The Gas Market After the Storm
Almost three years after the invasion of Ukraine, the energy market has yet to find some stability. The European Union reacted in a united way to Russian aggression, ending a a decades-long path marked by a very high dependence (45%) from natural gas imports from Russia at stable and convenient prices, underpinning the energy systems of many European countries, including two of its manufacturing giants, Germany and Italy. in a matter of days, natural gas, once synonymous with secure and cheap supplies, became a geopolitical liability that pushed the Union to radically change course, with the aim of freeing itself from Russian dependence.
On the supply side, imports from Russia have dramatically decreased since 2022, going from 150 billion cubic meters in 2021 to 78.8 billion in 2022, and 43 billion in 2023 (data for 2024 are not yet available). This very sharp contraction was offset by a major increase in supplies from Norway and imports of Liquefied Natural Gas (LNG) from the United States and other non-European countries.
On the demand side, Europe’s market remained substantially unchanged in 2022 compared to 2021 at 334 billion cubic meters, and significantly fell in 2023 to 290 billion cubic meters, both due to the voluntary reduction tools introduced by the European Commission and adopted by many member countries, and the impact of higher energy prices on users’ consumption.
The inevitable tensions of such an abrupt and radical change in the gas market were translated into price hikes: after a decade of stability, prices began to grow starting in 2021 and then soared to levels never reached before, peaking in the summer of 2022, to subsequently settle at levels that were still 50% higher than pre-war values. Electricity prices experienced a similar dynamic, driven by rising costs at gas-fired power plants which om turn set the price for the whole wholesale electricity market during the day.
If the Commission's policies have therefore guaranteed security of supplies, through the containment of demand and a radical change in supply flows, although the abruptness of the process led to a marked increase in the cost of energy, many problems still remain open on the agenda.
On the supply side, the void left by the abandonment of Russian gas pipelines could only be filled by LNG supplies carried by tank ships. This requires new infrastructure, regasification terminals, and an improvement in intra-European connections along the new import routes.
The price of natural gas overduly affected by speculative fluctuations om wholesale markets, first and foremost the Dutch TTF, where transactions lead to speculative bubbles and unjustified increases compared to actual market imbalances between supply and demand. Furthermore, although the quantity of gas traded on these markets is much lower than natural gas purchased through long-term contracts, the fact that these supplies are indexed with respect to the TTF transmits the fluctuations in spot prices to the whole market. One challenge is therefore to loosen this link and reduce the speculative component of gas pricing in spot markets.
Another challenge lies in reforming the functioning of the wholesale electricity market, in order to mitigate the correlation between the price of gas and the cost of electricity, a path that the European Union has undertaken by advancing proposals last year.
A further challenge concerns reconciling the needs of security in supply with decarbonization policies, for which the European Union boasts global primacy. The development of renewable energy entails a reduction in gas consumption to produce electricity, and higher energy efficiency of new buildings reduces the consumption of gas for heating, but the path still appears long, and the necessary investments huge to decrease Europe’s reliance on imported gas.