By Ben McWilliams, a research analyst in the field of climate and energy policy, and Georg Zachman, a senior fellow at Bruegel, who has worked at the firm on energy and climate policy since 2009. Originally published in Bruegel.

European gas markets are in turmoil. Russian supply in the first quarter of 2022 (289 TWh) is 30% lower than in the same period in 2021 (408 TWh). Both Russian and EU policymakers are discussing the possibility of completely halting Russian gas deliveries to the EU. The market is extremely tight, resulting in a six-fold increase in natural gas prices in the first quarter of 2022 compared to a year ago (Figure 1).

In the first quarter of 2022, high EU gas prices (as well as favorable global market conditions) led the EU to import 305 TWh of liquefied natural gas (LNG), compared to 170 TWh in the same period last year (see tracker). But high prices aren’t just attracting new gas supplies into Europe. They also encouraged consumers to drastically reduce gas demand. We estimate a 7% decline in Q1 2022 compared to Q1 2021 (1402 TWh vs 1507 TWh; see Exhibit 1). This can only be partly explained by the mild weather.

rumor It suggests that high prices have led industrial companies to reduce gas consumption, but it is unclear how much. National and sectoral gas demand data are not available in a timely manner, and we can only provide partial evidence (see below) that EU industrial gas demand has fallen by about a fifth.

Compared to 2021, gas-fired power generation in the first quarter of 2022 was actually 4TWh higher than in 2021, as the conversion of gas-to-coal in the EU power sector did not lead to a reduction in demand due to lower nuclear and hydropower generation (Figure 2). ).

This means that domestic and other natural gas demand (including service and non-personal home heating) in the first quarter of 2022 was down about 5% from a year ago (Figure 3). If the goal is to completely replace Russian gas, this is a promising start, as Russia looms over Ukraine at the end of the first quarter of 2022, and the EU and its member states have so far not put in place strong energy-efficiency policies.Instead, national policies to address rising energy prices focus on Tax cuts boost demand. We have previously shown that through stronger policies, Save about 20% on total requirements can be realised.

Industrial Demand Estimation

Our estimates of industrial emissions reductions are based on data from the European Network of Transmission System Operators of Natural Gas (ENTSOG) (Figure 4, Annex 2). This shows that in the first quarter of 2022, weekly industrial demand for natural gas in Italy was 0.25TWh/week below 2021 levels; in Belgium, 0.3 TWh/week; Luxembourg, 0.1 TWh/week; and the Netherlands, 1.3 TWh /week. Overall, these demand reductions represent a 20% decline from 2021 levels. With industrial demand accounting for 25% of total EU demand, a 20% annual reduction in industrial demand in all countries would result in a 5% reduction in total gas demand. Available data for the UK shows a weekly decline of 0.35 TWh/week.

The shift in trade flows further underscores the drop in demand for gas from EU industry over the past few months. One of the factors that reduces EU industrial gas consumption is the decrease in exports and/or an increase in imports of energy-intensive products when gas and electricity prices are high (Figure 5).

Natural gas is the main feedstock for the production of chemicals and ammonia. EU ammonia imports were worth EUR 250 million in December 2021, compared to EUR 96 million in June 2021 (Figure 3). Part of this impact is driven by price, but not all. We estimate that ammonia imports in December increased by 27% compared to June. Each ton of ammonia production requires 10 MWh of natural gas, so the increased ammonia import is effectively equivalent to an additional 0.5 TWh of embedded gas imports per month (Table 1). From June 2021 to December 2021, chemical imports excluding ammonia increased by around EUR 400 million, implying further embedding of natural gas imports.

Imports of aluminium, where electricity is a key input for production, also responded to high electricity prices. EU aluminium imports were worth €2 billion in December 2021, compared to €1.2 billion in December 2020. Taking into account price effects, we estimate a 35% increase in physical imports. Electricity input per tonne of aluminium is 15.5 MWh, which means 3.6 MWh of electricity is imported indirectly per month. If produced using only natural gas, this would represent 7 TWh/month of natural gas.

Steel imports rose throughout the second half of 2021, increasing by around €2 billion in October compared to June, but falling in November.

As a side note – but important – our triangulation of data sources and industry gas consumption highlights a significant data issue. More disaggregated and timely data on gas consumption, especially on households and industry, is needed if complex demand reduction policies must be organized in near real-time during a crisis.

Recommended citation:

McWilliams, B. and G. Zachmann (2022) “EU Demand Response to High Gas Prices”, Brueghel BlogApril 8

Annex I

To calculate implied demand, we compared inventory changes on the first day of each month, taking into account imports provided by Bruegel’s import tracker, and assuming production is the same as in 2021. Retrospective application of the method shows that it is a reliable predictor of Eurostat demand reports.

Annex II

ENTSOG provides gas flow data for industrial consumers in several countries: Italy, Belgium, Luxembourg, the Netherlands and the United Kingdom. These flows are described as “Italian Industrial Consumers”, “Belgium Industrial Customers”, “Industrial Customers (LU)”, “Dutch Industrial Consumers” and “UK Industrial Purchases”.

Excluding the UK, the combined industrial demand of the four EU countries in 2020 reached 400 TWh. Eurostat reports final consumption (energy and non-energy) for these four countries at 270 TWh in 2020, which means that the ENTSOG data includes some additional demand beyond typical industry descriptions, such as flows to large combined heat and power plants. natural gas. We do not have access to a precise description of what the data contains.