How Bad Could Winter Get in Europe?

Though some of the anxiety has abated, our European writers say to prepare for rationing and more demand destruction. Winter is coming!

Valerio Baselli 6 October, 2022 | 2:10PM
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LNG terminal in Rotterdam
Russia's gamble to weaponize energy exports in a bid to end Western support for Ukraine has not played out the way it anticipated. By finding new suppliers, European countries reduced Russia's share of their gas supplies from about 45% to less than 10%, while filling up storage facilities ahead of schedule.

All this is good news, but put away the champagne. It would be a mistake to conclude that European industries and households are ready to coast through this winter on stored gas, or that the energy market is about to return to pre-crisis price levels. 

Is There Enough Gas in Europe?


Storage levels play a key role in the gas situation in Europe, so much so that an EU regulation obliges the 27 member states to fill their gas storage facilities to at least 80% by November 1. This seems to have been largely achieved, as our interactive map shows.

“Norway is now our biggest gas supplier”, European Commission spokesman Tim McPhie said in a Sept. 19 press briefing. He further explained that “the U.S. has filled part of this gap by already going above the level set in the EU-US bilateral agreement on LNG supply” and that the EU “has worked with a number of partners including Azerbaijan, Algeria, as well as having concluded a trilateral agreement with Israel and Egypt”. In short, thanks to efforts at member state level, there has been a significant increase in supplies from different producers.

Maximum Storage Covers Less Than Half of Consumption

All that stored gas doesn't mean European radiators and smelters will stay hot through the winter. 

“Storage is for peak supply, not for everyday use”, explains Massimo Nicolazzi, professor of Economics of Energy Sources at the University of Turin. “Our maximum storage capacity covers less than half of our winter consumption, and the effective use of reserves also depends on pipeline pressure; as it empties, in fact, the storage reservoir delivers less and less gas because the pressure decreases, which is why at certain times of the year - typically in March - it is more difficult to draw from it.”

In short, we cannot imagine spending the winter in peace because we have our storages 100% full-- it doesn’t work that way.

There is No Common Response Yet

At the last European Energy Council at the end of September, EU energy ministers approved a package of “emergency measures” that is unlikely to have much impact.

The measures include a cap on extra market revenues set at EUR180/MWh for nuclear or renewables, a 33% tax on fossil fuel producers, and a mandatory 5% reduction in electricity demand.

“The energy crisis is serious and it requires a common response from Europe, we must do more”, European Commission President Ursula von der Leyen declared following the Energy Council. Such a common response has been slow to materialize, with Northern European countries, and especially Germany, still opposed to a cap on the price of gas imports.

Instead, Berlin has allocated a EUR200 billion fund to help German citizens and industries, opting to pay more for supplies without risking damage to its energy-intensive economy. The measure could well be effective, but runs counter to the vision of a united European response, while also potentially constituting illegitimate state aid under European competition law.

“The limitation of the price cap is that, assuming the legitimacy of such a choice especially on existing contracts, it could only be applied via pipeline, but certainly not to the liquefied natural gas (LNG) market, all of which would go immediately to Asia,” comments Professor Nicolazzi.

Could LNG Prices be Linked to an Index?

In a non-public document, the EU Commission stated its willingness to create a new transaction-based benchmark for LNG, as declining flows from Russian pipelines and a record increase in LNG imports have created imbalances in the current pricing mechanism, now represented by the Title Transfer Facility, or TTF.

This alternative LNG price benchmark - which market players could use voluntarily - should be based on verifiable assessments of LNG cargo delivery prices to ensure that it reflects real fuel prices.

On Tuesday, Italy's Minister for Ecological Transition Roberto Cingolani promoted that idea to Italian media, suggesting “indexing the price of gas by linking it to Stock Exchanges that are more stable than the TTF, which has nothing to do with the real situation and the mechanisms of supply and demand”, and that the “time has come for a European index that is more truthful”.

Europeans Must Get Ready for Rationing 

It will probably take months before an alternative to TTF becomes reality. For now, Europe's  only prospect of having extra gas quotas in a hurry is to cut consumption. Several European countries have already presented national plans to curb energy consumption.

So, will we spend the winter in the cold?

“It is difficult to say, certainly the 'hardness' of the winter depends on many factors,” says Massimo Nicolazzi. “As far as technically possible, now that Nord Stream is out of service, we need the Russian flow to continue; then, let’s hope for a winter that's not too cold, for there to be wind in the North Sea, and for French nuclear power to return to 100% of its capacity in January, compared to the current 50%.”

“The only thing that is certain is that a rationing plan is indispensable,” Nicolazzi continues, “and people must know this, they must be ready in case it has to be implemented. Overly optimistic signals are politically wrong. At this time, energy efficiency and energy saving should be the mantra for those in charge.”

“The real, tragic risk is that rationing may become 'unintentional',” warns the professor, “for every industry that shuts down, in fact, demand for energy decreases.”

It Could Take 3 Years to Get Back to Normal

According to an analysis by Goldman Sachs released in early September, the price of European gas is expected to cool significantly in the coming months. The American investment bank expects the price to fall below EUR100 per MWh by the first quarter of 2023- thanks to full storage facilities- before rising again during the summer when they will have to be refilled.

According to Goldman’s analysts, European storage facilities will remain more than 20% full by the end of March next year. This could set the stage for a sense of market relief at having weathered the winter, gradually displacing the current sense of urgency to destroy demand.

“Most likely, we will still be short of gas next year, more or less in the same situation as today, so I don't think prices will be much lower,”  Massimo Nicolazzi reasons. “Winter 2024-25 will be better because we will have more supply capacity already available, but we will not be totally out of it. The following year, on the other hand, we may finally return to a 'long market' situation. Of course, it all depends on demand side.”

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Valerio Baselli

Valerio Baselli  Valerio Baselli is Senior International Editor at Morningstar.