Europe’s energy crisis: Understanding the drivers of the fall in electricity demand

Following Russia’s invasion of Ukraine, the world has been experiencing its first truly global energy crisis, which has caused prices to soar and disrupted energy trade flows. While natural gas supply to Europe was front and centre of the crisis, the ripple effects have been felt throughout the energy industry and across all regions of the world.

In the European Union, the carbon dioxide intensity of the power sector increased significantly in 2022. As security of supply became the overriding priority for policy makers, some countries restarted coal-fired power plants while outages at nuclear plants and low hydropower output challenged the reliability of the system. This supported gas demand for power generation even though gas prices were at record highs. Despite the focus on supply side issues, trends in electricity demand received less attention. In this commentary, we look at the drivers behind the decline in electricity demand including weather patterns and high prices as well as the regional differences between countries in the European Union.

In 2022, all EU countries – except for a few Mediterranean countries such as Malta, Greece and Cyprus1 – observed a significantly milder winter than in 2021. Across the European Union, heating degree days (HDDs) – a measure of how much energy is required to heat a building due to colder weather – were lower in 2022, resulting in lower electricity consumption for heating. The year-on-year decline was most pronounced in the fourth quarter of 2022. But there was also a considerable drop in the second quarter, mainly because April and May 2022 were milder than the same months in 2021, when many western and central European countries experienced exceptionally cold weather in late spring.

While the mild weather was a factor in the overall decline in electricity demand across the European Union, the hotter summer weather partially offset this, especially in southern Europe as heatwaves gripped the region. France, Italy and Spain saw prolonged periods of record temperatures resulting in a substantial increase in cooling degree days (CDDs) – a measure of how much energy is required to cool a building due to warmer weather.

Removing the impact of weather on electricity demand allows us to identify other factors that affected the change in electricity consumption from 2021 to 2022. The weather-corrected monthly demand profile of the European Union in 2022 aligns well with the actual demand profile in 2021 up until June. However, from June onward, the gap between these two profiles widens, highlighting significantly lower demand in 2022. A major driver behind this demand decline was the higher electricity price in 2022. Electricity demand is generally considered to have a low price elasticity, but some components of demand, such as electricity-intensive industry, are more price-elastic than others.

With the clean energy transition gathering pace across Europe and beyond, weather will play a more important role in the shaping of electricity demand due to the increased electrification of heating as heat pumps become more widespread. At the same time, more and more air conditioners are being installed. Given the expected increase in the frequency and intensity of extreme weather events, the impact of weather on electricity demand deserves more attention.

For the European Union in 2022, weather explains only part of the fall in electricity demand. As shown in this commentary, most of the decline has been due to non-weather-related factors, primarily the soaring electricity prices. The price elasticity of electricity demand suggests that, irrespective of the preferred electricity market design, only the right price signal will lead to adequate demand response. However, while allowing for price signals, governments should also ensure that their citizens have access to affordable electricity through appropriate policies and that the most vulnerable citizens and households are protected.