It’s always interesting at the start of the year to look back at what I was thinking this time last year. In my opening remarks I said: “I suspect that by the end of 2022 we will have finally moved on and by the end of the following year things will be more or less back to normal in a social sense (sadly I think we will be paying the price of dealing with the pandemic for many years to come).” I think I can safely say that this prediction was correct! But how about the rest?

My other predictions for 2022 were:

  • More supplier failures
  • More regulation of the supply segment
  • More focus on security of supply; and
  • International interconnector tensions

I was “more confident” in my predictions for 2022 than I had been in the past saying “certainly I think there is little doubt about the first three on my list. The last one may not really emerge this year, but I definitely see this as a growing risk, so if not in 2022 then at some point soon”.

Perhaps my predictions were reasonably safe bets. We did see a small number of additional supplier failures, and we have certainly seen both more regulation, particularly proposals for prudential regulation, and a renewed focus on security of supply. We also saw signs of discontent from Norway about its interconnectors with GB and Germany in particular with two reports commissioned by the Norwegian Government stating that these had both inflated costs and undermined energy security in the country. The Government has outlined plans to link electricity exports with reservoir levels.

However, I completely failed to anticipate the biggest energy story of 2022 which was the invasion of Ukraine. In my defence, I don’t recall any other energy commentator predicting this either, but it had a seismic effect on the market which will take some years to unwind. Also, I don’t think even the Russians expected the impact it would have…when Putin’s tanks crossed the border on 24 February the Russian aggressors believed they would quickly seize Kyiv and that the Ukrainian Government would crumble and its officials flee. President Volodymyr Zelenskyy, a former comedian who became famous pretending to be the Ukrainian president, has turned out to be anything but a joke, and has emerged as a bona fide war hero inspiring his people in a spirited and surprisingly successful defence. There is now talk not only of Ukrainian victory but of Russia even being expelled from Crimea which was illegally annexed in 2014.

In any case, this was no Crimean campaign – Ukraine failed to collapse and rather than turning a blind eye as it did in 2014, the international community piled economic sanctions on Russia, triggering an energy war in which Russian supplies to the EU collapsed, with the most serious impact being in the gas market. As a result, global gas prices soared, and with them electricity prices across Europe. In turn these high prices have triggered various policy interventions – most European countries are subsidising their citizens as energy costs became increasingly unaffordable, in part funded with windfall taxes on those benefitting from high gas prices. Other interventions such as market price caps have also been introduced.

In the closing moments of 2022, China was forced into a sudden reversal of its zero covid policy which may see its demand for gas grow in 2023 as its economic activity recovers.

Energy market outlook for 2023

In some ways the resolution of the conflict in Ukraine will have much less impact that its inception: the world is unlikely to quickly forgive and forget and Russia will probably never recover its energy relationships with the West. However, there are still ways in which the conflict will influence energy prices.

Russian gas exports to Europe

There are four main transit routes for Russian gas into Europe: Nord Stream through the Baltic Sea, Yamal through Poland, Brotherhood and Soyuz through Ukraine and Turk Stream. In May 2022 flows through Yamal were halted as the Polish gas operator was sanctioned by the Russians for refusing to pay for gas in roubles. Flows through Nord Stream gradually declined until they stopped altogether in late August, and with the dramatic destruction of sections of the pipes in September they will not resume operations any time soon. Volumes though Ukraine have stabilised at roughly half of their potential capacity while flows though Turk Stream have been more consistent.

Russian pipeline gas flows to Europe 2022

In mid-December, Russian Deputy Prime Minister Alexander Novak suggested the country might be willing to resume gas supplies to Europe through the Yamal-Europe pipeline:

“The European market remains relevant, as the gas shortage persists, and we have every opportunity to resume supplies,” TASS cited Novak as saying in remarks published by the agency on Sunday. For example, the Yamal-Europe Pipeline, which was stopped for political reasons, remains unused,”
– Alexander Novak, Russian Deputy Prime Minister

The markets have received these comments positively, but the fact is that these “political reasons” were imposed voluntarily by Russia and could have been removed at any time. While the prospect of the resumption of exports through Poland is positive, there remains a threat to flows through Ukraine where the Naftogaz, the pipeline operator is in dispute with Gazprom which has threatened to cut off supplies if Naftogaz does not suspend its arbitration case against the Russian supplier.

This all matters because the gas which was used to fill EU gas storage facilities ahead of winter 2022 came primarily through Nord Stream. If Yamal does not re-open to replace this gas, and/or if flows through Ukraine are reduced, the EU will need to attract larger volumes of LNG. It has successfully deployed a number of floating LNG terminals to boost import capacity, but with the prospect of an uptick in Chinese buying, prices could start to rise again. Winter 2023 is widely expected to be more challenging than the current winter, and much will depend on the weather in the coming weeks, and how low gas inventories will be going into the summer injection season.

European gas infrastructure

European policy interventions

In 2022 we saw four main areas of policy interventions in the EU:

  • Subsidies for both business and domestic consumers
  • Gas price caps
  • Demand reduction measures
  • Windfall taxes

With the exception of demand reductions to protect precious gas inventories, the other interventions may have perverse consequences. Subsidies and price caps can both incentivise gas consumption to be higher than it would have been without the measures – when Iberia introduced its cap on the price of gas used in electricity generation in May, it saw both demand increase and exports to France increase (although the French nuclear problems might have caused an increase in exports regardless). At the same time, price caps can also deter suppliers from selling gas to EU countries, and might impact market liquidity since the cap applies to futures contracts and not OTC trades.

The cap is by far the most controversial of these measures, but it may be just sound and fury with the Commission giving itself widespread powers to suspend the cap or not activate it in the first place. Some countries were concerned about the impact of the cap while others felt it did not go far enough, so it will be interesting to see what happens next, particularly if either ICE moves trading of the benchmark TTF futures contract out of the EU eg to London, or if traders move their trades OTC to avoid the cap which only applies to TTF futures.

UK policy interventions

It was difficult to keep track of UK energy policy in the final months of 2022 after two rapid changes of Prime Minister and their ministerial teams. However, what seems to have survived the upheavals are:

  • Subsidies for both business and domestic consumers
  • Windfall taxes
  • New focus on energy security

The Government has introduced separate support schemes for business and households, but with changes in government there have been changes in the support being offered. Businesses are particularly unhappy that the support scheme is set to expire at the end of March and the Government has missed its 31 December 2022 deadline for announcing what measures will be adopted after that date. There is more clarity for households but as the support is being offered universally, it is very expensive, so may yet change again.

The first windfall taxes were applies to gas producers who have seen profits rise significantly, however, after the Autumn Statement, the carve-outs for new investments were weakened creating a major dis-incentive to new gas production in the UK. This is the exact opposite to what is needed, and several companies have indicated an intention to re-evaluate their activities in the North Sea as a result.

More recently the tax has been extended to electricity generators benefitting from high gas prices driving up electricity prices. This includes renewable generators and nuclear operators. While renewable generators are squealing, some mechanism to re-balance and overly-generous subsidy regime was overdue, which they well know, and so the impact on future investment is unlikely to be significant. However the inclusion of nuclear operators is perverse – Britain has an aging fleet and at a time when EDF is considering investments to extend the lives of two reactors set to close in little over a year, this tax is likely to tip the decision against any upgrade (I contributed to the linked article which was on the front page of the Daily Telegraph on New Year’s Day).

On energy security, there is a new Bill going through Parliament and is now in the Committee stage, but while it is badged as an “Energy Security Bill” it does not really address the key aspects of energy security, particularly around collapsing winter margins, not least because in the next 2 years a further 2 nuclear reactors and all of the remaining coal plant will close. While a review into “energy market regulation to address issues of long-term energy security and affordability” was announced on 8 September, there has been no further information about it. The Energy Supply Taskforce set up by Liz Truss to lead “negotiations with domestic and international suppliers to agree long-term contracts that reduce the price they charge for energy and increase the security of its supply” was abolished by Rishi Sunak.


I would venture to guess that the main themes in the energy markets in 2023 will mirror those in 2022:

  • How will the EU fill its gas storage facilities in summer 2023?
  • Will Russia resume flows through Yamal to replace lost Nord Stream volumes?
  • Will competition for LNG remain high supporting prices?
  • Will France succeed in re-starting its nuclear reactors?
  • Will Norway act to restrict electricity exports?
  • Will policy interventions reduce gas production in Europe and gas imports to Europe?
  • Will there be blackouts during periods of low wind output in any of the European countries relying on wind power?

In the UK we can also expect further changes in the retail market…

  • Will Ofgem change its mind again on ring-fencing customer credit balances?
  • Will the price cap be replaced with a social tariff?
  • Will the Octopus acquisition of Bulb conclude successfully and how much will it the Bulb bailout end up costing consumers?

And more broadly…

  • Will the UK Government get serious about reducing heat losses from homes?
  • Will the Government change its mind about the application of windfall taxes?
  • Will the Government and NG ESO act on falling winter capacity margins?

I guess my conclusions are that there are currently more questions than answers when it comes to the energy markets. I would encourage the Government to act on those which are within its control.


I wish you all a very happy and prosperous New Year!

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