EU regulator calls for cut in natural gas demand due to LNG ‘subsidy’

The European Union’s (EU) energy regulatory agency recommended that members of the bloc continue to reduce natural gas consumption in the short term and prioritize energy projects that will reduce future demand.

Since European natural gas prices hit record highs last summer, the region’s supply-demand balance has found an easy balance thanks to demand-cutting policies and an influx of mostly American LNG.

In a recently published market report, the Agency for the Cooperation of Energy Regulators (ACER) offered several recommendations based on its review of the extreme volatility of natural gas after last year’s Russian invasion of Ukraine. The main one was for members to “respect political commitments to reduce gas consumption”.

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The agency also recommended EU countries “direct financial support to encourage demand-side savings and efficiency investments instead of subsidizing final delivery costs”.

Global exposure

The International Energy Agency estimates that policies put in place after the invasion of Ukraine could accelerate the reduction European natural gas demand from 8% by 2026 to nearly 20%, or 3,884 Bcf, below 2021 levels.

Gas consumption alone fell by 13% in 2022, driven by widespread restrictions on Russian gas to Western Europe following the invasion of Ukraine. While gas consumption for electricity generation has remained at historic levels, gas demand from the industrial sector has continued to decline until 2023, according to ACER data.

In the same period, imports of liquefied natural gas into the EU increased sharply. Imports rose from nearly 60 million tonnes (Mt) in 2021 to 96 Mt last year, according to data from Kpler. At least 40% of these LNG volumes came from US terminals during the year.

While high levels of storage slightly slowed down the pace of LNG imports this year, delivered volumes are still significantly above the three-year average.

ACER researchers wrote that LNG imports could overtake pipeline gas supplies by 2030, increasing the bloc’s exposure to global competition for spot costs and fluctuations in other key gas markets.

“This situation is likely to increase the volatility of gas prices in the EU, which may in turn affect electricity prices,” ACER researchers wrote.

In the short term, ACER also recommended that countries continue to monitor how the expansion of import capacity across the bloc has affected gas distribution and to “promote transparent regimes for access to LNG infrastructure”.

‘Pressing Challenge’

Dutch Title Transfer Tool (TTF) prices for December deliveries started to fall again despite potential concerns about LNG supplies due to mild weather forecasts. TTF fell from USD 17/MMBtu to USD 16 in the middle of the week.

LNG spot deliveries to the EU for November was estimated by ACER at approximately USD 15/MMBtu.

However, European natural gas prices are roughly 1.5 times higher than in the same period before the invasion of Ukraine, “suggesting that the market sees higher supply risks for the coming winter season,” ACER researchers wrote.

ACER’s recommendations contrasted with a recent report by the International Gas Union, which suggested that global investment in natural gas production and LNG infrastructure would have to expand quickly over the course of a decade to reverse the market effects of the war in Ukraine.

While the agency recommended cutting gas demand as the most effective solution to reducing Europe’s energy volatility, the researchers wrote that finding effective ways to implement these cuts was still an “urgent challenge” for the bloc.

“The pace of reduction in gas demand entails significant short-term and long-term contractual consequences“, the researchers wrote. “In this context, it is important to increase the flexibility of the less sensitive segments of gas demand, as these segments will continue to significantly influence short-term gas prices.”

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