On December 19, the energy ministers of the European Union agreed on a Market Correction Mechanism for natural gas. Why do we need such a mechanism? What might it accomplish?

A thread. The starting point for the intervention is a diagnosis of market failure in European gas:

✅ Prices untethered from fundamentals
✅ Manipulation by a dominant player
✅ Sharp drops in liquidity
✅ Extreme volatility

In this context, the question is *how* to intervene, not if.

European natural gas prices have dropped by 2/3 since their peak in August.

This is very good news. Europe is heading into the winter in a better position than I could have ever imagined.

But it's way too soon to declare victory.

Let's review. The decline in European gas prices has been remarkable.

But we've also seen a sharp disconnect between month-ahead and day-ahead prices.

Day-ahead prices are much lower because there is too much gas and nowhere to store it.

But the month ahead price is still above 100 €/MWh.

The @IEA WEO is always a delight to read—full of beautiful graphs and penetrating insights, a roadmap for building the energy system of the future.

This year, I want to highlight a few charts that really underscore Europe’s energy security predicament. 🧵 The increase in energy prices represents a *massive* macro-economic shock. The global trade in natural gas is usually $200 to $400 bn. This year it might reach $800 bn. Europe accounts for most of this increase on the import side. This is a shock whose ripple effects will last.

The European discourse on energy often conflates two distinct ideas: market forces and market design.

Market forces say that Europe must pay more for energy. But market design can determine how much more.

We cannot escape market forces. But we can design markets differently. 🧵 The European gas market suffers from two market failures. First, a dominant player can easily manipulate prices to serve their political ends.

No government would let a domestic market operate untouched under such duress. Why should Europe?

Instant takes can be dangerous in a rapidly evolving situation. We are learning more every hour.

But I’ve appreciated the chance to think out loud before on this platform. So here are some ideas swirling in my head about Russia cutting gas to Poland and Bulgaria. 1/ I wonder if we are tripping over a technicality. European firms are paying in hard currency. The fact that Russia is converting these euros into rubles seems irrelevant to me. (I’ve read plenty on the specifics of the scheme; I am still baffled by it.)

Russia's decision to cut gas to Poland and Bulgaria is a decisive turn in this war. Maybe this is brinkmanship and flows will be restored. But we must assume the worst.

As we process this info, here are some graphs I use to ground myself. No comments—just data on gas in/out. Austria

🚨No more Russian gas for the Baltic states🚨

Can they do it?
If so, can others?
Any lessons?

Let's dig in. The Baltics used to import 6 bcm of Russian gas. Now it's just 2.5 bcm.

This reduction is 50:50 attributable to lower gas use and LNG imports into Lithuania (~1.5 bcm each).

Re-exports to Finland have added 0.5 bcm of imports.

So, LNG yes. But also: USE LESS GAS!

Will Russia's invasion of Ukraine accelerate Europe's energy transition?

You bet.

Here is a running tally 🧵 "The Netherlands will significantly ramp up the building of offshore wind farms in coming years, doubling the planned capacity by 2030, in a bid to meet climate goals and reduce its dependence on Russian gas."
reuters.com/business/envir…

Can Europe import an additional 50 bcm in 2022?

Let's look at some numbers.

tl;dr It's hard. And it requires outbidding consumers in emerging markets, which could trigger energy crises there too. LNG supply growth is supposed to be robust in 2022. Maybe +25 mmtons (34 bcm). I can't see the data from WoodMac (graph from Shell), but I suspect they assume Snøhvit, Prelude, etc. come back online.

My experience: you often produce less than you thought. But assume 25 mmtons.

Should we sanction Russian energy exports?

It's tough.

My current sense: Sanctioning Russian oil makes more sense than hitting Russian gas.

But I'm still on the fence. Here's how I am thinking about it. Sanctions should inflict more pain on Russia than on us. They should help us win. You want to hit exports that generate a lot of money for Russia, but whose loss is tolerable for Europe, the United States, its allies.

Oil seems like a better candidate in that regard than gas.

Can Europe live without Russian gas right now?

(Let’s ignore for a second whether this is a good political weapon—as in, do you think Putin will pull rethink the war if Europe stops buying Russian gas? I doubt it).

Let’s just focus on numbers. Europe imports around 400 bcm each year (using an expansive definition of “Europe”). Russia supplies around 175 to 200 bcm.

The basic question is: can Europe find another 175-200 bcm in alternative gas supplies and/or reduced gas use?

tl;dr: It's very tough.

How do you ensure energy security against an enemy?

Europe bought energy from the Soviets during an era of managed rivalry. It bought energy from a weak Russia in the 1990s, and handled occasional flareups during Russia’s resurgence in the 2000s and 2010s. But this is new. Few of the scenarios or strategies that Europe has used to secure its energy needs are designed for the world that we woke up to today. The European energy security toolkit is premised on a geopolitical balance that has been totally upended.

Targeting NS2 is significant as a sign that Germany is fed up with Russia. That's why it matters. The energy implications are trivial—killing NS2 does little to improve European energy security. But the willingness to hit NS2 shows that Germany believes Russia crossed a line. The idea that NS2 would rewrite the energy map of Europe was always far fetched—a talking point that gained potency through repetition, not truth. Let's not pretend that European energy security is stronger as a result of NS2 dying (if this is, in fact, death). It isn't.

The gas that transits Ukraine today mostly ends up in Italy. Here are some numbers I'm looking at when thinking about Italian energy security.

tl;dr: Italy's strategic stocks would be a lifesaver if gas flows through Ukraine were interrupted. Italy meets winter demand through storage and pipeline imports. LNG is important but small relative to those other flows. Storage, in particular, is key. At times, storage has delivered almost as much as international pipelines.

The idea that Europe didn’t do anything after 2006 and 2009 in terms of its dependence on Russian gas is rubbish. But this argument mostly fails to understand the basic contours of European gas policy over the past 15+ years. Let’s review. Europe’s LNG import capacity grew by 3.4x between 2005 and 2021. Almost every country added more capacity after 2005 than it had in 2005. LNG imports have more than doubled. No one can look at that and say Europe has neglected LNG.

How do you punish / deter Russia? Most options on the table are either too big or too small. One option that isn’t talked about, but should be: targeting Russia’s participation in Europe’s energy transition. This could really hit Russia.

A thread. Russia is too integrated into the European energy system to attack today. You cannot stop Russian gas exports. You can hit their growth prospects but who cares—they will adapt (or evade). Even NS2 is a poor target too—best case, it’s a reputational loss. Russian power is intact.

Lots of discussions these past few days about what happens to European energy (gas) in the event of a conflict in Ukraine. I've been writing and tweeting about this in various places. Here is a thread consolidating those points. Ukraine in 2022 is not the same as Ukraine in 2006 or 2009. Gas transit is down 70 percent versus 1998. At this moment, gas through Ukraine goes to only a few countries. The affected area is much smaller than in the past.

Read also: csis.org/analysis/can-e…

Coming out of COP26, I yearn for a general theory of emissions reductions. I don’t want to talk about ambition, bending the curve, or what countries are proposing to do. I want to talk about *performance*. Are emissions falling? Where? How much? Why?

A thread. Let me start with my favorite example: California, a state widely seen as a climate leader. Do you know how much California reduced CO2 emissions between 2005 and 2018? 8 percent. Same as Florida. Yes, there are caveats. But still: 8 percent?? Not exactly impressive…

LOVE this cover!
But the content—so many issues...
Let me just pick a few. What the article says: “Britain, the host of the [COP 26] summit, has turned its coal-fired power stations back on.”

What the data on coal-fired generation actually looks like.

Countries are making big bets on the technologies we need for the energy transition, unlocking enormous opportunity, but also creating the prospect of trade and other conflicts. @CSISEnergy is launching “Energy Rewired” to study how these bets will change the world's energy map. To start with, we will publish country briefs that focus on specific technologies like solar, wind, hydrogen, batteries, CCUS and others. We ask three questions: What is the country’s vision? What is the strategy? What is the geographic focus?

With every new WEO come a gazillion new ideas to reflect on and write about. This is no summary of the main points, but some of the data points I found particularly interesting. A thread on the @IEA WEO 2021: First, we are witnessing a profound transformation in the geopolitics of energy. By 2050, the geopolitics of energy will mean critical minerals and hydrogen rather than oil and gas. This is what we will trade. This is a big part of what we will need to manage across borders.