EESC Info: Jaroslaw Pietras, what do you make of the EU's energy market at the moment and what is the outlook for the future?

Jaroslaw Pietras: The gas price cap agreed on by EU energy ministers is well above the level that we are currently experiencing. The opening of the energy markets in the first days of 2023 was neither surprising nor dramatic. Gas and oil prices continue to fall, but at a slower pace. The current price level is comparable to that observed just before the Russian aggression against Ukraine. EU gas consumption has fallen by over 20%, with no critical impact on production or heating needs. Of course, consumers in every Member State had to reckon with high energy costs, but they were not exposed to freezing temperatures. The gas supply to households was uninterrupted. At the beginning of this new year, European gas storages are more than 80% full, which is a very good result compared to the average of the previous five winters. 

European countries have turned away from Russia for their gas supplies, which now come mostly from other sources. This includes LNG imports, which in 2022 were 58% higher than in 2021. As the Financial Times noted (7 January, 2023), "The EU's LNG import last year is equivalent to 137 billion cubic metres worth of natural gas, close to the approximately 140 billion cm of pipeline gas it received from Russia in 2021". This means that the EU has significantly reduced its dependence on Russian energy supplies.

This is all good news, but beware; the energy crisis is not over yet. The above trends would not have been possible if the weather conditions in Europe had been difficult and low temperatures encouraged greater use of heating. Besides, some energy-intensive industrial processes have not been fully restored. China's strict policy against COVID-19 has limited energy growth and demand, reducing global energy demand. These circumstances are out of Europe's control and may not be the same again. This means that energy markets in the EU are still under threat and, depending on how the situation will develop, difficult times could arise.

Not all EU Member States are equally affected by extremely high gas prices. However, as the EU's internal market is already quite interconnected, price shocks have affected every form of energy and everyone. Even before the invasion, Russia had an influence on gas prices in Europe. At the time, attempts to reduce dependence on Russian supplies were vigorously contested. The quake came after deliberate disruptions of gas flows from Russia. The gas price peaked at over €350 per megawatt hour on the spot market in mid-summer 2022. Such a high price immediately translated into the costs of other energy sources, in particular electricity, affecting millions of consumers. 

At the time, EU Member States made huge efforts to fill their gas storage facilities to the level required by the EU. This was also a moment in time when gas prices were up to seven times higher than before the war. Such a cost is unbearable in the long run, which is why EU energy ministers discussed measures to limit the uncontrolled rise in energy prices beyond endurable levels. Europe and its Member States acted wisely together and took a number of steps to stabilise energy markets, including pondering price caps, pooling purchases, imposing storage obligations and solidarity supplies, and much more.

Since the prospects for the rest of the heating season do not look too dramatic, the EU should start now to think about the coming winter and its ability to cope with possible difficulties in the future. Importing gas requires physical infrastructure that cannot be changed overnight. Europe is only connected by pipelines to some exporters, and changing sources of supply require new terminals. It takes time, but it has to be done quickly with the reliance on floating terminals like in the German port of Wilhelmshaven.

Summing up, the prospects for an acute gas problem are much lower. Alternative gas supplies are being sourced widely, new renewable energy sources are being installed at an accelerated pace, efficiency and energy savings are being seriously implemented. All this reduces the volatility of the energy supply and thus lowers the cost of gas. It allows for the diversification of energy sources and avoids disruptions caused by a sudden suspension of supplies from one source. 

However, energy markets remain very vulnerable to supply shocks. In such a case, the price of gas may increase significantly to balance demand with limited supply. Therefore, the energy ministers were right to discuss and agree on a cap on gas prices, even at the relatively high level of €180 per megawatt hour and based on the most volatile TTF gas spot market. It is like a safety valve that is needed in extreme situations, but better when not in use.