IEA
Once-certain growth in demand withered away, but there are reasons to expect a resurgence
Like
an athlete striving to re-attain past glories, European gas companies,
along with their suppliers, look at domestic consumption and wonder,
“When will it return to the record level of 2010?”
European
OECD member countries consumed 567 billion cubic metres (bcm) that
year, an 8% gain that more than wiped out the 6% drop in 2009 caused by
the economic crisis.
But, as the IEA warned in the Medium-Term Oil and Gas Market Report 2011,
that dramatic increase was an illusion, with half of the gain driven by
a particularly cold winter. The milder 2011, along with anaemic
economic growth and higher gas prices, indeed saw a 8% decline in
demand. Neither the economic nor the pricing environment improved in
2012, and demand is estimated to have declined by 2%, getting close to
the 500 bcm mark. Seasonally-adjusted gas consumption has actually lost
ten years of gains, and a few countries, such as the United Kingdom, are
back to levels unseen since 1995.
Only
five years ago, most scenarios assumed that European gas demand would
be well above 600 bcm in 2015 and around 700 bcm by 2030, driven by the
power sector. Gas-fired plants were to benefit from their lower CO2
emissions compared with coal and their complementarity with renewables.
Only scenarios featuring a strong increase of nuclear, renewable energy
or both, plus drastic improvements in energy efficiency, were expected
to dampen or reverse this growth track, and even then only in the long
term (post-2020).
Delving into the details to find the cause
The
economic crisis, persistent high gas prices and the still-unabated
growth of renewable energy completely changed this outlook, and some
analysts consider a recovery to 2010 levels by the end of this decade
quite optimistic. But we should be careful about “over-negativising” the
overall prospects for gas and instead analyse sectors individually.
The
residential/commercial sector, the backbone of European gas consumption
with 38% to 40% share of the market, looks unlikely to make huge gains,
given only modest population growth and governmental efforts to
incentivise energy efficiency in existing and new houses. Moreover,
increasing prices in most countries are prompting users to lower
thermostats whenever they can. Unless the European climate gets much
colder – are we not worried about global warming – there is little hope
for major gains in this sector. Instead, companies are counting on a
stabilisation.
Industry
has never quite recovered from the economic crisis. Indices on
production in manufacturing are below their 2007 levels in most European
countries, which translates into lower energy consumption. Another blow
originates from North America, where wholesale gas prices are one-third
to one-quarter of the rates in Europe, giving fertilisers and chemicals
industries there an unprecedented advantage. Only an improved economic
outlook or much lower gas prices would trigger a recovery in this
sector, and both look relatively unlikely in the medium term.
Power
generation is where much hope lies, even if it was the major driver for
the recent sharp drop in demand. Gas-fired plants are suffering not
only from low growth in electricity demand (with Turkey alone providing
two-thirds of the initial increase in 2012), but also continued strong
growth of renewables, including an almost 30% increase over the first
nine months of 2012, and a lack of competitiveness against coal-fired
plants. Ironically, the United States, where low gas prices are
prompting a switch from coal, is exporting cheap coal and triggering a
golden age of coal in Europe, despite the Emission Trading Scheme’s
price for carbon.
Decommissionings may power a recovery
But
additional nuclear plants will be decommissioned by the end of the
decade as well as many coal-fired plants after 2015 under the European
Union’s 2001 Large Combustion Plants Directive. To what extent this will
drive an increase in gas demand depends on how the gap between power
demand and renewables generation will be filled. Gas was once seen as
the fuel of choice, then the default fuel, but now power producers are
reluctant to invest in gas-fired plants if those are to run only a few
hundred hours each year as complements to other, variable energy
sources, instead of the 4 000 hours in previous economic models.
Additionally, the question of dispatch between gas- and coal-fired
plants will hinge on the delicate balance of future coal, gas and CO2 prices.
The
uncertainties are considerable for those investing all along the gas
value chain – and therefore for future security of supply.
Source: This article appears in the Spring 2013 issue of IEA Energy: The Journal of the International Energy Agency.
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