This article summarizes the paper "The Role of Natural Gas in the EU Decarbonisation Path" just published in the FEEM series "Note di Lavoro". The paper argues that over the last decade decarbonisation has become a key priority for the EU but, on the contrary of renewable energy or energy efficiency, the role of gas in this process has never been clearly defined. This uncertainty opens a wide debate on the future role of gas in the EU energy system, particularly vis-à-vis the progressively stronger role of renewables in the EU energy mix. The paper seeks to tackle this issue with the aim to explore what role gas might play in making the EU decarbonisation path more balanced and secure up to 2030 and beyond.
Keywords: Gas, Decarbonisation, EU Energy Policy
JEL classification: Q40, Q42, Q48
Suggested citation: Hafner, Manfred, Tagliapietra, Simone, The Role of Natural Gas in the EU Decarbonisation Path (October 22, 2015). Review of Environment, Energy and Economics (Re3), http://dx.doi.org/10.7711/feemre3.2015.10.001
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Over the last decade the decarbonisation of the energy system has progressively become a key priority for the European Union (EU). The role of natural gas in this process continues to remain undefined, like the one of all the other components of the energy system with the notably exception of renewable energy and energy efficiency. This uncertainty opens a wide debate on the future role of natural gas in the EU energy system, particularly vis-à-vis the progressively stronger role of renewable energy in the EU energy mix.
If there is a certainty about the future of the EU energy system, this is the continuous expansion of renewable energy in the mix. In order to meet the EU target of increasing renewable energy use to 27% of the overall EU energy consumption by 2030, about half of the European electricity will have to be generated by renewable energy sources. This represents a substantial expansion of the current contribution level of renewable energy to the EU electricity generation, estimated at about 25%. Considering that the hydro potential in the EU is already well exploited, the EU 2030 target will require an extensive development of variable renewable energy sources such as wind energy and solar energy (namely photovoltaic -PV-).
Up to date wind and PV have been developed with a "fit and forget" logic, being not integrated into the electricity market and having priority dispatch and access to network. However, a massive integration of such variable renewable energy sources into the system will require profound changes in terms of power system operation, market design, infrastructure development and particularly the transformation of conventional generation mix.
In this framework, conventional electricity generation will be key to ensure the stability and the security of the EU electricity system. As an overall trend, what will be needed is primarily a park of flexible power plants, where flexibility of a power plant is defined as its ability to run in partial load as well as by parameters such as ramping rates, start-up time and minimum down time.
Among the various possible options of conventional electricity generation (natural gas, coal, nuclear and oil), natural gas seems to be the fuel better placed to play a key complementary role to wind and PV in the decarbonisation path for the following four reasons:
1) First of all, natural gas-fired power plants can provide the flexible back-up capacity needed in a system with high share of variable renewable energy sources. An analysis carried out by Eurelectric (see Fig. 1) shows that among conventional electricity generation technologies pumped storage is the most responsive one, as it can be called upon to generate electricity almost instantaneously and as it can ramp up and down by more than 40% of the nominal output per minute. However, being contingent to specific geographical conditions, pumped storage cannot provide the flexible back-up capacity needed at system level. Among other technologies, combined-cycle gas turbines (CCGTs) are particularly suitable for load-following operation as they have both fast load gradients (4%/min) and can be brought online fairly quickly (less than 1.5 hours from warm conditions). These performances are far beyond those of coal-fired power plants (which are less responsive than any other technologies) and of nuclear power plants (which cannot be brought online from cold and warm conditions in timeframes similar to those of other technologies). For this reason natural gas-fired power plants can well play an important role in meeting the flexibility challenge arising from variable renewable energy sources.
Figure 1 - Flexibility of conventional electricity generation technologies
Note: NPP: nuclear power plants; HC: hard-coal fired power plants; Lign: lignite-fired power plants; CCG: combined cycle gas-fired power plants; PS: pumped storage power plants.
Source: Eurelectric (2011).
2) By displacing coal in the EU electricity generation systems natural gas has the potential to generate immediate and substantial GHG emissions' reductions. In fact, modern CCGTs produce about half the CO2 emissions per unit of electricity generated compared with coal-fired plants. Considering that coal still plays a key role in the EU electricity system (see Fig. 2) the scale of this switch might provide a consistent contribution to the EU 2030 GHG emissions reduction target.
Figure 2 - EU electricity generation by source, 2012
Source: own elaboration on Eurostat (2015).
3) A switch from coal-fired power plants to natural gas-fired power plants will not only positively impact the EU environmental effort at macro level (i.e. climate change mitigation) but also at micro level. In fact, if compared with coal and oil, natural gas avoids or reduces much of the local environmental damage arising from fossil-fuel use. Gas gives off fewer pollutants when burned, including the nitrogen oxide (NOx) that contributes to acidification and ground-level ozone formation; the sulphur dioxide (SO2) that (with NOx) causes acid rain; and the particulate matter that (again with NOx) causes smog and poor air quality. Consequently, using natural gas instead of other fossil fuels in electricity generation (and other sectors) offers the opportunity to improve air quality, especially in and around cities, where this problem is most acute.
4) Being the second-largest emitter of CO2 after the electricity generation sector (Fig. 3), the transport sector has an important role to play in the EU decarbonisation path.
Figure 3 - GHG emissions in the EU by sector, 2012
Source: own elaboration on Eurostat (2015).
GHG emissions from the transport sector decreased since 2007 due to high oil prices, increased efficiency of passengers' cars and slower growth in mobility. The European Commission expects this trend to continue but this will still not be sufficient to meet the goal to reduce GHG emissions from the sector by 60% by 2050 compared to 1990 and by 20% by 2030 compared to emissions in 2008 as set by the Transport White Paper adopted in 2011.
Notwithstanding their current difficulties (e.g. relatively high costs, low energy density of batteries and lack of recharging infrastructure), electric vehicles will most likely play a key role in the future decarbonisation of the transport sector. However, natural gas can also play a role in the field, not only in terms of compressed natural gas (CNG) vehicles, but particularly in terms of liquefied natural gas (LNG) for trucks and for ships.
Conclusions: towards a more balanced and secure decarbonisation path
In order to achieve its 2030 renewable energy target the EU will need to rethink its electricity system beyond renewable energy itself, with a particular focus on the role that natural gas might play in the future of the EU energy system.
Considering its previously illustrated characteristics, and particularly taking into consideration the potential to generate immediate and substantial GHG emissions' reductions by displacing coal with it, natural gas might well play an important role in the future EU decarbonisation path. Its role does not need to be supported by dedicated public policies but, on the contrary, what is needed is a more general EU action aimed at rebalancing the overall energy system along the lines of a truly sustainable decarbonisation path.
Such an action should be carried out by making use of two specific tools: i) Carbon pricing; ii) Environmental regulation.
i) Speeding-up the reform of the Emissions Trading Scheme (ETS)
The development of a well functioning (and technology-neutral) carbon pricing system, able to discourage high carbon options and to promote most cost-efficient ways of reducing GHG emissions, is theoretically the essential component of a sustainable decarbonisation path.
In fact, this system would create the basis of an automatic readjustment of EU electricity markets ideally composed by a progressive phase out of highly polluting coal-fired power plants, a strong development of renewable energy sources (even in absence of incentives) and a larger utilization of natural gas in electricity generation.
In 2005 the EU adopted the Emission Trading Scheme (ETS) as its flagship GHG emissions' reduction initiative. The scheme, based on the "cap and trade" principle, aims at providing appropriate incentives for investments in low-carbon technology via a carbon emissions price. After two initial phases, the ETS entered its third trading phase at the beginning of 2013, with the introduction of a EU-wide cap on emissions (reduced by 1.74% each year) and a progressive shift towards auctioning of emission allowances (EUAs) in place of cost-free allocation. However, low levels of industrial output and power generation due to the economic crisis have resulted in an increasingly large surplus of EUAs in the ETS, leading to a significant downward pressure on the carbon emissions price (Fig. 4).
Figure 4 - EU ETS carbon emissions spot price, EUR per tonne
Source: own elaboration on European Energy Exchange (2015).
Considering the current inability of the ETS to send sufficient price signals to investors in low-carbon technologies, with the 2030 Climate and Energy Framework the European Commission has brought forward proposals to address the level of over-supply in the ETS and reintroduce a meaningful carbon emissions price. This reform should be seen as the crucial element towards the consolidation of the EU decarbonisation path and, consequently, of the creation of a more balanced EU energy system on which renewables develop in parallel to other low-carbon and flexible solutions, such as natural gas.
ii) Tightening environmental regulation
Considering the numerous challenges related to the development of a well-functioning carbon pricing system at the EU level, the instrument of environmental regulation should also be exploited to rebalance the energy system along the lines of a sustainable decarbonisation path. In particular, tighter emission performance standards should be applied to power plants.
In 2011 the Industrial Emissions Directive (IED) came into force, updating and merging seven pieces of existing legislation, including the Large Combustion Plant Directive (LCPD).
The new IED places further restrictions on the level of nitrogen oxides, sulphur dioxide and particulate emissions permitted from power generators after 1 January 2016 (as until the end of 2015 the provisions of LDPD are applied).
It is difficult to envisage whether these provisions will have or not a consistent impact on the European coal-fired power plants fleet. This will largely depend on the materialization of the incentive to invest in depollution equipment, a choice set to be driven by technology cost and coal pricing itself. According to Cedigaz, for old coal-fired power plants there will be no incentive to invest in depollution equipment and 50-55 GW of EU coal power capacity may thus close by 2020/2023 at the latest according to the IED. However, other analyses carried out by European climate think tanks suggest that a predominant share of EU coal power plants will become IED compliant, as technological changes and flexibility in IED rules will make compliance much less costly than previously estimated.
The implementation of the IED should thus be followed closely, also through the system of review already adopted by the European Commission. At the same time, the EU should be ready to take further actions on environmental regulation, in order to ensure the achievement of proper environmental standards in the EU power plants fleet.
Carbon pricing and environmental regulation constitute the optimal tool-set to calibrate the energy system along the lines of a sustainable decarbonisation path. If correctly utilized, these tools could stimulate a further development of renewable energy sources, a greater role of natural gas in the energy mix and a reduction in the utilization of polluting coal, at one fell swoop. This readjustment seems to be the only way to make decarbonisation balanced and secure up to 2030 and beyond.
FEEM Nota di Lavoro 86.2015