Gas after Paris and Crimea
Gas demand in Europe is falling. Is that a long term trend or demand might recover in the future?
For the last two decades climate policies have been increasing energy efficiency and driving energy innovation in Europe. Since the 1970s energy security concerns have fuelled ambitious search for alternative energy solutions. Climate and energy security concerns catalysed the advance of a wide range of energy technologies most of which matured roughly at the time of the 2008 economic crisis. That coincident obscured the depth of a new gas demand trend.
Decline in gas demand in Europe was widely seen primarily as a result of the economic decline. However when the European economy started recovering gas demand has continued to decline in the three main areas it is used – buildings, power and industry. There are at least three factors in power generation and heating that might be contributing to the decline. They could be affecting the industry as well.
First, the impact of tighter buildings efficiency standards is piling up and reducing gas consumption. The construction sector is preparing now to adopt the new EU Near Zero Energy Building (nZEB) standard for new public buildings from 2019 and new residential buildings from 2021. The nZEB standard will inevitably spread over part of the old building stock through future renovation. Buildings efficiency could bring domestic heating to a tipping point where gas will not be a preferred heating fuel.
Second, electricity is competing with gas more and more successfully. This trend is partly linked to the first factor (buildings efficiency) but is also supported by the expansion of use of heat pumps, use of solar heating and innovation in electric appliances. Electrification of heating is a recognised trend now.
Third, renewables are not anymore a marginal energy source. Their continuously shrinking cost and expanding volume is making them a systemic game changer. The current decline of investment in renewables in Europe is mostly a result of a regulatory and policy adjustment than an end of their strong growth. Strong growth in renewables elsewhere in the world will secure their further cost decline and technological advance. Renewables might not only continue to displace gas in power generation, and in heating, they might also disrupt the gas power generation income model. The view that gas is essential for balancing the variable generation by renewables has also been challenged by more sophisticated demand management and weather forecasting.
The climate and energy security factors will be strengthened by both the outcome of the Paris Climate Conference and by the annexation of Crimea, an event that set in motion a strong new European wave of energy security policies that are putting further downward pressure on gas consumption.
The main source of gas demand recovery could come from one of the corners that triggered the decline – the EU climate policies. After Paris there is a clear sense that the EU countries will have to withdraw from coal power generation. UK already made a clear commitment for phase out coal and Germany has started a political discussion that could start a clear plan for phasing out coal.
Whether coal will be displaced by gas however depends very much on the timeline of withdrawer. A slow decommissioning of coal power plants would most likely lead to their displacement mainly by renewables and energy efficiency. More rapid decommissioning could create a space for increasing or at least maintaining the European gas demand.
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