The fate of natural gas in the European Green Deal

  • 2021-10-14
  • Alex Barnes

The European Union has declared its decision to achieve ‘net zero’ greenhouse gas emissions by 2050. This year the Commission has just published proposals to reach an interim target of a 55% reduction in greenhouse gas emissions by 2030, the “Fit for 55” package. Reaching these goals will require a transformation in the way that Europeans use energy – the type of energy they use, the way they use it, and how they manage greenhouse gas emissions. Inevitably this will mean a significant reduction in the use of fossil fuels, and this has led to questions about the role of natural gas in the economy. But, to paraphrase Mark Twain, reports of the demise of natural gas have been greatly exaggerated. To understand why, one needs to look more closely at how Europe can reduce its emissions quickly and effectively and still meet net zero target by 2050.

The transition will take time

The first point to recognise is the importance of natural gas in energy consumption today. It represents 22% of EU27 gross inland energy consumption, and higher shares in many countries for industrial, commercial and residential users. For example, natural gas accounts for 71% of residential energy consumption in the Netherlands. Until these consumers have alternative energy supplies, for example based on renewable electricity, they will continue to use natural gas. Replacing gas fired boilers with electric heat pumps in millions of buildings requires reengineering heating systems in buildings which takes time. The same applies to those industrial processes which use natural gas for heat. Natural gas will therefore be required for many years to come as the necessary investments in equipment and electricity grids is made. The EU Commission’s own impact assessment assumes that gas will have a similar share of energy supply to that today in 2030.

Secondly it will take time to ensure that there is sufficient renewable electricity to supply not only existing demand but also the additional demand for electricity as the economy electrifies. Currently electricity supplies only 23% of final energy consumption. Electricity’s share is expected to rise to 50 to 60%. Renewables only account for about a third of electricity generation at the moment, and this includes a large share of legacy hydro power. Wind and solar, which will need to increase massively, are less than half of renewable generation. Coal accounts for a fifth of total generation and natural gas slightly less. (1) However, companies have warned that Europe is “far from the needed volumes and capacity in terms of renewable energy to unleash the industrial electrification business case.” (2) The head of the world’s second largest wind turbine manufacturer, Siemens Gamesa, has said that wind power expansion was running at only half the rate needed to meet the EU’s 2030 target. (3) Countries such as Germany are phasing out zero carbon nuclear power, currently a quarter of EU generation.

The fate of coal?

This presents the EU with a dilemma. Electricity demand is increasing, renewables will take time to build out, and a reduction in nuclear generation will also need to be replaced by renewables if emissions are to be reduced. Natural gas will help fill this gap. Replacing coal fired generation immediately with existing gas fired generation capacity would result in an instant reduction in CO2 emissions, as gas fired generation emits half the CO2 of coal fired generation. This buys Europe more time for the roll out of renewables. The benefits of gas are very clear. Germany and the UK have similar proportions of zero carbon (renewables and nuclear) generation. Despite having spent billions on renewables, Germany still has electricity which is 50% more carbon intensive than the UK because Germany relies on coal for 36% of its electricity generation and gas for 15% compared to the UK which uses gas for 40% and only 5% for coal. Countries like Poland, Czechia and Estonia are even more dependent on coal. The Fit for 55 proposals will increase the cost of CO2 emissions, making coal fired generation more expensive compared to natural gas, and thus increasing demand for natural gas until sufficient renewables are available. In the longer-term natural gas generation with carbon, capture and storage (CCS) will provide back up for wind and solar which provide less reliable supply. This will be increasingly important as more people heat their homes with electricity. The Germans even have a word for the problem, ‘dunkelflaute’ where there is little wind or sun in winter, often coinciding with cold temperatures.

How about hydrogen?

Longer term natural gas will play an important role in supplying energy to those industrial sectors which cannot be easily electrified, such as steel, chemicals and cement, or heavy transport such as trucks and shipping. The EU has identified hydrogen which produces no CO2 when combusted, as the way to do this. It can provide high temperature heat which electricity cannot. Hydrogen is also used as a feedstock in chemicals and fertilisers, and in oil refineries. Hydrogen could also be used to heat buildings via gas boilers where electric heat pumps are not feasible. Hydrogen based fuel cells or ammonia can power trucks and ships. Currently hydrogen in Europe is produced by reforming natural gas, so called ‘grey’ hydrogen. This also produces CO2 which is currently released into the atmosphere. By adding CCS CO2 emissions are reduced by up to 90% producing ‘blue’ hydrogen. Hydrogen produced by electrolysis of water based on renewable electricity produces no CO2 and is known as ‘green’ hydrogen.

However, there is insufficient renewable generation to meet existing electricity demand. If existing renewables were used to supply electrolysers to produce hydrogen this would result in an increase in CO2 emissions overall. Firstly, other electricity consumers would need to use more fossil fuel-based electricity – green hydrogen would effectively cannibalise existing renewable generation. Secondly whilst 1kWh of renewable electricity can replace 1kWh of fossil fuel electricity, it produces only about 0.8kWh of green hydrogen because of conversion losses, so using renewable generation for hydrogen when there is a shortage of renewable generation is inefficient. Worse, use of grid-based electricity for electrolysis, for example when there is no wind or sun, can result in higher CO2 emissions than blue and even grey hydrogen, because of the fossil fuel share in the generation mix. German grid electricity would have to reduce its carbon footprint by 90% before hydrogen produced via electrolysis was comparable with blue hydrogen.

Blue hydrogen is also currently cheaper than green hydrogen. There is clear potential for blue hydrogen to start decarbonising industry, and thereby reduce emissions today, rather than wait until there is sufficient renewable generation. Once there is sufficient and cheap enough green hydrogen industry will be able to use that instead. The Hydrogen4EU study of how hydrogen could help Europe could meet its net zero targets found that blue hydrogen provided more than half of hydrogen in 2050 and that natural gas demand was similar to that today, but used with CCS and as a source of blue hydrogen. Even so renewables more than tripled their share of energy supply.

Do gas molecules have nationality?

This just leaves one final question, the source of the natural gas. Europe’s own production continues to decline, so even if gas demand stays the same or declines slightly, Europe will need to increase its gas imports. It is in the fortunate position that it can choose between a variety of suppliers, both via ships carrying liquefied natural gas (LNG) and gas pipelines, enabling it to negotiate the best price. The wholesale gas price in Europe is set by competition between the different sources of supply. Once gas has entered the European network it flows to where it is needed, irrespective of its origin, as gas molecules are physically the same and mixed together. Additional infrastructure, such as the Nord Stream 2 pipeline transporting Russian gas, or the recently completed TAP pipeline which brings Azeri gas to Europe, ensure Europe has multiple options to meet the increased import demand if other sources are unavailable, for example if LNG goes to higher priced markets in Asia. And it ensures that Europe can keep the lights on and supply its industry in as environmentally friendly way as possible if the build out of renewables is slower than expected.

Alex Barnes is an independent consultant specialising in energy market design. He has over 25 years’ experience working in European gas markets and is a Visiting Research Fellow at the Oxford Institute For Energy Studies.

Alex Barnes is director of Alex Barnes&Associates
Mobile +44 7741 205 373
www.alexbarnesassociates.co.uk

(1) Figures based on EU Energy in figures. Statistical Pocketbook 2020.
(2) Financial Times. “European industrialists sound alarm over EU’s renewable energy gap.” 8 th July 2021.
(3) Financial Times. “Europe risks falling behind China and US in renewables, warn industry chiefs.” 8 th June 2021.