Securing Europe’s Net Zero Path with Flexible LNG [Gas Expert Insights]

Securing Europe’s Net Zero Path with Flexible LNG [Gas Expert Insights]

This research examines the strategies Europe can employ to ensure energy security while meeting its decarbonisation targets, especially when renewable and nuclear resources underperform due to climatic and technological factors. Through comprehensive energy system modelling, the study quantifies the economic value of flexible LNG supplies for Europe under scenarios aligned with the Paris Agreement’s goal of limiting temperature increases to 1.5°C. The findings underscore the significance of LNG as a transitional fuel, particularly during energy crunch scenarios, and inform policies to stabilise energy prices, minimise emissions, and enhance transatlantic cooperation on energy security.

The modelling results indicate that stabilising gas spot prices during periods of market stress is essential to mitigate the economic impacts on Europe. Energy crunch scenarios, characterised by extreme weather and reduced renewable output, can cause substantial spikes in gas prices and consumer costs. The study demonstrates that access to flexible LNG supplies, particularly through LNG agreements (e.g., options, tolling and cap and floor LNG supply contracts) with North American suppliers, is crucial in moderating these price spikes. Such contracts offer European buyers the flexibility to adapt to market conditions, avoiding the long-term liabilities of traditional destinationfixed contracts and ensuring stable prices during high-demand periods. In scenarios without secured LNG contracting, wholesale gas prices could rise to as high as 144 EUR/MWh in 2030 compared to 31 EUR/MWh in the baseline scenario. On the other hand, forward contracts for flexible LNG help maintain prices close to baseline levels, yielding significant economic benefits. In 2030, these contracts are expected to reduce gas consumer wholesale costs by approximately 343 billion euros and energy infrastructure capital expenditure by 25 billion euros1 . If energy crunch events that we model in this study occur in 2030, 2040, and 2050, the cumulative discounted2 benefits would amount to 542 billion euros in consumer gas cost savings and 48 billion euros in CAPEX savings.

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The second benefit of having access to flexible LNG supplies lies in its potential to support European re-industrialisation. For example, in 2040, forward contracting for LNG leads to lower and more stable gas prices of €32/MWh compared to €68/MWh in the baseline scenario. This price stability mitigates the volatility typically associated with energy crunch events and supports higher gas consumption, projected at 293 bcm in 2040 compared to 253 bcm under the baseline scenario. This suggests that forward contracting for LNG enhances Europe’s energy security by hedging against potential supply disruptions and fostering conditions conducive to re-industrialisation. The availability of stable and reasonably priced LNG supplies can revitalise European industrial activity, increasing gas demand within the industry and supporting broader economic growth.

Thirdly, forward contracting for flexible LNG has implications for stabilising electricity and hydrogen prices, which are often closely linked to gas prices. While the direct impact of energy crunch events on electricity and hydrogen prices was not modelled in this study, it is reasonable to infer that the spikes in gas prices under such scenarios could lead to increased costs for electricity and hydrogen, especially when gas-fired power generation and hydrogen production rely heavily on natural gas. Stabilising gas prices through forward contracting would likely stabilise electricity and hydrogen prices.

This would be particularly beneficial during future energy crunch events, as it would help prevent cost escalation in these critical sectors, thereby reducing the overall economic impact on European consumers and industries.

Lastly, forward contracting for flexible LNG can avoid the extensive fiscal interventions and macroeconomic instability that Europe experienced during the 2021-2023 energy crisis. During this period, governments across the European Union, the UK, and Norway allocated approximately €651 billion3 to shield consumers from rising energy costs (Bruegel, 2023). Germany emerged as the largest spender, committing around €268 billion, which accounted for about 7.4% of its GDP (Bruegel, 2023). These extensive fiscal measures were crucial in mitigating the immediate impact of the energy crisis, particularly exacerbated by the sharp reduction in gas supplies from Russia following the invasion of Ukraine (European Commission, 2023).

In addition to direct financial support, the crisis prompted a significant acceleration in investment in renewable energy. For example, approximately 50 GW of wind and solar capacity was installed in the European Union in 2022, a record addition that reduced the reliance on natural gas by around 11 billion cubic meters in the power sector (IEA, 2023). This rapid increase in renewable energy investments was part of broader efforts to enhance energy security and transition away from volatile fossil fuel markets.

However, these sudden and large-scale fiscal interventions had broader macroeconomic implications (ECB, 2023). The energy crisis, coupled with significant government spending, contributed to inflationary pressures with potential adverse effects on political stability, investment, and consumption. While these interventions were necessary to avoid a deeper economic downturn, they could have long-term effects if not carefully managed (ECB, 2023). Thus, the sudden large transfers within society, driven by these fiscal measures, have the potential to distort economic balances and create challenges for future fiscal policy. By stabilising gas prices through forward contracting for LNG, Europe can avoid the need for such large-scale fiscal interventions in future energy crunches. This would help maintain macroeconomic stability, reduce the potential for inflationary pressures, and create a more predictable and stable environment for investment and consumption, ultimately supporting the green transition.

In summary, forward contracting for flexible LNG offers economic benefits by stabilising gas prices and supporting re-industrialisation, stabilising electricity and hydrogen prices, and helping avoid largescale fiscal interventions. These benefits make forward contracting for flexible LNG a crucial strategy for Europe as it seeks to ensure energy security and economic stability while advancing its decarbonisation goals. However, while stabilising energy prices is essential, addressing the environmental impacts of fossil fuel imports is equally important. The 2021-2023 energy crisis demonstrated how energy flows redirected to Europe, often from regions with less stringent environmental regulations, led to increased coal consumption elsewhere, undermining global decarbonisation efforts (IEA, 2022).

To avoid repeating this scenario, Europe must secure energy supplies and ensure that these imports align with more stringent GHG emissions standards, thereby contributing to the broader goal of reducing global emissions and avoiding unintended consequences of energy crunches. In particular, addressing the environmental impact of LNG imports, particularly methane emissions, is a critical first step in reducing fossil fuel imports’ overall GHG emissions footprint. The research highlights that extending carbon pricing to the entire fossil fuel import value chain (in addition to pricing combustion emissions via EU ETS) would have only a marginal impact on the EU’s total energy system costs, increasing them by about 1% over the period modelled. However, this policy significantly alters global LNG trade flow, creating economic incentives for emissive LNG exporters to improve their emissions profiles to maintain access to European markets. The policy’s revenues could also be redistributed within Europe to offset higher consumer costs, supporting public acceptance of stringent climate policy measures.

The EU’s comprehensive GHG pricing acts as a de facto climate club by imposing penalties on noncompliant exporters and encouraging cleaner energy supply practices globally. The study shows that when diverted to less environmentally regulated markets in Asia, North American LNG intensifies competition among established exporters like Australia and the Middle East, which in turn could incentivise these exporters to advocate for similar GHG emissions management measures within their primary export markets to maintain their competitive edge. This dynamic has two positive effects: (i) potentially helping to phase out coal consumption in Asia, reducing GHG emissions, and (ii) indirectly promoting wider international cooperation on methane emissions reduction. The reshuffling of global LNG trade flows due to Europe’s comprehensive GHG pricing demonstrates how strategic environmental policies can create economic pressures that incentivise wider adoption of similar measures, ultimately contributing to the broader objectives of global GHG emissions reduction.

The EU’s liberalised and integrated energy market provides the flexibility to absorb global LNG trade imbalances, positioning the region as a stabilising force during global trade disruptions. Combined with the EU’s legal commitment to achieving net zero by 2050, this market structure offers strong economic incentives for global energy players to engage with Europe while aligning with stringent climate standards. Enhancing market integration across Member States would further support efficient energy flows, infrastructure investment, and the balance between market liberalisation and climate commitments, reinforcing Europe’s position as a critical player in global LNG trade, even if it is not the largest import market.

The study suggests securing flexible LNG supplies through LNG agreements with key suppliers is crucial to maintaining price stability. In addition, the EU should explore incentive mechanisms to encourage active LNG contracting beyond the existing AggregateEU scheme, such as tightening gas security standards to account for various risks, including climate and geopolitical factors. Implementing stricter security of supply standards would enable each Member State to tailor its approach, combining options such as integrated LNG agreements, long-term contracts with emissions offset mechanisms, and demand-side response initiatives.

The EU’s commitment to net zero by 2050 is fundamental in providing long-term signals to energy – fossil, renewables and low-carbon – investors and stakeholders, reinforcing the economic viability of the low-carbon transition. Strengthening this commitment through clear and consistent climate targets aligned with energy policies and investment frameworks would attract sustainable investments and bolster the development of low-carbon technologies. Additionally, encouraging Member States to revise their National Energy and Climate Plans to extend beyond 2030 would enhance the credibility of the EU’s climate commitments and provide a clearer pathway to achieving decarbonisation targets.

The critical role of US LNG in addressing Europe’s energy crisis during 2021-23 underscores the need for strengthened transatlantic cooperation on energy security. The EU should seek to establish a cooperative framework with the US to secure a stable and reliable supply of LNG while aligning on environmental standards, particularly those related to methane emissions. Establishing common regulatory standards between the EU and the US would help ensure that LNG imports meet environmental requirements, supporting energy security and climate objectives. This cooperation would also enhance Europe’s ability to phase out Russian gas imports, a necessary step given the geopolitical and security concerns associated with continued dependence on Russian energy.

In summary, the findings suggest that Europe’s energy security during its transition to net zero by 2050 can be enhanced through a combination of market-driven LNG contracting, market integration, credible climate commitments, targeted GHG pricing, and strengthened international cooperation. Flexible LNG supplies are critical in mitigating price volatility during energy crunch events, while comprehensive carbon pricing promotes cleaner global energy supply practices. By adopting a strategic approach that balances economic, environmental, and security objectives, Europe can maintain energy security at a reasonable cost while advancing its decarbonisation agenda.

This publication was originally published by the Centre on Regulation in Europe (CERRE), authored by Chi Kong Chyong and Muntasir Shahabuddin; the full publication can be accessed here.

The statements, opinions and data contained in the content published in Gas Expert Insights are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.