Europe’s industrial heat:
don’t put all the eggs in the gas basket

Cornered by the new realities of the gas market?

Due to transportation constraints, the global gas market remains fundamentally regional in nature and prices are not unified across geographies. Europe, lacking substantial domestic natural gas resources and relying heavily on imports, faces an inherent disadvantage compared to producers like the United States.

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At a minimum, European gas prices must reflect the marginal cost of supply, which includes not only production but also the added burden of long-distance transportation resulting in a structural cost surplus. At worst, Europe must also contend with global competition from other demand-intensive regions further raising price pressure during tight supply periods.

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In this context, the collapse of Russian pipeline deliveries and Europe’s accelerated pivot to liquefied natural gas (LNG) constitute a fundamental structural shift. Previously, Europe benefited from mutual interdependence with a major low-cost pipeline supplier (Russia), helping offset the disadvantages of limited local output. That arrangement also provided a form of supply security – albeit one that is now recognized as politically and strategically fragile.

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While commodity prices are inherently volatile and future movements remain uncertain, several enduring factors point to a structural upward shift in Europe’s gas sourcing costs compared to the pre-2021 era:

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• Price floor shift: Europe has replaced a significant portion of its gas that was delivered via pipelines at a cost of approximately €9–17/MWh[4]  with LNG that now carries a marginal cost of €17–30/MWh.[5] This implies a fundamental increase in base cost.

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• Increased exposure to global LNG competition: Europe is now more tightly integrated into the global LNG market, where it must consistently bid against other high-demand regions. In tight, supply-driven environments, European prices must remain high enough to divert LNG cargoes from Asia, intensifying upward pressure.

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• Embedded risk and energy security premium: Multiple uncertainties have become embedded in European gas pricing. These include supply risks (e.g., LNG project delays, export disruptions), weather volatility (e.g., Dunkelflaute periods of low renewable output) and broader geopolitical instability. In response, Europe has adopted more stringent storage mandates, while suppliers and utilities face higher hedging and risk management costs. The era of cheap, predictable gas is over; each link in the value chain now incorporates a security premium, inflating final prices.

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Those drivers illustrate that European gas pricing is now anchored to a new structural paradigm. While no one can predict the precise path of future commodity prices, the new reality for Europe is shaped by external dependencies and enduring structural challenges that are complex to mitigate.

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Capitalizing on Europe’s strengths 

“The decarbonization of the energy system is an opportunity for the EU in reducing its dependence on fossil fuels to ensure its competitiveness, the affordability and security of supply. […] the challenge Europe will face is that the full benefits of the clean transition for EU competitiveness will only materialize when renewables combined with nuclear are regularly price setting and relevant investments in grids, storage and flexibility are completed (and amortized), so that the system can be managed in a cost-efficient way.” The Draghi report on EU competitiveness, 2024.

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The good news is that the EU electricity sector has maintained strong momentum in its transition. The share of renewables in the power mix has grown significantly – from 34% in 2019 to 47% in 2024 – while the share of gas has declined for the fifth consecutive year.[6] Low-carbon electricity offers a pathway to energy resilience, as it is derived from cost-controllable, sovereign sources, provided we can effectively capture its value.

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