FEATURE: Winter 2022 natural gas demand collapses; price volatility, mild winter drive destruction

European natural gas demand fell across all sectors in the 2022 heating season as high gas prices triggered by the Russia-Ukraine war prompted hubs to conserve energy as well as carry out cost-saving measures.

Gas-for-power, industrial and local distribution zone demand plummeted as the market sought to reduce dependence on Russian gas flows and limit demand to ensure adequate supply for winter 2022.

In terms of pricing, the European marker Dutch TTF reached a record Aug. 26 on a volatile market and a spur to refill stock levels prior to winter. Platts assessed the TTF month-ahead contract at a record Eur319.975/MWh on Aug. 26, S&P Global Commodity Insights data showed. Thereafter, pricing fell on strong gas storage levels as the European Commission implemented a minimum storage level of 80% full by Nov. 1 across all hubs, easing demand insecurities in the market. By Oct. 3, the TTF front month fell 47% from the all-time high to Eur168.50/MWh. Despite the fall in pricing, the market was still unsure how the winter would fare, especially if it turned out unusually cold, and demand destruction became a key topic for energy security.

Gas-for-power

Focusing on the seven major hubs of Germany, France, Spain, Italy, Belgium, the UK and the Netherlands, total gas-for-power demand fell 13% on a year-on-year basis to 37.8 Bcm, according to data from S&P Global. Power generation utilizing gas became less profitable during times of volatility, with many plants switching to coal during the period. Coal switching was used to provide energy security should there be a lack of natural gas available, as Russian flows were curtailed following the halt to the Nord Stream 1 and Yamal pipelines. Notably, both the German and Italian hubs saw the greatest gas-for-power reduction on the year. German gas-fired power generation fell 20% on the year to approximately 4.5 Bcm compared to 5.7 Bcm in the previous year. Likewise, gas-for-power demand in the Italian hub slipped 21% on the year to 10.9 Bcm.

On the contrary, LNG-supported hubs France and Belgium saw an increase in gas-for-power generation, increasing 5% and 9%, respectively. France also saw continued nuclear issues due to corrosion in its aging nuclear fleet, and therefore had to rely heavily on gas power generation.

European winter 2022 gas-for-power demand:

(million cu m)

Source: S&P Global Commodity Insights

Local distribution zones

In terms of LDZ, total demand from the seven hubs saw a 14% reduction year on year to 115 Bcm. High gas prices filtered down to the typical household user and many began turning down thermostats and limiting usage to tackle high energy bills despite some support from governments. Europe found some luck in a mild winter. Temperatures held predominantly above seasonal norms with only a few cold snaps over the winter heating period. As such, LDZ demand faltered on the mild weather. The largest drop was seen unsurprisingly in southern countries like Italy that fell 20%. The UK, however, did see some cold snaps throughout the winter and as such only saw a 9% drop in LDZ demand to 29.7 Bcm.

European winter 2022 LDZ demand:

(million cu m)

*Industrial and LDZ combined

Source: S&P Global Commodity Insights

Industry

The most significant drop in demand has been from the industrial sector, with industries limiting production or all out halting works on expensive energy costs. Industrial demand has been a key topic in the market with many participants wondering when and if demand would ever return to precrisis levels. Industrial demand in Europe plummeted 18% to 47 Bcm from 57 Bcm in the winter 2022 period. Industrial gas demand fell particularly in German and Italian hubs, with both down 18%, according to data from S&P Global.

In terms of Spanish data that combines local distribution and industrial demand, demand totaled 10.7 Bcm in the winter period, falling 22% on the year, despite the Spanish hub being more sheltered to the volatile price highs on a strong LNG support system. Also, a price cap was introduced in 2022 that capped gas-for-power pricing at Eur40/MWh until November 2022 before increasing Eur5/MWh every month. The cap was extended late-March to Eur55/MWh until Dec. 31.

European winter 2022 industrial demand:

(million cu m)

*Industrial and LDZ combined

Source: S&P Global Commodity Insights

More recently, gas pricing has dropped as the market finds itself with storage levels standing at 55.65% March 31, according to data from Gas Infrastructure Europe, limiting the amount needed to fill stores back up.

Platts assessed the Dutch TTF month-ahead at Eur44.575/MWh on April 5, posting a Eur1/MWh loss on the day, according to S&P Global data.

Winter 2023 forecast

According to S&P Global's Senior Gas Analyst Tom Purdie, "heading into W-23, we expect to see a continuation of the trends we saw in W-22. Falling wholesale prices will slowly filter through to residential and commercial end-users, but this process will be progressive, meaning end-users will continue to feel the impact of above-average prices, which will lead to sustained efficiencies and rationing. As a result, we expect LDC demand to fall to 13% below the 2017-21 average, but not be as pronounced as the level of savings seen in W-22 (19% below the 2017-21 average)."

"In comparison, we forecast total power demand to rise 5% year-on-year. However, due to higher renewable generation such as wind (which is expected to rise by 7.6 GW in W-23 vs. W-22) there is less space for gas in the power mix, meaning gas-for-power demand is forecast 8.6 GW lower in W-23 vs. W-22, which equated to roughly 37 mcm/d less gas demand," Purdie added.