A Resurgence for Natural Gas?

 Over the past five years, markets for energy have been determined by the intersection of decarbonization policies and the economic and geopolitical tensions affecting Europe and Italy. The development of renewable energy sources promoted by the European Commission has led to a steady increase in the stock of solar and wind power plants with a corresponding growing contribution of these power sources to electricity production (+150% in the 2019-2024 period), which constituted 47% of electricity generation in 2024. Coal and natural gas have seen a steady proportional decline, and contributed 29% of electricity generation in 2024. Natural gas for domestic use, while remaining the most important source of heating, declined by 21% in the five-year period from 2019 to 2024.

After the Russian Invasion

The natural gas market was hit by a major shock with the Russian invasion of Ukraine in 2022 and the reduction in European imports from Russia, primarily by Germany and Italy, with the prospect of zero imports of Russian gas in the next two years. These tensions were reflected in a rise in the price of natural gas, which in the summer of 2022 rose to more than 10 times the average price in the previous period. The sharp reduction in imports from Russia saw an increase in pipeline purchase of gas from Algeria, Azerbaijan and Norway, along with a steady growth in imports of liquefied natural gas (LNG). Unlike pipeline imports, LNG is transported by ship and is thus part of a global market. Italy has expanded its LNG terminals, increasing the weight of this energy source in the national economy, which also plays a very significant role in other countries, especially Spain.

Impact on the Electricity Market

Tensions in the gas market during the 2022-2023 energy crisis also spilled into the electricity market, because gas-fired plants, despite their decreasing share over total energy production, in many stages are the marginal and most expensive technology thus determining the wholesale price for all other power producers. The exorbitant prices paid during this phase to the less costly plants, including renewables, have led to the capture of abnormal economic rents, triggering various measures to contain prices across the EU, which however failed to eliminate the inflationary effect of gas on consumer electricity prices.

This scenario leaves open a multitude of problems regarding both short-term developments and longer-term prospects. The reduction of the dependence on Russian gas has led to a growth in the share of liquefied natural gas, potentially exposing Europe to a similar dependence on the United States, currently the largest supplier of LNG. At the same time, because liquefied natural gas is a global market, Europe is exposed to the tensions and trends coming from other major economic areas around the world: an increase in gas consumption in Asian countries, for example, leads to an increase in the price of LNG that European countries have to pay for their imports.

A Future of Large Consumption

Looking further ahead, numerous factors suggest significant growth in electricity consumption in the medium term. These include, for example, the replacement of fossil fuel heating by electricity and heat pumps. Similar substitution trends can be expected in many industrial processes, with a shift from fossils to electricity. And, despite the uncertainties over the timetable set by the European Commission, the growth of electric mobility appears irreversible. Finally, there is the serious impact that data centers and server farms, including those linked to the development of artificial intelligence, are having on the demand for electricity, because of the electricity needed for operating and cooling these infrastructures.

A New Dawn for Gas?

How will this growing demand for energy be met? Will it be driven by a steady development of renewable power generation, with fossil-fueled plants gradually declining in importance? And will the stronger role of renewables, characterized by discontinuity and non-programmability, require backup generation capacity entrusted to gas-fired plants, or will it benefit from new battery storage systems? And so, will gas, which at the final consumption stage is being abandoned in favor of electricity, find an unexpected resurgence due to the growth of the electricity supply? This is the crucial question that needs to be addressed today.