Lower Electricity Demand in Europe – What were the main drivers?

Electricity demand in the European Union is set to decline in 2023 for the second year in a row, falling to its lowest level in two decades. Drops in demand of such scale have only happened on two other occasions this century: once in 2009 in the wake of the global financial crisis, and again in 2020 as Covid19 lockdowns brought economic activity almost to a standstill.

The substantial demand declines in advanced economies contrast sharply with the growth observed in emerging economies such as China and India.

Almost two-thirds of the net reduction in EU electricity demand in 2022 is estimated to come from energy-intensive industries and this trend has continued well into 2023.

What were the main drivers behind this decline? 

1. Higher prices

European gas prices have now dropped from crisis highs but remain elevated compared to before the gas crisis began. With an average of €40/MWh in spot market, gas prices have fallen by more than 500% compared with the levels seen in the same period last year (€200-300/MWh). However, they are still double the prices in the first half of 2021 (€22/MWh).  Gas is currently expected to remain at least this high for the rest of the year based on forward prices. The recent rise in European prices due to the threat of curtailed LNG supplies from Australia is also a reminder that the risks of gas price surges remain, increasing as winter and the heating season approaches.

Source: M·Tech

Due to the price-setting role of fossil fuels in Europe’s power system, electricity prices also remain high, above €100/MWh in spot markets. This is a drop of more than 600% compared to the same period in 2022 (€600-700/MWh) but twice the price in the first half of 2021 (€55/MWh).

Source: M·Tech

 

Higher electricity prices were a major factor in the demand decline in the European Union.

2. Milder Weather

Higher than usual temperatures in the spring meant lower electricity demand due to a reduced need for heating and, in the summer, temperatures were also not high enough to cause an increase in demand for cooling with air conditioners. Undoubtedly, weather conditions have also clearly contributed to the lower demand.

3. Deployment of Renewables

The self-consumption production is demand that is no longer consumed from the electricity system, so it is clear that the deployment of renewables and the increase in self-consumption are beginning to have an impact on demand and will be accentuated over time.

The first half of 2023 shows evidence of the significant effort the EU has made to accelerate the deployment of renewables, with solar capacity additions booming in particular. After record breaking additions of 33 GW in 2022, the pace has continued in 2023. In the first six months of the year Germany added 6.5 GW (+10%) of new solar capacity, while Poland added over 2 GW (+17%) and Belgium added at least 1.2 GW (+19%). Italy installed 2.5 GW of solar in the first six months of 2023 compared to a total of 3 GW for the whole of 2022, while France added at least 600 MW in the first quarter of 2023, slightly above its deployment in the same period last year. Spain is expected to accelerate its deployment from 4.5 GW in 2022 to 7 GW this year.

Wind generation rose by 4.8% (+10 TWh) compared to the first six months of 2022, a modest increase. France had record additions of over 850 MW in the first quarter of the year, while elsewhere signs of challenges are evident. In Germany, total wind capacity only grew by 1.5 GW in the first half of 2023, and less than 2 GW of offshore wind was added across the entire EU in the same period. Spain had 1.6 GW of new wind capacity installed and Portugal only installed 28 MW.

4. Voluntary energy savings

On 30 September 2022, The European Commission agreed to electricity demand reduction targets to reduce overall electricity consumption from November 2022 to March 2023 by 10% on a voluntary basis and by 5% on a mandatory basis during peak-hours in response to soaring energy prices, and nearly all Member States succeeded in reducing their consumption over that period.

Voluntary energy savings as part of the public campaigns promoted by the governments included mainly: limiting indoor air conditioning equipment temperatures to 18°C in winter and 25°C in summer; closing the entrance to the street with the air conditioning system on and keeping doors and windows closed; favoring local production of electricity from renewable energy sources; increasing efficiency in the use of water; amongst others.

For example, Germany launched the Measures of the Ordinance to Secure Energy Supply through Efficient Short-Term Measures (EnSikuMaV). France announced an “energy sobriety” plan. Italy presented its “national energy saving” plan. Spain approved the Energy Saving Decree and subsequently the +SE Plan. Portugal unveiled its Energy Saving Plan 2022-2023.

5. Efficiency improvements across a range of different sectors 

Energy efficiency is something that has improved greatly in recent decades. Since the 2008 financial crisis, electricity demand has become decoupled from GDP, meaning that countries are using less energy to produce the same amount while minimizing waste. Improving energy efficiency is also one of the key aspects of the energy transition, and although it is not a one-off item this year, efforts to improve the energy efficiency of buildings and industries, including heat pumps and boilers, for example, or technological advances to improve efficiency and reduce emissions from internal combustion engine vehicles, make energy efficiency another factor that has contributed to low demand.

 6. Behavior and fuel switching

In a high-price environment, 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.

Similarly, energy-intensive industries were the first to respond to high price shocks in the European Union. Several industries have had to reduce production, relocate in search of affordable and secure energy and, in some cases, import finished products from outside the EU instead of manufacturing them domestically at higher costs. 

One of the alternatives for industries was to seek to purchase power directly from renewable energy suppliers through power purchase agreements (PPAs), which allows users to set long-term fixed electricity prices and protect themselves from high costs. PPAs in Europe increased by 21% in 2022, with over 180 deals signed. So far in 2023, more than 47 deals have been signed, and the recovery of the electricity markets is setting the pace for further expansion of the PPA market.

 

… it is an unresolved problem

The first half of 2023 showed some encouraging signs for the energy transition. Fossil fuel generation declined substantially due to the continued increase in wind and solar power and despite falling energy prices. However, much of this can be attributed to a significant fall in electricity demand, much of which is neither sustainable nor desirable. Most of the declines in demand came from energy- and gas-intensive sectors, such as chemicals, steel, ceramics, other materials manufacturing and fertilizers, which reduced production or shut down for long periods of time.

As energy prices gradually return to their pre-crisis levels over the next few years, some of that industrial demand is expected to return, but there will be a portion of demand that will have been permanently destroyed.

Sustained cost increases make European products less competitive than their North American or Asian equivalents, possibly until at least 2024. Some companies will be able to import cheaper intermediate goods, but this will further erode trade balances, which are already deteriorating as a result of higher prices for imported goods. If higher energy prices persist through 2024, global supply chains will begin to reorient, with international buyers shifting to non-European sources. There is a risk that these shifts will consolidate over several years of disruption and permanently damage European competitiveness.

To maintain its competitiveness, the EU needs a reliable and secure supply of affordable energy and a well-integrated energy market capable of withstanding shocks.

The REPowerEU27 plan aims to increase the EU’s energy independence and accelerate the decarbonization goals of the European Green Pact. Faster deployment of renewables and energy efficiency are key to improving our economic fundamentals, reducing energy prices and ensuring our energy independence.

Furthermore, the electrification of the economy requires the improvement of the grid to support the integration of renewables and the digitization of the energy system. Energy storage will also play an important role in ensuring flexibility and security of supply, facilitating the integration of renewable generation, supporting the grid and shifting energy to when it is most needed.  The EU has set ambitious targets and now has to meet them in order to increase its energy independence and progressively reduce the cost differential with other parts of the world.

In conclusion, the trend of the last six months must continue if national and EU decarbonization targets are to be met, but Europe cannot rely on an undesirable reduction in demand to achieve it.

 

Matilde Loureiro | Head of Operations