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Letter from Brussels: Gas still fuelling EU's green transition

The European Commission's transition plans, along with rising coal-to-gas switching, are entrenching gas in the EU energy mix

The European Commission is following through on its mantra that natural gas is key to the bloc’s energy transition. And coal-reliant member states appear to finally be falling in line, with increasingly diversified natural gas supplies and the EU's Green Deal plans contributing to coal-to gas switching.

The Commission's energy system integration strategy, unveiled earlier this summer, states that natural gas will still account for c.20pc of gaseous fuels used in the EU by mid-century, with the remainder a mix of "biogas, biomethane, hydrogen or synthetic gases—[that] is hard to project". But with the Commission hoping for greater electrification in the region, it anticipates overall gas demand will fall to below 630TWh by 2050 compared with 5,222TWh in 2019. The strategy identifies carbon capture and storage (CCS) as a way for natural gas to fit with the Commission’s climate-neutrality objective.

The Commission may update some of its scenarios for gas demand in light of its ambition to raise the EU's 2030 emission reduction goal from 40pc to 50-55pc below 1990 levels, with a 2030 climate target plan due in September. Yet, the latest strategy sets a clear path that expressly relies on natural gas as a bridge fuel to renewable gases while maintaining a long-term—albeit diminished—role for natural gas beyond the EU's carbon-neutrality end-point in 2050.

The Commission and Brussels-based industry bodies expect gas demand to be stable until 2030

The Commission also plans to present a proposal later this year to align the Trans-European Energy (TEN-E) regulation with the strategy. TEN-E empowers the Commission to identify energy projects that can be allocated specific EU funding.

However, it remains to be seen to what extent the European Parliament will embrace gas-fuelled initiatives hinging on the potential use of divisive CCS technology. Inclusion of natural gas projects for EU funding under the current TEN-E regulation was heavily criticised by MEPs earlier this year. Parliament may also diverge from the Commission on the 2030 emission reduction goals, with MEPs discussing raising the target to 65pc.

Coal to renewables and gas

The European gas market is becoming increasingly integrated and diversified as a result of new LNG terminals coming online, with more planned, and a multitude of new pipeline interconnectors—which received funding under TEN-E. These projects include the Trans-Adriatic Pipeline, set to be operational later this year, and the Baltic Pipe, which will connect Poland to Denmark and Norway in 2022. Gas source diversity is being boosted by geopolitical supply concerns in some member states—in particular Eastern European countries wary of Russian meddling.

While the Commission and Brussels-based industry bodies expect gas demand to be stable until 2030, the European Network of Transmission System Operators for Gas estimates that EU gas demand may increase by 186TWh by mid-decade due to rising coal-to-gas switching.

As an indication of the coal-to-gas switching already underway, data from climate NGO Ember shows EU hard coal and lignite generation fell by 34pc and 29pc respectively year-on-year in the first half of 2020 while coal-reliant Germany, Poland and the Czech Republic boosted gas generation by 9pc, 10pc and 32pc respectively. Rising EU carbon permit costs, along with an overall drop in electricity demand due to Covid-19 and a mild winter, are likely to have exacerbated the fall in coal generation.

Total electricity demand in the EU was down by 6.6pc in the first half of 2020, while gas generation maintained its market share with a drop of 5.6pc. Overall, gas generated 221TWh in the first half of 2020, representing 18.2pc of the bloc's electricity production. Over the same period, renewables rose by nearly 11pc year-on-year.

While rapidly rising renewable power generation is integral to the transition, it may also spur a renaissance for gas plants in some member states because of the need to balance variable wind and solar generation. Belgium plans to decommission by 2025 all of its nuclear plants, which have a total capacity of 5.9GW and generated 42pc of the country's electricity in the first half of this year.

There are several new gas plants planned in Belgium to complement new renewable generation and offset the fall in capacity. Yet there is a caveat when counting gas plants that are complementary to renewables, in that gas-fired capacity does not necessarily translate into demand for the fuel.

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