Policy uncertainty is 'biggest challenge' for European gas

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Uncertainty over regulation and policy and its impact on investment is the biggest challenge facing gas businesses in Europe, according to polling of delegates at November's European Autumn Gas Conference (EAGC) in Brussels. Around 300 delegates attended the conference, which, though less gloomy than last year's event in Vienna, was nevertheless a sombre affair.

Gauging expectations: A regular feature of the EAGC is electronic polling of delegates – a unique opportunity to gauge the expectations of delegates by posing carefully-framed multiple-choice questions. The polling is sponsored by London-based consultancy Gas Strategies, which also drafts the questions and publishes a "Viewpoint" report*, analysing and commenting on the responses.

When asked “what is the greatest strategic challenge to European energy utility companies?” 44% of delegates voted for “the uncertainty created by policy and regulatory risk complicating decisions on potential investments” – up from 17% last year. Votes for “loss of gas demand”, which attracted 48% last year, were down to 29%. Votes for “continuing economic weakness” were down from 17% to 9%.

Unintended consequences: In an opening address to the conference, Marco Alverà, Senior Executive Vice-President for the Midstream at Eni, spoke of the unintended consequences that the shale gas revolution in North America had had on Europe.

Cheap gas there has displaced coal from power generation, leading to the export of cheap coal to Europe where it has been pushing gas out of the electricity generation fuel mix and increasing carbon dioxide emissions. The result has been that Europe now pays three times more for its gas and 2.5 times more for its power than consumers in North America. That in turn has made energy-intensive industries in North America more competitive than those in Europe

François-Régis Mouton, chairman of GasNaturally, a gas advocacy body, said the result had been “a new coal-plus-renewables paradigm” in European electricity generation, with gas consumption falling by 9.9% in 2011 and 2.3% in 2012, while coal use grew by 3.6% and 3.4% respectively. This meant that in Europe, where climate change is a major policy driver, greenhouse gas emissions fell by just 2% between 2010 and 2012, while in the US, where climate policy is virtually absent, emissions fell by 10%.

Didier Sire, executive vice-president for strategy at GDF Suez Energy Europe, quantified the switch from gas to coal in electricity generation in the EU 15 countries. Average load factors for gas-fired plant, he said, had fallen from 47% in 2009 to 38% in 2011 and just 30% in 2012. Meanwhile coal-fired plant has gone from 49% in 2009 to 52% in 2011 and 56% in 2012.

He added that for coal and gas to reach parity in Europe, the carbon dioxide price would need to rise by a factor of 12 or gas price would need to halve or coal price would need to double.

Demand drivers: When delegates were asked “what is likely to be the biggest demand driver between now and 2020?”, only a quarter thought that gas demand would “grow robustly as renewables fail to live up to their promise and nuclear power wanes in the wake of Fukushima”. All the other options were about demand falling, because of cheap coal imports from North America (38%), strong growth in renewables (16%), continuing economic difficulties (12%) and energy efficiency measures (9%).

Delegates were also asked: “Which new power generation facilities, by fuel type, will attract most investment in Europe over the next 5 years?” Last year, for the first time, coal attracted more votes than gas, 13% against 11%. Indeed only nuclear attracted fewer votes than gas. This year support for gas was up to 18%, making it second only to wind, which once again took the top spot with almost half the vote (47%). Coal was down to 5% while solar fell from 28% to 17%.

Beate Raabe, Secretary-General of Eurogas, the trade organisation that represents the interests of many European gas businesses, reminded delegates that – despite falls in demand – in 2012 gas consumption in Europe was 466 Bcm. She called for the Third Package of regulatory measures intended to create a single market to be implemented fully as quickly as possible.

Echoing the sentiments of several energy executives in Europe in recent months, she called for reductions in subsidies for mature low-carbon technologies. “I’m very pleased to hear from the European Commission that they are going to undertake a study about subsidies,” she said.

Several speakers noted that the collapse of prices in the EU Emissions Trading System had favoured coal over gas but there was little optimism that the carbon market would be fixed any time soon, given concerns about high energy costs and the competitiveness of European industry.

2030 policy framework: The European Commission is currently formulating proposals for an energy and climate policy framework to 2030 and is expected to publish its proposals in January so that they can be debated by the European Council at its meetings next spring.

When delegates were asked “how optimistic are you that the new framework will give gas its rightful place in the energy mix?”, only 1% of voters opted for: “Very optimistic. Policy-makers never intended for Europe to have an energy mix dominated by renewables and coal. The new proposals will surely address that anomaly.”

Three-fifths of voters took the view that: “Europe needs major policy reform now. For example, a realistic carbon price and reductions in subsidies so that different energy sources can compete on a level playing field.”

Just under a fifth (19%) were “cautiously optimistic – almost anything would be better than the mish-mash of policy we have now”.

Just over a fifth (21%) were “pessimistic”, taking the view that: “There is little indication that Europe has got over its obsession with taking a unilateral lead on climate change. That will continue to distort policy.”

The Gas Strategies Viewpoint report goes on to comment on the recent history of European gas businesses seeking unsuccessfully to resist change.  It raises the question of the need for gas businesses to address this cultural challenge with some urgency – addressing new sources and opportunities for value that are emerging rather than Canute-like seeking to hold back the tide of change.

* The Gas Strategies Viewpoint report on the 2013 EAGC conference and previous years can be downloaded below.

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