Energy Strategy Reviews 1 (2012) 62e65

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A second life for natural gas demand in Europe?

Edward Hunter Christie
Pan-European Institute, Finland

A R T I C L E I N F O A B S T R A C T

Article history: The European Unions natural gas balance is projected to deteriorate rapidly over the next
Received 17 November 2011 couple of decades due to strongly decreasing domestic production. According to the IEAs
Accepted 28 November 2011
Available online 16 January 2012
World Energy Outlook 2011, the EUs production is expected to fall from 216 bcm in 2008
to 89 bcm in 2035. Different energy models come to different conclusions concerning the
Keywords:
evolution of demand, but none of them project demand falling fast enough to offset the
Natural gas fall in production before at least 2030. In this paper the goal is to focus more closely on
Demand selected strategy drivers and on specific market segments in order to shed light on what
Energy scenarios may drive EU gas demand in future. Brief sections follow, addressing power generation
Power generation costs and the price of carbon; recent political decisions to move away from nuclear
Transport
power; and natural gas in the transport sector.
2012 Elsevier Ltd. All rights reserved.

1. Introduction: demand uncertainty and
rising import dependence
The mid-term prospects for natural gas to
play a large role in Europes energy mix have
been boosted by several recent decisions and
phenomena. There is a narrative about
natural gas as an ideal bridging fuel. In
addition the Fukushima disaster encouraged
a decision to switch away from nuclear energy
in Germany. There is also a rising interest in
natural gas for the transport sector. What do
recent modelling efforts tell us about the
potential effects of these events and deci-
sions? EU demand for gas remains strongly
dependent on climate policy commitments,
with renewable energy exerting crowding-out
effects both in power generation and in final
consumption. Transport could be an inter-
esting source for new demand within final
consumption, but the ultimate volume is
likely to be modest. More generally it would
be desirable to carry out a detailed
E-mail address: Edward.Hunter.Christie@gmail.
com.
comparative analysis of leading energy
models in order to better understand differ-
ences in projected demand profiles.
Fig. 1 shows the 2010 and 2011 projections
from the IEAs New Policies scenarios, see
Refs. [1,2]. According to the IEAs 2011
projections [2], demand could rise from
536 bcm in 2008 to 629 bcm in 2035. The EUs
import requirement would therefore increase
from 320 bcm to 540 bcm, thus raising the
import dependence ratio from 60% to 86%,
over the same period.
The EUs projected production decline is
driven by a rapid decline in existing North Sea
fields, a dearth of new finds, and an expec-
tation (so far) by the IEA that unconventional
gas production will be very limited in the EU.
The EUs shale gas resources are not globally
important, see Ref. [3] for estimates, but
potential production would nevertheless be
substantial provided certain hurdles are
overcome, see Ref. [4] for a recent
discussion.
Besides domestic production, the key
issue for the European Union is what drives
natural gas demand and how sensitive it may
be to economic and policy variables. Within
(and between) quantitative energy-economy
models, the impact of some key variables
can be very large, thus leading to significant
uncertainty concerning future demand, see
e.g. Christie [5] for a comparison between
IEA, PRIMES, and Eurogas scenarios to 2030.
Current uncertainties are no smaller than two
years ago: the 2009 update of the PRIMES
reference scenario [6] projects a fall in total
demand (gross inland consumption) for
natural gas of around 12% by 2030 as
compared to the 2005 level. The IEAs New
Policies scenario projects an increase of
about 13% on the 2005 level in [1], and of
about 18% in [2]. In addition there is consid-
erable heterogeneity within the European
Union in terms of the current energy mix and
in terms of projected shifts in demand. Fig. 2
shows the PRIMES Reference scenarios
projections for gross inland consumption of
natural gas in 2030 for each EU Member State,
relative to the 2005 level.
However the PRIMES [6] and IEA scenarios
[2] are much closer in terms of the EUs
domestic production path, leading to import
dependence projections for 2030 of 81% and
84% respectively.

2211-467X/$ e see front matter 2012 Elsevier Ltd. All rights reserved.
doi:10.1016/j.esr.2011.11.004

Fig. 1. IEA projections for production, demand and import dependence, EU, 2008e2035. Source [1,2].
2. Levelized cost of electricity:
sensitivity to carbon and fuel price
assumptions
Natural gas is often presented as
a bridging fuel: less carbon-intensive than
coal, but more so than wind power or nuclear
power. The intuition is therefore that natural
gas would thrive within a goldilocks zone of
strictly positive but moderate carbon prices:
all other things assumed equal, with a carbon
price of zero one would expect coal-fired
power to play a very important role, but
natural gas would gradually edge out (non-
CCS) coal as the carbon price increases. With
much higher carbon prices, however, zero-
carbon technologies as well as CCS should
in turn edge out (non-CCS) gas-fired
Fig. 2. PRIMES reference scenario: Natural gas demand in 2030 (2005 100). Source [6], author calculations. Cyprus and Malta had no reported consumption in 2005.
E.H. Christie / Energy Strategy Reviews 1 (2012) 62e65
generation altogether. Of course this general
pattern also depends on shifts in the relative
price of gas compared to coal e and on
differences in capital costs and operating
costs. One way to look at this question is to
compute the levelized cost of electricity
(LCOE) for each main option. The IEA [7]
recently published estimates of LCOE for
gas (CCGT), coal (ultra-supercritical), coal
with CCS (based on oxyfuel), nuclear, and
onshore wind. Using the IEAs assumptions for
the European Union (see Annex for details),
LCOE estimates are computed for a carbon
price ranging from 0 to 130 USD per tonne of
CO2, allowing for a low versus a high gas
price assumption, and assuming a discount
rate (cost of capital) of 8%. The results are
shown in Fig. 3. These estimates are
63
designed as a forward-looking exercise:
based on todays available technologies, and
on assumptions about future average (real)
energy prices and carbon prices, they give an
indication of choices a rational investor
would make.
The low price assumption corresponds to
an average real price (base period 2009) of 9
USD/MBtu. The high price assumption is 11.5
USD/MBtu. The price of coal is assumed
constant at 105 USD/tonne. With the low gas
price, coal without CCS is the cheapest option
up to a carbon price of approximately 20 USD/
tonne. Gas is then the cheapest option for
a carbon price in a range of around 20 to
around 95 USD/tonne. Beyond that level, coal
with CCS has the lowest LCOE among the
three technological options. However the
64
Fig. 3. LCOE for gas- vs. Coal-fired plants in the EU, USD per MWh (2009 prices). Source: author computations, based on
IEA assumptions [7]. Vertical axis: USD per MWh (2009 prices); horizontal axis: carbon price in USD/t CO2 (eq.).
results for fossil fuel options are strongly
sensitive to the fuel price assumption: with
the high price assumption of 11.5 USD/MBtu,
a gas-fired CCGT plant is never the lowest-
cost option, regardless of the carbon price
level. Of course if one assumes that CCS fails
to become commercially deployable, then
gas can dominate over coal even under the
high price assumption, but only at high carbon
prices e in the present case from around 60
USD/tonne.
The LCOE estimates for onshore wind and
for nuclear are very favourable, both in
a range of 81e83 USD/MWh, and thus both less
costly than all fossil fuel options as soon as the
carbon price goes beyond about 20 USD/
tonne. Of course, due to the need to perma-
nently balance electricity supply with elec-
tricity demand, there is a need for minimum
capacity levels for base-load and for peak-
load generation alongside intermittent sour-
ces. Even if economic framework conditions
were such that wind would have the lowest
LCOE, growth in wind power could in fact lead
to demand for gas-fired generation. The IEA
[2] suggests a rule-of-thumb of 5-for-1, i.e. for
every 5 GW of intermittent capacity one
should have 1 GW of peak-load capacity.
LCOE estimates are particularly useful for
constructing estimates of future average
generation costs based on a given power
generation mix. However using LCOE alone as
the predictor for what power mix a given
country will choose would be incorrect.
Ambitious commitments to boost renewable
sources and other interventionist policies in
support of or against nuclear power and coal
can dominate over the incentive effect of
carbon pricing.
3. Germanys nuclear exit
The disaster at the Fukushima Daichi plant
led the government of Angela Merkel to do an
E.H. Christie / Energy Strategy Reviews 1 (2012) 62e65
abrupt U-turn in its energy policy, announcing
in May 2011 a full exit from nuclear power
effective from 2022, a move that was widely
seen as rushed and ill-thought-through.
Shortly afterwards, in Italy, Silvio Berlusco-
nis intention to resume the use of nuclear
power after the countrys 1990 exit was
opposed by over 90% of voters in a compulsory
referendum. However other EU countries
reacted with cooler heads. Recent assess-
ments [2,8] suggest that there are no changes
to previously existing plans to rely on nuclear
power in France, the UK, Spain, Belgium, the
Netherlands, the Czech Republic, Slovakia,
Hungary, Sweden, and Finland. On the other
side, Austria, Greece, Ireland, Latvia,
Liechtenstein, Luxembourg, Malta, and
Portugal have re-affirmed their pre-existing
commitments to stay away from nuclear
power, see Ref. [8].
The effects of Germanys decision are
widely predicted to be negative. Recent
projections from models for Germany, see
Refs. [9, 10], suggest that both gas-fired and
coal-fired generation will need to increase as
compared to a baseline scenario with nuclear
power, in order to compensate. According to
Schlesinger et al. [10], gas consumption for
power generation will increase from 563 PJ in
2008 to 653 PJ in 2025 (16%), and decline
somewhat thereafter. This contrasts with
a projection of 398 PJ in 2025 (29%) for
a scenario with a gradual long-term decrease
in nuclear (plant life extensions without new
build). Due to the resulting upward push in
the average carbon content of power gener-
ation both total carbon emissions and elec-
tricity prices will be higher than in the
baseline scenario, and part of Germanys
power generation gap will be covered due
to a lower consumption profile. In the broader
economic picture Germanys decision is pro-
jected to lead to slightly lower GDP and
employment profiles due to the negative
income effect of higher electricity prices, and
to higher dependence on imports e both for
natural gas and for electricity itself e in
comparison to the baseline. In the broader
energy picture, Germanys nuclear exit may
lead to sizeable increases in the price of
carbon allowances on the EU ETS. According
to Prognos [9] there will be an increase of 3e5
V/t CO2 (eq.) by 2025 as compared to the
baseline scenario. This is an extra cost that
will affect everyone in the Union.
The findings above would seem to imply
that Germanys total demand for natural gas
will increase. This is however not projected
to be the case. According to Schlesinger et al.
[10], total primary demand for gas falling
from 3070 PJ in 2008e2489 PJ in 2025, a fall of
around 19%. Since gas demand for power
generation is projected to rise this must imply
a substantial fall in final consumption: from
2174 PJ in 2008 to 1567 PJ in 2025 (28%).
That part of the projections is almost iden-
tical between the two scenarios considered in
Ref. [10]. The key drivers are Germanys
renewable energy policy, in the case of final
consumption notably a strong increase in
biomass consumption, and assumed increases
in energy efficiency.
4. Prospects for natural gas in transport
The gas industry and major producer
nations (e.g. Russia) are partly shifting their
attention to new market segments. Transport
is a major component of final energy
consumption: around 28% (322 Mtoe) of the
total in the EU in 2009.
According to data from the European
branch of the Natural Gas Vehicles Associa-
tion (NGVA Europe), natural gas vehicles are
in relatively wide-spread use in several South
American nations and are even dominant in
Pakistan and in Bangladesh. In the European
Union, by contrast, market penetration is
very low and the corresponding infrastructure
for refuelling is very limited. NGVA Europe
estimates suggest a total natural gas vehicle
(NGV) fleet of just under one million in the
European Union, out of a total of around 264
million road vehicles (all weight classes
together), i.e. 0.38%. Bulgaria and Italy have
the highest market penetration: 2.25% and
1.86% respectively. Clearly there would be
much work ahead for NGVs to become
significant, but technical feasibility is
demonstrably not a problem.
The European Commissions 2011 Trans-
port White Paper [11] defines an indicative
target for reducing greenhouse gas emissions
from transport: 60% on the 1990 level by
2050. According to the Commissions internal
modelling work, by far the largest single
source of emissions reductions would be to
shift to electric vehicles for light-duty

vehicles (cars and vans). As estimated by the
IEA [7], well-to-wheel emissions, i.e. the
emissions made by the vehicle plus the
emissions from producing and transporting
the fuel, are likely to be far lower for electric
vehicles than for any other alternative
assuming the EUs projected power genera-
tion mix for 2020. However electrification is
not foreseen as a technically viable option for
heavier vehicles and/or for longer distances.
Two market segments therefore seem
particularly interesting: heavy-duty vehicles
for freight; and urban vehicle fleets (e.g.
urban bus services, municipal waste collec-
tion). The latter segment is the easiest to
penetrate given fixed depots, as the cost of
installing new refuelling infrastructure would
be low. Heavy-goods vehicles are a far greater
challenge, as a comprehensive refuelling
infrastructure would have to be built.
Europes main natural gas industry associa-
tion, Eurogas, suggests that dual-fuel engines
could be a useful intermediate approach, see
Ref. [12]. The other main segment of interest
is maritime shipping which could rely on LNG.
Eurogas [12] comes up with an estimate of
total consumption of natural gas in the EUs
transport sector of 28 bcm in 2030 and 33 bcm
in 2050. This is of course a relatively opti-
mistic scenario produced by the gas industry
itself. It may therefore be seen as an upper-
bound estimate of what might happen.
5. Conclusions
The contrast between the IEA projections
and the PRIMES model projections, as well as
recent modelling efforts on the German case,
all suggest that mid-term growth in EU natural
gas demand is far from certain. While the
mid-term prospects for carbon prices may be
favourable to natural gas, renewable energy
policies can have a crowding-out effect. The
latter can occur both for power generation
and for final consumption. Germanys nuclear
exit decision, for example, will likely be of
insufficient magnitude to compensate for
projected falls in final consumption. In addi-
tion, new sources of final demand such as the
transport sector may be limited. Much would
have to be achieved in terms of infrastructure
adaptation and the ultimate total demand
volumes are likely to be modest even under
favourable assumptions.
E.H. Christie / Energy Strategy Reviews 1 (2012) 62e65 65
While talk of a golden age of gas seems kW of capacity for new build. The impact of
very apt at the global level, EU demand for gas different average construction lead times is
remains strongly dependent on climate policy rendered by applying a pre-financing coef-
commitments. Furthermore the latter ficient that is a function of the discount
continue to generate significant differences in factor and of construction lead time. The
projected demand from leading energy calibration was identical to the one used in
models. It would be interesting to carry out [7] and is shown in Table A.1 for conve-
a detailed assessment of the main drivers for nience. The units for fuel costs are USD/
those differences, with a particular focus on MBtu for gas, USD/tonne for coal, and USD/
the IEAs World Energy Model and on the PRIMES MWh for nuclear. All costs are at year-2009
model used by the European Commission. prices.
Table A.1
Calibration for LCOE calculations.
Gas CCGT Coal USC Coal CCS Nuclear Wind
Capacity factor 60% 75% 80% 90% 24%
Thermal efficiency 61% 50% 41% 33% NA
Capital cost $/kW 900 2100 3550 4200 1480
Pre-financing coefficient 1.082 1.173 1.173 1.275 1.020
Construction lead time 3 5 5 7 1.5
Plant life 25 35 35 40 20
Unit cost of fuel 9 or 11.5 105 105 3 0
Non-fuel O&M costs $/kW 23 63 105 125 22
Source: [7].
Acknowledgements References
The author wishes to thank Marco Baroni, [1] IEA, IEA World Energy Outlook 2010, OECD/IEA,
Paris, 2010.
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assumptions for computing levelized costs of Paris, 2011.
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assessment of 14 regions outside the United States
(2011).
[4] Ruud Weijermars, Crispian McCredie, Assessing
Appendix. Annex shale gas potential. Petroleum Review (October
2011).
[5] Edward Hunter Christie, EU natural gas demand:
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computed over the life-time of the plant: 2011, 17/2010.
[6] DG Energy, EU energy trends to 2030 d Update
2009, Publications Office of the European Union,
Luxembourg, 2010.
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