European gas demand is set for only slow growth over the next two decades amid competition from cheaper coal and an increasing share of renewables in the energy mix, according to a new market study.
The continent has seen a slump in gas demand in recent years due to economic recession resulting from the 2008 financial crisis as well as other factors including higher gas prices, low population growth and the migration of manufacturing industries to other global regions.
A key driver of the market drop has been lower gas consumption in the power-generation sector, which had earlier fuelled demand growth in the early 2000s, due to flat power demand, a higher priority given to cleaner renewable fuels as part of low-carbon energy policies and competition from coal.
The market outlook from the Oxford Institute for Energy Studies (OIES) paints a continued gloomy picture for European gas demand in the short term, predicting it will fall from 594 billion cubic metres in 2010 to 564 Bcm by 2020.
Demand is not expected to recover to 2010 levels until around 2025, but is anticipated to rise to 618 Bcm in 2030.
Furthermore, gas demand in the power-generation sector is set to drop by an average 2.3% annually to 2020, before starting to increase by 1.5% per year in the subsequent decade, and is forecast to reach only 186 Bcm in 2030 – short of the 2010 level of 202 Bcm.
“Gas demand in the power sector will only happen if much more competitive gas prices can help it compete with coal, as the place of nuclear and renewables in the merit order is not affected by changes in fuel prices,” report author Anouk Honore stated.
While coal is one of the most pollutive energy sources and is not in alignment with Europe’s climate goals, relatively lower prices mean it has edged out gas as the fuel of choice in the continent’s power-generation sector.
The US shale gas boom led to increased domestic consumption across the Atlantic, thus diverting coal exports to other markets including Europe and cutting the price of the fuel relative to the higher gas price that has traditionally been linked to that of crude.
The price differential between coal and gas has been exacerbated by the fall in carbon prices in the European Union Emissions Trading System, giving a greater incentive to use coal even though it generates twice as much carbon dioxide emissions as gas-fired plants and should normally be penalised with higher carbon prices.
The OIES study does though offer some hope that the current price relationship between coal and gas can be reversed farther down the road, but not within the 2030 timeframe, as a new system being proposed could lead to double digit carbon prices.
Honore also suggested there could be improved prospects for gas in Europe’s power sector later this decade with the phase-out of nuclear plants and retirement of coal-fired facilities, though this will depend on the level of renewables adopted to fill the energy gap.
Further gas demand growth is seen coming in the transport sector.
“It will not be an easy road, and the European gas industry will need to adapt to the new energy mix and market fundamentals if it is to survive,” the author concluded.