The COP21 meeting held in Paris in December 2015 resulted in an agreement between 195 governments to cooperate to hold global temperature increase below 2 degrees Celsius. To achieve this target, a global peaking of GHG emissions and emissions neutrality after 2050 are needed. Policy measures in the European Union and in various Member States also focus on reducing emissions progressively up to 2050.
Although all sectors are expected to contribute, the power sector is seen as the biggest potential for cutting emissions. Electricity is expected to come from renewable sources like wind, solar, water and biomass or other low emission sources like nuclear power plants or even fossil fuel power stations equipped with CCS technology. In this context of decarbonisation of the power sector in Europe, what is the future for gas?
The role of gas in the generation mix has already been eroded as a result of low power demand, rising renewables and low coal and carbon prices, especially since 2011. It is hard to imagine any of those factors being reversed anytime soon, at least this side of 2020, but lower gas prices (potentially up to the early 2020s thanks to a global LNG glut) are raising new hopes of gas demand recovery.
One should be cautiously optimistic though. First, the power sector lost about 75 bcm between 2010 and 2015, and even in a theoretical scenario for 2016 of a return to the level of competitiveness between coal and gas seen in 2010, this would probably translate into only about 30-40 bcm of additional gas demand due to the rise in renewable generation in the mix in the meantime. Second, to be competitive at times of low coal and carbon prices, gas prices would probably need to drop below $3.5/MMBtu in (Western) Europe before switching starts to happen for baseload generation. Additional measures may be needed to trigger a shift to gas in the short term, like in the UK for instance. In this country, the carbon price floor (a national measure which comes on top of the EU ETS price and which reached £18 in April 2015) changed the relativity of the spark and clean dark spreads, with more gas being used in the system and even some days in 2016 with no coal at all in the mix (an event that has not happened in over 100 years). Exactly how this model can be replicated in other markets is uncertain due to differences between markets, but it has the merit to offer a concrete example that something can be done.
Gas-fired generation will also benefit from expected closure of firm capacity (coal and nuclear), especially in the 2020s. Although the exact amount of retiring plants is yet unknown, this will leave some space for gas in the mix as renewables will not be able to compensate the entire loss and new coal, nuclear and even large hydro power plants will be limited. Even in a world of tighter and lower carbon emissions, there is a possible role for gas in the generation mix in Europe, but this will require that enough gas plants are in place and ready to be used (which is yet a question mark) and that the gas industry manages its high-carbon status in the 2020s and beyond (by developing power stations equipped with CCS technology).
All these issues and much more are developed in their forthcoming publication: ‘LNG market in transition: the great reconfiguration’, OIES/KAPSARC, September 2016.
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