Can anything reverse the decline of natural gas as a source of primary energy in Europe? Gas demand in 2015, despite a fractional uptick on the 2014 figure, was 20 per cent below the level reached a decade ago. Unless something changes radically, Europe has passed the point of peak gas consumption. The promise of “a golden age of gas” talked up by the industry and some commentators a few years ago looks very tarnished. The reasons for this are obvious. In the absence of a carbon price, coal is cheap and in countries such as Germany it retains crucial political support because of the jobs it involves. Renewables are subsidised. So gas is squeezed, especially in the power sector because efficiency gains and slow economic growth have kept total electricity demand down. It is very hard to see any of those factors being reversed anytime soon. There is no prospect of a carbon price set at a level that will change behaviour or force the closure of existing coal-fired stations. Renewable investment remains quite strong, adding to the existing capital stock. With downward pressure on its price gas may be cheap, but coal is cheaper and even if renewable subsidies are pruned back technology is advancing all the time and the costs of both solar and wind are now materially lower than they have ever been. In the end, natural gas may be evolving into being a swing supplier – a back-up source of power when the wind doesn’t blow, or when nuclear power plants are delayed. Gas-powered generating capacity would in those circumstances provide a layer of comfort, with capacity payments to meet the costs of keeping stations in continuous readiness even if they are only used for 20 or 30 per cent of the time. In different ways, that is what is happening in both the UK and Germany. As we move from scarcity to plenty in the energy market, the terms of trade will alter and some suppliers will inevitably lose out. The natural gas suppliers look like being the next victims.
FT 23rd May 2016 read more »