On 13th December the Energy Exchange held a webinar on gas advocacy in Europe.
Gas operators today need to find a way to effectively advocate for the gas industry and plan for the role of gas in the future European Energy mix. In this webinar our four experts discussed the role of gas in the current European energy mix heavily populated by fossil fuels, and made predictions about the developing role of renewables in the energy mix and what the implications of this are for natural gas.
In this webinar, we’re looking to the role of gas and how the gas industry needs to find a way to be more successful in advocating gas, in particular gas in Europe. To update you on these topics we are joined by François-Régis Mouton, VP, Oil & Gas, Advocacy Total E&P; Oliver Schäfer, President, from Solar Power Europe; Julian Popov, ECF Fellow, European Climate Foundation, and former Minister, Environment, for Bulgaria; Danila Bochkarev, senior fellow from EastWest Institute. I’d like now to introduce our first speaker panellist: François-Régis Mouton, VP from Oil & Gas, Advocacy Total, E&P.
Just to put the framework about where we are at the moment, we just have to look at COP21 and COP22, I looked at it right before the webinar and to date 117 parties have ratified this Paris agreement out of the 197 and if we looked at all the NVCs to be implemented, we will get to 2030 and still having an emission gap of around 12 gigatonnes of CO2 equivalent and that makes the world on track to a temperature rise of around 2.7 degrees by 2100; the situation has to evolve. As the gas industry, we do believe that coal to gas change has become more of urgent in recent years. There is a good example of that so it’s not something that cannot happen, which is very difficult to make it happen. It’s not at all the case. Proof of that is what happened in the UK in the recent past. If you look from April 2015 to May 2016, just by increasing the coal floor price in the UK from around £10 to £18 a tonne of CO2, UK has decreased its coal generation mix by 90% therefore the emissions of the power market have reduced dramatically by around half.
Therefore it’s something which is absolutely feasible. The problem is if you look at what’s happening globally, if we compare for instance 1990 to 2013, we have had quite an increase of both power generated but also the share of coal in today’s power which is generated. For instance, in 1990, there were around 5 gigatonnes of CO2 that were emitted by coal generation and in 2014 we were around 10 gigatonnes that were emitted by coal power generation units. These 10 gigatonnes are more or less three times the total EU emissions. So not only is it huge, but at the same time it’s ready to be reduced and we could reduce it. These emissions from coal are generating a lot of CO2.
Today, the coal generation is producing 10 gigatonnes of CO2. Finally, I want to mention the air quality impact. Gas has absolutely no sulphur dioxide or fine particulates in its emissions, and therefore nowadays when we see what the problem in our city is about; we do have a solution through the coal to gas switch.
The second part of this is the gas and renewables, for us gas and renewables are the ideal formula to address climate change at least in the sense of power generation. Everybody knows that renewables are zero emission and at the same time we question if they are viable, whereas natural gas can meet demand at ten a time and is a cleaner non-renewable source of energy. Gas can also store excess electricity right through from the power to gas solution. So I will end by saying also that not only the switch from coal to gas and not only the gas and renewable partnership, but also through developing new uses of gas, gas in transport and gas in shipping in particular when gas will really consider itself as being part of the solution.
I would like to look a little bit more into the current gas demand in Europe. If we look at the gas demand and the trend of the gas demand, it’s clear that gas demand is declining. For quite some time we thought that the decline of gas demand in Europe was very much resolved of the economic crisis. That certainly played a role because of the change of structure of the economy has an impact. Currently, the demand in the EU is a little higher, probably 400 billion cubic meters a year, and the expectations for this demand in early 2000 are that it would be more like 600 billion cubic meters a year. So there is obviously a massive discrepancy between what was expected 15 years ago and what we are seeing now. A reason for this is certainly the significant increase of renewable energy. Renewables were underestimated for quite a long time, seen as solar panels here and there, and intermittent wind but not something that could have a massive system impact. The other issue that we underestimate is the massive advance in the energy efficiency.
In the last ten years there were European wide rules and regulations on tightening efficiency of buildings and appliances. Again this is one of the policies that are usually not visible because it is very incremental and doesn’t have a major dramatic visibility; it is not about building one big pipeline or big generation capacity. As it continues we can see that actually energy efficiency across the board is having this impact. I fully agree that gas has a major role to play in achieving the climate goals, I also think that this role is quite complex, because when we start replacing coal with gas it is not always straightforward. Very often, if you leave a coal power plant to die naturally and slowly, it is very likely that this capacity will be replaced by renewables and by energy efficiency.
We more and more see the whole idea of base load being undermined. Many technologies and solutions balancing intermittent energy are being discovered and introduced. When we start seeing and discussing the future of gas I think we need a very deep understanding of the future of gas demand. It is not only the decline of the overall volume but one thing that renewables do and people who are directly involved with gas generation are doing is damaging the business model of gas. Renewables could generate almost zero cost electricity at any time and that basically digs intothe expected generation of gas.
Another thing is that we’re gradually moving to the so called near-zero energy building standards. The near-zero energy building standards are mainly applicable to new buildingsand it comes into force in the next few years; from 2018 and 2020 for public and private buildings and for new buildings, it basically means building standards that might not require gas or direct heating options. What we will see probably is buildings where there is a wide choice of heating options and gas will have to compete. I predict it will not be easy to penetrate or keep the market share in heating. Overall, I believe that we need to understand and be prepared for a much more complex picture of gas demand in the future.
You shouldn’t see gas from a solely European perspective. Estimates of gas as the fastest growing fossil fuel are due to the fact that huge demand is coming from Asia. I think with the lack of understanding in Europe is the planning on gas and then renewables, and using basic energy models that are disconnected from what happens to the rest of the world is a big mistake.
If we see what’s happening in current European energy markets, on one hand we see already like single markets almost ready, it will be finished in 4 to 5 years and is ideal conditions for competition between different fuels for gas and gas competition. But on the other hand the market raised such an anti-gas push in regulations and extreme obsession for renewables. In that sense, I don’t say it’s critical but it undermines the positive things which can be derived from market mechanisms.. If we compare between 2015 and 2005 for instance, Europe delivered much more emissions’ reduction, but if you see by unit of GDP, the results in the US and the European Union were more or less the same. But bear in mind that electricity costs three times less in the US than in Europe and subsidies are much less important.
Europe already has a competitive market where you can get gas, or gas from different sources, different suppliers, different roots; and it can complement renewables. If you look at the US, you go to China, and it’s an absolutely different picture and I think is an issue of concern. Let’s say efficiency plays its role, growth might be slow but what if growth picks up? Would renewables be able to like solely respond to European demand? I'm not sure. Its then as François-Régis was mentioning about coal to gas ratio. In the current market conditions; and if the competition between different suppliers remains, then it’s viable. At the end of the day, as we see in the US, it also brings quite impressive results at a lower cost.
I don’t want to talk about the switch from coal to gas. I want to talk about the switch from coal to many different sources, including gas. 15 years ago when I started working on energy, particularly renewable energy, people thought I was a totally crazy for believing in solar and wind. Now we are much further than we ever thought 15 years ago, even with our ideological position that we had at that time. The renewables community against was nuclear and anything in the basket called fossil fuels. I personally changed my mind now because I see we cannot afford nuclear, from an economical perspective, from an ecological perspective and from a security perspective; nuclear is a fossil because it needs to be phased out. The same is true for coal, particularly from an environmental perspective. It needs to be phased out as soon as possible and be replaced. The replacement will be very different than what we have today in the market and will not just be replacing oil with gas. It will be replaced by a mixture of fuels; the concept of base load as we have had it in the last 100 years is not going to continue. Batteries will play a different role but not solve a 100% of our problems, and then we need other flexible sources; and there I see something in between renewables and fossil fuels, and a very good solution and a technical solution also for the challenges we have which is the basis of solar and wind. This solution is gas.
Gas is very flexible; gas is much cleaner than coal and has been available for a long time. I don’t know how long; maybe not 500 years but for quite some time we will have gas and we can use it in an economically and environmentally sound way. Maybe not as clean as wind and solar, but it’s much cleaner than coal. There’s a middle way with using coal, and that’s what I see as a perfect solution for many, many years to come. No idea for how many, but for quite a long time. The base load concept is not working anymore, and therefore we also need to change the way our market is designed. We need a price for wind and solar, no marginal costs; and free CO2 . We need a price tag for other technologies or sources that provide the flexibility that needs to go hand in hand with the share of solar and wind of much beyond 50%, I can expect; and for quite some time. And so, the flexibility needs to get a special price, the flexibility that could be offered by gas. Gas is for me an important way to continue with clean energies like solar and wind.
Sofia: How much are we importing gas from Russia? Isn’t that a problem for European gas?
Francois: 55% of our consumption in the EU is coming from either inland in new production or Norwegian production, so quite a lot of our gas is produced within EU or Norway. When it comes to other countries, in 2015 we had ten different countries that were providing 45% of our gas consumption, and among those ten the first one was Russia and Russia is more or less providing between one-fourth and 30% of our consumption. Our domestic EU gas production is declining and therefore at Total we are calling for a reversal of this situation, and we would like really to see more investment coming into inland EU gas exploration and production.
Danila: Right now, Europe has such a vast choice are there are shifts in volumes similar to those we observed at the end of 2014, when Gazprom was reducing gas delivered via Ukraine and this didn’t impact our prices in the European Union; I believe this is a sign of a well developed market. Five or ten years ago such a reduction of volumes during the cold times would have a certain impact on the price but right now it had almost zero impact.
Sofia: How do you see gas prices developing in 2017 in light of the state of the European gas market and the OPEC oil deal?
Julian: First, the OPEC deal already had an impact on the oil price; but I would be surprised if the deal led to a price above $60. So the price of oil will not go much higher; and oil related prices of gas will not be particularly affected. But we see increasing traits of gas that are not related to oil prices, including the arrival of LNG gas from US, and also the pressure that the Gazprom is experiencing from the European commission on their non-market behaviour. So I assume that that would counter mostly the affect of oil price increase, and we might see some small price increase for gas but it will not be substantial.
Sofia: Do you think that power to gas with electricity from renewables, wind, solar, and vehicles running on compressed natural gas will increase in the near future?
Oliver: No, I don’t believe they have a big future. I believe the future in transport is really based on electricity, and that electricity might be produced also partly from gas. But this is what I see as future of transportation: electricity, not compressed gas.
Sofia: What trends in building heating should we expect in the next decade and how might they affect gas demand?
Julian: I already mentioned about the near-zero energy building standards, so this is very important regulation and trend that we should look at. There is also an interesting factor that we could call a tipping point in the energy efficiency of buildings. When you increase the energy efficiency of the building, there is a point in which heat pumps that are simply delivered to air conditioning systems become much more is acceptable and this is a future likely source of heating.
We can divide Europe in huge geographies; one would be the more advanced Nordic countries such as Denmark or even central European countries like Austria where the building efficiency is very high already. We can see that trend that gas is increasingly not installed at the heating source in near and high efficiency buildings. But we can also see it in countries with very low energy efficiency, like Bulgaria, for example; when a building can be retrofitted because of high price of district heating. People retrofit their buildings and then they install air conditioning systems for heating. And that is a very interesting trend. So these are trends that we will see and that will depress and create more problems for the gas demand in buildings and at the end of the day this is the largest share of gas use in Europe.
Sofia: Will solar and gas play the main role in the future energy mix?
Oliver: Looking back at the last ten years in the EU at the new additions in power generation, there are three main sourced three sources. It’s wind, it’s solar and it’s gas. So if we had started building an energy future only ten years ago, it would be based on these three sources only. We did a 100 years differently because many sources were not available as they are today and it was great because it has brought us forward; but we don’t need to necessarily repeat for the next 100 years what we did the last 100 years; so let’s just repeat what we did the last ten years, and this is adding gas, solar, and wind solely in the energy mix.
Sofia: Recently, Russia and Turkey signed an MOU for the construction of the Turkish Stream pipeline supply of South Eastern European gas. How does this affect the whole renewable energy space in Europe?
Julian: Yes, I build things and I'm not the only person that thinks that the Turkish Stream will not be built, despite the MOU. The last few years the gas demand has been installed there up around 50 bcm per year. It’s unlikely that it will increase in the next five or maybe ten years, Turkey needs to make massive energy efficiency gains as well and renewables are coming there too. So, Turkey as a demand direction is under question. South East Europe is very unlikely to increase its gas demand. In fact if we look at the gas demand in the region, which is a limited user of gas and is declining over the last ten years. It is also getting into a direct competition with biomass which is widely used and the efficient use of biomass would be a very strong competitor of gas and heating. So, I don’t think it will change anything. I think if it’s built it would add to the list of standard assets of large energy projects.
Danila: If everything goes well for Turkish Stream but only for the line 1 which will basically replace the transit capacity which is going via Ukraine; it’s only going be available for Turkish consumption and maybe Greece at the most. The second line is much more problematic and is right now more of a speculation. If you see their plans for construction in the southern part of Ukraine transit network that was cancelled; and basically were cancelled exactly so the pipeline which supplies Turkey, Romania and Bulgaria are interconnected. So my answer is essentially first line yes, but the second line under question.
Sofia: Is there still a role for gas in a power market increasingly dominated by renewables in Europe?
Francois: For the time being, gas will have to deal with what is in the power mix today, which includes a lot of coal. Let’s keep in mind that 26% of power which is generated in Europe comes from coal. This one quarter of power generated by coal produces three quarters of the power sector emissions.
So, our belief is that today gas’ role is to replace coal as soon as possible and tomorrow to be less and less in base load and more and more in partnership with renewables. We have the ambition to be today and tomorrow base load and complementing renewables; and perhaps later on the time will come when renewables are absolutely dominating the power mix. When this happens, will be the role of gas complementing renewables, absolutely.
Sofia: Would you say that this will happen on a short time frame or a long time frame when you say that renewables will be dominating and gas would be replacing coal?
Oliver: I think it’s going to happen sooner than we all think, as I said 50 years ago nobody would have believed that in some areas renewables are now supplying a 100% of electricity needs. The development of renewables is much faster than we anticipated and I think it’s going to continue much faster than we anticipate today. I know that many sources would be around for quite some time; the first thing that we need to phase out is coal and replace the 26% as soon as possible. We can replace it by a competition between wind, solar, and gas, and I will not make a forecast; but as I anticipate it’s going to happen much faster that renewables will dominate and gas will be a complementary source to renewables.
Sofia: In terms of looking at solar, gas and the role that it will play in the future energy mix; what do you say are the requirements are to realise this in your opinion?
Oliver: We need to move away from what we did in the last 100 years in terms of energy market design. We will have a market design necessary that serves energy needs and services. Energy services include services that volatility of solar and wind will be covered by some flexible sources which will be different - one of these will be gas. So the market design needs to change and reward flexibility on the one side; and no marginal cost CO2 free sources; which will be based, I believe, on energy services; and it will be based on probably new players. When the Apples and Googles of this world will run the energy services, I’m not saying that Apple is not investing in solar billions of dollars today because they want to be owners of big solar plants, but they want to learn how to control the technology, that’s why they invest. They want to be the intermediates between energy production, which will play a much lower role in the whole value chain and the energy services needed in between the end customer and the end producer. So, many new players will come and the energy market will look very different and very soon already.
Sofia: Some people have got the perception that natural gas industry is an old dinosaur. Do you feel it is one?
Francois: We are an old industry compared to renewables in France, when you look at whatever technologies which are being developed, be it new commencing buyers or be it power to gas systems or the new gas engines, there is a lot of R&D in the gas industry. Since we consider ourselves as the best partners to renewables, we do not consider at all ourselves as being an industry of the past. This question shows that we have a lot of work to do in order to showcase this more and more and to be more proactive on that issue, absolutely.
Oliver: Just to comment that 15 years ago I had a basket of fossil fuels that was oil, coal, and gas. The fossils that will die out are coal and nuclear and gas will survive for quite a long time to come. I wouldn’t call gas the fossil fuel even if it’s around for a while. Fossils I would call those that are dying very soon.
Julian: I agree with all that, but we should also be prepared for sudden changes as a result of not only technology inventions but growth of innovative technologies that suddenly can change the landscape of the gas industry or any other energy industry. We are living in a time of very high uncertainty.