EU Energy Woes Continue: Faced with Disruption to Gas Flows from Russia this Winter, EU Energy Ministers Agree to Reduce Consumption

Concerns over throttling of Russian gas has led the EU to demand reductions in usage. As gas-dependant Germany teeters on recession, there are also fears repercussions will be felt across the North Sea, with UK gas prices set to surge even higher

Published

August 3, 2022

Lauren Foye

Head of Reports

Trending

EU-27 agree to demand reductions

Following weeks of resistance from EU members, a new deal has been agreed which will see countries reduce their gas consumption over the colder months, as the EU attempts to shore up energy supplies over the coming winter. Earlier in July we saw Brussels table it’s plan for EU countries to reduce their gas consumption by 15% between August 2022 and March 2023. however, the plan faced backlash from many EU countries concerned by proposals which would allow the European Commission to change the voluntary 15% target into one that would be mandatory without consultation with the EU-27[i]. After a redraft of the text by the Czech Presidency of the EU Council, the new proposal has been met with widespread support- 26 of the 27 EU countries have voted it through, with only Hungary opposing. According to Edie.net “Under the approved text, the Commission would still propose the highest level of alert, which triggers the mandatory target, but EU countries would then vote to approve it. Alternatively, at least five countries that have declared national alerts can request the European Commission to present the EU-wide alert. Other changes include exemptions from the mandatory target for island countries, like Ireland and Malta, which are not connected to the EU gas grid. Exemptions also cover EU countries whose electricity grids are synchronised with countries outside of the EU and may need to fuel their electricity production with gas in case of an emergency desynchronisation.”[ii]

The agreement came just a day after Russian state-owned gas supplier Gazprom announced it would further reduce gas flows to Germany. Flows from the Nord Stream 1 pipeline, which provides more than a third of Russian gas to the EU, were cut to 20% of capacity, from 40%[iii], with Gazprom blaming maintenance issues. According to the Daily Telegraph, EU officials are greatly concerned by the unpredictability around Russian supplies. Kadri Simon, the EU’s energy commissioner said Moscow’s bid to squeeze Europe had brought “consensus around the table that we need to get ready for the worst”[iv]. Józef Sikela, the Czech minister for industry and trade, said: “The winter is coming and we don’t know how cold it will be, but what we know for sure is that Putin will continue to play his dirty games.”[v]

In light of this, high storage levels of gas will be essential to get through winter 2022 and avoid difficulties filling gas storage for winter 2023. Gas storage levels have now hit 66%, according to the European Commission. But some EU countries still have a lot of work to do to reach the EU’s target of filling its gas storage to at least 80%, said Sikela. The Czech Republic met the target yesterday, he added[vi].

Germany fearing upcoming winter, as gas dependence take its toll

With concerns mounting that Russia may cut gas to Europe this winter, Germany, a country which is particularly reliant on Russian fuel supplies- sourcing over 55% of it’s gas from the nation, is seeing increased fears around energy shortages this winter.

Source: BBC

According to the BBC, German gas stores are just 66% full at present, yet experts say that level needs to rise to 80-90% by the start of the so-called heating season.[vii] When looking at reducing gas consumption, the German government announced a new energy security package on 21st July, which included mandatory gas savings measures for companies, as well as stricter regulations for the level of gas storage tanks (a suggestion there will be an increase in gas storage targets of 5%). Until now, gas consumption in the country has reportedly only declined by between 5-7% compared with last year, much short of the 15% reduction that the European Commission aims for.

Robert Habeck, Germany’s vice-chancellor has said:

“We need staying power. Winter is yet to come. Even the second winter will still pose challenges for this country and Europe, according to all the scenarios we are calculating,”[viii]

To achieve the necessary consumption cuts, Germany is set to introduce several measures, ranging from, the reopening of lignite-fuelled power plants (1.9 Gigawatts of capacity), gas-cutting measures in public buildings, and mandatory gas saving rules for companies. However, there are growing economic concerns, the Financial Times reports that the IMF has cautioned that there was “a high risk that Russian gas supplies to Germany suddenly stop”, warning that Berlin’s struggle to replace all the missing gas would force it to ration supplies to heavy industrial users. The IMF also estimated this disruption would wipe out as much as 3% of German gross domestic product and drag the economy into recession next year[ix].

Experts warn UK’s comparatively lower gas prices could come to an end

Up until now the UK, whilst faced with much higher gas prices than we saw a prior to the war in Ukraine, has not seen costs hit the levels reached on the continent. Historically, the UK imported just 4% of its gas from Russia, and a lack of storage combined with many other factors including stable North Sea output during the warm months of low demand has allowed the UK to help its neighbours on the continent by exporting gas at record volumes[x]. Yet, the increasing fears that Russia may switch off supplies of natural gas to Europe entirely, have pushed UK wholesale prices to levels last seen in the early days of the war in Ukraine. Even so, when UK and European costs are compared, it shows the UK wholesale price was about 30% lower than its continental counterpart.

Data given to Sky News shows that the contract for next-month UK delivery rose by more than 12% a day after Gazprom announced the restrictions on supplies from Nord Stream 1. Tom Marzec-Manser, head of gas analytics at commodities specialist ICIS said:

"British gas prices remain at a discount with those on the continent… as Britain is oversupplied with LNG (liquified natural gas) arrivals and cannot export surplus volumes to the European mainland at quick enough rates. Britain only has a small amount of gas storage capacity, too, so much of the arriving surplus cannot be stored in reserve for winter."

However, he warned that the lack of storage meant there would be a price consequence:

"ICIS data show the gas market expect the discount held by British wholesale prices will evaporate as winter begins and demand rises."[xi]

There are already signs of rising prices with the UK wholesale price for October delivery increasing by 30% to 490p on Wednesday 27^th July, despite being far less exposed to the supply crunch than the UK’s neighbours on the continent.