March 16, 2023 - In the wake of Russia’s invasion of Ukraine and a surge in energy prices, natural gas demand in the European Union fell in 2022 by 55 bcm, or 13%, its steepest drop in history. The decline is the equivalent to the amount of gas needed to supply over 40 million homes. What were the main drivers behind this decline? In this commentary we assess how changes in the energy mix, economic activity, weather, behavioural changes and other factors were responsible for this dramatic shift in natural gas consumption.

Milder winter temperatures certainly played a role. However, not all weather effects reduced gas use – low rainfall in southern Europe led to a very poor year for hydropower and increased the call on gas-fired power. Policy-driven changes were vital, most notably record additions of wind and solar capacity. High prices also played a considerable role in bringing down demand, especially in gas-intensive industrial sectors. However, the extent to which they led to permanent demand reductions remains unclear. 

As noted by IEA Executive Director Fatih Birol, it is important to credit governments for how they responded to this large and complex energy crisis. Policy measures – such as renewable support schemes, grants and preferential loans for housing retrofits and heat pump installations, alongside campaigns to encourage behavioural change – all played a part in moderating gas demand. Rapid adjustment to lower Russian gas exports and higher prices was also possible thanks to decades of reforms and policy initiatives, which enabled large consumers to lower their consumption, pursue import substitution and draw on alternative supplies across a well-meshed European gas grid. Nonetheless, there remains a vigorous debate about what weight should be assigned to each factor in reducing gas demand.

Power was the only sector in which gas demand rose above 2021 levels, with some of the notable changes caused by:

• Renewables, especially wind and solar. Thanks to ongoing policy support for renewables, around 50 GW of wind and solar was installed in the European Union in 2022, a record high. These additions avoided the need for around 11 bcm of natural gas in the power sector – the single largest structural driver of reduced natural gas demand. 

• Nuclear and hydro. The sharp year-on-year declines in both nuclear and hydropower output pushed up demand for gas-fired power, leading to a small overall net increase in gas demand in the power sector.

• Lower electricity demand. EU electricity demand fell by around 3% in 2022. This meant that around 14 bcm of gas demand was avoided. Weather played a part in reducing electricity demand, even though higher summer temperatures and drought conditions drove up gas-fired power generation in parts of Europe.

The buildings sector, which comprises both households and public and commercial spaces, used 28 bcm less natural gas than in 2021, a drop of almost 20%:

• Weather effects. Heating Degree Days – a measure of how much energy is required to heat a building due to colder weather – across the European Union were 12% lower on average in 2022 than in 2021, lowering space heating requirements. There are different ways to attribute gas demand changes to weather effects, but this could explain up to 18 bcm of the drop in natural gas consumption in buildings.

• Behaviour and fuel switching. In a high-price environment, we estimate that behavioural changes, rising fuel poverty and fuel-switching in the residential and commercial sectors reduced natural gas demand in buildings by at least 7 bcm. Data from a sampling of smart thermostat providers suggests that consumers adjusted their thermostats lower by an average of around 0.6 °C. Such adjustments were, in part, a response to government-led campaigns to reduce energy demand (as per the IEA’s 10-Point Plan). Additional savings arose from efforts to reduce heating and hot water usage in commercial and public buildings. Fuel poverty was another factor: many vulnerable consumers reduced consumption because they could not afford the higher bills, leading to cold homes or a shift to cheaper and sometimes more polluting fuels such as wood pellets, charcoal, waste or low-quality fuel oil.

• Efficiency, including heat pumps. Improved energy performance of buildings, including efficiency retrofits as well as boiler replacements, are estimated to have reduced natural gas demand by around 3.5 bcm. These structural reductions in natural gas use during seasonal peaks will carry over into future years. Around 2.8 million heat pumps were installed over the course of 2022, accounting for around 1.4 bcm of savings. There were also efficiency gains in industry as well as in the power sector, where the efficiency of the gas-fired power plant fleet was marginally higher than in 2021.

In the industry sector gas use fell by 25 bcm, or around 25%:

• Production curtailment. Energy-intensive industries were the first to respond to gas price shocks in the European Union. Several plants reduced production, and in some cases imported finished products from outside the EU instead of manufacturing them domestically at higher cost. This reduced the need for around 13 bcm of natural gas, with the fertiliser industry accounting for nearly half of this volume. Some industries also reduced their gas needs by increasing imports of intermediate gas-intensive goods, enabling overall output of final products to remain largely unchanged. This explains why industrial production in gas-intensive sectors – such as fertilisers, steel and aluminium – fell on average by around 8% in 2022 in the EU, less than the corresponding reduction in their gas consumption.

• Fuel switching. We estimate that around 7 bcm of gas-to-oil switching occurred in the industrial sector.

Overall, all these factors together contributed to a 13% drop in natural gas demand in a single year. The largest reductions in percentage terms occurred in Northern and Northwest European EU member states, where gas use declined across industry, buildings and power. Some of these factors can be considered cyclical or temporary – such as price-sensitive fuel switching or weather effects. Others, such as renewable capacity additions, efficiency improvements and sales of heat pumps, are structural – laying the foundation for lasting reductions in gas demand. There are also less desirable structural changes, such as permanent closures of factories or businesses. In the middle are changes such as voluntary actions to reduce demand or import substitutions to manage higher prices, which may not endure if gas markets rebalance and prices revert to historical averages.

Despite this historic drop in demand, the EU’s gas import bill ran close to EUR 400 billion in 2022 – more than three times the level in 2021. Russia’s share of total EU natural gas demand fell from 40% in 2021 to below 10% by the end of 2022, but the sharp increase in prices nonetheless ensured significant income for Russia over the course of 2022. Gas prices have come off recent highs and, according to Russia’s Ministry of Finance, natural gas revenues dropped by over 40% over the first two months of 2023 compared with the same period in 2022.

As we move into 2023, tensions in Europe’s gas market have significantly moderated due to favourable weather conditions and timely policy actions. However, gas supply is set to remain tight in 2023 with an unusually wide range of uncertainties and risk. These include the possibility of a complete cessation of Russian pipeline gas deliveries to the European Union, as well as potentially tighter LNG supply as China’s LNG imports recover. Weather-related factors – such a dry summer or a cold winter later in 2023 – could put further pressure on gas markets. Continuing the strong momentum in renewables growth seen in 2022 would also need sustained policy efforts.

Acknowledging these risks, the IEA hosted a Special Ministerial in mid-February. Forty governments took part, discussing how to foster gas supply security and highlighting the need for structural gas demand reduction and enhanced dialogue between consumers and responsible gas producers.