On New Year's Eve in 2021, managers at Germany's largest gas importer, Uniper SE, and owner Fortum Oyj had reasons to celebrate. The company was riding a wave of post-pandemic demand, and its share price was just off its all-time high.

Ten months later, Uniper has booked the largest loss in the history of German business at €40 billion and is facing nationalization as Europe scrambles to replace Russian gas imports. EU lawmakers are racing to shore up alternatives and protect industries and consumers from surging costs.

When it invaded Ukraine in February, Russia was Europe's largest gas supplier, and Uniper's gas business centered on a long-standing deal with Russia's PJSC Gazprom to import much of that gas.

"Like any marriage that lasts that long, it's had its trials and tribulations. However [the renegotiation and deal are] a testament to the strength of our relationship," Uniper's then-chief commercial officer, Keith Martin, said in 2017 after the company's spinoff from E.ON SE.

As the marriage of convenience broke down, Europe's access to cheap, abundant Russian gas for households and industries was cut.

In the early days of the war, the EU agreed to a €300 billion package, named REPowerEU, to end Russian gas imports by 2027, alongside sweeping sanctions targeting large parts of the Russian economy. In response, Gazprom gradually reduced gas flows, eventually leaving Germany with just about 20% of normal flows in the summer.

Gazprom closed its Nord Stream 1 line in late August, citing unplanned maintenance. Three weeks later, both Nord Stream 1 and Nord Stream 2 were struck by explosions, making them unusable — if not permanently, then certainly for many years to come.

Most of the shortfall is being made up by higher imports of liquefied natural gas from countries including the U.S., Qatar and Azerbaijan.

EU member states are also ramping up construction of import terminals. Germany hopes to receive gas via the Wilhelmshaven floating terminal from spring 2023, with more projects under construction. France is building an LNG terminal in Le Havre.

Norway's pipeline gas supplies have increased, making it now the EU's largest gas supplier.

With winter just weeks away, policy efforts have been targeted to shore up gas supplies and fill storage.

"What wasn't clear immediately is how expensive this would turn out to be and how quickly the availability of Russian gas would evaporate," said Coralie Laurencin, senior director and power and climate policy lead at S&P Global Commodity Insights. Policy discussions in the EU are now focused on managing those costs, Laurencin added.

As a result of Europe's relentless drive to secure supplies, gas prices — and, as a consequence, power prices — reached all-time highs in Europe in August, but costs receded in the following months. 

Industries, consumers turn down dial

Bolstering supply is just one action governments have taken. European nations have also asked consumers to cut energy consumption 15%, with a particular focus on expensive peak demand hours. Germany, which relied heavily on Russian imports until 2022, even requested a 20% cut in consumption from its citizens and businesses this winter.

High prices have done much of the hard work through 2022 already. Gas demand is consistently below last year's and below the five-year average consumption since 2018, according to data from Germany's network agency.

The call has been heeded. Across Europe, gas storage levels are well above the targeted 80% ahead of the heating season, and gas prices have consistently receded from their summer highs. Yet, Europe could still be in for trouble, according to Christof Rühl, adjunct senior research scholar at the Center on Global Energy Policy at Columbia University and former chief economist of BP PLC.

"One shouldn't celebrate too early," Rühl said in an interview. In fall, only 6% of gas is usually consumed and used for heating, making it too early to tell whether the gas in storage will suffice.

"Even if storage is completely full, it will last for about two-and-a-half months," Rühl said. "But the winter in Europe will last for three-and-a-half to four-and-a-half months, so even then, in countries like Germany, you will have to replenish."

Reduced demand from industry and households this winter will be crucial to prevent blackouts and large-scale industrial decline, said Anna Borg, CEO of Swedish utility Vattenfall AB, which owns power plants and residential heating businesses in central Europe.

"Unfortunately, there is no quick fix to this problem because there is a fundamental gap between demand and supply," Borg said during an Oct. 27 earnings call.

Industrial gas users, such as factories making steel, cement, fertilizer and chemicals, have reduced production across most European industry hubs, prompting concerns over economic decline.

"We need to distinguish between demand reduction and demand destruction," said Kristian Ruby, secretary general of Eurelectric, the trade association representing European utilities. "If we have completely unregulated runaway gas prices, you're going to get demand destruction."

Market interventions

The European Commission — the executive arm of the EU — set out market interventions, including windfall taxes for oil and gas producers, which are seeing record profits this year over commodity price hikes.

Similarly, power generators that do not use gas will be subject to a €180/MWh revenue cap, with funds raised then redistributed to consumers. Member states can also choose to set lower caps on these generators.

"In extraordinary times like this, it is also reasonable to have extraordinary measures, and that is what we see here," Borg said about the interventions. The success of such clawbacks will be tested by a continued signal for demand reduction, and investment in new power plants also ought not be disincentivized, Borg said.

"In our view, €180 is quite a generous starting point," Laurencin said. "It balances the need for producers to earn high revenues in this market ... with the need also to unlock some funding to support consumers."

A gas price cap remains on the table but has not been implemented, as several member states fear Europe would be outbid by other buyers on the global market and left with shortages.

Interventions into power markets without a gas price cap, however, promoted broad concerns across the utility sector.

Eurelectric's Ruby said gas markets ought to have seen intervention first, arguing that the EU has been timid in its interventions and was wrong not to introduce a cap on wholesale gas prices. "Is it healthy to have a completely unregulated gas price inform electricity prices? That should have been addressed in the wholesale gas market as the very first thing," Ruby said.

Some steps were made to rein in prices. The European Commission has proposed a price corridor to reduce volatility in the benchmark Title Transfer Facility, or TTF, gas hub and will also give the market a new basis for making contracts, a dedicated index linked to LNG. Liquefied gas, from places such as the U.S. and Azerbaijan, now makes up a larger share of overall gas volumes, and a pipeline-based benchmark such as TTF is considered unrepresentative of the value of gas by the commission.

New look at nuclear and coal

The turmoil of 2022 has also overturned long-held convictions over the closure of nuclear and coal plants.

Belgium decided to extend the lifetime of two of its reactors by 10 years, and Germany will keep two of its remaining plants online until April 2023 instead of finalizing its nuclear exit in December. Sweden's incoming government paved the way for lifetime extensions.

Coal is also making a comeback, replacing gas in power generation. Germany, France, the Netherlands and other countries are returning coal plants from standby back to normal operations.

Normality itself is likely to have changed for good in European energy. For regulators and industry, the task of grappling with surging gas and power prices will not recede into the background anytime soon, Laurencin said, adding that industry and consumers will have to pay higher energy prices for a long time to come.

"We are in a completely new market," the analyst said. "This isn't a parenthesis or a blip. This is a situation that's going to last for the next three years, possibly more."

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