European gas markets have come under extraordinary pressure as a result of Russia’s invasion of Ukraine. While much attention has focused on the reductions in volumes flowing through the Nord Stream I pipeline to Germany, export halts and flow reductions are widespread, raising concerns over Europe’s ability to meet power and heat demand this winter.
According to the Bruegel think tank, as of the beginning of July, Russian gas flows equivalent in total to 252 TWh of power had been cut off to Poland, the Netherlands, Greece, Bulgaria, Denmark and Finland. Volume reductions have been even greater, with Russian gas exports to Germany down 369 TWh, Italy 280 TWh and France 117 TWh. Flows to the Czech Republic, Slovakia and Austria have fallen by a combined 239 TWh.
Moreover, news in August that Russian state-owned gas company Gazprom would shut down the Nord Stream 1 pipeline for three days at the end of the month for unplanned maintenance again raised fears that Europe could face a complete shut off of Russian gas imports this winter.
Europe typically meets around 25-30% of its winter gas demand for storage, but inventories were low going into last winter and the ability to refill them has been threatened by the reduction in Russian import volumes. Nonetheless, through a variety of measures, such as demand reduction, gas-to-coal switching and increased gas imports from non-Russian sources, European countries are on track to reach the goal mandated by the European Commission of 80% capacity by 1 November.
As of August 2, according to data from Gas Infrastructure Europe, EU gas storage was 70.54% full, higher than the five-year average of 70.32%. By August 20, storage levels had risen to 76.99%.
However, whether the target will be met and whether that will prove sufficient depends heavily on how Russian import volumes evolve over the next few months and how cold the European winter proves to be.
Furthermore, the effort to build stocks ahead of winter has not come without a cost. Gas is being purchased at record high prices, despite European governments offering incentives such as credit lines, loans and subsidies to help companies procure more of the fuel.
The precarious balance between gas supply and expected winter demand has prompted emergency measures on the part of the EU. The “Save Gas for a Safe Winter” plan aims to cut gas consumption by 15% between August this year and March 2023, compared with average annual use from 2016-2021. The plan came into effect on August 9.
The regulation is voluntary, but in the event of a “severe gas supply shortage” or very high demand, the EU can ask its members to declare an alert, which would make the gas consumption cuts binding and limit exceptions.
Countries more dependent on Russian gas imports will likely have to cut gas consumption by more than 15%. Bruegel estimates that the demand savings required to deal with a complete shutdown of Russian gas flows ranges from zero (Spain, France, Portugal) to 54% (Bulgaria, Greece, Hungary, Croatia and Serbia). Germany, the EU’s largest economy, would need to reduce gas demand by 29%, according to the calculations.
Under EU rules households are classed as protected consumers. The burden of cuts in the event of an alert would therefore fall predominantly on industrial gas users.
One means of boosting gas imports has been to increase deliveries of Liquified Natural Gas (LNG). Europe’s LNG imports are running at pretty close to maximum, given regional constraints on regasification capacity and onward gas transmission.
In the first eight months of this year, Europe’s LNG imports averaged 10.62 million tons a month, according to Refinitiv data, up more than 60% from the same period last year.
The scramble for gas by European buyers has driven LNG spot prices to record levels. Moreover, a number of European countries are rushing to install new regasification capacity. Some of this, for example a government-sponsored project led by RWE in Germany, could be on-stream by the end of this year. This would be one of the world’s fastest deployments of new regasification capacity ever and a major boost to the nation’s gas security.
However, regasification projects in Belgium, the Netherlands, Germany and elsewhere in Europe, look set to increase LNG demand before the supply side of the LNG market has had time to adjust, meaning that Europe will absorb all new LNG capacity coming online this year and still draw cargoes away from Asian markets. Gas prices are likely to remain elevated as a result, adding to the cost of living crisis facing consumers across Europe.
The war in Ukraine is not the only factor at play. Climate change also appears to be having an impact in what is one of the warmest European summers on record. Drought and heat have adverse impacts on power provision and energy security.
Low levels in hydropower reservoirs reduce power output from a key source of renewable energy, while low water levels in rivers limit the operations of thermal power plants using the river water for cooling. Low water levels are also affecting the supply of energy commodities along important inland waterways, such as the Rhine, as vessels cannot carry as much cargo as normal.
All in all, it appears to be the perfect storm for Europe’s energy markets, but one in which both short and longer-term measures are being put in place as governments and energy companies like RWE mobilise to ensure energy supplies in extremely uncertain and challenging conditions.
In particular, while LNG and gas storage can provide essential security in the short term, governments and companies across Europe are upping their renewable energy ambitions to provide more domestically-generated sustainable power.
The EU’s REPowerEU plan, formulated in response to the Ukraine crisis, for example, banks heavily on much increased clean energy generation from solar and wind power, both on and offshore, as a means for transitioning to a greener, more energy-secure future.