European Gas Market: Stakes, Priorities, and Potential Solutions. Focus no. 93, April 2023

The deterioration of the geopolitical context, following Russia's invasion of Ukraine in February 2022, triggered a crisis in the European Union's energy system by leading to an 80% reduction in Russian natural gas imports, which represented 45% of European consumption in 2021. Despite effective consumption reduction policies, the natural gas market was severely disrupted in 2022, with its spot price rising from Euros 80/MWh to over Euros 300/MWh between January and August 2022. The rise in gas prices was transmitted to the electricity market as gas-fired power plants were often the last technology to be called upon to produce, setting the price on the hourly spot electricity market. The specific issues at stake in the electricity market are dealt with in the CAE's Note No 76 'The triple challenge of the reform of the European electricity market'. The purpose of this Focus is, in addition to the Note, to set out the considerable challenges linked to the gas market, and the strong uncertainties surrounding the future of the European energy in the short term. Although gas prices have returned to pre-2022 levels in the early spring of 2023 and there are no expectations of higher prices in the coming year, this does not mean that the crisis is behind us. Indeed, there are many sources of disruption that could lead to a new price surge: a cold spring or hot summer in the northern hemisphere, a winter drought in Latin America reducing hydroelectric production, a macroeconomic recovery in China, the world's largest consumer of LNG, a disruption of Russian pipelines that still supply 10% of European needs, an industrial accident, such as the one at the Freeport liquefaction terminal in Texas, or sabotage, such as the one on the Nordstream pipeline in September 2022. This Focus sets out the priorities for reducing this uncertainty and proposes several levers to adapt to the changing context. Far from being powerless, the European Union has leverage to effectively manage the current energy crisis. To develop an effective and proportionate response, the first essential step is to improve our information on the supply plans of the major gas market players, their exposure to short-term price volatility, and to reduce the uncertainty about the effectiveness of public actions. Second, while joint gas purchasing at the European level is a reasonable response to the energy crisis, we emphasize the fact that its success will depend on its implementation: several adjustments regarding the organisation of negotiations and allocation mechanisms are open to European players seeking to build such a project in the months to come. (authors)