Towards the 3rd winter since the war started: What is predicted for energy prices in Europe?!
Benchmark European natural gas prices are rising, signaling uncertainty about sufficient supplies and rising demand as Europe heads into its third winter since Russia invaded Ukraine. However, the necessary natural gas reserves appear to have been supplied and secured for the time being.
However, increased demand for heating and electricity due to lower temperatures has already tested capacities in the first weeks of November. Recent low temperatures boosted gas storage withdrawals in Europe in the first two weeks of November, benefiting close to 4% (4.29 bcm) of full gas storage capacity in Europe, according to data from Gas Infrastructure Europe.
Geopolitical tensions, fueled by the US and Russia, are a major risk factor for energy prices on the continent. Natural gas prices were at a one-year high in Thursday's trading. Uncertainty in Europe grew further after Russia's Gazprom halted the flow of natural gas to Austria on November 16, due to a dispute between the countries.
Meanwhile, a major contract allowing Russian gas to transit through Ukraine is set to expire on January 1, 2025, risking half of Russia's remaining pipeline gas exports to the EU being cut from the energy mix at peak demand.
The lack of Russian pipeline gas supply "could cause a return to coal and oil in the power generation mix, (...) which could have a wider impact on energy markets," said the President of the College of London Conference on Energy Economics. Shrinking Russian gas imports coupled with increased energy demand would trigger further LNG imports into Europe, which could also raise energy prices in Europe in general.
Looking at the trends throughout the year, the demand for gas is decreasing. It was 350 bcm in 2022 and shrank to 295 bcm last year. According to the Institute for Energy Economics and Financial Analysis, gas consumption in the EU fell by 3.2% in the first six months of 2024, compared to a year earlier. This decline appears to be the result of increased renewable energy capacity and improved energy efficiency measures.
However, according to the president of the London College of Energy Economics, energy crises and rising electricity prices cannot be avoided by simply relying on renewables. "Some countries in Europe such as Austria, Norway and Iceland are well positioned to use hydropower without a significant increase in energy prices. However, I do not think that Europe can fully rely on renewables."
An improvement in energy efficiency and diversification of the energy mix can serve as a remedy. One of the main factors that saved Europe during its energy crisis in 2021 and 2022 was the significant improvement in energy efficiency, especially in Germany, the reuse of coal as an energy source and the reactivation of many nuclear plants. In France, nuclear power accounted for 22.8% of EU energy production in 2023.
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