Ben McWilliams, Simone Tagliapietra, Georg Zachmann, and Thierry Deschuyteneer. Initially revealed at Bruegel.

The European Union has to date weathered the power disaster introduced on by Russia’s invasion of Ukraine in February 2022 and can handle winter 2022/23 even when Russia abruptly halts all pipeline fuel flows. Nevertheless, preparations should be made for winter 2023-24. Particularly, fuel storage services needs to be 90 p.c full by 1 October 2023.

We assess the demand discount wanted if the 90 p.c storage goal is to be achieved. Our evaluation takes into consideration EU imports, exports to refill fuel storage services in Ukraine and Moldova, the climate and the state of affairs in energy markets, the place fuel demand is extremely depending on non-gas power sources. Assuming restricted Russian exports proceed, and climate situations are typical, demand as much as 1 October 2023 should stay 13 p.c decrease than the earlier five-year common. The EU ought to due to this fact lengthen its demand-reduction goal, which is at present set to run out on 31 March 2023.

Two variables will decide how simply the goal might be met: 1) liquified pure fuel (LNG) provide, and a couple of) the character of demand reductions. Plans for fast deployment of regasification items will alleviate issues over LNG import infrastructure capability. Nevertheless, the EU will proceed to compete internationally for LNG cargoes, and can stay susceptible to world dynamics. Sturdy financial progress in China, for instance, might additional tighten markets.

The way in which demand is decreased will decide the financial penalties. Up to now, giant reductions in industrial fuel demand haven’t been accompanied by dramatic drops in industrial output, suggesting good substitution choices. Nevertheless, hardly any fuel was saved within the energy sector final 12 months, due to weak nuclear and hydro output. The return of French nuclear output will due to this fact be an enormous constructive. Lastly, households have decreased fuel demand, partly pushed by hotter than traditional climate. Report numbers of warmth pumps had been deployed in 2022, suggesting the beginning of a structural shift away from fuel demand for heating.

Coverage ought to assist a continued structural shift away from fuel. This entails enabling fast deployment of renewables and the accompanying grid infrastructure, energy-efficiency measures, assist for households that wish to swap to cleaner heating, and collaboration with business to speed up adoption of recent low-carbon manufacturing strategies.

1 Introduction

The European Union spent most of 2022 in disaster mode over power. Russia’s invasion of Ukraine and the next discount in Russian fuel exports to Europe pushed costs to beforehand unimaginable highs, inflicting ache for companies and households. To its credit score, the EU’s response has remained resolute. The disaster has to date been weathered by means of swift decision-making, gas switching and fast changes facilitated by a robust market framework, which has seen the fast ramping up of liquified pure fuel (LNG) imports and reductions in home demand.

Consideration now turns to planning for the following winter. We offer an up to date evaluation of the EU’s state of affairs, with a selected give attention to what should be accomplished to make sure filling of fuel storage services forward of the 2023-24 winter. We discover totally different eventualities considering the volumes of fuel which the EU receives from Russia, the climate and the state of affairs in energy markets, the place fuel demand is extremely depending on non-gas power sources.

We discover intimately the 2 pillars of power safety: LNG provide and the character and quantity of natural-gas demand reductions. In relation to LNG, plans for fast deployment of regasification infrastructure are set to alleviate issues about import infrastructure capability. These plans should be applied, nonetheless. An extra concern is competitors for restricted LNG on world markets. In the meantime, demand discount within the EU throughout the first half of the winter of 2022-23 has been very substantial. Helped by hotter than traditional climate, it has contributed to a major drop in costs. We consider precisely how this was achieved, with a give attention to potential financial penalties. A agency conclusion is that the EU ought to lengthen its demand discount goal to at the least October 2023.

2 By how a lot should demand be decreased?

EU nations in August 2022 agreed a goal to scale back pure fuel demand by 15 p.c between 1 August 2022 and 31 March 2023, in comparison with the common of the identical interval within the earlier 5 years[1]. With this discount, the EU can handle to fulfill demand throughout winter 2022-23, even with none Russian fuel (McWilliams and Zachmann, 2022a). Nevertheless, Europe’s power disaster is not going to be over in April 2023.

Selections needs to be taken already with winter 2023-24 in thoughts. An EU gas-storage regulation requires volumes to succeed in 90 p.c of capability (1,007 TWh) by 1 October 2023[2]. We calculated the required demand discount for the EU to attain this goal, starting with storage at 71 p.c full (800 TWh) on 1 February 2023.

We discover three eventualities (Desk 1):

1. A baseline wherein Russian pipeline fuel flows stay roughly at at present’s ranges, with fuel arriving by way of Ukraine transit and the Turkstream pipeline (UA/TS state of affairs; these are the 2 remaining supply routes for Russian fuel to the EU after deliveries to the Baltic States, by way of the Yamal pipeline, and by way of the Nordstream pipeline, had been stopped between April and September 2022). Turkstream (TS) flows are predominantly to Hungary passing by means of Serbia, whereas Ukraine transit fuel passes by means of Slovakia, Austria and Italy.
2. A state of affairs wherein solely Ukraine transit flows are halted however Turkstream flows proceed. For political causes we contemplate Turkstream flows to Hungary the least prone to be scrapped.
3. A state of affairs with no Russian pipeline fuel (NRPG).

In all eventualities, non-Russian pipeline and LNG flows are assumed to proceed on the each day common fee in 2022, when the EU secured document LNG volumes (see part 3 for extra dialogue of this assumption; see additionally the annex). We calculated the demand discount wanted as a share of the common demand from February to October within the earlier 5 years, in the identical manner because the EU’s 15 p.c demand discount goal was calculated[3].

Within the UA/TS state of affairs, the EU would wish to scale back fuel consumption by 13 p.c (320 TWh) relative to the earlier five-year common. If Ukraine transit is halted, this discount requirement will increase to 17 p.c (420 TWh), and to twenty p.c (490 TWh) if all Russian pipeline fuel is halted[4]. Temperature variations would require greater or decrease reductions (Determine 1 and Desk 2).

Determine 1: EU estimated fuel balances 1 February 2023 to 30 September 2023

Supply: Bruegel

Desk 2: Vital demand discount (%) beneath totally different winter temperature eventualities

Desk with 5 columns and three rows. Presently displaying rows 1 to three.

Supply: Bruegel. Observe: weak energy sector refers to decrease than traditional nuclear and hydro output growing demand for fuel within the energy sector. See part 4.2. Created with Datawrapper

Determine 2 exhibits the evolution of saved fuel in essentially the most dramatic NRPG state of affairs. With no additional demand discount, the EU might handle winter 2022/23 with a buffer of 400 terawatt hours or 35 p.c of storage capability. However the consequence could be a necessity for a 32 p.c discount throughout summer time 2023 to refill storage services. In the meantime, with the required 20 p.c discount, storage volumes is not going to drop under 55 p.c earlier than the tip of winter 2022/23. The identical logic applies for the opposite two eventualities. Coverage ought to be sure that the temptation to run down storage volumes throughout winter 2022-23 doesn’t prevail. In any other case, summer time 2023 will doubtless see a return to very excessive fuel costs as storage is refilled – a repeat of the power value spikes in August and September 2022.

Determine 2: Projected EU fuel storage volumes in NRPG state of affairs

Supply: Bruegel.

2.1 Regional results: should demand reductions fluctuate by geographical space?

Infrastructure bottlenecks have been a defining characteristic of Europe’s power disaster. Because of a number of developments, nonetheless, bodily bottlenecks are step by step turning into much less extreme. First, some deliberate infrastructure initiatives have come on-line over the previous few months, together with the Baltic Pipe taking Norwegian fuel to Poland, and interconnections between Poland and Slovakia, Bulgaria and Greece, and France and Germany (reverse circulation). With out the disaster, a few of these may not have occurred so shortly, if in any respect. Second, the fast deployment of floating storage and regasification items (FSRUs), significantly inside Germany, is ready to supply further LNG import capability in strategically necessary geographies (Determine 3).

Determine 3: New fuel infrastructure, September 2021 to October 2022

Supply: Bruegel. Observe: FID = ultimate funding choice.

Third, and importantly, EU storage services are in the beginning of 2023 unusually full. Storage volumes are unlikely to be totally depleted by the tip of winter. Past having fuel in reserve, a constructive consequence of that is that full storage services present a buffer to the fuel grid, which means that home demand on any given day might be met by a mix of manufacturing, imports and storage withdrawal. This relaxes imports constraints and will result in decrease costs (Takácsné Tóth et al, 2022).

As a consequence, nationwide fuel markets at the moment are extra tightly related than they had been in 2022. Which means that adjustments in demand and provide in a single nation have better spillovers throughout the EU: greater consumption in a single nation will draw away fuel from neighbouring nations. Conversely, demand reductions will assist the EU within the combination, no matter the place they happen. This contrasts with the state of affairs in early 2022 when believable arguments may very well be made that lowering demand specifically areas didn’t assist jap European nations due to infrastructure constraints. In 2023, reductions in Spanish imports of LNG for energy technology will unlock world LNG availability, lack of which might in any other case put limits on European provide. The Netherlands is extra in a position to cut back European fuel costs considerably by boosting output from the Groningen fuel area. The Dutch would be capable of decrease their LNG imports, whereas more and more passing fuel by means of to Germany by way of pipelines that may now not be working at most capability. These examples spotlight that there continues to be a robust case for a ‘grand cut price’ to be struck between EU leaders, buying and selling off nationwide benefits for the advantage of the entire EU (McWilliams et al, 2022). Extra tightly related markets imply that the argument for joint LNG buying and agreements on industrial and family subsidies, and probably for a typical EU Vitality Fund (Tagliapietra et al, 2022), is even stronger than it was in 2022.

3 Will the EU be capable of proceed document LNG imports?

In 2022, European LNG imports elevated by 600 TWh or 60 p.c of whole 2021 imports, with 400 TWh of the extra volumes coming from the USA (Determine 4). This was largely facilitated by a redirection of world LNG flows attracted by Europe’s willingness to pay greater costs. Chinese language imports fell by 200 TWh. In the meantime world LNG exports grew by just below 5 p.c, by 230 TWh.

Determine 4: Adjustments to LNG imports for chosen areas and world export progress, 2022 versus 2021

Supply: Bruegel based mostly on Bloomberg.

In recent times, US LNG liquefaction capability was largely contracted by Asian importers. In 2022, the US was in a position to run it nearly at full capability (apart from sure services throughout the hurricane season). In 2022 a part of the LNG contracted within the US by Chinese language importers was redirected to Europe. This was potential due to growing provides of pipeline fuel from Russia to China (by way of the Energy of Siberia pipeline, flows by means of which elevated from 10 billion cubic metres in 2021 to fifteen bcm in 2022), slower Chinese language financial progress and gas switching (from fuel to coal or oil). Whether or not Europe can proceed to depend on these volumes relies on China’s fuel-switching skill and its financial progress. Following the ending of China’s COVID-19 restrictions, Chinese language progress is projected to rise above 5 p.c[5], nearly twice the 2022 fee.

In the end, costs are the arbitrator between markets. The EU was in a position to import a lot LNG as a result of it was prepared to pay excessive costs. Sure Asian markets are significantly delicate to world LNG costs. Excessive costs drive gas switching, probably releasing up LNG for Europe. US, Asian and European fuel markets are all delicate to temperature, and LNG is usually used to soak up demand variations in all three markets. If the winter just isn’t chilly in all three markets on the identical time, some LNG might be diverted from areas with delicate climate to areas experiencing a harsh winter.

Russia remains to be exporting 10 TWh to fifteen TWh per 30 days of LNG to the EU. This isn’t topic to sanctions however may very well be reduce by Russia. Future LNG liquefication initiatives in Russia are prone to be delayed due to sanctions on imports of technical gear.

Lastly, the worldwide LNG market will proceed to see regular progress in 2023, increasing by someplace between 200 TWh and 300 TWh (IEA, 2023). Determine 5 visualises the minimal and most imports by the primary areas and nations from 2019 to 2022, and compares that towards anticipated 2023 provide (2022 provide plus 2023 progress). With weak extra-EU demand, there can be adequate capability for the EU to extend its LNG imports much more, whereas with robust extra-EU demand, world LNG competitors and costs will stay tight all through 2023.

Determine 5: World LNG, vary of anticipated demand vs anticipated provide, 2023, TWh

Supply: Bruegel.

4 Demand reductions: how and by whom?

In 2022, the EU decreased fuel demand by roughly 500 TWh, or 12 p.c of the 2019-21 common (McWilliams and Zachmann, 2022b). Gasoline demand for energy technology fell 2 p.c, whereas business and family demand collectively fell by 15 p.c.

The social and financial penalties of decrease fuel consumption rely on how fuel demand is decreased. At one finish of the spectrum, hotter temperatures result in straightforward reductions; on the different, saving fuel by closing factories can result in extreme disruptions. Right here, we discover the scope for demand discount by means of numerous channels, to offer a way of how combination demand discount targets may very well be met within the least painful manner.

4.1  Buildings (households)

Gasoline consumed within the buildings sector is overwhelmingly for heating, and as such demand is each extremely seasonal and influenced by climate variations. Temperature deviations are a key parameter for figuring out the mandatory discount in comparison with a ‘regular winter’.

Utilizing temperature and each day demand knowledge from 2021, we estimated a relationship between temperature and fuel demand for a gaggle of nations protecting 80 p.c of EU fuel demand[6]. The calculations recommend that fuel demand from February to October 2023 can be 9 p.c (210 TWh) greater if the climate is as chilly because the coldest it has been during the last ten years, and 6 p.c (150 TWh) decrease if the climate is at heat because the warmest it has been during the last ten years. By adjusting baseline demand to this, we calculated that traditionally cold-weather demand must be decreased by 20 p.c and traditionally warm-weather demand by 7 p.c, assuming Russian flows proceed at at present’s ranges. That compares to 13 p.c with normal-weather demand. In case of no Russian flows, fuel demand must be decreased by 26 p.c (chilly climate) or 15 p.c (hotter climate).

Past responding to temperatures, households can cut back demand by means of a spread of behavioural and structural adjustments. Households reply each to greater costs and to authorities requests to save lots of power (although these requests from EU governments haven’t been forceful). In October and November 2022, family fuel demand was round 30 p.c under common throughout a spread of EU nations, exceeding reductions that might have been anticipated based mostly on climate alone.

Extra structurally, EU households are buying and putting in warmth pumps at a document tempo. Market traits recommend that the document variety of installations of two.2 million heating items in 2021[7] can be far surpassed in 2022. For instance, the Polish heat-pump market grew by 121 p.c year-on-year within the first three quarters of 2022. In 2022, warmth pump gross sales grew 53 p.c year-on-year in Germany. With conservative assumptions[8], we estimate that the deployment of warmth pumps alone will cut back EU fuel consumption in 2023 by 20 TWh, or 0.5 p.c of whole fuel consumption.

4.2  Energy sector

Issues with French nuclear manufacturing, and weak hydro output on the again of the very dry summer time in 2022, meant little to no fuel may very well be saved within the energy sector. With out these points, which noticed a discount in electrical energy technology of over 120 TWh in comparison with 2021, considerably extra fuel might have been saved within the energy sector in 2022.

In our baseline state of affairs, we assume French nuclear (which ramped up considerably at first of 2023) and Italian/Spanish hydro output get better to their five-year averages. ‘Weak energy’ describes a state of affairs wherein each French nuclear and Italian/Spanish hydro output stay at 2022 ranges. We convert the shortfall in electrical energy demand to fuel demand, assuming 50 p.c gas-fired energy effectivity and gas-peaker crops working 35 p.c of load hours to compensate for French nuclear, and 80 p.c for EU hydro (dominated by Spain and Italy).

If French nuclear doesn’t get better to its five-year common throughout February to September 2023, fuel demand can be elevated by 43 TWh, whereas if Spanish and Italian hydro output doesn’t get better, an additional 29 TWh of fuel can be consumed. In sum, one other interval of each weak nuclear and hydro would require a further 2 p.c of fuel demand to be decreased elsewhere.

Past these elements, ramping up the deployment of renewable power sources continues to be important. In 2022, the EU added a document quantity of renewable capability. This document seems to be set to be damaged once more in 2023.

4.3 Business

Industrial worth chains use fuel to provide ultimate merchandise. Gasoline is both a feedstock, and is chemically reworked, or an power supply – combusted to generate course of warmth. The implications for ultimate industrial manufacturing of business lowering its fuel demand rely on whether or not business can substitute fuel and proceed manufacturing, or whether or not fuel shortages indicate full closures of commercial crops and misplaced jobs.

A easy technique for monitoring the consequences is to trace industrial manufacturing. Total, fuel provide points to date haven’t affected industrial output on the combination nation stage (Determine 6), whereas sure nations and sectors have been affected.

Determine 6: Complete manufacturing industrial output by nation

Supply: Eurostat. Observe: index, 100 = 2015 common.

Small results on the combination stage aren’t shocking on condition that the 4 largest gas-consuming industrial classifications within the EU eat 74 p.c of commercial fuel equipped, whereas accounting for 26 p.c of producing jobs (Desk 3).

Desk 3: Primary gas-consuming sectors in collection of EU economies, financial indicators

Desk with 5 columns and 6 rows. Presently displaying rows 1 to six.

Supply: Eurostat. Observe: we compiled knowledge from Eurostat databases NAMA_10_A64_E (contemplating THS_PER) and NRG_D_INDQ_N for 2020. Information for Germany, France, Italy, Belgium and the Netherlands. Information for all nations just isn’t obtainable. Created with Datawrapper

But, in lots of circumstances, even inside these sectors the consequences are muted (Determine 7). There are a number of potential causes for this. Producers can substitute fuel for different fuels. For example, furnaces might be heated with mild heating oil as an alternative of fuel. The Worldwide Vitality Company estimates that, of the economic fuel demand discount in 2022, round half was achieved by gas switching (IEA, 2023). Excessive costs additionally encourage incremental energy-efficiency enhancements. The most important discount in output has been from the chemical substances sector, the place pure fuel is often used as a feedstock and is harder to substitute.

Determine 7: EU27 manufacturing output by sector

Supply: Eurostat. Observe: Index 100 = 2015

Substitution can also be potential by means of imports. World worth chains enable for the substitution of solely the first stage of a worth chain. European business ought to due to this fact have been in a position to shift towards importing gas-intensive major merchandise, displacing this fuel demand domestically while retaining the next and better value-added phases of manufacturing. Mertens and Müller (2022) discovered that if Germany had been to import merchandise with excessive fuel depth and import substitutability, business might cut back fuel demand by 26 p.c, whereas dropping solely 3 p.c of ultimate gross sales. From its crops within the US, BASF is ready to improve imports of ammonia, which might then be used to fabricate fertilisers in Europe[9]. Evaluation exhibits the flexibleness of the fertiliser business in responding on this method with out harming home fertiliser output (Clemens et al, 2022).

The info means that business is lowering fuel demand efficiently with out considerably impacting industrial output or employment. Three-quarters of German companies have stated they’ve reduce on pure fuel consumption, with solely minor impacts on manufacturing[10].

5 What might be accomplished? No-regret choices

An unusually heat winter, the bringing again on-line of French nuclear crops, weak Chinese language power demand, and the absence of detrimental surprises on world LNG markets and by way of European pipeline provides, have eased considerably the European fuel supply-demand stability. Nevertheless, whereas costs have receded from document highs, they continue to be three or 4 occasions greater than their typical vary over the previous decade. Europe’s fuel supply-demand stability will stay a tightrope stroll for the following two years. There’s very restricted redundancy remaining within the system to compensate for any non-Russian provide threat that may happen. Policymakers should proceed to take robust and decisive motion. We define a set of precedence areas.

First, deliberate FSRUs needs to be put in and start operations based on promised timelines. Second, imported fuel – largely LNG – should be secured. Questions come up in regards to the quantity of long-term contracts that European corporations ought to signal for LNG, and the position for governments in facilitating such offers. New long-term contracts don’t essentially undermine local weather targets. In 2021, EU nations had long-term contracts with Russia with a nominal capability of 100 bcm/annum, extending to 2030 (ACER, 2022). Most of those at the moment are redundant. As fuel demand is ready to lower extra shortly than anticipated within the EU, not all this capability needs to be changed with new long-term contracts, however restricted volumes could also be crucial. Any contracts should respect the EU’s local weather targets and be concluded earlier than 2049.

Our state of affairs evaluation exhibits that no matter Russian flows, it’s important for the EU to proceed lowering demand till October 2023. Underneath regular climate situations, the required discount ranges from 14 p.c to twenty p.c, relying on Russian pipeline imports. At a minimal, the EU ought to agree to increase its 15 p.c demand discount goal from March till October 2023. Moreover, efforts ought to proceed to make sure that demand discount is structural and comes with minimal financial harm. Speedy renewables deployment, electrification of heating and power effectivity can all be accelerated to scale back the demand-reduction burden, which should be shouldered by industrial curtailment. Authorities campaigns ought to proceed to tell residents on the significance of saving power, and the way to take action with as little influence as potential on family welfare.

Subsidies for fuel consumption will proceed to trigger tensions whereas absorbing substantial fiscal sources. Enhancing the place of particular person client teams available on the market will stay a zero-sum sport so long as provide is tight. Offering sure customers in a single European space or sector entry to cheaper fuel implies making fuel dearer for all different customers. Governments ought to section out subsidies in a coordinated method, changed by agreements at EU stage if crucial[11].

One other problem in a extra relaxed market is tips on how to transition from 2022’s emergency regime of storage filling again to a extra environment friendly market-based strategy. This may require some European coordination, as in any other case nations that phase-out authorities interventions too shortly may wrestle to draw fuel for storage. Joint fuel buying by way of the EU’s Vitality Platform, with its requirement that nations use it to fill 15 p.c of their storage obligations (13.5 bcm in whole) is a step in the precise route[12]. As fuel storage seems to be prone to finish winter 2022-23 comparatively full, the platform may find yourself being accountable for a considerable share (over 50 p.c) of the fuel pumped into storage in summer time 2023.

A associated concern is tips on how to cope with the prices of emergency storage filling and infrastructure. Gasoline corporations or giant customers could now sit on fuel that they procured at a lot greater costs than the present market value, and gross sales or use of that fuel will entail substantial losses.

Lastly, for all of the evaluation of the EU’s success in transitioning away from Russian fuel, there are nonetheless no EU-level sanctions in place on fuel provides from Russia. As a substitute, Russia reduce flows to the EU. There stays a threat that Russia, after witnessing its broad embargo fail to have the specified impact, will attempt to selectively improve fuel flows to some nations in return for political favours. Many long-term contracts are nonetheless in place to facilitate this. Vitality weaponisation can work each methods: not solely reducing demand, but additionally sending low-cost power to pals. Such a state of affairs might sound far-fetched, but it surely stays legally potential. Regardless of lately falling fuel costs, the EU’s fuel state of affairs stays tight and the state of affairs might shortly worsen, relying on occasions. Gasoline provides by way of the Nord Stream pipeline (destroyed; sabotaged in September 2022) and the Yamal pipeline (extremely unlikely to be permitted by Poland) appear unfeasible, however there may be potential for will increase by way of Ukraine transit and Turkstream. The EU thus must implement shortly a joint coverage device, corresponding to sanctions or joint buying, to defuse this threat, and anticipate any future Russian transfer.