Europe is structurally short of gas, relying on LNG imports to tide over the chill of winter. The continent is shifting away from the feedstock but for now, at least, securing supplies and storage is crucial.

The UK’s aims for net zero power by 2030 will have an impact on gas demand, although there continues to be some scope for the resource.

In the meantime, LNG markets and an increased reliance on interconnections with the European Union loom large for planners.

The latest Winter Outlook from the UK’s National Energy System Operator (NESO) shows an increased reserve margin this year compared to last. However, there is also a greater reliance on interconnectors.

Spare capacity will be at least 5.2 GW (8.8% of Average Cold Spell peak demand). This is higher than last year’s margin, of 4.4 GW (7.4% of the assessed Average Cold Spell peak demand).

Seeking supply

NESO said this was the result of increased interconnector capacity, returning generation availability, growth in battery storage, and increased generation connected to distribution networks.

“In combination, these changes more than offset generation retirements and other temporary capacity reductions,” said NESO.

The UK will rely on electricity imports from Europe to meet more demand at peak times. The buffer of spare capacity the UK network operator has without these links is now negative. A new link to Denmark will increase this dependence further.

Imports will increase by 30% from a year earlier, according to NESO. The agency assumes interconnectors can provide 5.1 GW when needed.

The links to Ireland have become more variable in recent years. At times of tight supply in Great Britain, there is a chance these could reverse direction in response to market needs.

Dependence on imports does carry risks during extreme winter supply tightness. Previous cold snaps have shown that exports between countries can be curtailed, even within the EU, with authorities prioritising domestic supplies over export commitments.

It has been several years since a cold winter in Europe, and during that time many more interconnectors have been built that have not been tested under such conditions. Relying on this flow could pose risks to UK power prices.

NESO identified tighter supply periods in November and December, owing to nuclear plant maintenance. “Interconnectors will play a vital role during these periods, with the UK set to be a net importer of electricity overall this winter,” it noted.

Gas plans

Gas prices set electricity prices, while LNG prices set Europe’s gas markets. This has an impact on energy prices throughout the continent. All suppliers to the power market benefit from this pricing.

In the longer term, price formation will shift from being gas driven to storage driven – but that is some way away for the time being.

European gas prices, measured via TTF, declined 4% in September from the previous month, according to GECF data.

In from the cold

European storage levels are high. According to the Swiss Federal Office of Energy, European storage is currently 95.4%, with Italy at 98% and Germany at 97.9%.

The EU has a target of reaching 90% by November 1. By the end of winter, storage may still be at 40%.

Supplementing storage is reduced gas demand. EU demand is down 15%, it said, while the UK’s gas demand in the second quarter of 2024 was down 12%. The UK does not, though, have the same levels of storage availability. What storage there is, such as Rough, is short term and commercially, rather than strategically, focused.

But colder temperatures will have an impact on energy security. The 2023-24 winter saw super El Niño conditions, which made winter more moderate.

Forecasters have predicted a 60% chance of La Niña conditions between October and February 2025.

This would drive cooler than normal temperatures in the northern hemisphere and increasing heating. It may also trigger drought in the south, for instance in Brazil, which would need more gas to compensate.

Wind is now the main alternative to gas during winter, but it can be affected by the weather. Stagnant high-pressure areas can trap cold air and reduce wind speeds and power generation.

Increased wind capacity means heavier dependence and greater risk if supply is interrupted. Some climate models predict a period of colder weather in Europe as global warming alters ocean currents allowing colder water to extend its influence temporarily.

“Coal closures across Europe are making economies more exposed to volatile gas prices on days when the wind is not blowing,” National Gas has said.

Competing for volumes

The EU wants to squeeze out Russian gas volumes from the continent’s systems. A transit deal with Ukraine is due to end this year, which could drive prices up.

LNG is the alternative.

Concerns over upward price pressure are based on potential tightness in LNG fundamentals this winter.

“We haven’t seen much in the way of LNG supply growth, but demand for LNG has been rising,” Mark Simons, head of gas and power origination at TotalEnergies, told Bloomberg at a recent London conference. The market is “reasonably tight, and as a consequence, European [gas] prices are high, as traders are worried about what that will be like in winter.”

In Europe, high storage levels will buffer supply and demand fluctuations, but if heavy drawdowns occurred, demand would rise in spring and summer as buyers restock depleted storage.

National Gas, in its report, noted NBP was trading at a premium to TTF. As such, the UK will attract cargoes over Europe – although this will limit the re-export of volumes.

Supply concerns

Given the importance of LNG to meet marginal demand, consumers are watching the market growth closely. The International Energy Agency, in a September report, cut the amount it expected to grow by in 2025 from 600 billion cubic metres, to just under 580 bcm.

Delays stem from sanctions on Russian projects like Arctic LNG 2. There have also been issues at plants under construction in Texas and Mexico.

More broadly, there is upward price pressure from geopolitical risks, including disruption to LNG flows through the Red Sea, which are already off-limits to most LNG traffic, or the Straits of Hormuz. Recent tensions between Israel and Iran may spill over into this strategic waterway.

National Gas Transmission’s latest report raises the prospect of the impact it would have on the UK. LNG imports are expected to rise this winter, to 10.7 bcm, from 8.3 bcm in 2023-24.

The US is the UK’s top supplier but Qatar is second. Disruptions in Hormuz would imperil Qatari exports, which would likely drive up prices around the world.

New supplies are coming to the market, Mexico exported its first cargo recently, delivering LNG to the Netherlands’ Gate Terminal.

But new demand is also emerging. Egypt has been a gas exporter but rising demand has seen it shift back into imports. It relies on Israeli pipeline supplies but the risk of geopolitical disruption looms large. It began receiving cargoes via an FSRU in the summer.

*Source: National Gas Winter Outlook 2024*

US reliance

The US become Europe, and the world’s, top LNG supplier. While it is far from the geopolitical strife of the Middle East there are still risks.

Inclement weather has disrupted loadings in the past, as has performance problems. But looming large is the question of political support. There are also rising construction costs.

US President Joe Biden announced a “temporary pause” in January this year, citing concerns over the market impact and from methane emissions.

A study by Robert Howarth claimed that the greenhouse gas footprint of LNG is 33% greater than that of coal. “Even considered on the time frame of 100 years after emission, which severely understates the climatic damage of methane, the LNG footprint equals or exceeds that of coal,” he said.

The claims are controversial and have been made in various forms before. But proponents of US LNG expansion will be watching the presidential elections early next month closely.

LNG on the high seas

However, current supplies seem well set up and LNG charter rates have fallen in the Atlantic. Reports suggest that some vessels are being chartered as low as $20,000 per day. By way of comparison, at the height of the 2022-23 gas crisis, some vessels were commanding more than $400,000 per day.

Typically, carrier rates would strengthen with more demand for heating. The fleet grew strongly last year, which started to balance out some of the highs seen previously. But prices have fallen since summer, as concerns around European gas tightness have eased.

With low day rates, traders may begin to shift gas into floating storage. Such a move would provide further security for gas demand in winter.

Another outcome of lower carrier rates would be a capacity to send LNG further afield, particularly into Asia.

Chinese demand growth has stuttered amid wider economic woes and a growing renewable capacity.

Japan, though, has seen delays in restarting its nuclear plants and solar installations have slowed. As a result, it may increase winter LNG buying.

The UK will continue to seek support from the LNG market, and its European connections, through winter.

Involvement in the gas market direct – and via the proxy of interconnectors – leaves the UK reliant on complex market and political risks. The government has made clear it sees a move to domestic renewables as a move for energy security. In the meantime, though, it must deal with the world as it is, rather than how it wants it to be.

There is a need for a balanced approach to energy security, particularly in light of potential La Niña conditions and the impact of weather on renewable energy generation.

In the short term, the market needs to secure supplies and manage the risk that is associated with LNG dependence.

Updated on October 24 to correct the link between gas prices and CfDs.

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