Following its invasion of Ukraine, Russia cut pipeline deliveries of natural gas to the European Union by more than half. Russia’s pipeline supplies are expected to decline from 140 bcm in 2021 to around 60 bcm in 2022, a drop that has put unprecedented pressure on both European and global gas markets, with severe knock-on effects on many electricity markets.

The supply shock induced by Russia drove up natural gas prices on European hubs to record levels. Month-ahead prices on TTF – Europe’s leading gas hub – averaged over EUR 130 per megawatt-hour (USD 40 per million British thermal units) in the first 11 months of 2022, more than seven times as high as the average between 2016 and 2020.

Prices at these levels incentivised an increase in deliveries to the European Union via non-Russian pipelines and via record inflows of LNG. The EU’s LNG imports are set to increase by around 60% (or 50 bcm) in 2022 compared with 2021. The United States accounted for two‑thirds of this additional LNG supply. As a result, the reliance of Europe on the global LNG market increased dramatically, in particular on destination‑flexible LNG procured on the spot market.

The strong LNG inflows to Europe in 2022 were partly enabled by China’s lower LNG imports, which are set to decline by 20% (or over 20 bcm) in 2022 from 2021 levels because of slower economic growth and Covid-induced lockdowns. Stronger LNG inflows into Europe drew supplies away from more price-sensitive markets, especially in South Asia. Enforced power outages were introduced in Pakistan and Bangladesh because of the shortfall in gas supply to power plants.

The crisis has also had strong implications for gas demand in the European Union, which is set to fall by more than 10% (or about 50 bcm) in 2022. This is mainly the result of lower gas consumption across the industrial, commercial and residential sectors due to fuel switching, reduced output, behavioural responses to high prices, warmer than average weather, and efficiency gains.

There has also been a strong element of demand destruction, particularly in gas- and energy-intensive industries. The power sector is the only sector in which gas demand in 2022 is set to be above 2021 levels. The power sector’s demand for gas has increased despite the record-high gas prices because of very low hydropower and nuclear power output in Europe.

The combination of lower demand, a strong increase in non-Russian gas supplies and unseasonably mild weather conditions through October and early November has allowed the European Union to increase its gas storage levels by a record amount so far in 2022. Injections to EU gas storage facilities were over 70 bcm between April and mid-November, enabling them to reach 95% fill levels by mid-November. As of 9 December 2022, they are around 15% (or 11 bcm) above their five-year average.

High storage levels and lower demand put downward pressure on natural gas prices in October and November and reduced the risk of physical gas supply shortages for the 2022-2023 heating season. However, the cushion provided by relatively high storage levels should not lead to overly optimistic predictions about the future, as market fundamentals could well tighten again in 2023.

This is because Europe’s ability to weather the storm in 2022 was supported by several factors that might not be repeated in 2023:

• Russia cut deliveries sharply in 2022 but nonetheless supplied some 60 bcm by pipeline to the European Union over the course of the year. This included 30 bcm by pipeline during the April-September period when gas storages were filling, contributing either directly or indirectly to storage injections. It seems highly unlikely that Russian deliveries will reach these levels in 2023. And Russian pipeline supplies could cease entirely.
• Europe’s success in increasing LNG imports was enabled in large part by lower import demand from China because of slower economic growth and Covid-induced lockdowns. A recovery in Chinese LNG import demand would intensify competition for cargoes in 2023 and limit their availability to European buyers.
• Unseasonably mild temperatures in October and the first half of November 2022 effectively delayed the start of the European heating season by around a month. Natural gas consumption in the residential and commercial sectors was around 30% lower during those weeks than in the same period in 2021, leaving a stronger storage buffer for the remaining winter.

Despite a series of measures adopted by the European Union and by individual European countries (see box below) to increase security of supply, a supply-demand gap could open up in 2023 that – if not addressed – could provoke a renewed period of intense price volatility and turbulence in gas markets.

In this analysis, we conduct a stress test for the European gas balance in 2023, building upon the findings of the IEA report, Never Too Early to Prepare for Next Winter, published on 3 November 2022. The coming year presents clear risks to energy security and affordability in Europe and beyond, as Russia continues to seek leverage by exposing consumers to higher energy bills and gas supply shortages.

This report provides a menu of near-term actions and measures that can close a potential supply-demand gap in 2023 and avoid excessive pressures on European consumers and international markets.

Our analysis of the extent of the potential supply-demand gap requires taking a view on all elements of the EU’s gas balance in 2023. For demand, our starting point is to hold demand constant from 2022, but with three adjustments. First, to correct for higher‑than-average temperatures over the course of 2022. Second, to adjust in a way that avoids industrial demand destruction. And third, to recognise the need for the European Union to provide gas supply in 2023 for Ukraine and Moldova.

Our stress test assumes that Russian pipeline gas supplies to the European Union cease completely from the beginning of 2023, that China’s LNG imports recover to their 2021 levels, and that EU gas storage facilities will be around one-third full at the end of the 2022-23 winter heating season. We also take a view on the availability of supply from non-Russian sources. Our assumptions in all these areas and the main sensitivities are described in detail in the Annex to this report. This overall assessment results in a gap between baseline EU demand and supply in 2023 of 57 bcm.

Our analysis of how this gap can be closed is a two-stage process.

The first stage involves considering all the elements that are already visibly in motion or planned, as well as structural changes that are underway, such as new renewable capacity, fuel switching in industry, improvements in energy efficiency, installations of heat pumps, and new biomethane facilities. A potential recovery in nuclear and hydro power output from the decade-low levels seen in 2022 is another crucial variable, and this is assumed to lower EU gas demand by around 10 bcm in 2023 (see box below). Altogether, these factors already account for some 30 bcm of the additional amounts required to balance the European gas market.

This leaves a remaining gap of 27 bcm that needs to be addressed with additional actions in order to satisfy the conditions of refilling gas storage levels to 95% and maintaining gas supply security through to the spring of 2024 without excessive strains on markets and European consumers1. These additional actions are discussed in the main body of this report.

Without these additional efforts, Europe risks much less-desirable ways of bringing supply and demand into balance. These include higher spikes in gas prices to levels that force demand reductions through curtailments, alongside renewed pressure on energy bills, alongside the potential for rationing and emergency measures to protect consumers. This would have broader implications for economies and fiscal positions.

Higher coal-fired generation in Europe and elsewhere could also reduce pressure on gas markets. In 2022, nearly 20 GW of coal-fired power plant capacity in the European Union had its lifetime extended, re-entered the market, or had caps on working hours removed. Coal power plants will generate around 45 TWh more electricity in 2022 than in 2021, resulting in an extra 35 Mt CO₂ power-sector emissions. While additional gas‑to‑coal switching is possible in 2023, additional emissions would undercut the EU’s climate ambitions and are not assumed in our baseline level of demand.