Europe may need to return to coal as Russia reduces gas flows

Europe's biggest buyers of Russian gas raced to find alternative fuel supplies on Monday and could burn more coal to cope with reduced gas flows from Russia that threaten an energy crisis in winter if stores are not refilled.

Germany, Italy, Austria and the Netherlands have all signalled that coal-fired power plants could help see the continent through a crisis that has sent gas prices surging and added to the challenge facing policy-makers battling inflation.

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Italy's Eni said it was told by Russia's Gazprom that it would receive only part of its request for gas supplies on Monday, pushing the country closer to declaring a state of alert that will trigger gas saving measures.

Germany, which has also experienced lower Russian flows, announced on Sunday its latest plan to boost gas storage levels and said it could restart coal-fired power plants that it had aimed to phase out.

"That is painful, but it is a sheer necessity in this situation to reduce gas consumption," said economy minister Robert Habeck, a member of the Green party that has pushed for a faster exit from coal, which produces more greenhouse gases.

"But if we don't do it, then we run the risk that the storage facilities will not be full enough at the end of the year towardthe winter season. And then we are blackmailable on a political level."

Russia on Monday repeated its earlier criticism that Europe had only itself to blame after the West imposed sanctions in response to Moscow's invasion of Ukraine, which isa gas transit route to Europe as well as a major wheat exporter.

The Dutch front-month gas contract, the European benchmark, was trading around 124 euros ($170 Cdn) per megawatt hour (MWh) on Monday, down from this year's peak of 335 euros($458 Cdn) but still up more than 300 per centon its level a year ago, before prices started rocketing.

Filling inventories slowly

The chief executive of RWE, Germany's largest power producer, Markus Krebber, said power prices could take three to five years to fall back to lower levels.

Russian gas flows to Germany through the Nord Stream 1 pipeline, the main route supplying Europe's biggest economy, were still running at about 40 per centof capacity on Monday, even though they had edged up from the start of last week.

Ukraine said its pipelines could help to fill any gap in supply via Nord Stream 1. Moscow has previously said it could not pump more through the pipelines that Ukraine has not already shut off.

Eni and German utility Uniper were among European companies that said they were receiving less than contracted Russian gas volumes, although Europe's gas inventories are still filling, albeit more slowly.

They were about 54 per centfull on Monday against a European Union target of 80 per cent by October and 90 per centby November.

Germany's economy ministry said bringing back coal-fired power plants could add up to 10 gigawatts of capacity in case the gas supply hits critical levels. A law related to the move goes to the upper house of parliament on July 8.

Alongside a shift back to coal, the latest German measures include an auction system starting in coming weeks to encourage industry to consume less gas, and financial help for Germany's gas market operator, via state lender KfW, to fill gas storage facilities faster.

RWE said on Monday it could prolong the operation of three 300 megawatt (MW) brown coal power plants if required during the gas supply crisis.

Russia blames West

Austria's government agreed with utility Verbund on Sunday to convert a gas-fired power plant to use coal should the country face an energy emergency. OMV said on Monday that Austria was set to receive half the usual amount of gas for a second day.

Dutch broadcaster NOS reported on Monday that coal-fired energy plants in the Netherlands would be allowed to increase production to help reliance on Russian gas, citing government sources. The Dutch energy minister was due to make an announcement about gas supplies at 1530 GMT.

Russia's state-controlled Gazprom cut capacity last week along Nord Stream 1, a major pipeline supplying Germany and others, citing the delayed return of equipment being serviced by Germany's Siemens Energy in Canada.

"We have gas, it is ready to be delivered, but the Europeans must give back the equipment, which should be repaired under their obligations," Kremlin spokesman Dmitry Peskov said.

German and Italian officials have said Russia was using this as an excuse to reduce supplies.

Italy, whose technical committee for gas is expected to meet on Tuesday, has said it could declare a heightened state of alert on gas this week if Russia continues to curb supplies.

The move would trigger measures to reduce consumption, including rationing gas for selected industrial users, ramping up the production at coal power plants and asking for more gas imports from other suppliers under existing contracts.