21.03.23 Review

The Gas Cold War: Europe has overcome its gas dependency on Russia through fortune rather than designи

Europe has successfully survived its first winter without Russian gas. There was no catastrophic collapse, but some businesses were forced to either reduce their activity or stop production altogether. Additionally, many low-income consumers experienced what is known as ‘fuel poverty.’ According to experts from the International Energy Agency (IEA), the continent’s reduction in gas consumption was influenced by two volatile factors: the uncharacteristically warm winter of 2022 and Europe’s partial ability to substitute gas with alternative energy sources. However, the IEA cautions that Europe should not count on another warm winter this year, and alternative fuels such as liquefied natural gas and coal may become increasingly costly. Therefore, in the long term, Europe needs to focus on improving its energy efficiency and expanding its use of alternative energy sources. In the short term, it will also need to conserve more energy and swiftly restore its production of hydro and nuclear power.

Europe successfully got through the winter of 2022 without relying on the natural gas supplied by Nord Stream. The main reason for this achievement was its ability to successfully reduce its natural gas consumption by 13%, or by 55 billion cubic metres. Over the year, Russia's share of the European gas market share dropped from 40% to 10%, although the price of imports increased significantly compared to figures from 2021. In total, imports cost nearly 400 billion euros, which is a threefold increase on the previous year. Looking ahead to next winter, Europe needs to develop a strategy so as to avoid falling back on its reliance on the Nord Stream pipeline. Experts from the International Energy Agency (IEA) have assessed the factors that contributed to Europe’s reduction in energy consumption in 2022.

Despite 2022 being a record year for the production of energy from renewable sources (particularly solar and wind power) the energy industry, and more specifically, electricity production, is the only sector of the European economy that has seen an increase in gas consumption. Renewable energy sources helped Europeans to save 11 billion cubic metres of gas. To add to this, overall consumption fell by 3% year-on-year, or by 14 billion cubic metres, thanks to an unusually warm winter. Had it not been for the high temperatures in the summer in certain regions, which increased the electricity consumed for air conditioning, these savings would have been even greater. Moreover, 2022 saw a rise in coal consumption, while, by contrast, the energy produced by hydro and nuclear power plants decreased significantly. This decline was so substantial that it required an additional 34 billion cubic metres of gas to compensate for this loss in energy production. It is, however, worth noting that European countries already had plans in place to gradually shut down their nuclear power plants before the start of the energy crisis.

In 2022, the European public sector (which includes residential, public, and commercial buildings) consumed 20% less gas than it did in 2021, the equivalent of 28 billion cubic metres. This can partly be attributed to warm weather, which led to the conservation of 18 billion cubic metres. However, measures to reduce consumption were also implemented, leading to a further 7 billion cubic metres in savings. The International Energy Agency (IEA) cautions, however, that the aforementioned savings were often the result of the forced measure of so-called ‘fuel poverty’. An additional 3 billion cubic metres of gas were saved through the replacement of old heating equipment. 

In 2022, gas consumption in the European industrial sector decreased by 20%, or 25 billion cubic metres. Approximately half of this reduction occurred as enterprises cut their output as a result of high prices, which made production unprofitable. Fertiliser manufacturers were hit particularly hard, accounting for half of the overall decrease in consumption. Despite this, the total volume of production declined by just 8%. Enterprises achieved this reduction in consumption by importing materials and components that would have previously required significant amounts of gas to be produced. Another 7 billion cubic metres were saved through the use of alternative energy sources.

Estimated factors of change in demand for natural gas in energy, construction and industry in the European Union, 2022 compared to 2021, billion cubic metres

In general, the economic cost of surviving the winter without Russian gas was significant, but not catastrophic, and we are yet to observe any major political consequences. However, according to the IEA's analysis, last year’s reduction in gas consumption occurred largely as a result of two unpredictable factors: warmer weather and the use of alternative fuels. If the summer of 2023 turns out to be exceptionally hot and requires additional electricity for air conditioning, it will be much more difficult for the continent to do without Russian gas in the event of a cold winter. Energy shortages may drive up the price of alternative energy sources, and coal may become extremely expensive. Moreover, if China's economic activity rebounds, it may exacerbate the situation as China will likely want to acquire more liquefied natural gas than it did  last winter (when their economy was still under quarantine).

In sum, while Europe may have won the first bout of the gas cold war, this victory may largely be attributed to luck. According to the IEA experts, the continent will likely need to make some tough decisions in the future. They believe that more work needs to be done to improve energy efficiency and increase the use of alternative energy sources. These two measures will then become the ‘cornerstones of European energy policy’. Until these strategies are implemented, Europe will have to continue to conserve its energy use. In fact, the think tank Bruegel warns that even greater energy savings may be necessary this year.