Gas volatility threatens phaseout of coal

This is one of the findings from McKinsey & Company, which found that failure to immediately reduce gas demand could put Europe at ‘substantial risk’ from a rebound in Asian demand or reductions in Russian imports.

As a consequence of the war in Ukraine, McKinsey research finds that a total cessation of Russian imports could reduce Europe’s supply by 25bcm and renewed Asian LNG demand could absorb 35bcm of supply, while a colder winter in 2023 could boost demand by 15bcm.

The McKinsey analysis titled ‘A balancing act: Securing European gas and power markets’ shows 57 per cent of EU manufacturers not being able to further reduce gas consumption while maintaining output over the next two years, indicating that further gas rationing measures could impact the EU economy.

Furthermore, even if Europe meets its RePowerEU targets to reduce gas consumption and improves energy efficiency across buildings and industry, volatile gas prices and potential supply disruptions still pose a risk to many economic sectors. Consequently, Europe may need to delay the phaseout of coal, extend the lifetime of nuclear plants and accelerate the expansion of renewable energy sources (RES) to reduce reliance on gas as a baseload. Sustained supply-chain disruptions, slow permitting processes, and a lack of skilled workers for renewable installation could also impede the required pace of RES development in Europe.

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In a statement, Namit Sharma, senior partner at McKinsey said: “Our analysis shows there is little bandwidth to further reduce Europe’s gas demand without substantial economic damage. If the EU achieves all its gas-savings measures this could see a 24 per cent reduction in consumption yet other potential factors such as more competition from Asia could reduce Europe’s supply by an even greater amount.”

Sharma continued: “The many variables at play will produce significant uncertainty and Europe’s businesses may need to prepare to mitigate these risks. This may require businesses to consider diversifying their energy sourcing and managing demand, investing in natural gas substitutes or storage and closely monitoring movements in the energy market.”

According to McKinsey, several actions can help businesses navigate energy market volatility and disruption:

• Energy procurement and energy management – Diversifying energy sourcing and demand-side management could allow businesses to manage costs and stay competitive in an increasingly volatile energy market
• Risk management and security of supply – investment in storage or in natural gas substitutes such as biomethane could hedge against potential energy supply disruption while higher gas prices could boost the business case for longer-term fuel switching or electrification
• Signpost monitoring – Monitoring of key signposts in the energy market may allow businesses to respond to changing supply and demand dynamics, while scenario planning could help pivot between different levels of demand response.