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| Fig. 1: U.S. LNG exports to Europe, EU and the UK. Exports climbed significantly in 2022. (Source: A. Ekpo-Otu, after Ravijumar et al. [7]) |
During the Winter of 2022-2023, Europe faced a severe energy crisis primarily due to a drastic reduction in Russian gas supplies following its invasion of Ukraine. In response to this reduction Europe underwent a historic 13% drop in natural gas demand (equivalent to the gas needed to power over 40 million homes over that time period). In order to compensate, Europe increased its liquified natural gas (LNG) imports by 65%, with a significant portion of this coming from the US. This crisis served to underscore the urgent need for Europe to diversify and invest in more sustainable energy sources. [1]
The primary trigger for the energy crisis in Europe during the winter of 2022-2023 was a significant reduction in gas supplies from Russia. This reduction, which exceeded up to an 80% drop, significantly impacted the region's energy landscape. More specifically, imports of Russian gas from July to September 2022 were down 74% compared to the same time period in 2021, with flow via Nord Stream 1 dropping by 85%, and flow via Ukraine dropping 63%. This decrease in supply occurred simultaneously as the peak season for gas storage refilling, which led to wholesale gas prices soaring above 300 /MWh by the end of August 2022. [2] The Russian gas incorporated a critical component of Europe's energy supply for heating, industrial processes, and power generation, and its reduction resulted in steep increases in electricity and natural gas prices. This surge in prices, which reached levels almost 15 times higher than those in early 2021 in some places, put a high level of pressure on European economies, industries, and households. Exemplifying this, the European Power Benchmark averaged 339 /MWh during this period, a 222% increase from the previous year, which reflected the compounding effects of reduced gas flow, the shutdown of Nordstream 1, and other factors like reduced nuclear and hydroelectric production. [2]
In an effort to respond to the decreasing supply of Russian gas, Europe significantly increased its reliance on liquified natural gas as an alternative. Liquified natural gas production and use could be swiftly increased as opposed to other more static sources such as hydroelectric and nuclear energy. This shift was reflected in a 65% increase in LNG import volume over the first nine months of 2022 compared to the same period in 2021. Including the UK and Turkey, Europe imported around 95 million metric tons of LNG Q1-Q3 2022 which made up 32% of LNG imports worldwide, up from 21% in 2021. This increase was driven, in part by higher volumes from the US, as US exports to Europe increased by more than 100% before Q4 2022. Compared to markets in places such as Asia, European LNG prices were much higher on average, which illustrated the growing demand for such alternative gas sources in Europe. [3] However, this shift in reliance to LNG came with its challenges, as the price of LNG sharply increased to more than double following the invasion of Ukraine due to Europe's increased reliance. This price increase affected wholesale electricity prices across the continent, and with commodity price increases having a widespread effect across the economy, many Europeans felt the brunt not only at the gas pump and electricity bill, but in the rising prices at the grocery store or a whole manner of other services and goods. The crisis and the subsequent reliance on LNG underscored Europe's urgent need to explore and invest in diverse and more sustainable energy sources to mitigate such vulnerabilities in the future, particularly as LNG has an outsized climate footprint as opposed to pipeline gas, generating between 51% and 176% more GHG emissions than the supply from russia via the TurkStream pipeline as a result of the more energy intensive liquefaction process, and transport via LNG carrier. [4]
The energy market during this period was marked by periods of high volatility, caused largely by relatively modest infrastructure constraints, especially due to bottlenecks in re-gas capacity. Across just eighteen months, Dutch TTF front-month contract jumped around ten-fold from around 30 /MWh in January 2022 to almost 300 /MWh in August 2022. Over the same interval, the spread between North West Europe LNG cargoes, TTF flipped from 60-90 /MWh discount in mid-2022 to ≤ 3 /MWh by January 2023, driven largely by new FSRUs (Floating Storage and Regasification Units) removing the bottleneck. [5]
European governments implemented a variety of policies in order to address the impacts of the energy crisis. Across Europe, a total of 651 billion euros were allocated to protect consumers from rising energy costs. Leading the pack was Germany with 158 billion out of this total. Rather than direct income support measures, these subsidies generally involved un-targeted price alteration strategies such as cuts to excise duties( reductions to things like fuel taxes) and reducing sales taxes (VAT). Additionally, governments took actions such as putting into place electricity price caps, profit ceilings for oil and gas companies, and energy cost subsidies for various corporations(National fiscal policy responses to the energy crisis). [1]
As part of the broader strategy to stabilize and reduce prices while ensuring energy security in response to the crisis, the EU pledged to reduce gas demand by 15% during the winter. Adopted by the EU commission, the European Gas Demand Reduction Plan focused on a switch to alternative fuels from gas and incentivizing reducing consumption and fuel use for heating and cooling. In addition to the aforementioned measures, the commission proposed to establish regional groups of member states in order to leverage the collective purchasing power of the EU in order to negotiate better prices for the bloc as a whole (EU action to address the energy crisis). [6]
The key element of the EU's response to the crisis was the Green Deal Industrial Plan (GDIP). Key aspects of the plan included:
Streamlined Permit Process - new "Net-Zero Industry Act" will expedite the permit process for manufacturers of technologies that are essential to climate energy. Specific technologies being targeted include carbon capture, battery production, and anything related to renewable energy. [2]
Financial Subsidies - state aid rules have been relaxed until the end of 2025, which should allow EU countries to support investments in industrial decarbonization and renewable energy. Part of funding will come from the 225 billion euros of loans and 20 billion euros in grants, originally from the EUs 800 billion euro post-pandemic recovery fund. [2]
European Sovereignty Fund - a new fund that will be created to place long term investments in emerging technologies in sustainable energy technologies. [2]
Workforce Development - Recognizing the growing workforce supporting the green industry, the EU confirmed 14 industry partnerships for sectors including the automotive and agriculture industries which focus on education and training. [2]
Enhancing Trade Openness - As part of the plan, the EU is also planning on investing resources into expanding trade agreements regarding raw materials and clean tech. [2]
Additionally, the EU has taken several steps in addressing gas supply and demand.
Storage and Demand Reduction - in August 2022, EU countries agreed to reduce demand for natural gas by 15% during the period of August 2022- March 2023. This allowed the EU to manage demand during the winter of 2022-2023 even without Russian gas. The EU planned to ensure that storage facilities are at least 90% full by October 2023 which would entail continued demand reduction. [3]
LNG supply and Infrastructure - The EU is working to enhance LNG supply through the deployment of regasification technologies to address import capacity concerns. Unfortunately, with demand for LNG increasing in the wake of the recent events, global competition for the resource still poses a challenge. [2,3,7]
The energy crisis in Europe during the winter of 2022-2023 has highlighted the urgent need for a comprehensive and sustainable approach to energy security and decarbonization. While immediate measures have been taken to manage the crisis, the long-term solution lies in a strategic shift towards green transformation and renewable energy sources, which are essential for Europe's competitive future and global environmental goals.
© Alexander Ekpo-Otu. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] "Quarterly Report On European Gas Markets," 4th Quarter 2022, European Commission, 2023.
[2] C. Fetting, "The European Green Deal," Vienna University of Economics and Business, December 2020.
[3] "Proposal for a Council Regulation Amending Regulation (EU) 2022/1369 as Regards Prolonging the Demand Reduction Period For Reduction Measures For Gas and Reinforcing the Reporting and Monitoring of Their Implementation," European Commission, COM(2023) 174, March 2023.
[4] C. Swanson and A. Levin, "Sailing To Nowhere: Liquefied Natural Gas Is Not an Effective Climate Strategy," Natural Resources Defense Council, December 2020.
[5] Analysis of the European LNG Market Developments: 2024 Market Monitoring Report," European Union Agency for the Cooperation of Energy Regulators, April 2024.
[6] "Council Regulation (EU) 2022/1369 of 5 August 2022 on Coordinated Demand-Reduction Measures for Gas," Official Journal of the European Union, 2022 O.J. (I. 206) 1, 8 Aug 22.
[7] A. P. Ravikumar, M. Bazilian, and M. E. Webber, "The US Role in Securing the European Union's Near-Term Natural Gas Supply," Nature 7, 465 (2022).