“Among countless research papers on the energy problems in Europe, the recent report of the Earth Security Group stands out in at least two important respects. First, it approaches energy not as a separate object of analysis, but as a part of more general eco- and social systems in Europe and in its periphery. Second, it focuses not on the current energy wars between Russia and EU, but rather on the problem of defining long term sustainable solutions for energy problems in Western Eurasia. These two distinct features of the report make it refreshing and intellectually rewarding for anyone interested on out of the box thinking on energy matters.”

Andrey Kortunov, Director General, Russian International Affairs Council.

Blueprint 2

The impact of Germany’s energy revolution on Russia and Turkey

Germany’s energy transition towards efficiency and renewables – its energiewende – can help Europe improve its long-term leverage over Russia while strengthening energy transit hubs such as Turkey, which are strategic to Europe’s energy future.

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Russia

In early 2015, the collapse of the ruble due to European sanctions prices seems inevitable. The vulnerability of Russia’s domestic electricity sector however, provides Europe with long-term leverage. Energy blackouts, like the one that paralysed Moscow in 2005, will be more likely due to Russia’s exposure to weather extremes. Its domestic energy infrastructure, which largely dates back to Soviet times, loses over 10% of electricity through distribution alone and has a carbon-intensity 3 times that of Europe. In the long-run Russia is a key market for Germany’s technology, enhancing the soft power role of business diplomacy.

Strategic Opportunity 1

German companies like E.ON and Siemens are established players in Russia’s energy market and are key to its modernisation. As Russia seeks to access European technology by investing and integrating with European energy companies, Europe should retain its comparative technological advantage and increase its view of market opportunities. By investing in Russia’s improved infrastructure, Europe will grow its influence over Russia’s energy security.

Turkey

Turkey is a future transit hub for Europe to access gas in Central Asia, Iraq, the Eastern Mediterranean and Iran. However, it is also acutely energy import-dependent, with Russia supplying approximately 60% of its gas imports. Because of its external dependence, the efficiency of Turkish energy consumption is vital to its future position as a reliable transit partner. Turkey’s electricity demand is set to grow at 6% annually over the next decade. The government’s bold commitment to renewable energy targets and efficiency provide a unique opportunity for extending the presence of technology-intensive European energy companies in the Turkish energy market.

Strategic Opportunity 2

European companies currently compete with other regions for a place in Turkey’s growing energy market. The EU at large should encourage energy companies to invest in Turkey. Renewables, efficiency, storage and distribution are areas that will help create the domestic stability Turkey needs to be a strong transit partner to Europe. Turkey is set to build its first nuclear plant with Russia’s Rosatom. Europe’s nuclear safety expertise should be part of its broader energy market agenda.

Russia’s domestic energy security gap

European sanctions on Russia following its military proxy war in Ukraine, combined with low oil prices, have begun to undermine Russia’s capital market and public resources. Russia’s future looks bleak. Domestically, a crumbling electricity sector is in urgent need of modernisation and has the potential to affect domestic stability. The risk of instability is illustrated by the electricity blackout that hit Moscow in 2005. The crisis left tens of thousands of people stranded in the underground system and elevators, with railways out of action from stalled rail signal systems and government organisations left paralysed. The event was the result of a combination of inter- dependent factors: worn out equipment and absence of power backups for an ageing infrastructure largely dating from the times of the Soviet Union and high temperatures above 30°C endured in the city.

Inefficiency undermines Ukraine’s reliability as a transit country

From an energy perspective, the Ukraine’s vulnerabilities demonstrate the need for transit countries to be efficient domestic energy markets. Germany and Europe as a whole, import over 30% of oil and gas needs from Russia, with half of that transiting through Ukraine. The vulnerabilities that threaten Ukraine’s reliability as a transit hub include: structural financial losses of up to $2.5 billion annually in the district heating sector due to low prices paid for expensive imported gas; disincentives to upstream investment as regulated prices established by Naftogaz are too low to encourage new investment; and, finally, declines in domestic production. Estimates for the investment required to modernise Ukraine’s gas transit system vary widely from $3.2 billion (European Union estimate) to $9 billion (Gazprom’s estimate).

Turkey’s energy market stability is key for Europe

Turkey is located in a strategic position between Europe and Central Asia, Iraq and Iran, which together hold a large share of the world’s proven gas reserves. Turkey is well placed to become one of Europe’s long-term energy transit partners. The Turkish electricity market is one of the fastest growing in the world, with electricity consumption expected to grow annually by 6% in the next decade.

Energy policy-makers in Turkey plan to support private sector efforts to increase energy generation, develop renewable energy sources, improve energy efficiency and mitigate the impacts of climate change. Turkey has set the ambitious target of meeting one-third of its electricity demand through renewable energy by 2023, projecting a rapid growth in wind, solar and geo-thermal capacity.