Original version of article published by E-FWD in mid-October 2024. Also, here’s a link to the E-FWD edited version LNG and interconnectors are the security focus this winter
Without the substantial Russian gas pipeline deliveries of pre-2021/22, Europe and the UK are far more reliant on the volatile global LNG market, where they have to compete with buyers from around the world. This is helping support European gas and electricity prices, despite tank-top stock levels and lacklustre demand, with considerable potential for spikes through the coming winter should temperatures in Europe or northeast Asia be significantly below normal. In addition, the UK is more heavily reliant on Europe for power supply than ever, risking shortfalls – and price spikes – should there be a scramble for supply.
Concern is mounting among some politicians in Europe over the potential for price rises in the main TTF gas market this winter, with speculators blamed for adding unwelcome volatility as the heating season draws closer. Supply risk is behind the speculation: since large scale Russian pipeline flows ceased, the marginal ‘barrel’ of gas, (and therefore power across UK and most of Europe), comes in the form of LNG for Europe – a market in which it must compete directly with Japan, China and others, with competition even possible between the UK and continental Europe. Currently the assessed price of delivered LNG is just slightly below the TTF price, and the two are likely to move in tandem throughout the winter.
Concerns over upward price pressure are based on potential tightness in LNG fundamentals this winter and comes despite European stocks being close to tank top for the third year running. Global LNG prices are higher than they were last year, and with Russian gas transit through Ukraine more likely than not to halt at the end of this year, Europe will require additional supply – much of which is likely to come in the form of LNG.
“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 SE, was quoted by Bloomberg as saying 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, the high level of storage will function as a buffer to any fluctuations in supply and demand to some extent, but if heavy drawdowns occurred then demand would rise during the spring and summer as buyers restock depleted storage.
Supply concerns
Worryingly for buyers in Europe and the UK, a number of new LNG projects and expansions around the world that were designed to meet the current phase of growing global demand keep incurring construction delays. In late September, the International Energy Agency cut its outlook for LNG capacity gains in 2025 by 20bn m3, from 600bn m3 to just under 580bn m3 in its Q3 report.
There are several reasons for the delays, including sanctions on Russian projects, notably Arctic LNG 2, as well as problems at plants under construction in Texas and Mexico.
There is also a growing threat that further upward price pressure will come from rising geopolitical risks, including disruption to LNG flows through the Red Sea (already off-limits to most LNG traffic) or Straits of Hormuz – which would impact the UK, according to National Gas Transmission in its latest report. “Coal closures across Europe are making economies more exposed to volatile gas prices on days when the wind is not blowing,” it noted.
Egypt, which had been an LNG exporter until recently, may have to buy winter cargoes should pipeline gas supply from Israel be affected by the current unrest – adding unexpectedly to potential demand.
US reliance
The US has become Europe’s top LNG supplier, with the main risks this winter coming from ongoing delays at some new plants and technical faults, which have disrupted a significant portion of output over the last year or two.
More troubling perhaps for the new net zero-focused UK government; recent studies show US LNG actually produces 33% more GHG emissions than coal when used for power generation (depending on destination), which would mean a recalculation of GHG reduction achievements to date throughout the continent and UK, and a possible reassessment of its use in the UK/EU energy system.
Further ahead, new US projects beyond those already in the pipeline are looking less like proceeding due to rising construction costs and regulatory challenges. These include a contested moratorium on new plant approvals under the current US administration and court rulings in favour of groups opposed to development on environmental grounds. A lot is likely to depend on the result of the upcoming presidential election. It will also be several years before Qatar’s LNG expansion results in more supply.
Threat of cold
Extended cold events have frequently affected a large portions of Europe, sending prices up and heightening competition among national grids and generators. However, the continent has not seen a particularly cold winter for some time, and over this period many interconnectors have been built upon which grids base their supply and availability forecasts – despite their effectiveness not having been put to the test under prolonged cold winter conditions.
La Nina conditions in the south Pacific mean long term forecasts for this winter are colder in Europe, although underlying global warming may well be enough to avoid an extended period of cold. However, cold snaps like December 2010 or late Feb/early March 2018 (Beast from the East) are certainly still possible, and drive gas demand up sharply. Cold snaps in Asia are also a risk to UK/European prices.
Wind is now the main alternative to gas during winter, and it can also of course be affected by the weather. Stagnant high-pressure areas can trap cold and reduce average wind speeds, and the power generated from it. Increased wind capacity means heavier dependence, and a greater risk if supply is interrupted for a lengthy period. Looking ahead, some climate models even predict a phase of potentially colder weather in Europe as global warming alters ocean currents allowing colder water to extend its influence temporarily.
Asian factors
Factors affecting Asian LNG supply and demand are also relevant to European prices. On the bearish side, higher nuclear and renewable capacity in China and South Korea, and the possibility of stronger coal-fired generation levels in Asia more broadly could curb LNG use in the power sector. In addition, weak global economic growth has slowed Chinese gas demand growth, while its domestic production and pipeline imports are rising.
But in Japan, still the world’s second biggest LNG consumer (after China), delays in restarting nuclear reactors and a solar installation slowdown are tightening the power supply outlook. This could increase winter LNG buying, on top of heavy summer demand due to record heat.
Falling domestic gas output in Malaysia, Indonesia and Thailand mean more LNG imports will also be needed there, while Philippines has recently joined the ranks of buyers. Strong growth in India means demand is rising there, while buying interest from some developing countries, such as Pakistan and Bangladesh, is strong but tends to be heavily price dependent.
LNG prices stable
Asian LNG prices were steady heading into October at the end of the cooling season, with China celebrating its golden week October 1-7. The average LNG price for November delivery into north-east Asia was at $13.10/mn Btu – slightly above delivered levels in Europe, which stood at $12.62/mnBtu on October 3, according to S&P Platts (other pricing agencies were at similar levels). This was a $0.21/mnBtu discount to the November gas price at the Dutch TTF hub.
By October 11, there had been little change, with prices easing back just slightly, according to Reuters; to $13.00/mn Btu for November delivery into NE Asia, down just $0.10/mmBtu. The price for December delivery was estimated at $13.30/mmBtu. In Europe, Reuters quoted S&P Platts at $12.635/mmBtu on October 10 – an unchanged $0.21/mmBtu discount to November TTF futures.
As well as LNG, European and UK gas prices can also be affected by disruption to UK and Norwegian supply, with extensions to Norwegian upstream maintenance contributing some support to TTF and NBP prices over recent weeks.
UK weak link
As well as a risk from the LNG market, the UK is also running a risk through its growing dependence on EU power supply. The latest Winter Outlook published by the UK’s National Energy System Operator (NESO) in September shows an increase in the reserve margin this year compared to last, but an even greater increase in reliance on interconnectors.
Spare capacity will be at least 5.2 GW (8.8% of Average Cold Spell peak demand), which is higher than last year’s margin of 4.4 GW (7.4% of the assessed Average Cold Spell peak demand), due to increased interconnector capacity, along with returning generation availability, growth in battery storage capacity and the effects of increased generation connected to the distribution networks. “In combination, these changes more than offset generation retirements and other temporary capacity reductions,” said NESO.
However, the UK will have to rely on imports of electricity from Europe to meet a larger portion of demand at peak times. The buffer of spare capacity the UK network operator has without these links is now well into negative territory, and another new link to Denmark that started in April has increased the dependence further. Imports of power will increase by 30% from a year earlier, according to NESO.
The dependence on imports carries risks during periods of extreme supply tightness that can be experienced during winter. A country or region’s top priority is to its citizens and previous cold snaps have shown that exports between countries can be curtailed, even within the EU. 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.
The NESO identified periods in November and December when supplies could be tighter than usual because nuclear plants will not be running due to 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.
So, while the gas price is the marginal price for electricity, the LNG price is the marginal price for Europe’s gas markets – making it key for all European energy price levels. This carries a lot of price risks for consumers, but any move away from marginal pricing would be prohibitively expensive for the UK government at least – with reasonably high prices essential to moderate its’ CfD bill, unless it wishes to fund the energy transition through general taxation. Marginal pricing is also essential to encourage storage, with the price of storage likely to take over as the marginal price as gas is phased out.