October 2023
Downside risks on the
horizon
Winter 23/24 outlook for European gas,
power, and carbon markets
ICIS Analytics
Executive Summary
There is currently a lot of focus on European gas and power demand as any kind of recovery would be
a bullish price driver this winter. However, we see no evidence to date of demand recovery, across either
industrial or non-industrial sectors, and the ICIS Base Case view is that we will see almost no recovery
this winter vs. the 5-year average from 2017-2021, which will continue to add bearish pressure to prices.
We instead anticipate a slow recovery in gas and power demand between 2024 and 2026 as prices begin
to normalise with a change in the global LNG supply-demand balance.
Given Europe’s pivot to an increasing reliance on LNG, events in the global gas market (especially
demand in Asia) has the potential to apply a bullish shock to prices. However, we see this as a low-risk
probability event this winter, with Japanese and Chinese demand likely to remain subdued.
European pipeline gas supply going into winter is not expected to alter significantly to recent flow
profiles. The greatest risk to European pipeline supply remains Russia, particularly the volumes delivered
via Ukraine, but flows from Russia to Europe have been consistent for over a year and we anticipate any
reduction to be a low probability event.
Likewise, the European power supply position remains far more positive than was the case heading into
last winter, with hydro reservoir levels in key markets near to or above historical averages, and no major
concerns with the French nuclear fleet (though the increase in output will be partially offset by nuclear
plant closures in Germany and Belgium).
As is always the case with winter, the weather will be a crucial price driver given its impact on demand,
as well as the growing impact it has on renewable supply as capacity expands. Our Base Case assumes
normal weather, meaning that there is upside and downside risk to our forecasts. Europe has entered
winter with above average temperatures, and though it is far too early to confidently predict
temperatures and wind speeds in the rest of winter, several long-range forecasts are suggesting a
slightly greater probability of a mild winter.
While there are undoubtedly bullish risks for the winter period, we see each of the main threats (except
for cold weather) as low probability events. Given the anticipated lack of demand recovery and a high
likelihood of adequate domestic supply of gas and power, our view for winter is bearish. If Europe was
to see another mild winter, we expect prices on both commodities to deliver significantly below current
forward prices.
However, while the price trend is likely to be bearish, we expect gas and power prices to continue to be
volatile. As we have seen all year, the market can respond to news of weather forecasts, demand data
or perceived supply risks with significant daily price moves, and we expect this to continue throughout
the winter.
2
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ICIS Analytics
Demand Expectations
3
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ICIS Analytics
Industrial Demand
No respite for EU industry
EU producers are facing strong economic headwinds this year. While the headline EU-27 manufacturing
index has shown resilience, there is a significant divergence to the downside for energy-intensive subsectors of EU industry. On average, over H1 2023, the EU-27 industrial index registered a -18%, -10%
and -12% decline in chemicals, steel, and aluminium production YoY.
EU-27 Production Index
135
125
115
105
95
85
75
65
Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023*
Manufacturing Index
Pulp & paper
Basic chemcials and fertilisers
Cement & Lime
Steel production
Aluminum production
[Sources: Eurostat, ICIS]
Demand destruction: A story of both permanent and temporary shut-downs
The 2022/23 demand destruction has been a story of two tails. Firstly, optimisation activities as seen
with BASF, which plans to permanently close one ammonia plant and several associated fertiliser
facilities at its Ludwigshafen site. Secondly, this has been a story of temporary shutdowns driven by the
lingering high-cost and low demand environment. European gas prices remain considerably higher than
pre-crisis levels, which is keeping margins extremely tight for producers and, in some cases, incentivising
import substitution. For example, Yara has confirmed that it will continue to import ammonia while
curtailing EU production capacity.
Winter outlook not looking bright
Looking ahead, we expect a large share of energy-intensive production capacity to remain idled or
operate below BAU utilisation rates. A sub-sector showing significant weakness is the chemicals industry.
Organic chemicals and ammonia production is expected to be operating at ca. 65-70% utilisation rates
for the rest of 2023. For Ammonia production, elevated gas prices are keeping margins extremely tight.
In H1 2023, profitability improved. However, collapsing ammonia prices driven by weak demand quickly
eroded this development. Looking forward, margins for new ammonia production are in-line to weaken
further in the next 6-months with the winter contango on the ICIS TTF gas curve expected to erode
notional profits in Q4 ’23. Looking beyond this winter, the gas curve is elevated across 2024 with
winter ’24 now the highest price period. Ultimately, this makes unprofitable fertilizer production a real
prospect in the upcoming 18-months. To conclude, we see limited prospect for a tangible recovery in
industrial demand towards year-end.
4
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ICIS Analytics
Gas & Power Demand
No signs of recovery so far this year
European gas and power demand has seen significant declines so far this year. In the first nine months
of 2023, European gas demand fell by 11% compared to the previous year and 17% compared to the
2017-2021 average. The equivalent figures for the power sector were 4.3% vs 2022 and 7% vs the 5year average.
The most notable aspect of gas and power demand so far this year has been the lack of any kind of
recovery even as wholesale prices have declined substantially from their peaks back in August 2022. Gas
and power demand have consistently been at least 10% and 5%, respectively, below the 5-year averages
in each month of 2023.
Monthly European gas
demand forecast deltas
4.0%
2.0%
March
February
January
December
November
October
July
June
September
-6.0%
August
-4.0%
May
-2.0%
April
0.0%
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
Monthly European power
demand deltas
-8.0%
-10.0%
-12.0%
v2017-2021 average
YoY
vs 2017-2021 average
YoY
[Source: ICIS]
In major gas consuming markets such as Germany and Great Britain, residential-commercial demand
has been on average 13% and 17%, respectively, below the five-year average. Industrial gas offtake,
which is the most price-responsive, has seen declines of 28% below the 2017-2021 range in countries
such as Germany in the first nine months of 2023.
Demand to remain supressed this winter
The ICIS Base Case view is that demand will remain subdued throughout the winter, with gas demand
expected to be 17% below the 5-year average, while power remains 7% below.
Wholesale and consumer prices remain at high levels by historic standards, as do inflation rates. We
expect that many of the behaviour-based changes that have been seen since the start of last winter and
continued throughout 2023 will remain prevalent throughout this winter.
The ICIS view across both gas and power is that a slow demand recovery will be seen between 2024 and
2026, with prices by the latter year returning towards pre-crisis levels with the increase in global LNG
supply, which will help to incentivise a demand increase. On the power side, electrification requirements
are expected to mean that demand rises above 2021 levels by 2026 and continues increasing thereafter.
Given recent high energy costs and the roll out of new industrial capacity outside of Europe in recent
years, we assume some gas demand destruction in Europe is now permanent.
5
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ICIS Analytics
Supply Outlook
6
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ICIS Analytics
Global LNG Outlook
Tight balance remains
The availability of LNG into the global market and the demand for that liquified natural gas from Asia
will be key to Europe's ability to secure sea-borne volumes this winter. Naturally, the premium price of
the ICIS TTF over spot indices in Asia will provide a signal to market participants, but the fundamental
balance and interplay of the basins will be a major source of price risk and volatility. Our view is that
while the LNG market remains tight and slightly undersupplied, much of that shortness is focused on
the Pacific basin and particularly during Q1 2024. We see the Atlantic basin as being sufficiently well
served this winter to meet LNG demand in the EU and GB. We see West European LNG arrivals as in line
with a year earlier, with Q4-23 arrivals at 26.8m tonnes and Q1-24 imports at 26.3m tonnes.
While concern over Australian LNG production has driven European market volatility through
September, ultimately volumes from Gorgon and Wheatstone have not dropped. We do not foresee
any other supply side risks that would have an undue impact on the LNG market. Most crucially, our
view on Japanese and Chinese LNG demand is bearish and neutral, respectively. And it’s the role of these
two major importing nations which ultimately set the demand-side balance.
Japanese demand down, early concerns over China rally wane
In Japan, we expect LNG demand in 2023 to be around 10% lower than a year earlier and this trend to
import below the 2017-2021 range to continue into next year. Restarts at nuclear power plants has led
to August reactor outputs hitting just over 8TWh and while we anticipate this to decline into winter,
monthly generation should remain above 6TWh/month through this winter and well above nuclear rates
in Winter 2022/23.
Japanese LNG import
Chinese LNG imports
10.0
10.0
8.0
6.0
2017-2021 range
2023
2025
2022
2024
2017-2021 range
2023
2025
Dec
Oct
Nov
Sep
Aug
Jul
Jun
Apr
May
Feb
Dec
Oct
Nov
Sep
Aug
Jul
Jun
May
Apr
0.0
Mar
2.0
Feb
2.0
Mar
4.0
4.0
Jan
m tonnes
6.0
Jan
m tonnes
8.0
2022
2024
[Source: ICIS]
Along with higher nuclear output we expect conservative power demand across Japan, which – August
aside – has also been below five-year ranges for much of the year. This, coupled with increased use of
coal-fired generation, leads to the market share of gas-fired generation being squeezed, which in turn
will continue the trend of falling Japanese LNG imports.
In China, the weaker economic situation than expected at the start of the year has translated into 2023
LNG imports being marginally weaker than the bumper year of 2021. So, while we expect LNG growth
in China, the growth rates are noticeably below what many had anticipated at the start of the year.
7
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ICIS Analytics
European Gas supply
Ukraine transit a low-probability risk
European pipeline gas supply going into winter is not expected to alter significantly to recent flow
profiles. Aside from the variability of LNG, the greatest concern to European pipeline supply remains
Russia, particularly the volumes delivered via Ukraine. Russia’s Gazprom has now been flowing gas to
the EU at consistent low rate of around 2bcm/month for a year and we expect this continue in our base
case. These volumes are delivered via both Ukraine and Turkey, with transit via Ukraine holding the
most risk of an abrupt stop.
We assume most buyers of Russian gas that receive volumes via Ukraine have de-risked this from their
books, meaning that were a halt to occur it would not lead to a sizable volumetric jump in buy-side
short-covering. The likelihood prices would rally remains high, nevertheless. Overall, we see the
probability of a Russian pipeline supply cut as low.
Norway and Algeria to continue to flow
Norway as Europe’s largest outright supplier of gas is not scheduled to experience any major outages,
particularly given the protracted nature of summer maintenance that led to extensions into early
October. Norway is expected to deliver just over 10bcm/month from November until early February
2024. We expect North African flows will remain within recent ranges, with Algeria delivering
2.6bcm/month to Italy and Spain combined, and Libyan volume holding at 0.2bcm/month. Deliveries
from Algeria’s Sonatrach into Europe can be volatile, being driven by both buy- and sell-side nominations;
however, for this winter we expect offtake to be in line with recent rates. Gas delivered via the TAP
pipeline into Southeastern Europe from Azerbaijan should continue at 1bcm/month.
Domestic production of gas within Europe – meaning the EU and Britain – will volumetrically not be
overly different from the summer or previous winter. The glaring difference will be more symbolic in
the closure of the giant Groningen field in the Netherlands. In Great Britain, no key changes to
production profiles are anticipated.
EU11 + GB storage fullness
100
80
%
Enough storage to last the winter
The combined impact of lower demand with
Western European LNG winter supply around
53m tonnes should mean conventional storages
empty at slower-than-normal rates. We expect
stocks at 49% by the end of March, down slightly
year on year, but above what was typical preCovid. A certain amount of risk has, however,
been priced into European contracts assuming a
heavy storage draw. Given we do not expect this
to happen we foresee bearish movements
driven by storage repositioning as 2024
commences.
60
40
20
0
2022
2023
2023 f
2024
[Source: ICIS]
EU11 = DE, NL, FR, BE, ES, AT, IT, SK, CZ, PL, HU
8
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ICIS Analytics
European power supply
Heading into the winter of 2022/23, Europe faced two significant sources of supply concern:
hydropower and French nuclear generation. In both cases the outlook for Europe is significantly
improved compared to 12 months ago.
Hydropower reservoirs at or above historical averages
On the hydropower side, Norway entered October with reservoirs 21% up on the same week in 2022
and 4% up on the 2015-2021 average, while more wet weather is expected in the first half of October.
This should be bearish for German and GB power prices given the interconnection between each
country and the NO2 zone, with ICIS Power Foresight forecasts showing high levels of imports
throughout the winter.
In Southern Europe, the hydro outlook is vastly improved from 12 months ago, with French and Italian
reservoir stocks starting the winter 25% and 51%, respectively, above the same period last year.
French nuclear availability to reach 320-325TWh this year
France has now largely overcome the substantial problems it faced in 2022 due to reactor corrosion
issues and the impact of delayed maintenance due to Covid. In September, nuclear output was 48%
higher than the same month in 2022 and generation is set to remain far above last year’s levels for the
rest of the winter.
In the absence of major new outages in the coming weeks, ICIS Power Foresight projects French
annual nuclear generation to reach 320-325TWh for 2023, which is towards the top end of EDF’s
anticipated range of 300-330TWh. Between October and March, ICIS forecasts output to be 21%
higher than the 2022/23 winter.
Nonetheless, generation is still anticipated to be below the 2015-2021 range for much of the winter,
while outside of France generation is set to continue at historic lows due to the closure of plants in
Belgium and GB, as well as the full phase-out in Germany.
When countries outside of France are also considered, European nuclear output is only forecast to be
6% higher than the previous winter. However, Europe does not face the risk of substantial uncertainty
over nuclear output, which was the case heading into last winter.
Rest of Europe generation
45
45
40
35
30
25
20
15
TWh
40
35
30
25
20
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
TWh
French nuclear generation
Range 2015-2021
2022/3
Range 2015-2021
2022/3
2023
Forecast 2023/4
2023
Forecast 2023/4
[Source: ICIS]
9
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ICIS Analytics
Fuel switching dynamics
The gas-to-coal fuel switch revival
In H1 2023, amid falling gas prices, coal-to-gas fuel switching experienced a revival. Looking towards
winter though, the forward fuel switch curve implies a likely gas-to-coal reversal. Average efficiency coal
plants (39%) are expected to run ahead of gas plants (50%) from Dec ’23 and throughout the winter.
As a result, utilities are likely to hedge EUAs based on more favourable coal generation economics for
the next 6-9 months. Timing wise, forward fuel switch curve currently indicates Dec ‘23 as the key
turning point. This could obviously be altered depending on gas price volatility.
DE coal-to-gas fuel switching curve
250
EUR/tCO2e
200
150
100
50
0
Nov-23
Dec-23
Q1 '24
Q2 '24
Q3 '24
Q4 '24
German fuel-switching channel
Fuel-switch costs - coal 39%/gas 50% (average efficiency plants)
Dec-23 EUA price
[Sources: ICE, ICIS]
Gas-to-coal fuel switch will limit EUA downside
EU27 cumulative power emissions in 2023 are 25% down YoY and the lowest on record. To be clear, the
expected winter gas-to-coal fuel switch will not create any bullish EUA dynamics considering the overall
bearish fundamental picture ahead. We can rather expect that the increase in the emission intensity of
EU fossil-fired generation this winter is expected to at best limit further downside for power sector
emissions in Q4 ’23.
Bearish EUA price risk if gas misbehaved on the downside
On the risk side, we should not rule-out the possibility of seeing the fuel switch curve shift downwards
this winter, which would result in additional bearish EUA pressure. This would be similar to what was
observed during the 2022/23 winter when the risk premium evaporated from prices and shifted to the
following winter period.
We are already starting to see that for the gas market with the higher price contracts now seen in
Winter ’24. For EUAs, should we see a decisive downward correction in the fuel switch curve, there is a
risk that utilities will begin to unwind previously hedged EUA positions as there is a re-optimisation for
gas-fired generation. Hence a bearish risk for the upcoming winter 2023/24. See the EUA price forecast
section at the end of the report for more details.
10
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ICIS Analytics
Weather impact
11
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ICIS Analytics
Power demand & supply
Variability in weather is having an increasingly important impact on European energy markets each
winter as Europe expands is renewable capacity. There can be large variations in wind output
depending on weather conditions, which has a direct impact on power markets and an indirect impact
on gas and carbon markets (since gas plants are the main technology to ramp up and down in
response to wind availability).
We assessed historical winter weather data for 43 European power market zones going back to
1999/2000 to highlight the variability in power sector demand and renewable output depending on
the weather conditions. The data below is represented in terms of the upward and downward
variability compared to our Base Case.
Winter 2023-2024 power demand:
Potential deviation from base case due to weather conditions (TWh)
15
10
TWh
5
0
-5
-10
-15
FR DE NO GB SE IT ES FI PL CH BE AT CZ NL GR DK BG RO HU PT SK IE EE LT HR LV SI CY
Downward deviation
Upward deviation
Winter 2023-2024 solar and wind generation:
Potential deviation from base case due to weather conditions (TWh)
30
TWh
20
10
0
-10
-20
DE GB ES SE FR NL DK PL IT PT NO IE BE FI AT GR RO HU LT HR CH EE CZ BG LV SK SI CY
Downward variation
Upward variation
[Source: ICIS]
France has the largest potential demand swing (around 25TWh, which is 10% of the Base Case
demand), because of both high absolute demand and a high share of electric heating. For comparison,
the swing in Germany is 14TWh, while it is below 10TWh in all other European countries.
On the solar/wind side, Germany has by far the greatest potential swing (35TWh), followed by GB
(19TWh) and Spain (11TWh). The size of installed wind capacity (onshore and offshore) is the primary
determinant of the magnitude of the potential swing, and these swings will therefore continue to
grow in the years ahead.
12
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ICIS Analytics
The aggregate results for all European countries show a potential demand swing of 80TWh (around 5%
of Base Case demand) and a solar/wind swing of 70TWh (around 14% of average solar and wind
generation).
The overall swing in residual demand is 150TWh (around 13% of Base Case residual demand). With gas
being the main technology to be impacted by variability in European demand and renewable supply,
the results translate to a weather-driven swing of around 15-20bcm in gas demand from the power
sector, which also has a significant impact on emissions over the winter.
Latest weather projections
Long-term weather is notoriously difficult to predict, so the current projections should be viewed
sceptically at present. However, the C3S multi-system seasonal forecast of the EU Copernicus climate
change service is currently forecasting large parts of Europe to be 0.5 to 1 degree above the long term
mean between December and January. The results combine eight different seasonal models from
various weather agencies.
[Source: Copernicus]
13
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ICIS Analytics
Price Outlook
14
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ICIS Analytics
Gas, power & carbon price expectations
Gas
We expect there to be greater chance of downside risk on the ICIS TTF, than upside, for the coming
winter and as a result predict monthly winter prices to weaken as they approach delivery. The
underlying driver to this is our view that demand from industrials will not recover relative to 2017-2021
rates and nor will we likely see residential-commercial consumption rebound notably winter-on-winter.
This is due both to price signals and expectations of a warmer-than-normal start to winter. In the
absence of cold weather, gas-to-power demand is expected to be broadly similar to last winter.
The LNG market’s two largest importing markets: China and Japan, also show little sign of spiking
demand, which could otherwise lead to a tightening LNG supply margins within Europe and lead to
prices firming. While Japanese LNG imports are actively falling year on year, the growth in China is more
muted than had initially been feared by some. Notwithstanding Russian pipeline supply via Ukraine, no
clear upside risks are seen to pipe supply on Europe’s doorstep. The prospect that around 42mcm/day
of Gazprom supply is lost is considered a low probability event. Were it to occur, however, prices would
undoubtedly find some support.
The combination of continued low demand and adequate supply of both pipe gas and LNG will mean
storage withdrawals will occur at a slower-than-normal rate and end the winter at around 49% full. This
would pull risk from current winter prices, which in turn would lead to Summer ’24 and Winter ’24 prices
sliding too.
Power
Gas prices will continue to be the most significant driver of power prices over the winter period, given
the role of gas plants in setting power prices in the largest share of hours in most European countries.
As outlined in the weather section above, temperatures will also play an important role in price
formation, with potentially large swings in demand in countries with a high share of electric heating
within their demand. Given the increase in renewable capacity in Europe, volatility in supply will also
be driven by the weather, with Germany and GB in particular having potential for substantial swings in
generation depending on how windy the winter is. This will also have a knock-on impact on both gas
demand and emissions within Europe.
However, with power demand likely to remain supressed throughout the winter, and any fears over
hydropower and nuclear supply having largely receded in recent months, we do not see any major
potential for prices to increase outside of gas bullishness or colder than normal winter conditions.
The French winter contracts have been significantly overvalued throughout the year, with the price
not justified by the likely supply and demand balance at any point. A relatively small amount of risk
premium remains on the French Q1 contract (~€16/MWh), but we expect this to be eroded before
expiry of the contract. Our modelling suggests that France is likely to be a net exporter throughout the
winter, including to Germany, which has historically not been the case.
15
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ICIS Analytics
500
450
400
350
300
250
200
150
100
50
0
01-Mar
350
300
250
200
150
100
50
€/MWh (risk premium)
€/MWh (price)
French OTC price vs ICIS Forecast (Q1 2024)
0
01-Apr
01-May
01-Jun
Risk premium (right axis)
01-Jul
01-Aug
OTC Price
01-Sep
01-Oct
ICIS Forecast
[Source: ICIS]
Carbon
The ICIS EUA price forecast suggests a sideways trend in EUA price towards the end of 2023 with an
overall tight trading range around the €80-85t/CO2e. On the upside, if the EUA price was to break above
the €85t/CO2e level, we expect this development to be short lived due to the underlying bearish market
fundamentals with low power and industry emissions.
On the downside, the €80/CO2e mark will constitute a key support level as the EUA market remain
fundamentally short over 100m allowances in 2023. Our EUA price forecast already reflects future gasto-coal fuel switch in Dec ’23. However, this could also constitute a downside price risk should the gas
price experience downside pressure. In that context, the support EUA level of €80/tCO2e could be
tested on the downside.
As for 2024, our ICIS EUA price forecast models further downside pressure. The main drivers will be
heavy auction supply and a challenging demand environment. On the supply side, REpowerEU will add
around +87m additional supply volumes in 2024. On the demand side, we expect limited power and
industry emissions recovery.
EUA price forecast
82
81.3
80
EUR/tCO2e
77.73
78
76
74.39
74.52
73.49
74
72
70
Q4 2023
Q1 2024
Q2 2024
Q3 2024
Q4 2024
EUA price (Oct '23 base case)
[Source: ICIS]
16
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ICIS Analytics
About ICIS Energy Analytics
ICIS takes a cross-commodity approach to assessing European energy markets, shedding light on the
interplay between gas, power, and carbon markets. Our European models take a common view on the
price of commodities with a unified weather assumption that gives users a clear and consistent
integrated view of the market.
ICIS Power Foresight provides daily forecasts for European power markets, from month+1 to year+3,
enabling users to see whether contracts are undervalued or overvalued by the market. All the key
fundamental data is also provided, down to the hourly level.
ICIS Gas Foresight provides traders and analysts with a daily forecast on the delivered, fair-value price
of the ICIS TTF and other key hubs over the traded horizon. This is accompanied by a corresponding
fundamental forecast for key European markets.
ICIS LNG Foresight gives traders and analysts a rolling 24-month global LNG forecast for both supply and
demand, covering each liquefaction plant and importing market individually. The forecast builds on ICIS’
deep insights into real-time LNG cargo-tracking as well as contracts and infrastructure databases.
ICIS EU Carbon Foresight combines quantitative and qualitative approaches to offer a holistic view on
developments in the EU ETS and UK ETS. Our in-house suite of models captures the interactions of the
EU ETS with national electricity markets and technology investments.
Authors
Matthew Jones
Tom Marzec-Manser
Lead Analyst EU Power
Head of European Gas Analytics
matthew.jones@icis.com
tom.marzec-manser@icis.com
Lewis Unstead
Analyst EU Carbon
lewis.unstead@icis.com
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