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McKinsey & Company: Europe may need to reduce gas demand by 55 billion m3 this year to avoid risks from supply reductions

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The latest analysis from McKinsey & Company reveals that failure to immediately reduce gas demand by 55 billion m3 could put Europe at substantial risk from a rebound in Asian demand or reductions in Russian imports.

In the wake of the war in Ukraine, McKinsey research finds that a total cessation of Russian imports could reduce Europe’s supply by 25 billion m3 and renewed Asian LNG demand could soak up 35 billion m3 of supply, while a colder winter in 2023 could boost demand by 15 billion m3. The McKinsey article ‘A balancing act: Securing European gas and power markets’ reveals that 57% of EU manufacturers would not be able to further reduce gas consumption while maintaining output over the next two years, indicating that further gas rationing measures could substantially impact the EU economy.

The analysis reveals that even if Europe meets its RePowerEU targets to reduce gas consumption and improves energy efficiency across buildings and industry, volatile gas prices and potential supply disruptions still pose a risk to many economic sectors. McKinsey projects that Europe may need to delay the phaseout of coal, extend the lifetime of nuclear plants and accelerate the expansion of renewable energy sources (RES) to reduce reliance on gas as a baseload. It also found that sustained supply-chain disruptions, slow permitting processes, and a lack of skilled workers for renewable installation could impede the required pace of RES development in Europe.

Namit Sharma, Senior Partner at McKinsey, said: “Our analysis shows there is little bandwidth to further reduce Europe’s gas demand without substantial economic damage. If the EU achieves all its gas-savings measures this could see a 24% reduction in consumption yet other potential factors such as more competition from Asia could reduce Europe’s supply by an even greater amount. The many variables at play will produce significant uncertainty and Europe’s businesses may need to prepare to mitigate these risks. This may require businesses to consider diversifying their energy sourcing and managing demand, investing in natural gas substitutes or storage and closely monitoring movements in the energy market.”

Thomas Vahlenkamp, Senior Partner at McKinsey, added: “If Europe can sustain and accelerate several gas-demand reduction measures, the market is likely to remain balanced without significant price spikes in the coming years. Europe could drive substantial gas demand reduction by accelerating industrial-electrification measures like fuel-switching and build-out of RES and through longer lifetime extensions of nuclear and coal.”

McKinsey identified several actions that can be utilised by businesses to help navigate energy market volatility and disruption:

  • Energy procurement and energy management – Diversifying energy sourcing and demand-side management could allow businesses to manage costs and stay competitive in an increasingly volatile energy market.
  • Risk management and security of supply – investment in storage or in natural gas substitutes, such as biomethane, could hedge against potential energy supply disruption while higher gas prices could boost the business case for longer-term fuel switching or electrification.
  • Signpost monitoring – Monitoring of key signposts in the energy market may allow businesses to respond to changing supply and demand dynamics, while scenario planning could help pivot between different levels of demand response.

Read the article online at: https://www.lngindustry.com/special-reports/01052023/mckinsey-company-europe-may-need-to-reduce-gas-demand-by-55-billion-m3-this-year-to-avoid-risks-from-supply-reductions/

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