Will gas demand for temperature control heat up or cool off? Meredith Annex is Director of Heat & Cooling Research at Bloomberg New Energy Finance. We caught up with her at Flame to discusses BNEF’s predictions for the segment, whether or not the gas grid can continue to play a role, and how increasing summer demand for air conditioning is affecting baseload power consumption.
"You’re taking a gamble on the [costs of hydrogen] being able to come down enough to compete with electrification... the gas industry really needs to move fast if it is to take that role"
Q: Today we’re talking about heating, cooling and the gas industry. That is your field.
Annex: It is, yes. I’m leading BloombergNEF’s research on the long-term trends within heating and cooling. Understanding how decarbonisation policies and trends within the market, from retail prices to capex costs of systems, are going to affect where we’re getting our heat and cold from.
Q: Let’s start with heating. What sort of role is gas playing at the moment, and how do you see it moving forwards?
Annex: At the moment gas is instrumental for heating systems, especially in Europe. It’s the largest source of heating supply that we have – about 44% of the European market is heated by gas, and that’s including industry, so it’s even higher for residential homes like where you and I live.
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Q: That’s at the moment. What about the future?
Annex: Well this is the open question. Right now we know that in order to hit decarbonisation targets, every country is going to have to look at how it’s heating its homes and how it’s creating things through industrial processes. It’s going to have to change.
Q: When you look at individual countries, talk me through what policies are in place.
Annex: Absolutely. Starting at the very highest level with the European Commission, we’re expecting to see more coordinated policies in future. There’s an ongoing lobbying effort to try and undertake that. At the moment though, the current regulations are providing mixed messages. So some are pushing you towards more efficient gas boilers, and some are pushing you off of gas and on to heat pumps.
Now when you go on to country levels, there are a couple of countries that are really taking the lead. The Netherlands has announced a ban on new homes connecting to the gas grid, and the aim is to phase out gas entirely from homes by 2040. In the UK we’re seeing a similar policy. New homes will not be allowed to connect to the gas grid by 2025, and with the recent net zero report that was released earlier this month, we’re seeing a plan for the absolute phase out of natural gas – either converting to electrification, or to a hydrogen network.
Q: Does that mean in terms of heating, the gas industry can almost see the end of the line? Is there anything the industry can do to say well actually, hang on, we can decarbonise, we can get cleaner and still play a part?
Annex: It’s going to be challenging if I’m honest. There is stuff that you can do. You can have the gas grid be repurposed, if you will, for biogas or for hydrogen, but there are limitations as to the amount of biogas that you can produce, and at the moment hydrogen costs are quite expensive. So you’re taking a gamble on those costs being able to come down enough to compete with electrification technologies, which are currently improving and are currently being innovated.
So the gas industry really needs to move fast if it is going to want to take that role. Otherwise, there is a potential that there is going to be an additional role for gas in the power grid. So if you do electrify with heat pumps, you will see an increased load on the power networks, and that could be an opportunity for gas.
Q: You mentioned the UK, the Netherlands – what about some of the big markets like the States?
Annex: Yes. The States is a very interesting one. So we’ve seen some recent gas moratoriums in the United States. Westchester County, which is a suburb of New York City, is no longer allowed to connect to the gas grid. There have been discussions of gas bans as well in California, in Denver Colorado, and a few other locations. A lot of it though is at the state and local level rather than the national level.
Q: And they are quite small areas. Do you see them getting bigger?
Annex: I think it’s going to stay as a kind of local decision for now, given the current policy trajectory in the US. And while these are small areas, they are very large population centres. If you had the natural gas grid that serves California lose San Diego, San Francisco, Los Angeles, you’d have to have to look at how many homes would remain on the gas grid after that.
Those individual homes would have to have to bear the brunt of maintenance costs and OPEX that are going on in the gas grid, so it could become harder.
Q: We’ve talked a lot about heating, but on the flip side of that is cooling. When you look at some of the ways that cooling is used, particularly in some countries where it’s used at night and you don’t have any solar energy – is there a role for the gas industry there?
Annex: Yes. I think it’s quite interesting, although it can also make some difficulty around the arguments for seasonal storage. So natural gas right now is being touted as this opportunity to provide peak electric load in winter.
But if you electrify summer demand as well, through the increased use of air conditioning units and fans and other smaller air conditioning systems, you could end up seeing a simultaneous rise in summer peaks on the power grid as well as winter peaks. That means that you could have more baseload power generation, which can be provided by anything that produces power throughout the course of the year – you don’t have to oversize the grid nearly as much.
Q: Which is a very different type of graph to what we’re normally used to seeing.
Annex: Exactly. You start to look a lot more similar to the southern United States, or to where the Southern United States is heading. In the southern states, you’ve got milder weather so heat pumps are more effective, and you have a need for both winter heating and summer cooling. This means that over time we’re expecting to see an evening out of the peaks within the Southern US grid.
Q: What’s your message to the gas industry? The picture you are painting is one where there could be opportunities, but actually when we look at heating, it’s coming to the end of the line.
Annex: It is very intense right now. These decisions are a far ways out – for instance the UK is likely to choose between electrification and hydrogen sometime in the 2020’s. We’re not talking about tomorrow, we’re not talking about the day after, but we are talking about 2030.
The gas industry does need to realise that if you’re going to be building a new gas plant, or are betting on a new gas plant coming online, it’s going to come online in 2022 if we started building it today. And that plant is going to hit 2030 during its 10 year operational lifetime, which is the minimum lifetime that you would want. So these considerations are going to start to affect real decisions today and the gas industry needs to start to realise that.
