How the war in Ukraine transformed the European energy market

The energy crisis triggered by the Russian-Ukrainian war has turned the European energy market upside down. After soaring prices led to a drop in consumption, what were the other consequences of the crisis? What changes and transformations enabled Europe to avoid the worst of the winter?

Lower gas and electricity consumption

Transmission system operator RTE has forecast that electricity consumption in France will fall by 4.2% in 2022 compared with average values for the period 2014-2019. Gas consumption, meanwhile, is forecast to fall by 9.3% in 2022 compared with the previous year.

The only downside is that this fall in gas consumption, which reached 11.5% in the industrial sector, is partly linked to production stoppages imposed by soaring prices. These interruptions could prove costly for the economy.

In any case, everyone has contributed to the fall in energy consumption in France, from households to the tertiary sector, via industry. This collective contribution to energy sobriety made it possible to avoid rationing measures and load shedding.

High gas stocks

Favorable weather conditions also contributed to lower consumption, which in turn kept gas inventories at historically high levels.

Europe has resorted to massive imports of liquefied natural gas (LNG), and Storengy, Engie's gas storage subsidiary, is working to increase storage capacity to avoid any risk of shortages in the future. As for electricity, EDF expects nuclear power plants to be more available next winter, enabling higher production.

On the other hand, European oil reserves have fallen, and their replenishment will contribute to higher prices.

Lower gas and electricity prices

The resurgence of Covid-19 in China and its zero Covid policy, although now relaxed, have contributed to weakening its economy and reducing demand for gas. The high level of reserves and mild temperatures have also contributed to lower gas prices.

While the TTF, the Dutch index used as a reference on the European market, exceeded 350 euros per MWh for one-month delivery this summer, it has now fallen below 50 euros. Electricity prices are also falling: forward market prices for 2023, which had exceeded 1,000 euros per MWh at the end of August 2022, now stand at around 270 euros.

However, according to specialists, this price decline is not synonymous with a return to normality. In Europe, the price of a megawatt-hour of gas could double between the 1st and 3rd quarters of this year. As for Brent crude oil, which has settled at around $80 a barrel since the end of 2022, according to the American bank Goldman Sachs, it could rise to $105 by the end of 2023.


Energy transition under threat

The war in Ukraine and gas supply difficulties have contributed to a greater reliance on coal. As a result, European coal-fired power generation rose by 7% year-on-year, an increase that remains reasonable according to the think tank Ember, thanks to the boom in production from renewable energies.

The situation is more critical in Pakistan, which plans to give up gas for power generation and increase its coal-fired capacity by a factor of 4. The explosion in European demand for LNG has caused prices to soar, preventing Pakistan from continuing to access this resource. Other countries could find themselves in the same situation.

However, the International Energy Agency is reassuring that the current threats to the energy transition should be offset by continued investment.