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    EU Dizzy Over Gas [NGW Magazine]

Summary

The EU’s aim to be carbon free by 2050 threatens to sound the death knell for natural gas, but the bloc is also pushing new gas infrastructure projects. [NGW Magazine Volume 5, Issue 4]

by: Tim Gosling

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Featured Articles, Europe, Premium, NGW Magazine Articles, Volume 5, Issue 4, Carbon, Infrastructure, EU

EU Dizzy Over Gas [NGW Magazine]

Does Europe need really need new pipelines and terminals, locking in carbon emissions for decades to come? The answer to that question depends on your perspective on the potential role of the gas industry in the energy transition.

On the one hand, natural gas is viewed as a vital element in the drive to decarbonise, reducing greenhouse gas (GHG) emissions to 2040 and possibly beyond. Alternatively, it is a pricey and temporary chimera that will hinder the transition.

Critics say EU policy reflects this dichotomy. With one eye on energy security, Brussels has spent billions on expanding gas networks across the bloc. And it is planning further support for dozens of new projects. The European Parliament voted February 12 to proceed with 32 gas infrastructure “projects of common interest” (PCI) whose construction would appear to conflict with climate neutrality targets that demand that energy-related GHG emissions fall to zero by 2050.

The European Green Deal, released by the European Commission (EC) in December, aims to make Europe the first climate neutral continent within the next three decades. By 2030, it has committed to halving GHG emissions compared with 1990 levels.

Efficiency gains are a big part of the solution. Alongside those is a plan to replace fossil fuels with renewable sources. Both of these requirements entail cutting demand. So the critics ask, what is the point of building new infrastructure?

Stranded assets risk

Some analysts claim that €29 ($31.4) bn will be spent on 32 gas projects on the PCI list that will never repay the investments: a quarter of the PCIs are related to gas and eligible to seek EU funding. They worry that building infrastructure risks locking fossil fuel gas into the European energy system and they also fear that the projects built will eventually become stranded assets.

In the view of European gas industry group Eurogas, the parliamentary vote was“a positive step towards completing the missing links in the gas infrastructure in central, eastern and southeastern Europe.” But these regions used to be in thrall to Gazprom’s pricing tactics: now they can access cheaper gas thanks to new market rules and new capacity, including LNG terminals.

Consulting firm Artelys, in a study commissioned by the European Climate Foundation, says that what is already built is enough to fulfil demand, especially given that under the Green Deal, demand has to fall significantly in the coming decades.

“The 32 natural gas infrastructure PCI projects combined are calculated to come at a cost of €29bn and would add 338 GW capacity to the EU natural gas infrastructure system, which is already approaching 2,000 GW of pipeline and LNG terminal capacity,” the study reads.

The EC’s projections estimate that achieving climate and energy targets will result in a 29% cut in gas demand or from 415bn m3/yr in 2015 to 297bn m3/yr by 2030.

The report concludes that existing EU gas infrastructure is capable of meeting a variety of future gas demand scenarios in the EU28, including extreme supply disruption cases. Even year-long disruptions from Ukraine, Belarus and Algeria could be compensated by imports from other sources, it decides, primarily through existing LNG terminals in the west of Europe.

“This suggests that most of the 32 gas infrastructure projects on the fourth PCI list are unnecessary from a security of supply point of view and represent a potential overinvestment of tens of billions of euros, supported by European public funds,” the Artelys analysts state. There is a high risk that many of the projects will end up as stranded assets, it adds.

Last of the gas PCIs?

In the face of this criticism, EC officials insist that all projects on the PCI list must fit with the decarbonisation strategy, remaining flexible enough to ensure gas is not locked in.

“We need a future-proof infrastructure policy for Europe,” the EU commissioner for energy said in January. “This requires upgrading some existing infrastructure and assets, to ensure they are fit for purpose and climate resilient.”

Speaking on condition of anonymity, one official at a TSO with a project on the list says it is clear that the tide has turned. Although it is not official policy yet, he says, the EC has made it clear behind the scenes that the next PCI list, which is scheduled for 2022, will include only “green” projects. The gas sector has no choice but to go with the flow.

“There will be no space for support for traditional gas and electricity networks,” he said. “They have the same approach at institutions like the European Investment Bank. These are strong signs that we must now adjust our mindset to work more closely with the green policies of the EC.”

Other researchers, more wary of the EU projections that consumption will drop so significantly, suggest that some new gas infrastructure offers “socioeconomic value”. However, most of the projects are still forecast to struggle because they’re not flexible enough to survive the transition.

A study led by the Budapest-based Regional Centre for Energy Policy Research (REKK) analysed a list of 18 of the PCIs under three scenarios. 

“The decarbonisation goals do not need much investment on gas infrastructure, as the [EU’s] demand projections are showing a decreasing gas demand that can be served by the current infrastructure,” the researchers conclude. “However, a limited number of PCIs are needed owing to the decreasing domestic production within the EU.”

“Based on the EU projections, it’s clear that the EU doesn’t need any new gas infrastructure,” Borbala Toth of REKK, one of the authors of the study, tells NGW. “However, it’s not that simple,” she continues. “There are strong assumptions behind the projections; in particular that natural gas will fall out of the fuel mix entirely. But it may be that the policy goals are too ambitious. I’m not sure the EU’s energy system can be changed so quickly.”

The TSO official is of a similar mind, suggesting that there is still some space to build infrastructure. However, there’s only a brief window of opportunity.

“We still think gas will play an important part in the energy transition,” he says. “Although gas consumption will drop, we don’t expect a significant decline in the next 20 years.”

Political fog

While there is strong concern that many of the PCI projects could struggle for economic viability, the list can also accept plans that are beneficial “at the EU level for society.”

It is no coincidence that the bulk of the 32 projects are in central and eastern Europe and designed to relieve the region’s historical deep dependence on Russian gas. Many countries fear that this reliance offers Moscow political leverage. They are also wary of the kind of devastation they suffered in 2006 and 2009 when Russia’s “gas wars” with Ukraine saw supplies cut in the middle of winter.

That means a strong element in many of the projects on the list is “energy security”. However, that is a slippery term that can be tricky to back up with numbers. At the eastern end of the EU in particular, energy is often closely tied up with questions of national pride, which can see energy policy entwined with short-term political interests.

In Hungary, a “non-profit” energy sector has been key to Viktor Orban’s success at the elections. Budapest has plans for several pipelines that would put it at the centre of a regional network that could distribute flows arriving from Russia and possibly Romania’s Black Sea coast. Not only does Orban seek to raise his leverage in southeastern Europe, but also to cap gas prices for Hungarian voters.

To the north, Slovakia has long seen its role as host to the main overland route carrying Russian gas arriving from Ukraine into the EU as a marker of geopolitical importance, balancing the country’s slender size. Little wonder then that Bratislava is desperately seeking a new role as Russia moves to circumvent Ukraine. Like its southern neighbour, Slovakia is also working on several new projects linking its trunk line to the networks of its neighbours.

The worldview of the nationalist conservative PiS government in Poland may have much in common with that of Russia under Vladimir Putin, but strident opposition to Moscow is a cornerstone of the party’s support. Poland’s plan to develop alternative sources to allow it to ditch Russian gas entirely, rather than using them to secure better pricing and terms from Gazprom, suggests that it’s national politics not national security that sits at the heart of the government’s energy strategy.

In short, PiS cannot back down without breaking its promise to the electorate that it is the only party that will protect a strong and independent Poland. Warsaw’s projects to tap the Norwegian shelf and raise LNG import capacity are this ideology made concrete.  

Although Poland needs to wean itself off a heavy reliance on coal in the coming years, these projects struggle to convince analysts that they can survive the energy transition longer term. However, Warsaw is not a keen supporter of the EU’s climate strategy at the best of times and is unlikely to be easily persuaded that the bloc’s Green Deal targets should derail its plans.

Runners and riders

Some projects do get the thumbs up from REKK though. For instance, the paper suggests Croatia’s planned LNG terminal on the island of Krk should go ahead, despite the project having struggled in capacity auctions.

Those difficulties have left the EU and Zagreb to pick up €100mn of the tab each. The remaining €33mn will come from state-owned operator LNG Croatia.

The terminal should bring socio-economic benefits by providing competition to Russian gas, which dominates the Croatian market, says Toth.

She adds that the financial viability of the project remains very risky but she suggests that the project could benefit from potential lying outside the EU’s borders. “The PCI list only looks at the EU, but there are other issues in the immediate neighbourhood,” the analyst points out. “In the Balkans, there is a lot of coal, and gas could be used to substitute that. Krk could serve these markets.”

The Poland-Slovakia interconnector is another project that gets the green light, for its offer of an alternative route for Russian gas to the troubled Ukrainian line. Potential Polish access to the Southern Gas Corridor would also help ensure diversification and stability of supply.

However, several projects fail to convince, either in terms of economic or welfare-based feasibility.

These stragglers include Stork II linking the Czech Republic and Poland and the BRUA pipeline, which is planned to carry Romanian Black Sea gas to Hungary and onwards to Austria’s Baumgarten hub, and connecting to Bulgaria.

Polish plans to build the 10bn m3/yr Baltic Pipe route via Denmark to link to the Norwegian shelf also fares poorly in REKK’s study, returning “negative discounted social welfare and [a] route [that] is under-utilised”.

While not included in the study, proposals to expand Poland’s LNG import capacity from the current 5bn m3/yr to over 15bn m3/yr by expanding the existing Swinoujscie facility and building a new terminal are also viewed cautiously by many.

Toth says that while Poland will need a lot of gas in the medium term before renewables are able to substitute its huge coal use, she’s uncertain of Warsaw’s plans to build so much new infrastructure.

Baltic Pipe looks weak in both economic terms and the potential social benefits it could offer, she says. “The project is expensive, and the gas it will tap is pricey compared with Russian gas. Our modelling suggests it’s not the most economic solution.”

“I would also be wary as a Polish decision maker of putting a lot of money into gas distribution,” she states, noting that renewables are likely to pose strong competition in the household energy sector.

The TSO official suggests Baltic Pipe can be “successful” but that such projects need to connect with “some green element” to stay in contention for EU funding. “Right now, if you want support, you need to offer more,” he says.

The caution is not limited to central and eastern Europe though. Scepticism also surrounds EastMed, which also looks to have politics rather than a solid economic case, behind it.

The cost of building the world’s largest underwater pipeline to carry Israeli gas to southern Europe is estimated at around $7bn. Many doubt if, with that kind of price tag, the 1,900-km route could ever make any money. Rather, EastMed is being driven by geopolitics and the long and bad-tempered fight over the region’s gas reserves.

That leaves the challenge of convincing private investors to pump billions into a project that could struggle to make a return. The Green Deal targets only add to the challenges of the route, which will also have to face off against Russia’s TurkStream and the Southern Gas Corridor (SGC), both of which have begun operations and are backed by gas reserves in politically stable regions.

Over the bridge

Such political drivers look particularly risky given the Green Deal targets. That’s because the key for Europe’s gas infrastructure to prosper in the longer term is to find a genuine role in the energy transition.

The IEA warns that the gas industry must look past the bridging role it so often appears happy to embrace.  Analysts worry that the use of gas to replace coal could “lock in new gas infrastructure and the associated emissions, unless there is a credible plan to use this infrastructure to transition to low-carbon gases.”

“The debate on Europe’s gas security has tended to concentrate on external aspects, mainly the sources and diversity of supply,” the IEA continues. “But the focus may be shifting to internal questions over the role of gas infrastructure in a decarbonising European energy system, and the system value of gas delivery capacity.”

Analysts across the board urge the European gas sector to recognise that this is where its strength lies. Electricity is set to lead the energy transition. That means renewables generation will expand exponentially, and so huge capacity to store, transport and distribute that energy will be needed.

Europe’s gas infrastructure offers much larger capacity than the continent’s electricity networks, and was designed to take the additional burden of winter heating demand in its stride.

It also has an advantage over long distances, notes a study led by Frontier Economics and backed by the Green Gas Initiative – a lobby group featuring several TSOs from western and central Europe. European “gas infrastructure is well positioned to help overcome the challenges of decarbonisation,” the analysts say. “Existing gas infrastructure is extensive and already helps address many of the challenges of generation, transport and storage of energy,” the report reads.

The EC is also eyeing the how the continent’s gas infrastructure could be harnessed, and says it is important that operators find their place in the transition by helping to store and transmit the energy produced by renewables.

“One important component of sector integration is the coupling of electricity and gas production, meaning power-to-gas and gas-to-power conversions,” notes the Council of the European Union. “This will allow better management of energy storage and faster integration of renewable energy. As electricity starts dominating the energy landscape in heating, transport and industry, gas will increasingly act as a back-up.”

Grasping at green gas

However, to become the transmission network of choice in Europe’s new energy system, the TSOs must adapt their networks to work with green gases.

“As things stand, gas grids typically deliver more energy to consumers than electricity networks and provide a valuable source of flexibility,” the IEA says. “Gradually repurposing or retooling gas grids over time to deliver low carbon energy helps to make the continued use of gas networks compatible with a low-emissions future. To be compatible with a fully net-zero emissions global energy system, gas infrastructure will ultimately need to deliver truly low-carbon energy sources,” the analysts conclude.

EU projections suggest “clean gases could” constitute between 30% and almost 70% of total gas use by 2050, mainly in the form of biomethane and hydrogen, depending on the scenario.

“We have already achieved impressive results in decarbonising the electricity sector, where 31% of electricity is produced from renewable sources and more than half comes from low-carbon technologies,” Simson said in January. “I would like to replicate the success of decarbonisation of electricity in the gas sector. Natural gas constitutes almost one quarter of the EU’s energy mix. So this is a significant challenge … the EU can and should contribute to cleaning up the gas sector. I will work on creating an environment where clean gases can have a significant presence in the EU gas sector.”

Under the Green Gas Initiative, Energinet (Denmark), Fluxys (Belgium), Gasunie (Netherlands), Gaznat (Switzerland), GRT Gaz (France), Ontras (Germany) and Swedegas (Sweden) say they’re committed to achieving a 100% carbon-neutral gas supply in their network infrastructures by 2050.

“There are various renewable and low-carbon gases available, which justify to pursue the usage of the gas infrastructure in a decarbonised Europe,” reads the Frontier Economics report. “These include biomethane, green hydrogen or synthetic (green) methane from electrolysis (power-to-gas, PtG) and “blue hydrogen”, ie natural gas decarbonised by carbon capture and storage (CCS) or carbon capture and use (CCU). All these renewable and low-carbon gases have in common that they either do not emit GHG when being burnt (hydrogen), or only emit the amount of GHG they have captured from the atmosphere recently (biomethane and synthetic methane), in contrast to natural gas or other fossil fuels that, when being burnt, release GHG that has been captured over millions of years.”

Hydrogen: the big unknown

Green gases have been touted as a life-saver for Europe’s gas infrastructure for years, and they can be blended into natural gas flowing through existing pipelines. However, TSOs face potentially serious and expensive problems before they can dump the natural gas out of the equation.

Hydrogen is the most problematic, says Toth. Because its molecules are much smaller, natural gas infrastructure needs expensive upgrading to prevent leakage and corrosion when working with high concentrations. “The TSOs are working hard,” says Toth, “but so far, they’ve not managed to find a workable solution.”

In addition, because hydrogen has a much lower energy value by volume, the infrastructure to carry it would need to three times the size of natural gas capacities to deliver the same amount of energy, according to the TSO official.

“The investment to solve all of these issues would be huge,” he said. There’s no rush therefore, to worry about the fact that there are no plans agreed to produce hydrogen on a large scale.

Biogas is easier to produce and can flow through standard pipelines. However, the TSO official says the logistics of biogas production make it very difficult for his company to deal with.

“We’re set up to carry large volumes from point A to point B, but biogas doesn’t fit that. It’s based on small local producers,” he said.

Despite these issues though, the EU push on decarbonisation is already changing the mindset of the gas sector. The TSO official says his company is now working to identify new hydrogen and biogas projects in a bid to get back in Brussels’ good books. “You have to offer more now,” he said. “It’s clear that this is the only way we can remain at the table.”