By Ben McWilliams, a Research Analyst in the field of climate and energy policy, and Georg Zachman, a Senior Fellow at Bruegel, where he has worked since 2009 on energy and climate policy. Originally published at Bruegel.
European gas markets are in turmoil. Supplies from Russia in the first quarter of 2022 (289 terawatt hours) were 30% lower than the same period of 2021 (408 TWh). Policymakers in both Russia and the European Union are discussing the possibility of a complete stop to Russian gas flows to the EU. Markets are extremely nervous, resulting in a six-fold gas price increase in the first quarter of 2022 compared to one year earlier (Figure 1).
High EU gas prices (and benign global market conditions) saw the EU import 305 TWh of liquefied natural gas (LNG) in the first quarter of 2022, compared to 170 TWh a year previously (see tracker). But high prices have not only lured new gas supply into Europe. They have also encouraged consumers to reduce gas demand significantly. We estimate a 7% drop in Q1 2022 compared to Q1 2021 (1402 TWh versus 1507 TWh; see Annex 1). This can only partly be explained by milder weather.
Anecdotal evidence suggests high prices have led industrial companies to reduce natural gas consumption, but it is not clear by how much. National and sectoral natural gas demand data is not made available in a timely manner, and we can offer only partial evidence (see below) suggesting EU industrial gas demand has fallen by around a fifth.
Gas-to-coal switching in the EU power sector has not contributed to reduced demand as gas-fired generation was actually up by 4TWh in Q1 2022 compared to 2021, because of lower nuclear and hydro production (Figure 2).
This implies that household and other gas demand (including services and non-individual household heat generation) in Q1 2022 was about 5% lower than one year previously (Figure 3). If the goal is to replace Russian gas entirely, this is a promising start, as Russia invaded Ukraine near the end of the first quarter of 2022 and so far, the EU and its members have not introduced strong energy-saving policies. On the contrary, national policies in response to rising energy prices have focussed on cutting taxes, boosting demand. We showed previously that with stronger policies, savings of roughly 20% of total demand could be achieved.
Industrial Demand Estimate
Our industrial reduction estimate is based on data from the European Network of Transmission System Operators for Gas (ENTSOG) (Figure 4, Annex 2). This shows in Q1 2022, weekly industrial demand for natural gas in Italy was 0.25TWh/week below 2021 levels; in Belgium, it was 0.3 TWh/week lower; in Luxembourg 0.1 TWh/week lower; and in the Netherlands 1.3 TWh/week lower. In total, these demand reductions suggest a 20% drop compared to 2021 levels. As industrial demand comprises 25% of EU total demand, a 20% annual reduction in industry demand across all countries would result in a 5% reduction in total gas demand. Data available for the UK show a weekly drop of 0.35 TWh/week.
A shift in trade flows further highlights declining demand from EU industry for natural gas over the past few months. One of the factors in decreasing EU industrial gas consumption is that energy-intensive products are exported less and/or imported more when natural gas and electricity prices are high (Figure 5).
Natural gas is the key input for production of chemicals and ammonia. In December 2021, EU ammonia imports amounted to €250 million compared to €96 million in June 2021 (Figure 3). Some of this effect is driven by prices but not all. We estimate a 27% increase in ammonia imports in December compared to June. The production of each tonne of ammonia requires 10 MWh of natural gas, and therefore the increased ammonia imports amount, in effect, to an increase in embedded natural gas imports of 0.5 TWh/month (Table 1). Imports of chemicals excluding ammonia increased by about €400 million from June to December 2021, implying further embedded natural gas imports.
Imports of aluminium, for which electricity is a key input to production, have also responded to high power prices. In December 2021, EU aluminium imports were worth €2 billion, while in December 2020 they were €1.2 billion. Accounting for price effects, we estimate a 35% increase in physical imports. For each tonne of aluminium, the electricity input is 15.5 MWh, implying indirect imports of 3.6 TWh/month of electricity. If produced using only gas, this would represent 7 TWh/month of natural gas.
Iron and steel imports grew throughout the second half of 2021, and were approximately €2 billion higher in October compared to June, but in November they dropped off.
As a side note – but importantly – our triangulation of data sources and sectoral gas consumption has underlined a significant data problem. If complex demand-reduction policies must be organised almost in real-time during a crisis, more disaggregated and timely gas consumption data is needed, especially on households and industry.
Recommended citation:
McWilliams, B. and G. Zachmann (2022) ‘The European Union demand response to high natural gas prices’, Bruegel Blog, 8 April
Annex 1
To calculate implied demand, we compared the change in storage on the first of each month, accounting for imports provided by the Bruegel import tracker and assuming that production volumes were the same as they were in 2021. Applying the methodology retrospectively shows that it is a reliable predictor of what Eurostat demand reports are likely to be.
Annex 2
ENTSOG provides data on gas flows to industrial consumers for some countries: Italy, Belgium, Luxembourg, the Netherlands and the United Kingdom. The flows are described as ‘Italian Industrial Consumers’, ‘Belgian Industrial Clients’, ‘Industrial Clients (LU)’, ‘Dutch Industrial Consumers’ and ‘UK Industrial Offtakes’.
Excluding the UK, industrial demand in the four EU countries in 2020 added up to 400 TWh. Eurostat reports final consumption (energy and non-energy) from these four countries of 270 TWh in 2020, implying that some extra demand is included in the ENTSOG data beyond a typical description of industry, eg gas flowing to large combined heat and power plants. We are not able to access precise descriptions of what the data includes.
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‘Gas-to-coal switching in the EU power sector has not contributed to reduced demand as gas-fired generation was actually up by 4TWh in Q1 2022 compared to 2021, because of lower nuclear and hydro production ‘
Yeah, they may want to rethink that. About three days ago the EU said that from August, there will be no more coal imported coal from Russia which means that any coal that they will be using will have to be shipped from a coupla thousand kilometers away from other countries which will add to costs – and pollution. I have heard that the EU is the first government on history based on a bureaucracy and I guess that we are seeing how that is working out-
https://www.reuters.com/business/energy/eu-countries-hunt-global-coal-stocks-russian-ban-looms-2022-04-06/
And it’s very likely to be coal said other countries bought from RU. Same coal, more middlemen, more transport costs, higher prices. “Smooth move, Jackson’, as we used to say. / ;)
adding: the US and Koch Industries (KI) have lots of coal mines; KI could do very well out of this. / ;)
Yesterday I was imagining how this would play out in the international coal market-
EU to Russia: ‘We are banning all your coal coming to the EU.’
Russia to India: ‘Hey India – would you like to buy some discounted coal?’
India to Russia: ‘Sure. We can always use some.’
EU to World: ‘Hey. Anybody got some coal? We’re all out.’
India to EU: ‘Why yes. But it’s gunna cost you.’
The Pepe Escobar article linked yesterday is a perfect description of the current EU strategy.
“Sit back and watch Europe commit suicide”
Michael Hudson appears to be correct – the real US strategy is to destroy the EU. Is there anyone in our famously “free press” or in Washington who has enough intelligence to think through the implications?
Destroying the EU, coupled with the ROW moving away from the US dollar, will eventually destroy the West.
Everything is going according to plan? WTF! This reminds me of a quote about societal bankruptcy, slowly at first then suddenly it’s over.
Perhaps this explains Brexit. Their ruling cult expected the EU to come apart soon anyway.
Actually it was our ruling cult or self styled ‘elite’ who fought us the people with every dirty trick in the book not to leave the EU. But the same people are still in charge and are still happiest following the herd (just look at there pathetic group photoshoots at say the G7 or 20) so expect us to get dragged along with the EU into poverty.
The UK is doing its best to drag itself into poverty, without any help from the EU. Still when you have a ruling class that has never done any real work in its history, what can you expect.
I’ve decommissioned and demolished 4 large coal plants. Unless those units were mothballed very carefully, it’s not easy to bring them back up. It used to be that when they were decommissioned there would be an attempt to sell some of the equipment (usually the turbine/gen set) to developing countries, but I haven’t seen an ability to sell that gear in the last 3.5 sites I’ve worked on.
A huge problem is the fragility and mass of the fin/axle assembly in the turbine. It has to be kept moving if you have any hope of it being usable; if not it deflects slightly. If you’ve maintained it to some degree the deflection can be eliminated but it requires weeks of slowly increasing the rpm of the turbine. Almost no clearance inside the turbine shell, so if you go a bit to fast you’ll shatter the fin assemblies against the shell.
The other issue is miles and miles of piping. They get drained, but drained for demolition prep and drained for mothballing are different. And since these plants are always heated by the steam they generate, as soon as they go dark they’re unheated and unheatable. I’ve been in cold dark plants during low winter temperatures and you could hear elbows and fittings exploding from water trapped in them. Properly mothballing a coal plant is a significant and expensive operations. I doubt that it was done. Additionally, salvaging switchgear is common since the plants are mostly old and that gear isn’t made anymore, decomissioned plants will be used for spare parts elsewhere.
I wouldn’t want to be at a coal plant that had been shut down and then restarted. Firing up a boiler is when things go boom, even after planned outages. Those boilers move a lot when they get hot. I’m not sure how they’d react after being off for years. Wet bottom types should seal again, but dry bottom types might not. On coal, plants are designed for coal types, can’t be easily or safely just switched out for a new type. Western US coal in particular and that’s where the heavy coal mining is in NA. That stuff is a “when it explodes” rather than if. At plants i’ve worked in, preparing for using western coal requires installation of explosion vents and reinforcing the interior of the building with carbon fiber strips.
I always assumed that leaders of the EU (or any large trading block) had a basic foundational understanding of the energy requirements for the trade they manage.
Sadly I think knowledge of basic economic inputs has been replaced with MBA techniques that “play” with economic inputs instead of “analyzing” them.
Combine this missing knowledge with excessive optimism on possible solutions and you get the current mess we are in.
most politicians in Germany are lawyers.
Most “politicians” are lawyers… fifu!
In The European Union demand response to high natural gas prices I read:
Why does the use of the TWh/week unit make me want to scream? Because it’s a unit that seems designed to obscure matters. Obviously TWh/week = TW/(7 x 24). A few could probably adequately do the conversion by mental arithmetic; to most the numbers are meaningless.
It matters because most of these energy considerations are simple enough to be understood by kids in elementary school. They don’t because even most of the teachers are clueless.
Here is an example. The yearly energy consumption of the U.S. is about 100 Quad, an idiosyncratic U.S. unit of energy even more obscure than the TWh/week. It turns out that 100 Quad per year amounts to an average power consumption of 3 TW = 3,000 GW. A 1GW power station costs about $1billion. In other words, for $3 trillion, we could replace the whole U.S. power sector. That’s about 3 years worth of U.S. war economy and militarism spending. Numbers big and small acquire meaning only in a context. Irrational units destroy context.
A child can understand this, but in the U.S. it takes a $100,000 contract with a consultant to generate a 30 page report with roughly the same information.
Is this stupidity or is it design? I never stop wondering. One thing is clear to me: the U.S. has never caught up with elementary energy concepts and 18th century thermodynamics in particular, as this web page makes clear.
It was predicted at the suspension of Nordstream-2 and outbreak of the war in Ukraine that Germany’s industrial production would have to be “shut down” for lack of natural gas; that there would only be enough for minimal household use. So everything is going according to plan. It’s a little twisty to say that demand for natgas is now back up, almost to before, because this demand is based on a 20% reduction in supply. So revenue remains relatively stable – feature not bug? Germany is not producing aluminum – they are importing it? Etc. It also looks like the Germans stocked up on certain things like ammonia before the war broke out. Gee, how prescient. Possibly because the Euro bought more then than they knew it would with their industries shut down. The great leveling down. I wonder if it will actually make a difference in CO2?
And if I am reading the article correctly, they think reduced industrial demand is a good thing. Just wait until BASF and others start shutting down production facilities and we get mass unemployment.
But it seems Europe is hell-bent on its own destruction – Hungary announced it was ready to pay for Russian gas in rubles and von der Leyen apparently tweeted this would be a breach of sanctions.
I can only hope PK was right in yesterday’s thread, saying this might take a while to play out.
They have their hopes and dreams. “Assume a can opener appears immediately”, or something. / ;)
https://www.desmog.com/2021/07/08/fossil-fuel-industry-given-billions-through-eu-hydrogen-support-report-finds/
The European election returns will tell us how well the EU is mananging this crisis.Dave in Austin
The money quote for me:
As I stated RobertC March 25, 2022 at 12:23 pm
They are still flailing.
I believe the US and Europe do not have adequate and accurate models and data for their economies because they don’t want that level of visibility to interfere with their foreign policy and national security agendas. And perhaps personal agendas.
PS thanks for this research report.
Maybe, they are trying to follow orders and let their “supplier” know their hands are tied. They must say bad things about the supplier, threaten war, send weapons and so on. They will continue accepting the gas and oil and pay in rubles if they can. They don’t care what markings are on the ships or which pipeline.
The party giving orders is likely trying to resell the oil coming in to the Ukraine on the futures market they used to control and wondering how long before the countries dependent on the supplier will revolt as they search for roubles.
Once this is done, they can work on the rest of the products the supplier provides to the EU that are necessary for life without intolerable chaos.
Is anyone home?
.
The United States is run by a bunch of backwards thinking, greedy, power hungry stupids. They’ve been planning and plotting for at least 58 years. Man, have they been successful to the detriment of the whole world. But, guess what? That dumb (family blog) mindset isn’t just confined to the States. Look at the U.K., France, Australia, the list goes on. The big sign is climate catastrophe. And is Russia, China, India doing anything to help alleviate the problem. No, they aren’t.
I was reading this weekend about the Burisma rights to gas deposits in in Donbas. Perhaps the US’s “plan” was to have Ukraine capture that, frack it and then instead of being dependent on Russian gas transmitted via Ukraine, Europe could be dependent on Ukrainian/US gas. That’s likely where the stop NS2 movement comes from. No sense in developing those fields in competition with cheaper Russian gas.
And now I’m beginning to wonder if the US is so desperate to keep the fighting going because unless “Ukraine” wins in a way that US fracking firms get access to those fields, they just burned Europe to the ground for nothing. It would be the middle ground between total US incompetence and Hudson’s theory that the US is trying to destroy Europe. It would still have a lot of incompetence but would be a better explanation of how to make Europe dependent on the US than presently unfeasible LNG schemes. Did they think that the crunch would be relatively short lived? They could probably start producing in those fields pretty quickly and the pipeline infrastructure already exists.