Gas’ place in the energy transition: What do European companies have to do?

David Ledesma's picture
David Ledesma, Energy & Strategy Consultant and Senior Research Fellow, Oxford Institute for Energy Studies
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The pace of energy transition towards low carbon fuels is one of the biggest challenges facing individuals, companies and governments today. In 2018 and 2019, the Oxford Institute for Energy Studies (OIES) published three papers authored by Professor Jonathan Stern, arguing that the gas industry needs to take decarbonisation more seriously or it risks being marginalised or removed from the European energy system. Also, the gas industry, together with its customers, must develop a series of narratives as to how it will achieve European carbon reduction targets. 

The path towards a decarbonised future is unstoppable. The industry must, therefore, develop long-term strategies as to what it will do to achieve the European carbon emission targets and set out what additional costs will be incurred and who will pay them. If this is not done, then the impact on the European energy business is that it will be increasingly electrified and use considerably less gas by 2050. Europe is facing a crossroads in its approach to decarbonisation. Industry either accepts the need to decarbonise and takes steps today to achieve that or accepts the inevitable decline and starts searching for alternative markets and revenue sources. Also, politicians need evidence that the industry is taking the necessary steps to contribute to the achievement of the goals that have been set. If this does not happen, then politicians may either regulate a roadmap for industry or assume that it will not be part of the long term energy future.

Such regulation will not be easy to implement as liberalisation and deregulation of the European gas industry has resulted in a disaggregated value chain with different players, closely interlinked, but with different commercial objectives. This may lead to companies not wanting to forgo short-term profits for the promise of long-term revenues and ‘the greater good’ of a low carbon economy. Companies and governments need to see a future for gas in the European energy market post-2030 to avoid a short-term focus and decision making. Politicians and regulators will need to manage this carefully and develop new regulations with industry to support the progressive decarbonisation of the gas sector.

To achieve the carbon reductions that European governments have committed to as part of COP21, the gas industry must develop decarbonisation pathways that include biogas, biomethane and hydrogen (from power to gas and reformed methane with carbon capture and storage).  The cost of developing these technologies will be high but the industry cannot just rely on government funding or regulatory support. The industry itself must develop economic models that support the business investment into these technologies. Infrastructure providers will also need to ensure their networks are ready to accept these new gases.

Companies could refocus their activities outside of Europe in the high growth markets of Asia and to some extent Africa and the Americas, where environmental challenges or regulations are not so immediate.  These markets may give growth opportunities in the short to medium term. Many are focusing on the challenge of particulate pollution in cities to which gas can make a substantial contribution (as we have seen in China). But in the longer term, they will need to decarbonise their economies in order to meet COP21 targets will need to impose environmental solutions similar to those in Europe. The issue in these countries is that the economics of switching from coal and oil to renewables must make economic sense, and in countries where energy affordability is the most important factor, the prices of imported gas or LNG may be too high to support a move away from alternative, dirtier fuels.

The gas industry and associated players must react positively in order to achieve the COP21 targets. If they fail to do so, then energy markets will increasingly move towards electrification with a resultant reduction in the role of gas in the European energy sector 2035+ and dramatically lower gas consumption by 2050.

For further discussion on this subject, please refer to the OIES website https://www.oxfordenergy.org/gas-programme/.

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