Box I.2.1: European gas market: recent developments and outlook
Security of supply and affordability of natural gas are crucial for the EU economy. Gas
households and industry (both 32% of final energy consumption in 2020). Natural gas is also an
important driver of electricity prices across the EU, as it acts as the marginal production source of
power. Whilst to meet the decarbonisation targets the EU aims to shift to low-carbon gases and reduce
its total gas consumption, natural gas will continue to play an important role in the energy mix in the
coming decade and beyond. For these reasons, the security of supply and affordability of gas remains
a key priority for the EU. Last winter, the EU was able to weather the energy crisis thanks to an effective
diversification of energy supply and a sharp fall in gas consumption, as well as by taking measures to
support the functioning and transparency of price formation in gas markets. The EU is therefore now
in a much better position in terms of its gas supply ahead of the next winter.
The EU diversified its energy supply and tackled bottlenecks in the delivery of LNG gas.
While total gas imports from Russia decreased by 80 billion cubic meters (bcm), and thereby almost
halved in 2022 year-on-year, the EU stepped up its cooperation with other countries to boost gas
imports. In particular, LNG imports from the US more than doubled, to around 50 bcm in 2022. New
floating LNG terminals were made operational in Finland, Germany and the Netherlands. Furthermore,
a record number of more than 56 Giga Watt (GW) wind and solar capacity was installed in the EU in
2022, potentially leading to a reduction of up to 11 bcm of natural gas demand in the power sector.
Gas demand reduction also played a fundamental role. Between August 2022 and March 2023,
households and corporations reduced gas consumption by 18% (or 53 bcm), compared to the 2017-
21 average. This exceeded the objective of the emergency Council Regulation (EU) 2022/1369 setting
a voluntary gas demand reduction target of 15% (or 45 bcm) between August 2022 and March 2023.
The exceptionally high gas prices have been a decisive factor of demand restraint. Wholesale
compared to pre-pandemic levels of around 10- These very high prices reflected the
synchronised surge in demand from Member States in order to refill depleted gas storages ahead of
the winter season, amid fears of shortages in the market due to the unprecedented reduction in Russian
supplies and limited physical capacity to import LNG into the EU.
(1)
The available empirical analysis
suggests that gas demand is relatively inelastic to prices.
(2)
Historically, however, fluctuations in prices
-linear in the
presence of very large price increases, like the ones experienced in 2022. Therefore, part of the gas
demand reduction can be attributed to the price signal.
Industry (excl. power generation) contributed about half of the reduction in gas
consumption, partly through output cuts
(3)
. In the summer months, the overall gas demand
reduction was mostly driven by industry, as manufacturing companies were first to reduce their gas
consumption. Gas demand reductions can be driven by savings (behavioural changes and energy
efficiency), fuel-switching to carbon-intensive and/or clean fuels, and production curtailment. Over the
period 2017-22, total manufacturing output was at its highest level in 2022, showing that high energy
prices have not come at the cost of lower overall production. Still, the output of some energy-intensive
sectors, such as basic metals, chemicals, non-metallic minerals and paper products started to decrease
in the second half of 2022. As gas prices are expected to stabilise at a level significantly below the
peak prices of 2022, one can expect gas demand from energy-intensive industries that reduced
(1)
The analysis builds on European Commission (2023).
gas. Staff Working Document SWD(2023) 63 final.
(2)
Labandeira, X., J. M. Labeaga, and X. López-Otero (2017). A meta-analysis on the price elasticity of energy
demand. Energy policy, 102, 549-568.
(3)
Eurostat currently only reports the sectoral detail in terms of gas consumption annually, with a delay of about
one year, which makes a detailed breakdown between sectors challenging. However, to this end, the JRC
analysed gas consumption in seven Member States between Aug-Dec 2022. The reported figure is therefore
based on estimates by the Commission. The figure is derived from an extrapolation of BE, DE, ES, FR, IT, NL,
and RO, representing 78% of consumed gas in the EU. The International Energy Agency and Bruegel derived
similar conclusions.