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The European Union Demand Response to High Natural Gas Prices

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By Ben McWilliams, a Analysis Analyst within the subject of local weather and vitality coverage, and Georg Zachman, a Senior Fellow at Bruegel, the place he has labored since 2009 on vitality and local weather coverage. Originally published at Bruegel.

European gasoline markets are in turmoil. Provides from Russia within the first quarter of 2022 (289 terawatt hours) had been 30% decrease than the identical interval of 2021 (408 TWh). Policymakers in each Russia and the European Union are discussing the opportunity of an entire cease to Russian gasoline flows to the EU. Markets are extraordinarily nervous, leading to a six-fold gasoline value enhance within the first quarter of 2022 in comparison with one 12 months earlier (Determine 1).

Excessive EU gasoline costs (and benign international market situations) noticed the EU import 305 TWh of liquefied pure gasoline (LNG) within the first quarter of 2022, in comparison with 170 TWh a 12 months beforehand (see tracker). However excessive costs haven’t solely lured new gasoline provide into Europe. They’ve additionally inspired customers to cut back gasoline demand considerably. We estimate a 7% drop in Q1 2022 in comparison with Q1 2021 (1402 TWh versus 1507 TWh; see Annex 1). This may solely partly be defined by milder climate.

Anecdotal evidence suggests excessive costs have led industrial firms to cut back pure gasoline consumption, however it isn’t clear by how a lot. Nationwide and sectoral pure gasoline demand knowledge shouldn’t be made out there in a well timed method, and we are able to provide solely partial proof (see beneath) suggesting EU industrial gasoline demand has fallen by round a fifth.

Fuel-to-coal switching within the EU energy sector has not contributed to diminished demand as gas-fired technology was really up by 4TWh in Q1 2022 in comparison with 2021, due to decrease nuclear and hydro manufacturing (Determine 2).

This suggests that family and different gasoline demand (together with providers and non-individual family warmth technology) in Q1 2022 was about 5% decrease than one 12 months beforehand (Determine 3). If the objective is to exchange Russian gasoline solely, this can be a promising begin, as Russia invaded Ukraine close to the tip of the primary quarter of 2022 and thus far, the EU and its members haven’t launched sturdy energy-saving insurance policies. Quite the opposite, nationwide insurance policies in response to rising vitality costs have focussed on cutting taxes, boosting demand. We confirmed beforehand that with stronger insurance policies, savings of roughly 20% of total demand may very well be achieved.

Industrial Demand Estimate

Our industrial discount estimate relies on knowledge from the European Community of Transmission System Operators for Fuel (ENTSOG) (Determine 4, Annex 2). This reveals in Q1 2022, weekly industrial demand for pure gasoline in Italy was 0.25TWh/week beneath 2021 ranges; in Belgium, it was 0.3 TWh/week decrease; in Luxembourg 0.1 TWh/week decrease; and within the Netherlands 1.3 TWh/week decrease. In whole, these demand reductions counsel a 20% drop in comparison with 2021 ranges. As industrial demand contains 25% of EU whole demand, a 20% annual discount in business demand throughout all international locations would lead to a 5% discount in whole gasoline demand. Knowledge out there for the UK present a weekly drop of 0.35 TWh/week.

A shift in commerce flows additional highlights declining demand from EU business for pure gasoline over the previous few months. One of many elements in lowering EU industrial gasoline consumption is that energy-intensive merchandise are exported much less and/or imported extra when pure gasoline and electrical energy costs are excessive (Determine 5).

Pure gasoline is the important thing enter for manufacturing of chemical substances and ammonia. In December 2021, EU ammonia imports amounted to €250 million in comparison with €96 million in June 2021 (Determine 3). A few of this impact is pushed by costs however not all. We estimate a 27% enhance in ammonia imports in December in comparison with June. The manufacturing of every tonne of ammonia requires 10 MWh of pure gasoline, and subsequently the elevated ammonia imports quantity, in impact, to a rise in embedded pure gasoline imports of 0.5 TWh/month (Desk 1). Imports of chemical substances excluding ammonia elevated by about €400 million from June to December 2021, implying additional embedded pure gasoline imports.

Imports of aluminium, for which electrical energy is a key enter to manufacturing, have additionally responded to excessive energy costs. In December 2021, EU aluminium imports had been price €2 billion, whereas in December 2020 they had been €1.2 billion. Accounting for value results, we estimate a 35% enhance in bodily imports. For every tonne of aluminium, the electrical energy enter is 15.5 MWh, implying oblique imports of three.6 TWh/month of electrical energy. If produced utilizing solely gasoline, this might signify 7 TWh/month of pure gasoline.

Iron and metal imports grew all through the second half of 2021, and had been roughly €2 billion greater in October in comparison with June, however in November they dropped off.

As a aspect be aware – however importantly – our triangulation of knowledge sources and sectoral gasoline consumption has underlined a major knowledge drawback. If advanced demand-reduction insurance policies should be organised virtually in real-time throughout a disaster, extra disaggregated and well timed gasoline consumption knowledge is required, particularly on households and business.

Advisable quotation:

McWilliams, B. and G. Zachmann (2022) ‘The European Union demand response to excessive pure gasoline costs’, Bruegel Weblog, 8 April

Annex 1

To calculate implied demand, we in contrast the change in storage on the primary of every month, accounting for imports supplied by the Bruegel import tracker and assuming that manufacturing volumes had been the identical as they had been in 2021. Making use of the methodology retrospectively reveals that it’s a dependable predictor of what Eurostat demand reviews are more likely to be.

Annex 2

ENTSOG gives knowledge on gasoline flows to industrial customers for some international locations: Italy, Belgium, Luxembourg, the Netherlands and the UK. The flows are described as ‘Italian Industrial Shoppers’, ‘Belgian Industrial Purchasers’, ‘Industrial Purchasers (LU)’, ‘Dutch Industrial Shoppers’ and ‘UK Industrial Offtakes’.

Excluding the UK, industrial demand within the 4 EU international locations in 2020 added as much as 400 TWh. Eurostat reviews remaining consumption (vitality and non-energy) from these 4 international locations of 270 TWh in 2020, implying that some further demand is included within the ENTSOG knowledge past a typical description of business, eg gasoline flowing to massive mixed warmth and energy crops. We aren’t capable of entry exact descriptions of what the information consists of.

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