Has time run out for natural gas in Europe?
Back at the start of the 2000s when Europe’s clean energy policies were first being developed, the theory went that a price on carbon would drive up the cost of generating power with fossil fuels, and this would render renewable electricity more competitive and enable it to grab a foothold in our energy mix.
European Commission studies and indeed analyst projections all predicted that as renewables became competitive, their unit costs would tumble and so subsidies and support could be wound down.
And so it has proved. Renewables are winning the cost battle, to the extent that no new coal and very few gas plants are being built in Europe. And this development may herald a challenge for natural gas.
Just 20 years ago coal generated the majority of Europe’s power, and natural gas was seen as a “bridging fuel” to a low-carbon future when renewables would do the lion’s share of the generating, backed up by gas and other, newer sources.
The evolution is clear to see in the data below, which shows UK power generation by source since 1996:
The UK benefited primarily from the so-called “Dash for Gas” policies of the early 1990s under Prime Minister Margaret Thatcher, which sought to exploit abundant North Sea reserves.
What is disquieting about this chart however, is that gas’ share of generation has not progressed much beyond a 40% share of the market, and with the steady rise of renewables, this may be gas’ high-water mark.
Some of this may be due to the introduction in the UK of a carbon “top-up” price. In 2010, the government decided that the price of EU emissions allowances was not high enough to drive real change in the merit order for power generation. It introduced the Carbon Price Support (CPS) mechanism, under which large emitters were required to pay a fee over and above the cost of EU allowances.
The CPS raised the cost of emitting far above the prevailing EU ETS price, forcing UK coal generators to close their plants well ahead of schedule.
The UK experience was not replicated anywhere in Europe until the late 2010s, when the price of natural gas fell to such an extent that it encouraged fuel switching away from coal, without the need for a carbon top-up price.
In Germany, gas has never expanded much beyond a 10% share of total electricity generation. Coal-fired plants accounted for about half of all German supply in 2002, with nuclear plants supplying another third. But two major policy decisions – the nuclear exit in 2011, and the coal exit last year – mean that renewables an natural gas will need to step up their shares in the coming years.
As the chart above shows, renewables have made rapid progress, growing from a 10% share in 2014 to more than 25% in 2019. As of 2019 wind is now the largest single source of electricity in Germany.
But, like the UK, German gas generation growth has stalled, and while there is plenty of evidence to suggest that more capacity will need to come on stream in the coming years as coal plants are closed, there is now a new threat to long-term growth: hydrogen.
The EU has laid out its climate ambition of achieving net zero emissions by 2050. To do this will require the complete phasing out of fossil fuels in primary energy production, and the development of energy sources based in renewable resources.
Hydrogen can be manufactured using natural gas (often referred to as “grey” or “blue” hydrogen, or by electrolysis using renewable energy (“green” hydrogen).
The European Commission in July published its hydrogen strategy for a climate-neutral Europe, in which it states:
“The priority for the EU is to develop renewable hydrogen, produced using mainly wind and solar energy. Renewable hydrogen is the most compatible option with the EU’s climate neutrality and zero pollution goal in the long term and the most coherent with an integrated energy system.”
The Commission targets the installation of at least 6 GW of renewable hydrogen electrolysers in the EU and the production of up to 1 million tonnes of renewable hydrogen by 2024.
By replacing gas-power with solar and wind-supported electrolysis, the EU is nailing its colours to the mast of a renewable-powered future. Hydrogen will be used in industrial sectors first, replacing fossil fuels in chemicals production and other industrial processes, before attention switches to making it a primary energy source in transport.
We’re a long way from even starting this journey towards a green hydrogen economy, but it already looks gloomy for natural gas.https://blog.ze.com/guest-blogs/has-time-run-out-for-natural-gas-in-europe/https://blog.ze.com/wp-content/uploads/2020/10/Has-time-run-out-for-natural-gas-in-Europe.pnghttps://blog.ze.com/wp-content/uploads/2020/10/Has-time-run-out-for-natural-gas-in-Europe-150x150.pngGuest Blogsnatural gas,Natural gas analysis,Natural Gas Forward Curve,Natural Gas Industry,Natural Gas SupplyBack at the start of the 2000s when Europe’s clean energy policies were first being developed, the theory went that a price on carbon would drive up the cost of generating power with fossil fuels, and this would render renewable electricity more competitive and enable it to grab a...Alessandro VitelliAlessandro Vitellialessandro@carbonreporter.comAuthorAlessandro Vitelli is an independent journalist with more than 30 years of experience in energy markets. Since 2004 he has also worked as a journalist and analyst covering global carbon markets and climate policy. He has worked as a journalist for S&P Global, Bloomberg, and as an analyst for IDEAglobal.Blogs by data management Experts & Analysts | ZE