Europe needs a strategy for seasonal energy balancing

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

There are different models to handle seasonal balancing. No matter the approach, what is needed is the same: investment in storage and transportation; proper price signals; and a process to manage or curtail demand when supplies are scare, writes Nikos Tsafos. [BIHLMAYERFOTOGRAFIE / Shutterstock]

As the role of gas in the energy system evolves, the approach to meeting winter peak demand must also keep up, writes Nikos Tsafos. More fundamentally, someone needs to be responsible for supply security, he argues.

Nikos Tsafos (@ntsafos) is the James R. Schlesinger chair in energy and geopolitics at the Center for Strategic and International Studies (CSIS).

The European energy crisis has been described differently, but it is clearly one thing: a crisis of seasonal energy balancing. Looking ahead, whatever else Europe does to safeguard its energy system, it needs to pay attention to balancing energy demand across seasons.

The importance of seasonality in the current crisis is clear. Markets are obsessed with the amount of natural gas in storage. High gas prices resulted not from an actual shortage but from fear that Europe might not have enough gas to make through winter.

The reason is simple: Europe’s gas consumption is 2.5-times higher in the winter than in the summer. By contrast, the seasonal swing in electricity is 30%, in oil 20%. So gas presents a unique challenge.

Europe has relied on three pillars to meet this seasonal demand: production, imports, and storage. The Groningen field in the Netherlands used to produce ten times more gas in the winter than in the summer.

Gas production in the United Kingdom and Norway fluctuated as well, but not as widely. This flexibility was crucial for energy security—almost as important as (annual) self-sufficiency.

But the European resource base is being depleted. With falling production, the capacity to match supply and demand in winter has withered.

Without the ability to modulate production, Europe must rely on imports and storage. Pipeline imports have a seasonal rhythm but are not always predictable, as Europe learned in 2021.

Seaborne gas, transported in liquefied form, is mercurial. One year Europe may soak up surplus gas, another it might struggle to compete with customers in South America and Asia who are willing to pay more.

So even though Europe’s storage capacity has increased, and will increase further, the ability to fill this storage depends on forces beyond Europe’s control.

What can Europe do?

For one, Europe needs tighter rules. Russia’s Gazprom booked storage capacity in Europe but did not use it. Certain obligations on capacity holders make sense. Europe has never managed to agree on the need to hold strategic stocks, although some countries do. Maybe it is time.

Better data would also help: the market kept guessing what the storage situation in Russia looked like. And while it is not clear if there was foul play, a serious investigation into the price spike could help restore some faith in markets.

But this seasonality challenge will remain even if Europe’s Green Deal is implemented in time—a move away from hydrocarbons is not, on its own, a solution. A heating system based on electricity could reduce demand because heat pumps are more efficient than existing systems.

But the balancing task merely shifts from gas to electricity. Even a hydrogen-based heating network will need to be balanced seasonally. Moving away from gas does not solve this predicament.

There are different models to handle seasonal balancing. One is to rely entirely on price signals, hoping extreme prices will incentivise players to build the infrastructure needed to meet seasonal peaks.

But high prices can also discourage companies from buying gas lest they are left holding gas they cannot resell. A more sensible path is to embed balancing into the overall network or market operation cost, either through rules or tariffs.

No matter the approach, what is needed is the same: investment in storage and transportation; proper price signals; and a process to manage or curtail demand when supplies are scarce.

More fundamentally, someone needs to be responsible for supply security. In the past, that task fell on state-owned utilities in a closed market.

There is no need to revert back to the era of monopolies. But the liberalisation in energy markets cannot be an excuse for no one to be responsible for security of supply. The task must fall on someone.

The energy crisis of 2021 exposed fundamental flaws of gas market design. But the real problem is season balancing. The gas system may have failed in 2021, but it has a tough assignment. No other energy source is now able to deliver as much seasonality as gas.

As the gas market changes, and as the role of gas in the energy system evolves, the approach to seasonal balancing must keep up. A real strategy on seasonal balancing is the best way to show we learned from the energy crisis of 2021.

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