Analysis: Gas is facing an existential crisis in climate-damaging Europe

© Reuters. FILE PHOTO: An aerial photo shows the four natural gas power plants “Gersteinwerk” from RWE Power, one of the largest European electricity and gas companies near the North Rhine-Westphalian city of Hamm, May 6, 2015. REUTERS / Wolfgang Rattay

By Nina Chestney

LONDON (Reuters) – Europe faces the prospect of higher electricity bills and a supply crisis as utilities struggle to fund new gas-fired power plants unless they meet stricter emission criteria imposed by banks that are pressured Stop funding fossil fuel projects.

The region’s energy suppliers are already anticipating electricity supply problems as they phase out the generation of coal and nuclear power and the aging of the infrastructure.

International producers have declared for well over a decade that gas is a necessary transition fuel on the road to decarbonization.

However, the increasing urgency to stop climate change and the proliferation of renewable technologies have made investors and policymakers reluctant to plan for large new facilities in the region.

The falling costs of renewable energies and the potential of new technologies such as hydrogen are at the forefront of political decision-makers and are pushing gas out of favor if they set even more ambitious climate targets.

When burned in a power plant, natural gas produces around half of the carbon dioxide emissions of coal.

One way to eliminate the remaining emissions is to use CCS (Carbon Capture and Storage) technology to capture carbon dioxide. However, this is expensive.

It also fails to address growing concerns that the leakage of methane from gas infrastructure, which is warming the planet, could undo the benefits of switching to coal-based gas.

The Executive Vice President of the European Commission, Frans Timmermans, said at an industry event in March that fossil gases will only play a “marginal role” on the path to net zero emissions by 2050.

Last year, the International Energy Agency (IEA) announced that gas demand in the EU will be 8% lower in 2030 than in 2019.

“Existential questions are imminent in some mature markets in Europe, North America and parts of Asia, particularly after the announcement of net-zero targets,” said the authors of the IEA’s World Energy Outlook in an email.

STRANDED ASSET RISK

Some developers and utilities have already diverted funds from gas.

In Europe’s five largest power markets – the UK, France, Germany, Italy and Spain – developers have announced more than 60 gigawatts of new gas plant projects, as figures from S&P Global (NYSE 🙂 Market Intelligence show, although not all are likely to be built.

An April report by U.S.-based think tank Global Energy Monitor said that building all planned or ongoing gas infrastructure in the European Union would expose stranded assets to $ 105 billion .

Gas projects worth around 30 billion euros were canceled, postponed or postponed indefinitely last year due to difficulties in finding funding.

Renewable energy costs are expected to continue to fall while gas plant owners are exposed to EU carbon prices, which have hit record levels of over € 50 per tonne, as well as volatile wholesale prices for energy.

If CCS is required by regulators, it would mean several euro cents more per kilowatt hour, according to analysts, as CCS requires additional infrastructure and overall more fuel is needed to produce the same amount of electricity.

Gas generation remains a quick and effective way to create new capacity to meet demand.

As utilities are reluctant to commit to it, several European governments are trying to import more electricity and liquefied natural gas and paying operators to keep gas facilities available for short-term standby capacity. This could also increase energy costs for consumers.

LARGER SCRUTINY

Elsewhere, gas systems may not have the same struggle. The Oxford Institute for Energy Studies said China could increase 40 to 50 GW of new gas-powered electricity capacity to 140 to 150 GW by 2025, a 50% increase from current levels as the government seeks to limit coal consumption.

In Europe, where coal is already difficult to finance, credit institutions and governments have tightened the requirements for funding gas projects.

The European Investment Bank, Europe’s largest public lender, has revised its lending policy to largely exclude new gas infrastructures from the end of this year.

“To put it mildly, gas is over … We will not be able to achieve the climate targets without the end of the use of undiminished fossil fuels,” said EIB President Werner Hoyer in January.

The European Commission has proposed rules to limit funding for natural gas projects due to the risk they pose to the bloc’s climate goals.

Industry and some governments have been campaigning for the Commission to consider how to include natural gas-fired power plants in their sustainable finance taxonomy and have postponed the decision until the end of this year.

If gas-fired power plants are classified as environmentally friendly, provided they are equipped with CCS, they can be marketed as sustainable investments in Europe from next year.

Nevertheless, the end of the European gas era could be in sight.

“The window for conventional (construction) gas generation seems to be narrowing. We have the feeling that investments in material gas will have to be made by the middle of the decade, unless you combine it with CCS or do something creative with hydrogen” said Murray Douglas. Research director at the consultancy Wood Mackenzie.

“But we still need something to close the (supply) gap in the next 10 to 15 years so that gas has to remain part of the electricity mix.”

($ 1 = 0.8295 euros)

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