Gas: A Balancing Act of Demand Destruction and Oversupply

E-world, Europe's largest energy trade fair, will bring together over 900 stakeholders from the energy and water sectors in Essen from February 10 to 12. Join us at our stand in Hall 2 - 2D100 Hall 2 during this event to connect with our experts, who are ready to share their market assessment and answer your questions about the evolving energy landscape. 

This is also an opportunity to gain insights from our dedicated Energy Research, featuring special reports from Joel Hancock, Commodities Research Analyst, on the gas market, and Jean-Louis Malon, Head of EU Power Origination at Global Markets, on ongoing developments in Germany and the planned implementation of the capacity market from 2027.

The loss of Russian pipeline gas following Russia’s invasion of Ukraine has defined the European, and global, gas market since 2022, triggering a market dynamic defined by demand destruction – rationalising global gas consumption to offset lost molecules.

With substantial LNG volumes entering the market through 2026, and the supply wave continuing through to 2029, the market will shift to an oversupplied regime defined by demand creation, with prices moving lower to incentivise gas consumption.

But timing the transition to the new, lower priced market regime remains elusive, particularly with cold weather through the winter so far draining inventories at a much faster pace when compared to last year, supporting TTF prices.

Yes, we still expect the market to shift to oversupply in summer 2026, with European injection demand insufficient to fully absorb the magnitude of LNG supply additions. In order to balance the market, excess cargoes will need to be absorbed in more price-sensitive Asian markets, with switching between oil products and gas a critical dynamic. We expect TTF to average €28/MWh in 2026.

Our view outlined above is dependent on new LNG facilities coming online to schedule – Golden Pass in the US is a critical project to watch, as is the performance at LNG Canada. Towards the end of the summer and into Q3-26, any delays to Qatar’s North Field expansion project would trigger bullish sentiment.

We remain constructive on EU Allowances (EUAs) in 2026, with policy driven tightening as well as a reduction in free allowances triggering more pressure from the supply side this year. However, we point to the heavy long positioning from speculative market players in EUA futures, the build-up of which has driven most of the recent rally. We expect some rationalisation, with prices expected to average €85/tonne in 2026.

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Amid the nuclear and coal phase-out and the rapid expansion of intermittent renewables, the German power market is undergoing its most significant structural change in decades.

Against this backdrop of rising variability in electricity generation, thermal units remain essential for grid stability, maintaining voltage and frequency. Yet, as they will progressively be tasked with compensating for weather conditions and/or imports, these assets are gradually being brought to operate for shorter periods, making it harder to recoup investments. The political consensus holds that the Energy-Only Market (EOM) is insufficient to address the “missing money” issue and to guarantee national security of supply.

The German Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz – BMWK) has therefore committed to introducing a capacity market, where part of the revenues from pure energy sales will be shifted to payments for firm capacity via network and retail tariffs.

Jean Louis Malon, Head of EU Power Origination at Global Markets, debriefs the adaptations and opportunities facing market participants.

To adapt the market and ensure grid stability, the government has adopted a two-pillar approach. First, starting in 2026, the Kraftwerksstrategie (Short-Term Tenders) will be an immediate, state-aid-approved instrument to bridge the capacity gap.

In this framework, BMWK has confirmed tenders for approximately 10 GW of new, hydrogen-ready gas-fired power plants (H2-ready CCGTs). These plants are expected to be commissioned by 2030/2031 and must transition to 100% hydrogen by 2045 at the latest.

From 2027/2028, a market-wide mechanism (namely Kapazitätsmarkt - capacity market) is to be introduced, where part of the revenues from pure energy sales will be shifted to payments for firm capacity through network and retail tariffs.

The precise market design is being elaborated between the government and the various stakeholders. The favored model appears to be a decentralized, technology-neutral system that values firm, available capacity from all sources: thermal plants, battery storage (BESS), pumped hydro, and demand-side response (DSR).

This shift from energy-price-driven revenue to a mix of energy and capacity payments has impacts on the different market players and requires re-evaluating asset strategies.

It will also likely raise costs that end-consumers will ultimately bear in exchange for reduced supply volatility and improved price stability, but we will see that it can also represent a source of flexibility revenue.

For integrated utilities and thermal generators, the capacity payments will undoubtedly offer a more predictable revenue stream, reducing exposure to EOM price volatility and eventually improving their risk profile.

Participation in the upcoming 10 GW of H2-ready tenders will be key. This requires preparing project financing, site selection, and EPC (engineering, procurement, and construction) partnerships. The bid price will be a careful balance between securing a long-term capacity payment and remaining competitive.

Existing gas and CHP (combined heat and power) plants might find a new lease on life by bidding into the future capacity market. However, they will compete against newer, more efficient CCGTs and flexible storage.

Modeling profitability under various « Kapazitätsmarktumlage » (capacity market levy) scenarios and stricter emissions regulations will prove necessary. Some assets may be viable; others will need to be earmarked for decommissioning.

Renewable energy developers and investors are not expected to generate significant income from firm capacity payments, as their contribution to supply security during peak hours is limited. Therefore, their business model is likely to remain essentially focused on pure energy sales - Energy-Only Market (EOM) and Corporate PPAs.

However, the real opportunity lies in co-locating renewables with dispatchable assets, typically solar/wind plus BESS projects. These hybrid assets can capture volatile EOM prices while simultaneously securing stable revenue from the capacity market by offering firm, predictable capacity. This enhances their bankability and constitutes a key growth area.

This system will also benefit developers who can link renewable generation to electrolyzers and H2-ready power plants, creating a fully integrated, future-proof value chain.

Storage assets (BESS, pumped hydro) and other grid-scale batteries are perfectly positioned in this new market scheme, which more globally strengthens the investment case for storage projects.

They will likely be able to stack revenues in three ways: from energy arbitrage, capturing spreads in the wholesale market; from ancillary services, by being compensated for providing FCR/aFRR (and potentially other services such as voltage regulation, black-start, etc.) to the TSOs; and finally from capacity payments, which will provide them with stable, long-term income under the new capacity market.

For end-users, the cost of capacity payments is typically passed through to retail customers via levies or network charges, leading to an increase in the non-commodity portion of electricity bills and, on average, higher electricity prices compared to a pure Energy-Only Market.

However, this can also present a major opportunity for industrials able to monetize flexibility. In the new scheme, any industrial process with dispatchable loads (e.g., interruptible furnaces, electrolyzers, cold storage) or on-site generation can be certified as a capacity resource and, therefore, receive a capacity income which could partially or fully offset the increased levy.

For electro-intensive industries, Germany is laying the groundwork for an “industrial electricity price” scheme starting in 2026, aimed at subsidizing the energy component for eligible customers, funded by the federal budget and subject to EU state aid regulations.

After years of prioritizing flexibility, security of supply has now become an explicit, valued commodity. The companies that adapt fastest to this new revenue scheme by optimizing their flexible and dispatchable asset portfolios are best placed to benefit from Germany’s ongoing power market design.