The on-going dispute between Russia and Ukraine over natural gas supplies has again highlighted the conundrum that the European Union faces in balancing environmental goals with security of supply.

As representatives from the two sides meet for talks in Brussels, some power generators in the 27-nation bloc have already started fuel switching to maintain electricity supplies. In Bulgaria, President Georgi Parvanov has touted the idea of restarting closed nuclear reactors at the Kozloduy plant.

The dispute, which began on January 1 and which is a repeat of a 2006 dispute between the two countries, illustrates the continued dependency of the EU on Russia for supplies of natural gas. It could also provide ammunition for groups opposed to the adoption of the European Commission’s Third Energy Package, which is aimed at improving the environmental performance of Europe’s economy and which could result in a switching away from coal to natural gas.

Countries worst-hit by the dispute include those in central, eastern and southeastern Europe that are highly dependent on Russia for natural gas supplies. Countries in Western Europe have reported a fall in supplies but currently have adequate resources in storage to cover demand.

Romania has reported a 30 per cent drop in gas supplies, while Greece and Poland have seen falls in supplies of 33 and 11 per cent respectively. Turkey has been cut off altogether, although Gazprom says that it has increased deliveries of gas through the Blue Stream pipeline in order to meet commitments.

Across Europe, utilities have been stockpiling lignite in preparation for the dispute, which was widely expected, according to Datamonitor Associate Analyst Kash Burchett.

“Greece generates around 13 per cent of its electricity from natural gas, which is not a huge amount, but it has seen a 33 per cent fall in supplies,” commented Burchett. “Around 64 per cent of its generation is from lignite-fired plant so it has been stockpiling lignite and switching fuel.”

Other countries have also been preparing, according to Burchett. “Ukraine stored up 17 billion cubic metres (BCM) of natural gas, which is a huge amount.

“Everyone saw this coming but did not expect it to go on for as long as it has.”

Countries in Western Europe are less dependent on Russian gas, but are still feeling the “domino” effect of shortages on the continent, according to a Centrica spokesman. On January 6 the interconnector gas pipeline connecting the UK with continental Europe began forward flows to the continent in spite of high levels of demand in the UK.

Oil-fired generators have been brought on-line in the UK, where coal-fired generators are also expected to be ramped up, according to E.ON UK’s Jonathan Smith. “Stocks of coal are high … we are OK in the UK at the moment,” said Smith.

Gas from Russia accounts for only three per cent of volume flows into the UK, but the country depends on natural gas for around 40 per cent of generation. As a whole, Russia accounts for 23 per cent of EU gas supplies, and 40 per cent of the bloc’s gas imports.

The European Commission has been trying to address security of supply through legislative measures, but there are concerns that the environmental goals of the third energy package – also known as the 202020 package – will result in increased dependency on natural gas, particularly in eastern European countries.

The third energy package has been approved by the European Parliament but has yet to pass through the Council. A number of eastern European countries – notably Poland – were vociferous in their opposition to parts of the legislation, in particular the proposed changes to the region’s emission trading scheme (ETS).

Although the current dispute may add weight to the position of Poland and its allies, neither these countries nor the lobbyists that traditionally hold sway with the European Council are likely to be able to delay adoption of the third energy package, according to Burchett. “This crisis is nothing new, although it might help to generate more sympathy within the Commission and Parliament.

“There is a strong determination in Brussels to have a cohesive environmental policy in place before the next climate talks in Copenhagen in 2009.”

One possible long-term impact of the dispute could be an increased drive to improve energy efficiency in the EU, according to Burchett, who says that while the carbon and renewable targets of the third energy package will be hard to attain, a significant increase in energy efficiency will improve energy security while reducing emissions.

Brussels is now placing sustained pressure on the two sides to negotiate an agreement and end the dispute, although Kiev recognises that the longer it can hold out, the less it will end up paying for gas, according to Burchett.

“Gazprom is losing £6.3 million per day in profits for not exporting and is also facing damage to it reputation,” says Burchett. “Kiev is therefore under pressure from the EU … Barroso has already said that if they continue to play games then they risk damaging their chances of accession to the EU.”

Ukraine, however, is mindful that a massive increase in the price of gas will have a severe impact on its economy, which is highly dependent on the steel and fertilizer industries. Elections are also due to be held in the country in 12 months, and the government cannot afford to be seen to be allowing gas costs to spiral or to cave in to Russian demands.

“The perception is that in 2006 there was more sympathy for Kiev as it was felt that Moscow was simply flexing its muscles and expressing its feelings over the Orange Revolution,” says Burchett. “Now Kiev appears to be scoring political points.”