A sustainable solution to reduce Europe’s reliance on natural gas

G. Boccara, McKinsey & Co.
B. Heringa, McKinsey & Co.
D. H. Diaz, McKinsey & Co.
O. Rolser, McKinsey & Co.
N. Sharma, McKinsey & Co.
T. Vahlenkamp, McKinsey & Co.
C. Xue, McKinsey & Co.

The war in Ukraine disrupted the European energy market more than any event in recent history. This event decreased Russian piped natural gas to Europe by half, driving up gas prices and supply volatility. Europe was able to avoid substantial economic damage through a series of measures from industrial plant closures to increased LNG imports. However, the authors’ company’s analysis shows the continent will need to reduce demand by 55 Bm3 this year alone1 to mitigate against a potentially colder winter, a possible end to Russian supplies or rebounding Asian demand. This comes at a time when Europe has little bandwidth for additional energy rationing without sustaining a steeper slowdown in economic activity.

Reducing gas demand without largely impacting the balance of the energy market will involve significant changes, from industrial electrification to delaying the phaseout of coal and nuclear and accelerating renewable energy construction. Businesses will also need to consider new strategies from energy procurement and risk management to monitoring the market for signposts of forthcoming disruption.

A pivotal year. In a single year, Russian piped gas flows to Europe decreased by more than 50%. This sent energy costs soaring, with gas prices peaking at $100/MMBtu, Brent crude oil prices reaching $130/bbl and coal prices climbing to $441/t.2 This meant Europe spent $1.1 T more on oil, natural gas and coal in 2022 vs. 2021, more than doubling the share of GDP spent on energy.

Europe responded by reducing gas demand through energy efficiency measures across many industries and production shutdowns in energy-intensive sectors (e.g., steel, chemicals). Households also substantially cut consumption, with many countries seeing gas demand falling by 15% to 20 percent%, even accounting for a relatively milder winter. Additionally, Europe compensated for reductions in piped gas flows by increasing LNG imports to 64 Bm3 above 2021 levels.3

Continued vulnerability. Despite these measures, Europe may need to prepare to navigate the risks created by rebounding demand for LNG in Asia, a potential cessation of Russian supplies and the return of colder weather. Resurgent Asian demand would intensify competition for LNG cargoes, driving up prices and reducing European gas supplies by up to 35 Bm3, while ending Russian imports would reduce supply by 25 Bm3. This comes at a time when a return to colder weather could add another 15 Bm3 to Europe’s gas demand. The authors’ company’s analysis reveals Europe would need to find further savings of 55 Bm3 just to stabilize the market in these scenarios.

However, Europe may struggle to further ration energy consumption without economic repercussions. For example, the authors’ company’s recent survey found that 57% of manufacturers could not continue reducing gas consumption while maintaining output over the next 2 yrs.4 Even a trebling of gas prices would only decrease gas demand from the European power sector by 8%.5

The path ahead. It is a challenging time for Europe, as it attempts to reduce reliance on gas without affecting industrial output or disrupting the economy. A series of measures could help reorient the region away from gas over the coming years, which may reduce Europe’s vulnerability to supply chain instability and price volatility.  

Europe could save up to 19 Bm3 by accelerating heat-pump uptake across buildings in line with RePowerEU targets and reducing thermostat temperatures. Incentivizing energy efficiency in buildings could reduce gas demand by 28% and 14% by 2025 and 2030, respectively. This would also drive a 24% reduction in gas consumption. Continued industrial shutdowns in 2023 could save a further 20 Bm3 in the short-term. In the longer term, industrial-electrification measures such as fuel-switching and energy-efficiency initiatives could help curb demand across many industry subsectors.

In the longer term, Europe’s power sector could transition away from a gas baseload. Delaying the phaseout of coal and nuclear power plants could help provide an alternative baseload and a bridge to the energy transition. For example, increasing German and French nuclear availability could help offset 5 Bm3 of gas consumption. With another 70 Bm3 of additional annual LNG regasification capacity also expected to come online across Europe over the next two years,6 this may help further balance supply and demand without price spikes.

To achieve the power supply mix needed to reduce European reliance on gas-fired power generation would also require an accelerated build-out of renewable energy at a compound annual growth rate (CAGR) of 14% until 2030. This will entail measures to alleviate supply chain bottlenecks, address Europe’s renewable skills shortage and streamline permitting processes.

Early signs are positive7 and suggest that Europe is on track to meet the European Commission’s gas-savings targets, including a voluntary gas demand reduction of 15% below the five-year average between August 1, 2022–March 31, 2023. The expected rebalancing of the global LNG market—driven by new projects from Qatar to Canada—also has the potential to stabilize supplies.

There are multiple steps that could help businesses navigate ongoing energy market volatility and disruption. For example, companies could consider diversifying energy sources and introducing demand-management measures to mitigate rising energy costs. Larger organizations could also invest in energy storage or natural gas substitutes such as biomethane to hedge against future supply-chain disruptions. In the meantime, businesses could actively monitor the energy market for signals of future disruption to help adjust to further shifts in supply and conduct scenario planning to adjust to further potential volatility.

A seismic shift in the energy landscape. Europe’s energy landscape has experienced considerable change following the invasion of Ukraine that could permanently transform the trajectory of supply and demand. Europe has taken multiple demand reduction measures to cushion against severe economic impacts. However, safeguarding against rebounding Asian demand or a cessation of Russian supplies, will involve new policy measures and potential trade-offs for businesses.

There are several measures that can be implemented now, but businesses could consider longer-term measures requiring large upfront investments from energy storage to alternative fuel sources. On a wider scale, Europe could also intensify efforts and introduce measures that include extending the lifetime of coal and nuclear to an accelerated rollout of renewable energy. This presents an opportunity to improve the region’s energy security and affordability while accelerating the energy transition.


1 European natural gas demand tracker, Bruegel, January 23, 2023; Daily power statistics, ENTSO-E January 23, 2023; Supply, transformation and consumption of gas monthly data, Eurostat, January 23, 2023; McKinsey Energy Insights Global Energy Perspective 2022.

2 Petroleum and other liquids spot prices, International Energy Agency, January 15, 2023; Market data, Montel, January 15, 2023; World Bank Commodities Price Data, World Bank, January 15, 2023.

3 Supply, transformation and consumption of gas monthly data, Eurostat, January 23, 2023.

4 Agosto, A., N. Browne, G. Bruni and N. Tan, “2022 LNG Buyer Survey: Adapting to an uncertain future,” November 15, 2022, online: https://www.mckinsey.com/industries/oil-and-gas/our-insights/2022-lng-buyer-survey-adapting-to-an-uncertain-future

5 Boccara, G., B. Heringa, D. H. Diaz, O. Rolser, N. Sharma, T. Vahlenkamp and C. Xue, “A balancing act: Securing European gas and power markets,” April 25, 2023, online: https://www.mckinsey.com/industries/oil-and-gas/our-insights/a-balancing-act-securing-european-gas-and-power-markets

6 McKinsey Energy Solutions’ Gas Intelligence Model.

7 International Energy Agency, Gas Market Report, Q4-2022, October 2022, online: https://www.iea.org/reports/gas-market-report-q4-2022

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