EU gas markets: spring has arrived, but how do we prepare for next winter?

The FSR Debate which took place on the 8th of March focused on the current outlook for European gas markets.

Background

From the second half of 2021 to the early part of 2023, EU gas markets underwent an unprecedented period of extreme price volatility, consistently driving record-high prices. This was in no small part caused by reduced deliveries from Europe’s primary gas supplier, Russia, dropping from roughly 40% of total EU gas imports prior to the crisis to less than 9% by early 2023. The extremely tight supply situation in Europe and further afield through 2022 threatened the ability of the market to fill gas storages during the spring and summer ‘filling season’, potentially risking forced curtailments during the extraction season the following winter.

Europe got through this crisis with various interventions, perhaps most importantly on storage obligations and demand curtailment. Prices have since returned to relatively normal levels, and stores were never entirely depleted over winter. However, as Europe moves into the warmer seasons, attention is again returning to refilling the stores and the preparation for next winter. Where do we stand this year? How much new supply capacity do we have? Is there a need to continue curtailing demand?

Presentations

The first presentation came from Sylvia Beyer of IEA, who focused on divergence from dependence on Russian gas as well as preparations for next winter. She remarked on the importance of a 41% increase in solar and wind capacity, as well as large uptake of heat pumps as key to structural demand changes. Looking at the 2023/24 demand outlook, Sylvia reflected on the interconnectedness of global markets and how Europe has taken significant volumes of spot traded LNG gas from Asia and drawn it to the European market through the high prices offered. Ms. Beyer gave some insights from the latest IEA market supply outlook which includes some very pessimistic scenarios. On the positive side for Europe, she indicated the likelihood of a continued decline in gas use in Asia, which should help ease competition relative to 2022, but remarked that global LNG capacity is not likely to grow in 2023, with insufficient volumes to compensate for reduced pipeline flows. IEA calculated a 40 bcm gas gap in Europe in the event that China returns to normal demand levels and Russian deliveries to Europe drop to 0. She reaffirmed that lowering demand was key to mitigating that 40 bcm deficit.

The second presentation came from Monika Zsigri of the European Commission. She outlined the European response, coordinated under REPowerEU and the Strategy for an EU external energy engagement. Monika presented the positive outcome of the introduction in 2022 of an obligatory storage target (80% for winter 2022/23 and 90% for the following year), as well as the Gas Demand Regulation which set a voluntary demand reduction of 15% between August 2022 and March 2023, since renewed for the following year. Ms. Zsigri remarked on the record level of LNG imports at over 130 bcm as well as increased volumes by pipeline from non-Russian suppliers, particularly from North Africa and Norway. Monika flagged capacity bottlenecks at some key internal interconnection points, for example between Belgium and Germany, as key issues. This is indicative that the limitations of internal infrastructure are a factor to take into account when looking at additional and diversified imports of gas which could help mitigate the crisis.

Panel debate

The panel debate that followed the presentations looked to bring together stakeholders with a range of perspectives, covering energy companies (Eva Hennig, Eurogas), infrastructure specialists (Boyana Achovski, GIE), and regulators (Annegret Groebel, CEER). The panel opened with an intervention from each panelist.

Eva gave the first intervention, also utilising her experience at Thüga. She remarked on the importance of moving towards hydrogen-ready infrastructure, and the revised ambition on biomethane (35bcm by 2030), as well as some of the industry initiatives taking place to develop future-proof infrastructure.

Boyana gave the subsequent intervention, highlighting a few important priorities from an infrastructure and planning perspective. For example, the 90% storage target and the need to invest in new and diversified transport routes, as well as reconfiguring the energy system more towards LNG imports. Ms. Ahovski raised concerns about the substantial upfront costs associated with the biomethane and hydrogen targets, and therefore the requirement for CAPEX support.

Annegret gave the final intervention, from the regulators’ perspective. She structured her statement on “five Ss”: storage, solidarity, savings, soft winter, and speeding up the energy transition. Annegret remarked on how well the instruments already in place prior to the crisis have worked in avoiding total failure and crisis, for example in the form of forced curtailments. Amongst other things, Ms. Groebel pointed towards the update of the Security of Supply Regulation as an ultimate safeguard that is only enabled by the well-functioning of the underpinning network codes, infrastructure, and market organisation. Ultimately, Annegret feels that the full replacement of fossil fuels with clean fuels will be key to long term security of supply in the energy sector.

Polls

Q: How long do you expect the EU to have to deviate from its decarbonisation path as a result of the energy crisis?

• 1 year
• 2 -3 years
• 5 years
• More than 5 years

A clear majority voted for the second option, 2-3 years. The panelists gave some quick reflections on the outcome of the poll, where they generally felt that the energy crisis would likely accelerate decarbonisation action in the energy sector, perhaps by even 5 or 10 years. However, for new liquidity to come online in the LNG sector would certainly take more than a year or two, and in that timeline, demand avoidance is the main lever available. Multiple panelists highlighted the need to prioritise the acceleration of permitting procedures for renewable generation, for example by earmarking projects as in the ‘overriding public interest’, as key to capitalising on the prevailing crisis for the benefit of decarbonisation.

Q: Which are the three most important aspects to ensure the security of gas supply next winter?

1. Diversification
2. Energy savings
3. Boosting renewables
4. Speeding up permitting for renewables
5. Storage obligations
6. Solidarity
7. Joint purchasing
8. Legal frameworks for recovering windfall profits
9. Price cap

Diversification and energy savings were the most voted options. The panel discussed the potential limitations of the joint purchasing platform as an option, remarking on the difficulty of a governance framework, as well as the levels and extent of participation, but remained overall positive on its aims. Moreover, the connection between joint purchasing and low prices was also not clear to all panelists, for example, Annegret made reference to the high prices paid for jointly procured vaccines in Europe.

Closing remarks

In closing, Ilaria Conti suggested that we should feel somewhat safer and more secure in our position than we did at the same time last year but highlighted a few variables to keep an eye on. Namely, the demand from China and the storage injections over the filling season. Ilaria pointed towards the need for structural changes in demand driven by renewable installations and energy efficiency moving forward, to make a clear and final departure from the current ad-hoc and broad-brush demand avoidance targets.