russian energy as quickly as possible. European sanctions against Russia have excluded the energy trade, meaning that European purchases of oil and gas – which fund about 40% of Russia’s federal budget – are in effect funding the Russian war effort in Ukraine. So how could Europe eliminate the import of Russian fossil fuels? In this episode Shayle talks to Princeton energy professor Jesse Jenkins about how to do it. The EU’s current plan is to cut its import of Russian gas by two thirds by the end of the year. Jesse’s energy modeling team is working on a plan to cut 100% of Russian energy imports by October 1. Shayle and Jesse explore the immediate impact of the war in Ukraine on energy markets and the ripple effects on other markets like fertilizer, food and carbon markets.  Then they discuss the tools Europe and its allies have at their disposal in the short term, such as switching from gas to coal, ramping up heat pump installations and extending the operation of nuclear plants. They also examine a possible path for the US – decreasing domestic use of fossil fuels while increasing exports of coal and liquid natural gas to Europe.  Finally: How could this rapid shift in Europe accelerate the energy transition in the long term? We want to hear from you! Take our quick survey for a chance to win a $100 Amazon gift card. This will help us bring you more relevant content. Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you’re a startup, investor, enterprise or innovation ecosystem that’s creating positive change, Antenna is ready to power your impact. Visit anten​na​group​.com to learn more. Catalyst is supported by Nextracker. Nextracker’s technology platform has delivered more than 50 gigawatts of zero-emission solar power plants across the globe. Nextracker is developing a data-driven framework to become the most sustainable solar tracker company in the world — with a focus on a truly transparent supply chain. Visit nex​track​er​.com/​s​u​s​t​a​i​n​a​b​ility to learn more.

A quick ask before we start the episode, we have a survey, a very brief survey that we would love for you to fill out. There's a link right there in the show notes. It'll help us learn a bit more about you and what keeps you downloading the shows so we can create the best possible stories that connect to your interests. And as a thank you for completing the survey, if you leave your email at the end, you will have a chance to win a $100 Amazon gift card. Thank you so much for listening and for filling out the survey. from the studios of PostScript Media and Canary Media. I'm Shail Khan, and this is Catalyst. All right, Europe's current plan is to cut natural gas use by about two-thirds before this winter.

Can they actually go 100 percent? Can they cut if they needed to or if they needed to make a credible threat on the global stage to Putin that we will cut our gas use entirely if you don't get to the negotiating table? We think that they can do that. Purely in the context of energy and climate, the conflict in Ukraine is either, a really big deal or the biggest deal. Those are the possibilities. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility built for the

moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats and more through a single platform built for utility scale. Predictive, verifiable, and designed to perform when it counts. Learn more at energy hub.com. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital,

and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy and building the clean economy. Tune in as we unpack how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts. I'm Shail Khan. I'm a partner at the venture capital firm Energy Impact Partners.

Welcome. So the expression you can't see the forest for the trees has always bugged me, mainly because I've never been able to make sense of the syntax of that phrase. nevertheless, I've sort of been feeling that way about the current situation with natural gas and oil and global energy geopolitics as it relates to Russia's invasion of Ukraine. The trees themselves, what's happening in real time in energy markets and all the downstream effects of those markets are big and complicated and foreboding to really understand. But it is crazy. Last week, European natural gas prices spiked to basically the equivalent of about $600 per barrel. if it were converted to oil. We've never seen anything like that. Not to mention the natural gas was already in a wild period before this conflict started.

So separating Russia and Ukraine from the broader dynamics of that market adds a whole other layer. But I also have this growing suspicion that we're going to look back on this time right now and this conflict as being a seminal turning point for global energy and decarbonization. That would be the forest. Or maybe to frame it differently, and please forgive an advancement. my absolute torturing of this metaphor. Maybe all the efforts to transition away from fossil fuels and especially gas and doubly especially in Europe over the past decade have been adding Tinder, but this Ukraine conflict will spark the fire, the forest fire, so to speak. I don't know,

but I've been wanting to unpack what's actually happening here and how Europe can and might insulate itself from Russian hydrocarbons and ultimately what it might mean for the longer term in this transition. Thankfully, my much smarter friend, Jesse Jank, also wanted to unpack the same thing, and he's much better equipped to do so than me. Jesse has many things, but in his day job, he's a professor at the Anlinger Center at Princeton University. I've never had a bad conversation with Jesse in the decade-plus that we've known each other, and fortunately after this one, the streak continues. So, with no further ado, Jesse Jenkins. Jesse, welcome to Catalyst. Hey, thanks for having me on the show. I appreciate it.

It is great to have you here. There is so much to talk about with regards to the impact of this Ukraine-invasion. on energy, both in the near term and in the long term, and I'm confused as hell about all of it, so I'm hoping that you can help elucidate what's really happening a bit. I think we want to take this in three parts. First, I want to talk about what was the state of affairs with regard to Russia's role, and I guess Ukraine's role to a lesser extent, in global energy markets prior to this invasion. Then let's talk about what is happening right now, because obviously it is an extremely dynamic moment in global energy markets today, and you're seeing stuff change in real time. And then I think we want to spend some time on the kind of potential mid and long-term

effects that this might have. How might this reshape the global energy ecosystem? How might it change the pace of decarbonization, that kind of thing? So let's start with, you know, rewind a couple of months. What was Russia's role in global energy markets? How important was it, to whom? So Russia was a is and was a hugely important part of the global energy market. They're one of the top exporters of oil and natural gas in the world, and particularly for Europe, which is more dependent on Russia than any other source for their imports of energy. European unions, 27 members get about a quarter of their oil from Russia, and about 40% of all natural gas consumed in the EU is imported from Russia as well. Most of that via

pipelines that come westward from Russia and other former Soviet republics, including via transit through Ukraine, which is host to some major pipelines that are built to move gas from Russia through to Europe. They also supply a substantial amount of coal, about 40 million metric tons of coal to Europe each year as well. So it's not just oil and gas, they're also a coal exporter. And so, you know, Europe has been heavily integrated with Russia for its energy needs and was actually, you know, strengthening those ties before Putin's invasion of Ukraine with the completion and planned startup of the Nord Stream 2 pipeline, which is an undersea pipeline that was going to bring additional gas from Russia into Germany that was scheduled to go online this year until the invasion changed pretty much everything. So that's interesting. So prior to the Ukraine invasion, the trend line in terms of Europe's reliance on Russian gas in particular was up, not down?

Yeah, that's right. And I think this reflects a theory of kind of global politics in the post-Soviet post-Cold War era, which is that, you know, greater integration of economies via trade would help reduce the risk of conflict, would make, you know, countries so codependent on one another. that they would not risk open conflict or other types of, you know, geopolitical struggles that would threaten those economic ties. You know, this was really the underlying thesis for the European Union at the beginning after World War II, which began as the European Coal and Steel Union, right, to sort of manage integrated production of coal and steel so that every country, France and Germany in particular, were so dependent on each other for their raw materials that they couldn't conceive of a third world war between them. You know, similar theory around engagement with China. and the United States and our, you know, sort of codependence for manufactured goods and, and

their exports for their economy. So, you know, Germany in particular and others in Europe thought that, you know, many leaders in Germany thought that strengthening, you know, that tie between Europe and Russia would mean that Russia was so dependent on Europe for, you know, trade and for their revenue and Europe so dependent on Russia for their energy needs, that that would actually strengthen, you know, peace and prosperity between the, between the trading partners. Which turns out to be a somewhat suspect assumption given current events. I want to talk for a second about the difference between Europe and North America in this regard, because we're sitting here in the U.S., obviously, and I think we'll probably spend most of our time talking about

Europe in this conversation, because as you said, Europe is heavily reliant on Russia for oil and gas and coal. Less true in the U.S., right? That's right. On a whole, the United States has actually become energy self-sufficient in net, at least. We are net exporters of petroleum products, liquids, and we are net exporters of natural gas, and we're certainly net exporters of coal. You know, that wasn't the case, you know, when Barack Obama took office in 2008. We imported about 60 percent of our oil in 2008, and were, you know, potentially, we're poised to open up a number of liquefied natural gas import terminals across the country. to import natural gas from, you know, from Qatar and from Australia and other places with an abundance. You know, the shale gas revolution and later the shale oil revolution really changed all of that in the United States and the North American context. So that, you know, moving forward from 2008 to now, we've seen, you know, steady increases in production of oil and gas in North America. And now we have reached that, you know, sort of fabled point of energy independence, at least from a strict physical

standpoint, which makes the United States in a very different place than Europe when it comes to physical energy security. You know, if we were in the position that Europe was and we had to cut our ties to Russia, we could do it. In fact, the Congress just voted to say we're going to ban imports of Russian oil. And that doesn't really disrupt our physical, you know, trade very much because we only imported a small amount of our crude oil from Russia. And on net, again, are, you know, exporting more than we consume here. And so, you know, it shows that physical security. does matter. I mean, the fact that it will take significant amount of time for Europe to phase down its reliance on Russian imports, you know, has geopolitical consequences for what, you know, the degree of

freedom that Europe has to negotiate this crisis. But I think if you look around and all of us are seeing the price at the pump here in the United States, we can see that there's another type of energy security and economic security that we are still very vulnerable to in the sense that oil is a global commodity. And so that even though we don't directly consume much oil from Russia, the fact that Russia constitutes a substantial amount of the global oil trade means that, you know, potential embargoes and self-sanctioning of private companies on, on, that they're now reluctant to pick up Russian crude cargoes and, you know, transport them to market, means that already just that small reduction in exports from Russia has caused ripples across the

entire oil market and, you know, means that the, you know, the actions of a mad dictator in, you know, in one part of halfway around the world impact the cost at the pump in Des Moines, Iowa, or Denver, Colorado all the way around the world. And, you know, now we're seeing, you know, four or five, six dollar a gallon gasoline prices in the U.S., again, even though we're not directly consuming Russian oil and we are technically physically self-sufficient in terms of our oil. And that's because oil is a global commodity. It's traded fungibly across, the world. And so it doesn't really matter as much where you directly consume it from. The price goes up for everybody at the same time. So as of a few months ago, global state of affairs, Russia,

super important player in global energy geopolitics. U.S. not reliant really, actually on Russian imports, but impacted by the global market for oil in particular, less so for natural gas. And meanwhile, Europe actually pretty reliant on Russia and strengthening ties building out the North Stream 2 pipeline and so on. Okay, so let's fast forward to the invasion. So invasion happens, Russia invades Ukraine. There's a lot to unpack as far as what the impacts are sort of today, but let's start with the natural gas market dynamic, because that feels like that's the most immediate and obvious substantive craziness that's been going on. So what did this do to the natural gas market in Europe and in Russia?

Even before the physical invasion in the run-up to the invasion when Russia was positioning troops and threats of future sanctions were being issued by the West, it was already, sort of tight gas market conditions in Europe. And in fact, many observers, you know, geopolitical observers believe that that factored into the timing of Russia's decision to invade this year and not last year or some future year. In fact, during the invasion of Crimea in 2014, that was another period of very tight oil and gas markets. So the thinking goes that Putin knew that this was the point of maximum leverage that Russia had over Europe and others, you know, that the threat of withholding their supplies from the global stage would, you know, be most severe. And so time the invasion for that period.

And then, you know, there's some incidental evidence to support that in that Gazprom, the Russian gas company, owns a lot of storage assets for natural gas in Europe. And if you look at the storage volumes for Gazprom owned storage assets in Europe, they were much lower than the average for other assets at the time. So it's almost as if the nationally owned Russian gas company was deliberately keeping the tanks partially full going into this winter to further exacerbate the risk of, you know, shortfall. So all that is said, even before the boots on the ground, you know, crossed the border into Ukraine and started laying, you know, laying waste to the country, the natural gas prices were very high already in Europe. And, you know, that partly reflects that on the margin, the available, you know, import capacity is all liquefied natural gas, not the pipelines, which are already running at full capacity. And so LNG, like oil, has, you know, become a globally traded commodity. And so if Europe needs more gas, they have to outbid Korea and Japan and everyone else. And so prices start to go through the roof.

And I think, you know, I don't have these stats right in front of you right now, but I think, you know, where the United States was paying, you know, $4 a million British thermal units or MNBTU for gas here in the U.S. At the same time, customers in Germany or Poland, you know, were paying like $26 per MNBTU for gas. So, you know, almost like, you know, five, six full. higher prices, or almost an order of magnitude. And that's only gotten worse since the invasion actually started. And now Europe is trying to plot a course away from Russian gas to reduce their reliance as quickly as possible.

Yeah, we'll come back to the plot to get, to wean Europe off of Russian gas. I don't want to spend a fair amount of time on that because I think that's maybe the most important kind of medium and long-term impact of this from an energy perspective. I also want to just make a quick callback because last week on this show, I had Nat Bullard on from Bloomberg. We were talking about carbon markets. And one of the things that happened in the compliance carbon markets in Europe was that prices shot up, right? We were seeing 100 euro per ton CO2 prices. And the reason for that was these rising natural gas prices that you were just describing.

So there have been all of these knock on effects. I mean, that's CO2 prices. But another one that I've been spending a bunch of time on is fertilizer. which has become globally because natural gas fertilizer is generally, you know, ammonia is produced using natural gas, hydrogen is generally produced using natural gas, ammonia is produced using hydrogen, natural gas prices go up, price of fertilizer goes up, plus we've got all these other supply chain kerfuffles going on all over the world, and we're in like a really serious challenge globally in terms of fertilizer prices and places that can't, you know, farmers are hurting, places that can't

afford to pay more for fertilizer, are not planting as many crops. Like, we're in a, you know, there may be a bit of a food shortage globally. And it, you know, all mostly draws back to these natural gas markets. And so I think it's important. This is also true, by the way, like, of a bunch of other industries that have shut down production in Europe and things like that. So it's important to note that, like, these, I'm always reminded of energy is not a market in itself that's that important. It's because energy powers everything. And so when you have these kinds of disruptions in things like natural gas that become very reliant on, the downstream effects of that are just monumental.

Yeah, I mean, it shows the complexity and some cases fragility of our globally connected economy, right? I mean, the globalization has gone to such a degree that all these markets are integrated in one way or another across the world. And so small disruptions or even large disruptions like this can have big ripple effects all down the chain. Yeah. And, you know, food, we talk about the energy challenge.

You know, the other big implication of the invasion is for global food markets. You know, Ukraine is, in many ways, the breadbasket of Eastern Europe and also parts of Russia that, you know, that it produced a lot of wheat. So, you know, Ukraine is a major exporter of wheat and corn. So is Russia. You know, much of that goes to relatively low income countries in North Africa and the Middle East who can't produce, they are not food self-sufficient, right? they cannot grow enough food for themselves. And so now they're looking at, you know, soaring wheat and corn prices as well and potentials for famine and food shortages, you know, across good chunks of the world.

That's even without factoring in the effect that you mentioned of higher gas prices, making the supply of ammonia, you know, limited and also much more expensive for farmers as well. So, you know, huge implications of the conflict all over the world, really, you know, just pretty dire impacts, felt by people everywhere, you know, due to these sorts of global supply chains and food and energy and other important commodities. Right. Okay. So then Russia does invade Ukraine and does put boots on the ground and, as you said, lays waste to parts of the country. And then there have been a bunch of sort of immediate fallout impacts, cancellation of Nord Stream 2,

import embargoes. You mentioned, you know, the U.S. saying we're no longer going to import Russian oil and gas, unpack sort of what have been all the immediate ramifications, and have they all just generally served to exacerbate the existing trend line, which is short supply of oil and gas? And so prices spiking, or is it more complicated than that? Yeah. So it's interesting, you know, to look at the response of, you know, the Western powers, right, that, you know, basically said, we're going to do everything we can short of, you know, actually engaging NATO troops in combat. But so far, they actually haven't been willing to do everything, right? They have exempted energy trade very

deliberately from the economic sanctions that were imposed pretty rapidly after the initial invasion. You know, I think Putin miscalculated a lot of things here, right? Obviously, miscalculated the ferocity and bravery of the Ukrainian troops, you know, miscalculated how efficient and effective his army was and how quickly they would take Ukraine. They also miscalculated how effective Western financial sanctions would be on the Russian currency and the value of the ruble and, you know, the strength of their economy. So the fact that the U.S. and other central banks were willing to seize the Russian central banks foreign currency reserves overseas and basically say you cannot, you can no longer transact in euros and dollars was not something that Putin anticipated. And in fact,

they tried to build up this sort of fortress Russia in anticipation of further sanctions by building a huge foreign currency reserve they could use to prop up their markets. And I promise this all comes back to energy, which is why I'm talking about foreign currency, because now with those economic sanctions in place, the only way that Russia can get dollars and euros to exchange for rubles and keep the rubble from collapsing entirely is by garnishing the wages, effective the trade and income of Russian companies doing business overseas. So the central bank doesn't have access to its foreign currency anymore. But what it's doing is requiring that I think 80% of all trade in dollars and euros by Russian companies is converted back into rubles when they bring the money back to Russia.

And so, well, what is the foreign trade that's left when, you know, sanctions are imposed on, you know, aircraft and wheat and, you know, all kinds of other commodities? Well, it's energy and it's energy products. It's gas and oil and coal. make up the majority already of Russia's exports, and now make up almost the entirety of their foreign currency exchange, which is sort of the last thing keeping their economy from collapsing. And so, you know, there was this sort of deliberate effort of the Western powers to basically say, look, we're not going to sanction energy right away because we want our, we know Europe is dependent on oil and gas from Russia, and we want to make sure that

companies know they should continue to buy that crude and buy that gas and bring it in for now. But the companies actually, the private sector, move faster, I think, than the governments have in the sense that Western oil and gas companies, Western shipping companies that would have bought cargo shipments of crude oil and shipped them out of Russia have been very reluctant to engage in business with Russia for reputational reasons and also for risk of, you know, they're concerned risk that there will be future sanctions coming. And so they've self-sanctioned effectively and said, look, we're not going to buy this stuff from you anymore. And already we're starting to see, I think the estimates are about a million and a half barrels of oil a day, which is, I think, on the order of one or two percent of the global market, of what normally would have been Russian crude being exported, not finding a buyer.

There's no unwilling to pick it up and take it to Europe or take it to Japan or take it elsewhere. And so they are already, even though the pipelines are still flowing, the seaborne trade is already starting to get locked in and they're having to sell their oil at a discount to get someone else from China or other countries to buy it. And so we're already starting to see these sort of effects just from the private sector, not wanting to do business with Russia. And again, just a small reduction in global supply can have a big impact on global prices because the market is so tight.

So that, you know, one or two percent reduction in crude supply has, you know, contributed to that and the sort of perceived future risk that's being priced in of even greater scarcity has shot, you know, has doubled oil prices, right, to over $100 a barrel now. You know, so again, it's when you have tight markets like this with not a lot of slack, not a lot of producers that can step in and increase output to replace Russia's output in the short term, that can lead to very rapid price escalations when even, you know, only a few percent reduction in. supply occurs. Virtual power plants are becoming a reliable way for utilities to manage capacity, but enrolling devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched, and being able to prove it from the control room to the living room. Energy Hub's platform handles the full picture, from near real-time forecasting,

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by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. All right, so because this podcast is primarily focused on technologies for decarbonization, I want to bring it back to that. So the upshot of much of what you're discussing so far, I think is two things.

You could tell me if you feel like either those are wrong or there are more big things. But the upshot is, one, kind of record high prices. for fossil fuels, for oil and for natural gas, particularly in Europe. High prices for oil globally, higher prices for natural gas everywhere. But, you know, sort of record-setting insane prices in Europe. And then second, kind of an exposure of the geopolitical risk and volatility in these markets. You know, it's not like it wasn't known, but it's really come to the fore. And in the immediate term, it feels to me like that, there's a bunch of calculus that,

changes around alternatives, right? We certainly see a million things that are saying, we're going to replace natural gas used for process X or in market X with this other thing. And maybe on day one, historically, that's not been economic because natural gas, especially in the U.S., is generally extraordinarily cheap. First of all, those numbers are starting to flip because natural gas prices are high. And then second, there's also this sort of like risk and volatility thing. So there's this like very immediate, like, a bunch of things that didn't make economic sense kind of do make sense,

but they might only make sense right now because we're in this supply crunch and in this global geopolitical disaster. But then there's also the sort of the need, the fact that this has exposed this risk, particularly on Europe, there's a broadly recognized need to reduce Europe's reliance on Russian imports

as fast as humanly possible. So you talk a little bit about what the, plan is, the stated plan, which exists now by the European Union, to reduce this reliance on Russian imports. And then we could talk about what that might actually mean in terms of new technology adoption. Yeah. And let's maybe talk also about some of the different motivations here, right? So there's a near term and kind of think immediate motivation, which is, you know, that there's a geopolitical motivation, right, which is that Russia, as I mentioned before, is now dependent on its oil and gas exports to prop up its economy, to generate revenue that's going

straight into the war effort, right? It's, you know, German purchases of natural gas and oil leading to, you know, dollars to the Kremlin that are, you know, quite literally being used to pay for bombs that are killing civilians in Ukraine. So there's a moral imperative, right, to cut European consumption as rapidly as possible. And then I think there's this economic imperative that look like, you know, maybe it's Russia today, but maybe it's Iran tomorrow or it's, you know, China and flexing its muscle causing some disruption later that, you know, just exacerbates the level of economic insecurity that our economies inherently have if we're dependent on these globally traded commodities oil and increasingly LNG for Europe. And so there's now this sort of longer term

economic motivation as well to, you know, literally free Europe from that kind of volatility. So again, there's sort of an immediate, I think, geopolitical strategy, which actually could relate to, you know, putting pressure on Russia to get to the negotiating table and reach a peace settlement faster, right, by threatening to further destabilize their economy by reducing, you know, by cutting off imports to Europe. There's a moral imperative because the money being spent on Russian fossil fuels is going straight to the war effort and killing Ukrainians. And there's a long-term economic security rationale, which is also true, by the way, for the United States, right? That even though, again, we are net exporters in oil and gas, we are not economically secure

because we remain reliant on these globally traded fossil fuels. And so I think that the challenge is to, in the near term, you know, the moral and security imperative are immediate. We need to do everything we can today to try to end the conflict and to stop the killing. And so that argues for doing whatever you can do quickly. And then in the longer term, there's this economic security argument that might, you know, might motivate longer term or transformational changes that you can achieve over a five or 10-year period. So in the short term, you know, you don't have as many degrees of freedom.

And one of the things you can do is fossil fuel substitution. So, you know, this is why you said EU ETS, you know, carbon permit prices were skyrocketing because with high gas prices, now all of a sudden it makes sense for Europe to turn back to coal in the power sector. For which they are not as reliant. I mean, they import some from Russia, but not nearly as much, right? Because we've got coal in Poland and other places. Exactly. They're not as reliant on the imports. they could easily, the United States could easily step up our exports to Europe to eliminate Russian coal like now. And we should do that, right? From a, you know, from a moral and strategic comparative perspective, we should be exporting more coal to Europe now. And they should stop buying

all coal from Russia. That's the easiest one of the three fuels for us to displace. But yeah, because the economics has changed and now makes sense to use coal instead of gas and power generation. And so that's driven up, you know, emissions and therefore permit prices in the auctions. So using more coal instead of gas is one way to do that. Using alternative supplies of lukified natural gas, including from the United States, who's now going to do what we can to ramp up our LNG exports, the President Biden and the EU Commission reached an agreement last week to increase our exports by at least 15 billion cubic meters this year and up to 50 billion cubic meters over the longer term.

50 is enough to displace about a third of Russia's imports, just with U.S. LNG over the medium term. And that 15 BCM is about a tenth of the Russian imports right now. So we can knock out, you know, 10% of Russia's gas imports with U.S. LNG right now today. And then, you know, there are going to be other pipelines they can use. You know, so all of that is much more fossil dependent. Like let's find other sources of fossil fuels that we can use very quickly to get off of Russian gas. And then there are some more dramatic and, you know, costly conservation efforts that can be done quickly, you're already seeing, as you mentioned, industry respond to high prices by producing less commodities that use natural gas. So there's

already some price destruction, you know, price demand destruction going on. But there can be other conservation measures, right? The Europeans could, you know, in solidarity with Ukraine, turn the thermostat down in the winter, you know, a couple degrees and that could save, you know, 8% of their natural gas consumption for heating. You know, so there are measures like that you can do in the short run. And we've been looking at this in my group at Zero Lab with, you know, some great rapid assistance from students and postdocs at Princeton to sort of see, all right, Europe's current plan is to cut natural gas use by about two-thirds before this winter. Can they actually go 100 percent?

Can they cut if they needed to or if they needed to make a credible threat on the global stage to Putin that we will cut our gas use entirely if you don't get to the negotiating table? We think that they can do that. We think that there is a viable strategy that with the right, you know, wartime mentality, it would be possible to do what people probably thought was impossible just a month ago, and that's get off of Russian gas entirely by this October, this winter. You know, it take a lot of effort, but wars often have a way of making what seemed impossible, possible, and, you know, and the possible necessary.

So I think that's what's going to probably happen here, even though Europe is so far, only outlined plans to get two-thirds reduction this year of natural gas imports. I think it may be possible to go all the way to, it would completely eliminate Russian gas, which, again, is 40% of their total gas use. So that's a huge overnight shift. It's really amazing, you know, for all the wrong reasons. We never wish this upon the world. But in some ways, it reflects, like, you think of these things as changing so slowly over such a long time. Like, if you had said to me a year ago, you know, Europe wants to get off of Russian gas, how long is that going to take? even with coordination amongst the EU, I mean, I would have said decade plus, right? But turns out

they actually can do it within a year, you're saying. It's sort of amazing. Albeit, as you said, it takes a wartime mentality. And it's not without pain, right? I mean, I don't know if you have you analyzed the potential impact on prices that they would pay. Is it cost neutral? Yeah, that's our next step is sort of the cost implications. I mean, they're significant, right? There are significant costs incurred, which is why they've been so reluctant to want to do that. But, you know, I think the longer the war drags on, the more war crimes that are committed by the Russian military, the more civilian deaths that we see, you know, the clear the moral imperative is that it's just like, it doesn't really matter what it costs. We just

have to do it. And the U.S. should do everything it can to help Europe, you know, immediately get off of Russian imports. And, you know, again, in the short term, that does include increasing fossil fuel exports to Europe, even includes increasing coal consumption, which is going to have, you know, short-term negative implications for climate mitigation and for air pollution. But again, those are going to be short-term measures. They should be short-term measures. And in the medium term, we have more degrees of freedom. So if in the near term, there are very costly measures we have to take from either a climate or air pollution perspective or from an economic perspective, like conservation or just simply having reduced output in industry, which has, you know, could lead

to a recession in Europe, right? I mean, these sorts of short-term impacts are big, but in the longer term, we can ramp up new energy supplies and start to ease off of those more costly measures. And so that, you know, by 2025 or 2026, you know, in the sort of three-to-four-year timeframe, it should be possible to get back to sort of typical European, you know, conditions, albeit with dramatically lower oil and gas consumption, particularly gas consumption. And that's, you know, going to be achieved by accelerating the kind of clean energy transition that Europe was already on as rapidly as they can. So that includes deploying wind and solar, ramping up biomethane production, you know, trying to birth a new hydrogen industry, which again won't amount to much in the 2025

timeframe, but can be a long-term strategic alternative to natural gas. And improvements in energy efficiency, switching to heat pumps and buildings, all those sorts of measures that are also exactly what we need to do to confront climate change, now have a, you know, added motivation and a very clear imperative, at least for Europe. The question is whether we're going to see that same kind of realization here in the United States that, hey, even though we are big oil exporters, it would be a lot better and a lot more impactful, honestly, in the near term, from a geopolitical standpoint, for us to focus on reducing domestic use of oil and gas, which strengthens our economic energy security, and freeze up our domestic production for export to our allies in Europe and

Japan and elsewhere, which strengthens our geopolitical hand. So rather than just drill baby drill and continue to consume as we have, we get double the bang for the buck if we're producing, you know, steadily increasing U.S. fossil fuel production while reducing, you know, accelerating the clean energy and efficiency transition and reducing domestic use so that we're working on both the supply and the demand side at the same time. That could free up very large amounts of oil and gas for export over the medium and, you know, sort of five to 10 year time frame that could make. the U.S. the leading exporter in the world of both oil and gas and give us a much stronger geopolitical position, even as we again strengthen our efforts to produce to reduce emissions and strengthen our

economic energy security at home. So I very much hope that's what the U.S. does, but I have not seen the same kind of clarity of leadership and mind on that as we have in Europe yet. But you have seen that in Europe, you're saying. I mean, is your sense that all the things you just mentioned accelerating the clean energy transition, Europe was already more aggressive, I would say on that transition than the U.S. was. Are you saying it's accelerating even faster? And like, what have we seen, again, setting aside the kind of very near-term measures that the European Union is taking? Like, what's the three to five-year plan? Yeah. So the plan, we basically seen acceleration of measures that were already in place. So looking at how quickly they can deploy wind and

solar. There's been discussions about changing permitting for onshore wind and other things that could help accelerate deployment. Some countries, Belgium so far, has decided to, to prolong the retirement schedule for their existing nuclear power plants so that they don't have to turn to gas to fill the gap in the near term. So Belgium had several reactors that was scheduled to close this year. They're going to push that back by a decade. So far, Germany, who has three reactors that they are about to close this year, has not decided to do that, although it came up as a topic of national conversation, at least, which was a remarkable in and of itself that they were willing to broach the conversation after having such a strong,

long-term consensus about the need for the nuclear phase out there. So far, that's not a measure that they have decided to take, but could. I mean, it could still change their mind before the end of the year if the alternatives to doing that start to become clear, like, we're going to burn a lot more coal or we're going to see a lot more industrial conservation and demand reduction. Like, you know, the other measures are not easy either. So we are seeing, you know, rethinking of the role of nuclear. Poland and other countries are now saying they want to drive, and France are saying they want to drive more new nuclear deployment faster than originally planned. You know, basically it, I think, throws out the natural gas as a bridge fuel strategy in Europe that was previously the plan and,

you know, causes a rethink of all that, right? We're now, well, we don't want to really, you know, rely on natural gas as a bridge fuel because it is primarily going to come from, Europe, or it's going to be U.S. natural gas, you know, LNG exports, which are expensive, even if they're from a friendly country, they're still very expensive. And so, you know, I don't think in the long term, Europe wants to trade their dependence on Russian gas for USLNG. They may be willing to do that in the near term or as a piece of the overall puzzle, but they are going to want to dramatically reduce their reliance on gas overall. And that means accelerating the transition towards wind and solar, rethinking the role of nuclear

and accelerating the deployment of heat pumps and energy efficiency and buildings and industry so that they can reduce consumption on the demand side. You've probably seen this. There's been this insurgent move that people are talking about heat pumps for freedom, like US exporting heat pumps to Europe for deployment there. Is that a realistic idea? Would that be impactful? My sense is that that probably has the situation backwards, that Europe and Asia and manufacturers produce more of the global heat pump market. Again, with like some kind of bold wartime effort to remake our manufacturing base over a few years. Like, sure, you could do something like that. We could probably direct all U.S. manufacturing of air conditioning units to switch over to heat pumps. But there is some, you know, what I've seen is there's some concern that U.S. air-to-air heat pumps, which is what we primarily use here, where we're using, like, an air conditioner, you're, you're, you know, moving heat from the air outside into the inside for forced air ducts.

In Europe, they use a lot of water, you know, forced water heating. And we don't have a lot of hydronic heat pumps that do water, you know, air-to-water type heating. it's just not what we build and use in the U.S. very often. And so most of the stuff we deploy here comes from Europe in that category. And so it's not clear that we can really step up our exports of heat pumps in a meaningful way. And even in the short term, if you look at like the current EU strategy for this year, you know, they're talking about doubling the amount of heat pump deployment next year. And that's enough to reduce the consumption of natural gas, I think by about, if I'm not mistaken,

in one and a half billion cubic meters. So again, that's 1% of current Russian imports and a tenth of what we're going to do with LNG exports. So, you know, it's just, it's a smaller piece of the puzzle. A longer term, of course, it needs to be a big piece of the puzzle. And, you know, I think we are going to see, hopefully, in both the U.S. and Europe, investments in our industrial base to produce these efficient, you know, heat pumps to heat in cool buildings and to get off of natural gas.

One of the things, I mean, there's a lot of reasons to do heat pumps, right? They're more efficient than a boiler because they're not converting energy. They're moving it around so you can get, you know, three, 500 percent efficiency from a heat pump. And of course, they have zero direct emissions. That's good for air quality. It's good for CO2. You can switch over to clean electricity. That's good for climate mitigation. But from an energy security point of view as well, there are a bunch of different ways to produce electricity. We talked about coal substitution for gas. could be a very quick way for Europe to reconfigure its power production in the short term, right? We could also switch in the longer term for renewables. There's only one way to heat a gas boiler, right? And that's burning gas. And so the flexibility and fuel substitution ability you have with electric heating and electric transportation, I might add, for EVs is another step to improve our energy security by allowing more substituteability and more options that you just don't get in an electric, you know, in an internal combustion engine car that only burns gasoline or a boiler that only burns

natural gas. There's really not a lot of substitutability you can do there. Maybe a little bit of biomethane, but not wholesale substitution. So again, you know, adopting the different frames, you know, climate, efficiency, economic security, that economic energy security argument also, I think, motivates the need for electrification of our economy in a more, you know, a more profound way than it had before, I think. So it sounds like what you're saying is, from a decarbonization perspective exclusively, the likely outcome here is probably a short-term increase in emissions, largely because of fuel switching in Europe,

but a long-term acceleration of decarbonization because all the countermeasures that Europe in particular, and hopefully the U.S. and other countries are going to take to wean themselves off of this reliance on Russia, are going to be, generally speaking, lower carbon or zero-carbon alternatives? Is that your sense of it? it. Yes, switching from natural gas to coal and power generation will lead to increased emissions from the power sector. But if the European Union is also dramatically reducing natural gas consumption

overall through demand side measures and conservation, it may be that that nets out. The reduction in total gas burn is enough that it compensates for the temporary increase in emissions from coal consumption. Again, my team at the Princeton Zero Lab is running some models on this right now. Just a shout out to the value of open source energy models. We were able to fire up the open source pipes Europe model from to Berlin and others in Europe that built out and published this open source power system model. So we were able to now, we're running this week, cases of what do we do over the next 18 months in Europe from a power sector perspective, how much coal the gas switching you need or gas to coal switching you need? All that's really easy to do when you have open source models that are

right there ready to fire up when you need them. So just appreciate the effort that our colleagues in Europe have made to build these models and make them available, you know, so that our team here can now pick them up and try to do some rapid analysis that, you know, really matters. So it's still an open question. We're trying to answer that here as to whether or not it'll be a net increase in emissions in the short run. We have started to see some level, some life cycle cost, life cycle emissions analysis as well that notes that because the Russian gas sector and oil sector is, has very high upstream emissions, they do a lot of flaring. They have a lot of leaks in their gas system. system that even U.S. LNG, depending again on the leak rates here in the U.S. and where the gas is coming

from, there's quite a range of upstream leakage. But even relying on U.S. LNG to displace Russian pipeline gas may lead to a small net decrease in emissions because the greenhouse gas intensity of Russian gas is so high that even LNG, which is worse normally than pipelines, because you consume energy to liquefy the gas and regasify it, may actually be about a wash or even a slight reduction in emissions. And so that's, you know, I think the near-term climate implications are less dire than some folks might think. And I agree that the long-term looks like an acceleration of our transition away from fossil fuels, especially in Europe, but I think also likely in the United States as well. One of the issues you always face, particularly in the United States,

when you're trying to electrify something that was otherwise using natural gas is that our electricity prices are tied to natural gas prices. And so when you have a spike in natural gas prices, you tend to see a spike in electricity prices as well. Curious, the degree to which that is also true in Europe and what impacts that might have, and whether you think this, one of the outcomes here will be breaking that link to a large degree. So that's definitely true. In the United States and in Europe, gas generators are often on the margin, meaning they set the market price because they're the last generator that can move up or down.

I think that has switched in recent months maybe with, well, no, I guess it's probably still true that they are there on the margin now. And coal is cheaper even with the UETS prices. So I think that's probably true in the short run. And it's definitely true in the United States in many markets, gas generators set the price, a majority of hours of the year. And so on average, as gas prices go up, electricity prices go up as well. And so, yeah, I think that does, you know, that linkage does mean it's not so obvious from an economic perspective that you need to immediately electrify everything, you know, because electricity prices are also high. However, it does, I think, make it very clear from a policy perspective that providing additional incentives for consumers and businesses to electrify things makes good policy sense.

And so I think we're going to see a redoubling of incentives in Europe and, again, hopefully in the United States, for consumers and businesses to adopt heat pumps and electric vehicles and other measures by subsidizing their purchase so that even if the fuel price spread is not. so immediately advantageous it is from a, you know, from a consumer perspective. It, again, also is worth mentioning that a heat pump is so much more efficient than a gas boiler that it generally is still advantageous even if gas price or if electricity prices are higher than gas prices, right? Because you may, you think about, you know, let's just roughly, for ease of purpose, say that a gas generator is 50% efficient. So you would expect electricity prices to be double natural gas prices. But if a heat pump is three or four times more efficient, then the effect of cost of heating your house is actually lower.

So it still is often, you know, the price spread is still advantageous. It's just not as strong as it would otherwise be. And I do think longer term, you're right, it would, it could split that link if, you know, if basically natural gas plays a very small role in Europe's energy mix in another five years, that'll help drive a wedge between the prices in the power sector and the gas sector. All right. Maybe we'll check back in on this in a year and see how well Europe did. I mean, this will be interesting to see how well Europe did at reducing its reliance in the very near term and how well on track they are to the longer term, you know, complete link breakage and whether the U.S. followed suit. I do think that's an interesting question as well and

sort of TBD in my mind as well. But in the meantime, Jesse, thank you so much. Thanks, Shale. I hope that was helpful. A lot to unpack here for sure. Jesse Jenkins is an assistant professor at the and Linger Center at Princeton University and a leading macro scale energy modeler. This show is a co-production of PostScript Media and Canary Media. You can find the show on Twitter at At CatalystPod. You can also find me, PostScript, and Canary there too. Tag us to send feedback on this episode or suggest future topics. And if you like the show, go over to Spotify or Apple Podcasts or wherever you get your

episodes and leave us a rating and review. Or share this episode with a friend. You can find links for this episode's topic and guest in the show notes on Canary Media.com. PostScript is supported by my friends at Prelude Ventures, a venture capital firm that partners with entrepreneurs to address climate change across a range of sectors, including advanced energy, food and ag, transportation and logistics, advanced materials in manufacturing, and advanced computing. Our producers are Daniel Waldorf and Stephen Lacey, mixing by Greg, Vilfranc and Sean Marquand, theme song by Sean Marquand. I'm Shail Khan, and this is Catalyst.