The Brussels Conversation: Green Finance Drive Squeezes Gas Projects
European Commission president-elect, Ursula von der Leyen, has made a “European Green Deal” a cornerstone of her political agenda. It underpins her ambition to make Europe the world’s first climate neutral continent. Not all central and eastern EU member states have signed up yet, but they are expected to do so in the coming months as parallel talks on the next EU budget for 2021-27 draw to a close.
Von der Leyen will take over the presidency from Jean-Claude Juncker on November 1. Earlier in September she named Frans Timmermans, Juncker’s right-hand man and her former rival for the presidency, as her first executive vice-president, with responsibility for the European Green Deal and EU climate action. Non-government organisations (NGOs) rejoiced at her elevation of climate policy to a top political priority. Eurogas, the European trade association for gas, called on the new Commission to recognise the role of gas in decarbonisation.
Natural gas faces dim prospects under the European Green Deal. One of von der Leyen’s ideas is to turn the European Investment Bank (EIB) into a “climate bank" and double its climate investments until it accounts for half of all lending by 2025. The EIB issued a new post-2020 draft energy lending policy in July. As NGW reported, this foresees an end to virtually all fossil fuel-related lending from 2021.
We are talking about a lot of money. The EIB is one of the world’s largest public lenders. It spent more than €14bn on fossil projects from 2013-18, according to campaign group CEE Bankwatch. Most of that went to gas, including a €2.4bn loan to the Southern Gas Corridor to import non-Russian natural gas – a loan that Bankwatch said was misguided and did not meet the EIB's own environmental standards.
The new policy would phase out support for “oil and gas production, infrastructure primarily dedicated to natural gas, [and] power generation or heat based on fossil fuels.” This includes gas networks, LNG terminals and gas storage, the bank specifies.
The EIB says it “fully understands” that fossil fuels will continue to play a role in the European energy system for “at least” the coming decade, but argues it can provide “higher additionality by focusing on the longer term challenge.” Coal-to-gas switching can reduce greenhouse gas emissions, but “such investments are very likely to take place even without EIB financing.”
When it comes to security of supply, the bank says it intends to invest in electricity networks, low-carbon generation, demand response and (non-fossil) storage.
On September 10, the EIB's board met in Zagreb, Croatia, for a first discussion on the new policy. It was “very constructive,” an EIB spoksperson told NGW. NGO representatives said they heard it was “calm”. The exclusion of natural gas investments is the most contentious issue on the table.
As is so often the case in Europe, Germany is the key player to watch and as usual, it is struggling to reconcile its different ministries to come up with a position. Things will soon move however, with a flagship announcement on German climate policy – notably carbon pricing – due on September 20, and work starting on a national sustainable finance strategy. France has already come out in favour of the new EIB plan.
Gas is not entirely out of the picture. High-efficiency cogeneration is in as long as it emits less than 250gCO2/kWh, according to a footnote in the draft lending strategy. The same footnote gives the green light to "efficient gas boilers” in building renovation programmes. The EIB also sees a need to support “the production and integration of low-carbon gases, including hydrogen, biogas and synthetic gas.” This includes financing for projects to adapt existing infrastructure towards a “credible" and "imminent" high blend of low-carbon gases.
In parallel to the EIB discussion, the EU is in the process of devising a “green taxonomy” that will define in law what counts as a green investment. Its application at this stage is foreseen to be voluntary, but the gas industry and others are under no illusions over its potential scope. Here too, the proposal is to exclude natural gas projects.
In a long-awaited report in June, a Technical Expert Group convened by the Commission suggests that greenhouse gas emissions from power generation should be capped at just 100gCO2/kWh, to be decreased every five years to zero in 2050. That’s less than half the EIB’s 250gCO2/kWh proposal and far below the 550gCO2/kWh limit agreed for capacity markets in a recent EU power market reform (and in the EIB’s existing guidelines).
What irks the European gas sector no end is that the experts suggest solar, wind and existing hydropower are exempt from this life-cycle emissions requirement. For power generation with natural gas, however, the risk of fugitive emissions is “high” and these emissions must be assessed – with actual physical measurements – on an ongoing basis. Low-carbon gases would be eligible under taxonomy as long as they comply with the 100gCO2/kWh threshold.
WWF points to this threshold to argue that the EIB’s 250gCO2/kWh proposal is “way too high.” Wind, solar and hydro are at <50gCO2/kWh, says WWF economist Sebastien Godinot, based in Brussels. He argues that the EIB proposal is designed purely and simply to keep the door open to gas power plants with carbon capture and storage (CCS). But there is no market for this, he says. It is true that most CCS advocates in Europe today see a future for the technology in heavy industry, not power generation. Although lately there is a new possibility: making hydrogen from methane leaves the carbon in need of a permanent home.
Godinot’s main ask however, is for the EU to widen the green taxonomy to rank all investments, not just those labelled “green”. It seems unlikely at this stage, but EU member states could do this when they adopt their position on the file. The Technical Expert Group has moved in that direction by including sectors with large mitigation potential, such as steel and cement, in their report.
The Finnish EU presidency, which is in charge of the EU’s Council of Ministers from July to December 2019, wants member states to reach an agreement and kick off negotiations on the new law with the European Parliament. The Council agreement could come within “weeks” and a deal with the members of parliament by the end of the year, an EU source said. Parliament adopted its position – excluding gas – earlier this year, though it could, take note, revisit this since elections took place afterwards.
The EIB’s board will meet again on 15 October, in Luxembourg, for a second round of discussion - and possibly approval - of the bank’s new lending policy. With von der Leyen’s political agenda clear, the European gas sector is focusing its efforts on low-carbon gases. Eurogas is calling on the new Commission to develop “EU-wide binding targets for renewable and decarbonised gas”. But the onus is on the sector to demonstrate to policymakers and investors that it can be a “credible” and “imminent” part of the 2050 story.
Monthly column by Sonja van Renssen from the EU capital on the developments affecting natural gas.