The European Union has begun to prepare for the winter of 2023-2024, at the end of a winter whose abnormally high temperatures decisively helped the old continent to avoid an energy collapse.
With gas storage fill levels reaching 61% in early May, well up from 37% a year ago, the Commission’s spring forecast sets out estimates of how gas supply is expected to develop in the Union next winter, according to and for the range within which prices are expected to fluctuate.
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Emphasis on saving
Special importance is given to energy savings, the “27” having already agreed to extend until March 31, 2024 the objective of reducing gas demand by 15%. According to the Commission, compliance with the regulation by the member states will support the filling of natural gas deposits, keeping prices at low levels and ensuring a sufficient energy supply.
If the observed decline in gas demand is sustained, the Commission’s reference scenario estimates that storage levels will reach 95 billion cubic meters by the end of October 2023, therefore above the storage target of 90%. By the end of March 2024, reserves are estimated to reach 43 billion cubic meters, forming a good base for the winter of 2024-2025.
But if the bloc’s member states fail to meet their commitments to reduce gas consumption by 15%, the reservoirs could be nearly empty by the end of winter 2024.
Uncertainty about prices
As highlighted in the Commission’s report, although the threat of an energy collapse of the bloc with an absolute lack of natural gas has diminished significantly, price developments remain extremely uncertain. As of today, the high levels of storage and the diversification of supply sources have reduced the risk of a new wave of pressure on the European gas markets, up to the standards of August 2022. The market estimates that until the end of winter From 2022-2023 prices will remain somewhat stable above €50 per megawatt hour, capped at a sixth of the 2022 peak price, though moving to more than double pre-crisis levels.
However, any increase in demand could reinvigorate pressures. “This can be caused by a combination of e.g. cold winter or hot summer,” the Commission explains, noting that lower prices reduce incentives to save natural gas and use alternative fuels for power generation. At the same time, increased demand for LNG at global level, as well as problems in power generation from nuclear and hydroelectric power plants, could put pressure on prices On the other hand, any favorable weather conditions that contribute, among other things, to an increase in the production of renewable energy , could push prices below current future levels.
US LNG imports more than doubled
In any case, the importance of natural gas remains great for the bloc since, as highlighted in the Commission report, despite the EU’s moves to disassociate itself from fossil fuels, natural gas “will continue to play a important role in the energy mix over the next decade and beyond”. This is also the reason why “the security of supply and the affordable price of natural gas remain a key priority for the EU”.
Following Russia’s invasion of Ukraine, the report says, the EU has been in a race to diversify its energy supply and address LNG supply difficulties. “While Russia’s total gas imports fell by 80 billion cubic meters, the EU intensified cooperation with other countries to boost gas imports. In particular, US LNG imports have more than doubled, to around 50 billion cubic meters in 2022. New floating LNG terminals have been commissioned in Finland, Germany, and the Netherlands.” In addition, a record amount of more than 56 gigawatts of capacity was installed in 2022. wind and solar power in the EU, which could reduce gas demand in the energy sector by 11 billion cubic metres.
The reduction of consumption in figures
Reducing the demand for natural gas was essential to avoid the energy collapse of last winter. From August 2022 to March 2023, households and businesses reduced their gas consumption by 18% compared to the 2017-21 average, exceeding the Union target of a 15% reduction.
The very high prices of natural gas, which in August 2022 exceeded 300 euros per megawatt hour, were a decisive factor in curbing demand. Although gas demand is normally relatively inelastic and tends not to be affected by prices, the colossal increases this time helped reduce consumption.
“Industry (excluding power generation) contributed about half to the reduction in natural gas consumption, partly through production cuts,” the Commission says. “In the summer months, the overall decline in natural gas demand came mainly from industry, as manufacturing companies were the first to reduce natural gas consumption.” However, the reduction in gas use does not appear to have led to an overall reduction in production, as in 2022 total manufacturing output was at its highest in the five-year period 2017-2022. Now, lower prices are expected to trigger a recovery in business demand.
“The residential and commercial sectors are estimated to have contributed around the remaining half of the drop in gas demand in the EU, largely thanks to milder temperatures. Space heating accounts for, on average, around 63% of the final energy consumed by households in the EU. Therefore, reducing heating is an effective way for households to reduce their energy consumption,” the Commission notes.
The “key” months for energy sufficiency
“As the period between August and December 2022 had about 8.3% fewer warming degree days compared to the 2017-21 average, the Commission estimates that, of the overall reduction in demand for natural gas, about one sixth was caused by milder weather conditions (ie gas demand was 5 billion cubic meters or 3.0-3.2% less).” The months that most helped to achieve this result were October and November.
Mixed picture in power generation
In terms of power generation, while some Member States have moved away from natural gas for electricity generation (returning to coal), other Member States have seen gas consumption in the electricity sector increase significantly. “For example, in Spain, electricity generation from natural gas increased significantly due to a combination of factors, including the Iberian price cap. The cap limited the increase in the price of natural gas used by power plants and increased electricity exports to France, which had to compensate for the lower availability of nuclear power and lower hydroelectric production caused by the drought that hit Europe in the summer of 2018. 2022″, indicates the Commission.
Finally, the Commission refers to the agreement on the imposition of a “dynamic” ceiling on prices, which was reached with a characteristic delay and after many months of negotiations in the relevant EU institutions, at the level of the ministers of energy and also at the level of The bloc’s leaders noted that “initiatives to reduce demand and secure supply were supported by measures to improve the operation and transparency of price formation in the EU gas market.”