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    EU Green Deal woes [Gas in Transition]

Summary

With EU elections looming, there could be a revival in political support for natural gas, and a scaling back of Green Deal ambitions.

by: Charles Ellinas

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EU Green Deal woes [Gas in Transition]

 The theme of the International Energy Week (IEWeek) conference, organised by the Energy Institute in late February in London, was “In search of the energy transition.” Panelists agreed that natural gas will continue playing an important rule during the energy transition. They also pointed to increasing signs that EU countries are departing from the Green Deal.

Germany approved plans in February to finance one of Europe’s biggest expansions of gas-fired power plants. It plans to proceed soon with four short-term tenders for up to 10 GW, involving about 15 to 20 new plants. It requires developers to  to build hydrogen-ready gas-fired power plants –ready to convert between 2035 and 2040 to burning hydrogen- and also leave open room for implementation of carbon capture and storage (CCS) technologies.

In addition, in a departure from REPowerEU and the Green Deal, since the end of 2023 Germany has been signing long-term gas and LNG supply contracts, well in excess of 10 years' duration.

The UK is following a similar route, with its energy minister announcing plans in March “to build new gas-fired power plants, as well as to extend the life of some ‘ageing unabated gas assets’ where safe to do so, to ensure flexible power generation capacity.” The government recognised the need for continued unabated gas generation into the 2030s as a back-up to ensure energy security and reduce costs.

In 2023, the Green Deal came under sustained attack and with less than a month before EU elections it continues to be hacked to pieces, with some in Brussels calling “Green Deal out.”

These developments are symptomatic of a trend that points to one direction: that the Green Deal has passed its “glory days” and it is under increasing attack as voters and businesses worry about the cost of the transition. This is evidenced by the fact that more and more environmental rules are being challenged and watered down, be it the Nature Restoration Law, which is now on the verge of collapse; environmental requirements tied to EU’s farming subsidies, the Net Zero Industry Act, the Stability and Growth Pact, and others.

The Nature Restoration Law is seen as a pillar of the Green Deal, but it has already been substantially weakened by EU lawmakers and governments.

There were many successes in the EU's green legislative drive in 2023, with many environmental policies voted into laws. On the other hand, a recent report found that the EU is likely to miss the majority of its 2030 green objectives, including its emission reduction targets.

Entering 2024, the Green Deal is being questioned by farmers, industrialists, public opinion and even governments, including French President Emmanuel Macron who has been calling for a regulatory pause.

The European Commission (EC)’s key 90% emission reduction target by 2040 received only conditional support by EU countries on March 25, with 10 countries in favour, three against, and 13 asking for additional concessions. It will now be left to the next Commission to progress it. But this may be a step too far, especially as some of the more recent decarbonisation progress is down to EU industries shrinking, evidenced by the fact that electricity consumption in 2023 was 5.4% down on 2022, falling for the second successive year. 

It will take substantial new measures and costs to achieve the proposed 2040 target, with resistance from people, business and industry – already fatigued by too much green regulation – increasing further. EU citizens support climate action, provided that it does not increase their cost of living and does not impact daily lives.

The European manufacturing industry, even though supportive of the Green Deal, “is extremely concerned about the noticeable deindustrialisation on the continent.” In March, the EU’s main business lobby, BusinessEurope, and the German Chamber for Industry and Commerce (DIHK), put forward their key demands for the next Commission calling on the EU to “concentrate on the essentials.” They are asking for streamlining of policy, tackling double reporting and pairing the EU's Green Deal with a solid industrial policy plan.

There are already warnings that if the resistance to green regulations continues in the new Commission, “there could also be an impact on the national implementation of legislation that has already been agreed.”

With EU-wide elections coming in June, and polls showing a strong turn to the far-right, positions are being hardened, hoping to appeal to conservative and rural voters opposed to more top-down regulations from the EC. It is also a reflection on Europe’s waning enthusiasm for green rules and generally over the Green Deal’s future. Convincing European voters that maintaining the pace of green transition is in their interests is becoming increasingly challenging.

The concern is that the EU's entire green agenda may be on the block. There is a growing climate backlash that by the end of 2024 risks developing into something far more serious if the far-right emerges strong after the EU elections and Trump returns to the US Presidency. 

In any case, with attention expected to be turned to defence and security after the EU elections in June, it is very likely that the Green Deal will no longer be the EU’s top priority. Depending on the outcome of the elections, it may yet survive, but it will need correction and changes to make it more realistic and more responsive to citizen concerns by demonstrating that it provides clear economic and social benefits.

 

Transition will take time

Energy transition is not happening as quickly as the Green Deal and others suggest. 

As economies continue to expand, global energy demand carries on increasing fast. But even as renewable uptake increases exponentially, they do not “get the job done.” Their intermittent generation needs to be balanced by firm power. 

Available low-carbon firm power, such as nuclear, has its own challenges and is not at the required scale and green hydrogen has a long way to go before it becomes affordable. Energy storage is still woefully limited. The world still needs to rely on natural gas for firm, dispatchable, power at the required scale – in preference to coal.

In a report on Fueling a Transition Away from Fossil: The Outlook for Global Fossil Fuel Demand, released in February, the Rhodium Group concluded that in the absence of additional policy or technology innovation, fossil fuels will continue to supply a substantial share of global energy demand by 2050. It expects global energy demand to grow by 16% to 54% by 2050, based on 67% probability, with fossil fuels supplying 33% to 44% of this, in comparison to 67% today. 

Coal and oil demand will decline, but natural gas demand is expected to increase by as much as 50% by 2050.

The Rhodium Group concludes that “Transitioning away from fossil fuels while also providing for the massive growth in overall energy demand will be a significant challenge, requiring a systemic approach to identifying and investing in low-cost, low- or zero-emission alternatives.” These do not yet exist.

Without a step change in policy and technological progress, natural gas will continue to play a substantial role in balancing intermittent renewables and meeting the expected growth in global energy demand –driven in part by the massive growth in AI and data centres.

This is why senior oil and gas executives, led by Saudi Aramco’s CEO, Amin Nasser, sought at CERAWeek in Houston in March to temper expectations that “a timetable to a carbon-free future would unfold rapidly.” He said: “We should abandon the fantasy of phasing out oil and gas and, instead, invest in them adequately reflecting realistic demand assumptions.”

 

Focus on implementation

The next EC will need to ensure agreed green laws are fully implemented and that they are “properly rolled out [and enforced] in EU countries. Without this, the EU’s agreed climate and energy targets simply risk being missed.” However, it will face challenges where these have economic impact and affect people’s lives. Public acceptance is key.

In a recent report, IFRI (Institut Français des Relations Internationales) said that the Green Deal needs to be adapted. “Insufficient global decarbonisation efforts and a global economic and technological confrontation…and trade distortions, as well as the multiplication of malign actions, are profound game changers that require a strategic rethink and readjustments.” IFRI warned that the outlook is dire, recommending that the EU needs to face a number of realities, including challenges to its competitiveness and industry shrinkage. 

However, the European Green Deal is already a reality in terms of standards and rules, even if it is less ambitious than originally planned. In addition, worsening climatic events will keep the focus on climate change. 

A question that has been asked is whether Europe will be “willing to pay the costs – both financial and political – of moving forward with the next phase of decarbonisation at the speed and according to the model it has set out in the European Green Deal.” Probably not – a slowdown, less green policy ambition and weaker measures implementation are more likely. 

This change of direction is already happening, with Germany and the UK leading the way with their revived commitment to natural gas. Germany has already restored its gas imports to pre-Ukraine-invasion levels, by replacing Russian gas imports by others. The IMF considers Germany’s much-talked-about deindustrialisation to be overstated and, with gas import prices largely reversed, its competitiveness has now been restored to pre-crisis levels in 2024. 

Low gas prices, now down to pre-crisis levels and here to stay for the longer-term, are driving up demand. In January 2024, EU member states increased gas consumption by 8.8% compared to the same period in 2023. The figure was the highest in the last two years. Globally, the International Energy Agency (IEA) expects gas demand to grow by 2.5% in 2024. With such developments it is not overstated to claim: “Green Deal out – natural gas in.”