Europe Faces Continued Gas Price Volatility and Supply Challenges

European consumers and governments are now entering their fourth year of high and volatile gas prices. These elevated prices have had a significant impact on electricity prices and indirectly on food prices due to higher input costs for producers. The economic damage has been evident for both households and businesses, with the initial period of the gas price shock being a key factor in inflation and sharp rises in the cost of living, contributing to higher rates of energy poverty across Europe. Gas prices for industrial consumers in Europe since 2022 have on average been 30% higher than in China and five times as high as in the United States.

Several gas- and energy-intensive industries have had to curtail production, and some plants have closed. The elevated gas prices and their broad impacts have complicated efforts by governments to ensure reliable and affordable energy supplies for citizens and companies, and has put the spotlight on the international competitiveness of European industry.

In the EU, the European Commission and member governments have implemented a range of measures to tame volatility and protect consumers. These measures include the introduction of affordability support measures, gas storage obligations, voluntary targets to cut gas consumption, and a joint gas purchasing mechanism. Although some infrastructure bottlenecks remain, Europe has been able to call on well-meshed gas grids and significant LNG import infrastructure, which enabled it to increase LNG imports rapidly and diversify its gas supplies. Despite Russian piped gas flows to Europe falling by more than 80 billion cubic meters (bcm) (or 50%) in 2022, physical gas supply shortages were avoided.

Since the start of 2022, around 250 gigawatts of new renewable power capacity have been added across Europe (including the EU, Norway, Switzerland and the United Kingdom), helping to avoid a cumulative total of more than 60 bcm of gas consumption in the electricity sector since then. Although heat pump sales have sharply decelerated from their highs in 2022 and 2023, the 8 million units sold since 2022 have also dampened gas demand during the peak heating season. Europe also made strong improvements in energy efficiency in 2022 and 2023, helping to prevent even greater pressure on supplies and prices, although the rate of efficiency progress ebbed significantly in 2024.

Overall, Europe’s natural gas demand for electricity generation continued to decrease in 2024, falling by 8% and marking the fifth year in a row of annual declines. Alongside these clear signs of structural decline, gas remains essential for the continent’s energy security, including the provision of flexible electricity generation to complement variable renewables such as solar and wind.

At a time of heightened geopolitical and economic uncertainty, European energy systems face a challenging year ahead as the continent emerges from this winter with lower-than-average levels of gas in storage. Global gas markets are unlikely to start to ease significantly until well into 2026 when a huge wave of new LNG supply is set to start hitting international markets. These new LNG projects – most of them in the United States and Qatar – are expected to come online over a period of several years, increasing global LNG export capacity by nearly 50% by 2030, if the projects follow their announced schedules.

But waiting for this new supply is not a viable strategy for European economies facing elevated gas prices today. Between now and then, European governments need to work harder than ever to accelerate energy efficiency improvements, diversify energy supplies and implement other measures to strengthen energy security, including increasing sources of flexibility in electricity systems. In an uncertain geopolitical climate, reminding citizens of the benefits of energy efficiency and gas-saving measures – which improve both energy security and affordability – can go a long way toward demonstrating Europe’s resilience as countries continue to deliver on their goals of building newer, cleaner, more secure and more competitive energy systems. Particular attention needs to be paid to gas supply resilience, with options including the agreement of long-term contracts to provide more stable supplies and strengthening the transatlantic partnership on LNG trade.

For U.S. readers, the situation in Europe serves as a cautionary tale. The U.S. has seen its own share of energy price volatility, particularly with fluctuations in natural gas and oil prices. The shale revolution has made the U.S. a significant player in the global energy market, but it also highlights the need for diversified energy sources and robust infrastructure to ensure energy security. The U.S. has been a key supplier of LNG to Europe, and this partnership has been crucial in mitigating some of the supply challenges faced by European countries.

In the U.S., the focus on renewable energy and energy efficiency has been growing. The Inflation Reduction Act, signed into law in 2022, includes significant investments in clean energy and energy efficiency. This act aims to reduce greenhouse gas emissions and promote energy independence. The act provides tax credits and incentives for renewable energy projects, energy efficiency upgrades, and electric vehicle adoption. These measures are expected to create jobs, reduce energy costs, and enhance energy security.

While the U.S. has made strides in energy efficiency and renewable energy, there are still challenges to overcome. The transition to a cleaner energy system requires significant investment in infrastructure, research and development, and workforce training. The U.S. must also address the intermittency of renewable energy sources like solar and wind, ensuring that there are reliable backup sources of energy to maintain grid stability.

One example of a successful energy transition initiative is the state of California. California has set ambitious targets for reducing greenhouse gas emissions and increasing the use of renewable energy. The state has invested heavily in solar and wind power, as well as energy storage solutions. California’s efforts have not only reduced its carbon footprint but also created thousands of jobs in the renewable energy sector. The state’s experience serves as a model for other regions in the U.S. and around the world.

In conclusion, the challenges faced by Europe in managing high and volatile gas prices highlight the importance of energy security and diversification. For the U.S., these lessons are particularly relevant as the country continues to expand its renewable energy sector and work towards a more sustainable and resilient energy system. By learning from Europe’s experiences and implementing effective policies, the U.S. can ensure a stable and secure energy future for its citizens.