Europe’s latest energy warning reflects a shift in the nature of the continent’s energy problem. The European Union is not currently describing an immediate physical shortage of gas and electricity, but it is facing a combination of high prices, disrupted international energy flows and lower-than-desired gas storage levels ahead of winter. EU Energy Commissioner Dan Jorgensen has urged governments to consider measures that could reduce gas and electricity consumption while continuing to strengthen storage levels.

The significance of the warning lies in its emphasis on demand. Europe spent much of the previous energy crisis searching for alternative supplies, increasing liquefied natural gas imports, expanding renewable energy and reducing dependence on Russian pipeline gas. The latest shock shows that supply diversification alone cannot completely protect the region from global energy disruptions. When international prices rise sharply, reducing consumption becomes another form of energy security.

Supply Dependence Still Leaves Europe Exposed

Europe’s vulnerability comes partly from its continued dependence on imported energy. Foreign suppliers provide a large share of the bloc’s gas requirements, meaning European consumers remain exposed to international price movements even though the region has reduced its dependence on Russian pipeline supplies. The disruption surrounding the Strait of Hormuz has intensified pressure on global oil and gas markets, pushing European energy costs higher.

Gas storage has become especially important because winter demand can rise sharply when households and businesses require heating. EU-wide storage was around 70% full, significantly below the level recorded at the same stage a year earlier. That does not automatically mean Europe will run out of gas, but it reduces the margin available to absorb a prolonged supply disruption or an unusually cold winter. The problem is therefore partly about timing. Europe needs to enter winter with sufficient reserves, but high prices can make storage injections more expensive. Governments and energy companies consequently face a difficult decision between buying more gas at elevated prices now and accepting greater exposure to market conditions later.

The call for lower energy consumption is significant because demand reduction can influence the market through two channels. First, lower consumption reduces the quantity of energy that governments and companies need to purchase from international markets. Second, weaker demand can reduce competition for limited supplies, potentially limiting further upward pressure on prices.

Measures under consideration include reducing heating levels in public buildings, limiting outdoor heating and switching off unnecessary public lighting. These measures may appear relatively small individually, but they become more significant when applied across multiple countries and large public systems.

Demand reduction also provides governments with an option that does not depend entirely on building new infrastructure. New pipelines, liquefied natural gas terminals and generation facilities can take years to develop. Efficiency measures and consumption reductions can sometimes be implemented much faster.

The difficulty is political and economic. Reducing energy consumption can affect households, businesses and public services, particularly if restrictions become extensive. Governments therefore need to distinguish between unnecessary consumption and energy use that is essential for economic activity and living standards.

Europe Is Better Prepared but Not Fully Protected

Europe’s position today is different from the energy crisis that followed Russia’s reduction of gas deliveries in 2021. The region has expanded liquefied natural gas import capacity, increased renewable generation and reduced gas consumption. These changes have made the European energy system more diversified than it was several years ago.

Renewables have also reduced the role of gas in electricity generation. According to ECB Vice-President Boris Vujcic, renewable energy now accounts for about half of electricity consumption in Europe, while energy efficiency has improved across buildings and industry. This means gas is not as dominant a marginal driver of electricity prices as it once was.

Yet oil and gas remain deeply embedded in transportation, heating and industrial production. That is why a disruption in global energy markets can still produce significant inflationary pressure even when Europe’s electricity system is increasingly renewable.

The challenge is particularly acute because energy prices affect the wider economy. Higher fuel and electricity costs increase transportation expenses, manufacturing costs and household bills. Companies may pass some of those costs to consumers, creating secondary inflationary effects.

The Winter Will Determine the Scale of the Pressure

The most important variable is likely to be how long high prices persist and what weather conditions Europe experiences. A mild winter would reduce heating demand and make existing gas reserves more adequate. A cold winter would increase consumption at precisely the time when storage levels and international supply conditions could be under the greatest pressure.

This is why the EU’s warning is focused on preparation rather than declaring an immediate shortage. Governments still have options, including demand management, additional imports, storage injections and greater use of alternative energy sources. The broader lesson is that energy security is no longer simply about securing more supply. It also depends on how efficiently economies use energy and how quickly consumers can reduce demand when global markets become unstable.

Europe’s current situation therefore exposes a structural limitation in its energy transition. The continent has made substantial progress in reducing dependence on vulnerable suppliers, but it remains connected to global commodity markets. The ability to manage demand may increasingly become as important as the ability to secure additional supplies.

(Adapted from Investing.com)

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