Europe's Gas Sector Faces Crucial Period After Winter Depletes Stocks

As Europe emerges from a challenging winter, the continent's natural gas sector is entering a critical phase. The halt of Russian pipeline gas transit through Ukraine, combined with a return to average winter conditions and a period of low wind speeds and limited sunshine, has significantly depleted gas storage levels. This has put upward pressure on prices and increased Europe’s reliance on global LNG markets, which are already tight. The main European gas price benchmark, the TTF, currently stands around EUR 47/MWh, double pre-crisis levels. The relatively low amount of gas in storage in the European Union, with levels some 24 billion cubic meters (bcm), or 36%, below where they were this time last year, is exacerbating this issue.

The economic damage from high and volatile gas prices has been visible for both households and businesses. The initial period of the gas price shock was a key contributing factor to inflation and sharp rises in the cost of living, and it has contributed to higher rates of energy poverty across Europe. Gas prices for industrial consumers in Europe since 2022 have on average been 30% higher than in China and five times as high as in the United States. Several gas- and energy-intensive industries have had to curtail production, and some plants have closed. The elevated gas prices and their broad impacts have complicated efforts by governments to ensure reliable and affordable energy supplies for citizens and companies, and it has put the spotlight on the international competitiveness of European industry.

To mitigate these risks, several measures can be taken. The European Commission and member governments have already put in place a raft of measures to tame volatility and protect consumers, including the introduction of affordability support measures, gas storage obligations, voluntary targets to cut gas consumption, and a joint gas purchasing mechanism. Additionally, Europe has been able to call on well-meshed gas grids and significant LNG import infrastructure, which enabled it to increase LNG imports rapidly and diversify its gas supplies. Despite Russian piped gas flows to Europe falling by more than 80 bcm (or 50%) in 2022, physical gas supply shortages were avoided.

Furthermore, since the start of 2022, around 250 gigawatts of new renewable power capacity have been added across Europe, helping to avoid a cumulative total of more than 60 bcm of gas consumption in the electricity sector since then. Although heat pump sales have sharply decelerated from their highs in 2022 and 2023, the 8 million units sold since 2022 have also dampened gas demand during the peak heating season. Europe also made strong improvements in energy efficiency in 2022 and 2023, helping to prevent even greater pressure on supplies and prices, although the rate of efficiency progress ebbed significantly in 2024.

Overall, Europe’s natural gas demand for electricity generation continued to decrease in 2024, falling by 8% and marking the fifth year in a row of annual declines. Alongside these clear signs of structural decline, gas remains essential for the continent’s energy security, including the provision of flexible electricity generation to complement variable renewables such as solar and wind.

The halt of Russian pipeline gas transit through Ukraine has significant implications for the European gas market. Firstly, it has tightened natural gas supplies, driving up withdrawals from gas storage facilities and increasing gas consumption by 80% compared to the same period in 2023 to ensure continued electricity supplies during a period of low wind speeds and limited sunshine, often referred to as Dunkelflaute. This has put upward pressure on prices, with the main European gas price benchmark, the TTF, currently standing around EUR 47/MWh, which is double pre-crisis levels. The relatively low amount of gas in storage in the European Union, with levels some 24 billion cubic meters (bcm), or 36%, below where they were this time last year, is exacerbating this issue. Meeting EU targets for filling storage before the start of next winter will require much bigger inflows of gas than in the previous two years, increasing Europe’s call on global LNG markets and tightening market fundamentals.

To diversify its gas supplies and reduce dependence on Russian gas, Europe has been able to call on well-meshed gas grids and significant LNG import infrastructure, which enabled it to increase LNG imports rapidly and diversify its gas supplies. Despite Russian piped gas flows to Europe falling by more than 80 bcm (or 50%) in 2022, physical gas supply shortages were avoided. Since the start of 2022, around 250 gigawatts of new renewable power capacity have been added across Europe, helping to avoid a cumulative total of more than 60 bcm of gas consumption in the electricity sector since then. Additionally, the 8 million heat pumps sold since 2022 have also dampened gas demand during the peak heating season. Europe also made strong improvements in energy efficiency in 2022 and 2023, helping to prevent even greater pressure on supplies and prices.

In conclusion, Europe's natural gas sector is entering a crucial period as it emerges from a winter that has significantly depleted gas storage levels. The halt of Russian pipeline gas transit through Ukraine, combined with a return to average winter conditions and a period of low wind speeds and limited sunshine, has put upward pressure on prices and increased Europe’s reliance on global LNG markets. However, Europe has taken several measures to mitigate these risks, including the introduction of affordability support measures, gas storage obligations, voluntary targets to cut gas consumption, and a joint gas purchasing mechanism. Additionally, Europe has been able to call on well-meshed gas grids and significant LNG import infrastructure, which enabled it to increase LNG imports rapidly and diversify its gas supplies. Despite these challenges, Europe remains committed to ensuring reliable and affordable energy supplies for citizens and companies, and to reducing its dependence on Russian gas.

Ask Aime: What impact are Europe's natural gas market developments having on global LNG markets and renewable energy investments?