In the run-up to the European Autumn Gas Conference in Brussels in mid-November, Gastech News asked Philip Lowe, Director General for Energy at the European Commission, for his views on the policy issues confronting the EU.
He sees Europe’s energy sector as much more dynamic than a decade ago, but if gas is to fulfil its destiny in the EU, it will need to become more competitive, while carbon prices will need to rise to levels that provide appropriate investment incentives.
Gastech News: Between 2010 and 2012 EU gas demand fell by 12%. How do you view the future role of natural gas in Europe’s energy mix, given uncertainties around demand and the growing market shares of coal and renewables?
Philip Lowe: Natural gas has the potential to contribute significantly to the transition of the energy system. We expect that its share in the EU energy mix will remain roughly the same up to 2030 under current policies. The Union is in the process of agreeing a new climate and energy framework for 2030, and the share could vary depending on future climate and renewables policies and whether carbon capture and storage (CCS) is developed.
Gas is a good flexible complement to intermittent renewables and its role as backup in electricity generation is expected to increase. There is also undoubted potential for gas to be used in commercial vehicles and shipping.
The future role of gas is heavily dependent on the cost differential with other fuels. Coal currently has a cost advantage in power generation, largely due to input fuel price developments and the persistently low Emissions Trading Scheme ((ETS) price, but some coal-fired capacities will be withdrawn by 2016 as a result of tighter emissions controls. This could help gas.
The profitability and further development of gas plants in a number of Member States remain nevertheless uncertain. More competitive gas prices in Europe and a stronger ETS will be necessary for gas to fully contribute to decarbonisation of the electricity system.
Gastech News: How satisfied are you with progress towards gas market liberalisation in Europe? Are the Third Package targets likely to be met?
Philip Lowe: A lot has been achieved over the past ten years; the energy sector is so much more dynamic today. In gas specifically, entry-exit systems are now in place in most of Europe. New actors have appeared, such as independent network operators with a transmission-only philosophy. The number and liquidity of trading hubs is rising every year. Contracts are increasingly based on hub prices instead of being linked to oil.
We are starting to see the benefits of that. In most Member States businesses and citizens can easily switch suppliers – but not yet everywhere.
There is also a need for technical rules for cross-border transport and trading of gas. We need Member States to implement and apply the internal market rules and act in support of the internal market rather than in supporting any narrow policy objective. We need more investments to secure our supplies and to decarbonise our energy systems.
The Member States in 2011 gave the Commission a clear deadline to complete the internal market: 2014. Creating an internal gas market is a unique project with challenges which we will continue to address in a determined and logically coherent manner.
Gastech News: How big a role do you see shale gas and other unconventional sources playing in European gas supply over the coming decade?
Philip Lowe: Having a new and competitive source of gas delivered by pipeline in the EU would certainly be good news for energy prices, for energy independence and for security of supply. This scenario depends greatly on Europe being able to exploit unconventional gas commercially and in an environmentally sustainable way.
Apart from Poland and the UK, there has been hardly any exploratory drilling in Europe, and in some countries there isn't even the possibility of getting licences at the moment due to a lack of public acceptance.
The European Commission has undertaken an environmental, climate and energy impact assessment of unconventional gas extraction. It is now preparing proposals to ensure safe and secure exploitation. We expect the Commission to adopt these proposals before the end of 2013.
Gastech News: What is the Commission’s view on the most appropriate price-formation mechanism for gas in Europe?
Philip Lowe: Oil-indexation in gas contracts has been standard practice for years. However, since oil and gas markets have decoupled, several producers are changing their pricing. The Commission is currently investigating whether oil-indexation may, under certain circumstances, even be contrary to EU competition rules.
Gastech News: Earlier this year the Commission published a Green Paper as part of a consultation process that will lead to a 2030 framework for climate and energy policies. What have been the successes and failures of existing EU climate and energy policies? What lessons are there for future policy?
Philip Lowe: The EU is making good progress towards meeting both the GHG and renewables targets for 2020, and our energy consumption per head is decreasing. This is due to a combination of policies and the underlying dynamics of the EU economy, but the impact of polices agreed at the EU level should not be underestimated.
The ETS is in principle delivering on its task, but the carbon price is too low to provide any real incentive for investment. At the same time, Member State support schemes for renewables have contributed to price increases in many Member States and the national nature of these schemes sometimes works against market integration.
But end-price increases and differences with our main competitors are largely driven by the price of the input fuels. In this regard, shale gas development in the US is revolutionising its energy system and provides a cost advantage to energy-intensive industry.
Natural gas must become more competitively priced in the EU and the ETS must provide better incentives for a coal to gas substitution in power generation for gas to play its full role in the transition of the energy system.
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