The Future of Gas in Decarbonising European Energy Markets

Abstract

PrefaceThe future of gas in the energy mix is a topic of obvious interest to the Natural Gas Programme at OIES, but we believe that it is particularly relevant given that expectations about its role in Europe have been confounded over the past decade. The argument that gas is the cleanest fossil fuel and should at least displace coal in the energy mix, especially in the power sector, has had little if any traction with policy-makers in spite of the apparent boost to the fuel's prospects provided by the COP21 agreement in December. In fact over the past decade gas's share of the European energy mix has declined sharply in the face of a rise in renewable energy, while coal demand has remained remarkably robust.A number of factors have contributed to this outcome. A low coal price, combined with an ineffective carbon price, has undermined the economics of gas-fired power generation; the importance of the coal industry as an important source of employment in a number of key European countries has discouraged attempts to reduce demand for it; concerns over methane leakage in the gas chain, as well as the debate over the exploitation of shale gas using fracked wells, have raised environmental concerns; and finally security of supply issues have been raised due to the perception of an overdependence on Russian gas in the European market, in particular in light of the continuing crisis in Russia-Ukraine relations. Overall then, the potential benefits of gas as an energy source which can reduce short term CO2 emissions and complement the intermittency of wind and solar power have failed to gain acceptance from a variety of environmental, energy and political stakeholders.In this paper Jonathan Stern reviews in detail the problems which gas continues to face in Europe, and also highlights the potential impact on all parts of the gas value chain. Indeed he suggests that it is the fragmentation of the gas industry, and the different incentives within each sector, which is partly to blame for the lack of a coherent message from the industry as a whole. His conclusion is a radical one, namely that in order to have a long-term future the gas industry needs to develop a decarbonisation strategy. Furthermore, it needs to do it fast, because policy decisions made in the next few years will determine whether gas has a promising or declining outlook in Europe beyond 2030.The paper is deliberately Euro-centric, because this is the region where gas appears under greatest threat. Nevertheless, Stern acknowledges that different regions will have different outcomes, and it does appear, for example, that in Asia the potential for demand growth is significant. However, the European example can provide a salutary lesson concerning the mistakes that can be made by an industry that is convinced by a logic which fails to persuade a wider stakeholder community. The challenges in China and India, in particular the threat from cheap coal, are not so dissimilar, and the outlook for gas there remains uncertain.As a result, conclusions reached from...

Decarbonisation of heat in Europe

“…Supplying heat solely with electricity would be challenging and would place a significant strain on electricity networks due to the amount of energy that would be required but also due to the seasonal variation in demand if the heat load was transferred to the electrical network. For instance, 138 IEA (2017b) 139 GRTGaz (2017) 140 For more information, see Regan N. (2015) 141 Presentation by Cadent at the Oxford Institute for Energy Studies, 5 March 2018 142 Stern J. (2017) 143 European Commission (2011a), p.3 total German heat consumption is estimated to be three times that of electricity demand, 144 and in the UK, it is more than double electricity demand.…”

Methane Emissions

“…Stern (2017) has noted that in the minds of politicians and the media, emissions from upstream operations are directly connected with unconventional gas and hydraulic fracturing. A 2011 paper (Howarth et al) concluded that because 3.6 -7.9 per cent of shale gas escaped into the atmosphere it had a larger GHG footprint than coal if used in power generation, although more recent US EPA reports (2016) suggest that the evidence is less clear cut.…”

Challenges to the Future of Gas

“…25 For definitions of the IGU regions see Appendix 3. 26 For comments on the IEA's Golden Age of Gas hypothesis see: IEA WEO (2017, Box 1, p. 337); Stern (2017);and Boersma and Jordaan (2017). 27 Three of the five scenarios in the Annual Energy Outlook presentation (Slide 27) by the EIA Administrator Sieminski (2017) in January 2017 suggested that prices will be at or below $5/MMbtu until 2040.…”

“…55 The IEA is relatively pessimistic about the potential of gas as a marine fuel with only 51-57 Bcm of demand (significantly less than 10% of global bunker fuel demand) in 2040. IEA WEO (2017), Stern (2017). 57 IEA WEO (2017), p. 414 and 417 estimates methane emissions from oil and gas at 76 mt and those from coal at 40 mt in 2015.…”

“…As a result, financing of projects becomes 78 Although in much of Europe the route was large-scale switchover of industry and households from oil products, and later coal, to gas. 79 Stern (2017 This means that in new markets such as Africa and small island states, where gas sales to power generation are planned to serve as the anchor load, creditworthiness and the introduction of renewables threaten commercial viability. In existing markets, particularly those which have introduced liberalisation and competition, gas-fired power stations can only be expected to run at middle -which may increasingly become peak -load, and therefore cannot serve as an anchor for expanding gas demand.…”