Industrial zone, Steel pipelines and valves against blue sky

The European Union has set ambitious objectives regarding renewable energy capacity, de-carbonization, and energy savings. Gas – which is the least carbon intensive fossil energy – thus seemed to be the most appropriate fuel to guide Europe toward the «all renewable, carbon-free» ideal. And yet, …

 

Gas is often presented as a key component in the energy transition: in direct use (heating, transport) it is in fact less polluting than petroleum or coal, partly as a result of the low level of carbon emission during its combustion.  On the other hand, gas-fired power plants are very flexible due to their instant ignition and shutdown: thus the plants nicely complement renewable energies, whose production is intermittent by nature. Moreover, gas is not a target of lobbyists «against», as may be nuclear energy – as long as we limit ourselves to conventional gases.

With the American shale gas revolution (which allowed for an increase in production of 33% between 2005 and 2012) and the stable growth of estimated reserves calling for a «golden age» of the gas sector, there are many reasons to hope for a positive future for the gas market in Europe.

Nonetheless, the reality is far from this ideal theory. Currently, out of the 125,000 MW gas-fired power plant production capacity, 25,000MW are threatened of be a shutdown (1) for underutilization. Two storage sites in France have been put on hold (for a total capacity of 3.5 TWh). All in all, European gas markets are declining.

Several reasons may explain why Europe is progressively moving away from gas.

First, renewable energy capacities increase at the expense to of gas fired power plant capacity usage. As positive as this development may be, the present difficulties remain: renewable development is impossible without ensuring complementary sources to supplement intermittent supply. The implementation of a capacity market in France has been mentioned to balance this issue, yet it remains a real problem today.

Second, the gas sector is hindered by the coexistence of two divergent pricing systems that send conflicting signals to the market: on the one side long term contracts that only exist on the European market, are indexed on the petroleum price (stable though high);  on the other side spot prices (on the decline) align with actual market development.

Finally, in the United States coal has been massively replaced with gas, as a result there have been considerable coal exportation surpluses causing prices to fall from $130/ton in mid-May 2011 to $90/ton in early 2013. This phenomenon explains the increase in the utilization rate of coal-fired power plants at the expense of gas-fired power plants in Europe, which even led to the construction of new coal-fired production units… even if they are far more polluting. The carbon market should have shielded against this phenomenon, however prices (fallen below 5€ early 2013) do not allow a reversing of this trend (estimations state that CO2 should price at 50€/ton to favor gas-fired over coal-fired power plants).

In the medium term a major challenge remains: security of supply. We should worry that producing countries, being more optimistic of opportunities in Asia than in Europe, may steer production and infrastructure in more promising areas, leaving Europe behind.

We should thus fear that gas markets move towards suffocation inducing several negative consequences for Europe:

  • Inevitable gas prices increase, discriminating against heavy industry and large consumers, and thus an important impact on their economic competitiveness.
  • Gas industry decline (accounting for 132,000 jobs in France (2)) worsening economic growth, which already has been deplorably low in the «old Europe»
  • The loss of a  key energy in the transition making it more difficult to reach the «3×20» objectives, which is the European reference regarding energy and environment development…

In order to avoid deadlock, we can only reaffirm the need for a proactive European energy policy with concrete laws and actions able to give clear leading signals and credibility to reach our objectives.

NOTES: (1) from Usine Nouvelle n°3318 (2) Emplois directs, from AFG

By Jérémie Baron, Manager, and Camille Bensa, Consultant

Article published in French in Le Cercle Les Echos – 11/10/2013