Ambitious European project to build its way out of energy dependence on Russia faces potential delays and billions of dollars in extra costs, as the war in Ukraine makes steel, copper and aluminum scarce and more expensive.
The rush to replace Russian fossil fuels is pushing the Old Continent to focus on supporting short-term liquefied natural gas (LNG) flows and onincrease in generation from renewable sources by 2030. Germany will build two LNG terminals, while France wants to resume talks with Spain over a connecting pipeline, and the UK is looking for more wind, solar and nuclear power. Yet the prices of the necessary materials continue to go in only one direction.
Independence from Russia, at what price?
Steel, copper and aluminum hit records in the past 12 months, and the Bloomberg Commodity Spot Index jumped 46% over the same period. Price spikes that threaten to slow companies like the European Union’s plan to triple wind and solar capacity this decade, a colossal investment that could require around 52 million tons of steel. “This war has an impact on all those companies, including us, who are on the verge of making large investments,” said Fred van Beers, CEO of SIF Holding NV, which manufactures steel platforms for wind turbines. “It’s turning our business case upside down.”
The EU imported around 155 billion cubic meters of gas from Russia last yearaccording to the International Energy Agency and now in the aftermath of the war, wants to reduce dependence by two thirds this year.
About 30 billion cubic meters can be replaced by other suppliers, with the difference being renewables, nuclear and changes in consumption, the IEA said. The European Commission’s transition plan calls for the installation of 290 gigawatts of wind and 250 gigawatts of solar. The bill for steel alone, however, amounts to 65 billion euros (72 billion dollars) at current market prices.
Russia and Ukraine are among the largest exporters of steel used in the construction of turbines and gas pipelines. While alternative sources are possible, the costs are 50% higher than normal, according to Rysted Energy AS. Compounding the problem is China’s decision to block its Tangshan steel production center in an attempt to control a Covid-19 outbreak.
The copper it is another vital ingredient and Europe needs around 7.7 million tonnes to meet its 2030 target. Then there is the aluminum needed for the solar panels, turbines and grids to which they connect. Europe has a critical shortage as production has dropped after rising energy costs reduced smelters’ profits.
Russia is the largest producer outside of China, with its refined aluminum accounting for around 5% of global production. The market was already tight earlier this year, according to BloombergNEF, and prices hit a record high in March. The risk that Russia’s shipments could be throttled by potential sanctions helped fuel these increases.
“The world may have to move on without Russian supplies,” Andrew Forrest, president and founder of Fortescue Group Metals Ltd., said in an interview. “It is certainly feasible, but there will be an adjustment period.”
More grids will be needed to deliver huge amounts of renewable generation where electricity is needed. About $ 1.5 trillion in cumulative investments from 2020 to 2050 are needed to add new connections, according to BNEF. But it’s not just about clean infrastructure. LNG is receiving a boost with Germany’s plans for two new terminals as early as this year and the Netherlands securing a floating storage and regasification unit in March. Italy and Estonia are also pushing to create theirs quickly.
The UK and France are planning a vast expansion of thenuclear energy. “Everyone is talking about accelerating the energy transition, and everyone will need the same materials,” said Julian Kettle, senior vice president of metals and mining at Wood Mackenzie Ltd. The cost list is getting longer.