There has never been as much energy in the world as there is at the beginning of this new decade. Demand may have slowed down but it will rise again to record levels of 15 billion tons of oil equivalent, 5 more than 20 years ago. Thanks to technology, the energy supply is increasing at a faster rate than demand, resulting in an abundance of supply and falling prices, with positive effects particularly for the environment. Natural gas in particular is suffering all over the world. Its market has become global thanks to the trade in liquefied natural gas (LNG), which can be moved from one part of the globe to another based on the greater or lesser convenience of prices. In the last year, new LNG export capacity has been added at a time when demand is slowing down. New exports mainly come from the USA, where the new LNG export capacity in which investments have been made in recent years to find an outlet for the explosion in the domestic production of shale gas from hydraulic fracturing, or fracking, the big energy industry revolution of recent years, has fully come on stream. US exports of LNG increased by 50% to 45 billion cubic meters in 2019, out of a total global market of 450 billion cubic meters of LNG. In terms of export capacity, the USA has moved into top position, overtaking Qatar and Australia, countries which have also contributed with greater exports. Fracking is growing steadily, despite prices in the USA remaining low, and is expected to continue growing in the coming years.
The case of Europe
Most of the new loads have arrived in Europe, the area that most depends on imports for its consumption. Here prices have dropped to €9 per megawatt hour, two thirds lower than the minimum levels reached only a year and a half earlier, in September 2018, when they reached 28 €/MWh. In addition to imports from the United States, the excess supply in Europe stems from demand being weak for two fundamental reasons: the significant industrial slowdown caused by a slowing economy and the mild climate of the last two winters, which has left stocks almost full. These have been boosted by greater exports from Russia, particularly via pipelines, as well as via LNG from the new terminal built in Yamal, on the Arctic Sea. Overall, in 2019 Russia broke a new record in gas exports to Europe, reaching over 200 billion cubic meters, over a third of the total demand for the entire continent. This winter there were no problems with pipeline deliveries in Ukraine, across which much of Russia's transport capacity to Europe passes. Furthermore, the Nord Stream 1 gas pipeline across the Baltic, which avoids Ukraine, operated efficiently, while in the South, at the beginning of January 2020, the first Russian gas arrived in Europe through the Turkish Stream pipeline.
The fall in coal
From an environmental point of view, the most interesting aspect is that low prices have made it convenient to use gas instead of coal in many European power plants, particularly because the CO2 price has remained high above €22. In the most important electricity market in Europe, which is Germany, where production stands at almost 650 billion kilowatt hours, more than double that of Italy, there has finally been a significant drop in the use of coal. For more than a century, coal, both imported and internally produced, lignite, has covered most of the consumption for electricity production in Germany but the share of coal has fallen in recent years to 38% in 2018. Last year saw the biggest drop every recorded, with consumption falling by almost a third, particularly due to the inexpensiveness of gas. The constant growth in production from renewable sources, especially wind, also made a contribution, combined with cheap gas. According to data from the International Energy Agency, the production of coal-fired power plants in the European Union decreased by more than 25% in 2019, while gas production increased by almost 15%, exceeding coal for the first time. At the same time, CO2 emissions fell by 5%. In the last twenty years in Germany, as in the rest of Europe, numerous policies have been implemented in succession to reduce CO2 emissions, but none have been as effective as the low gas prices of 2019. What is happening in Europe mirrors the experience of the USA, where for years coal has been retreating in electricity generation, because it is not convenient compared to gas, given the continuous increase in fracking production. These dynamics are significant given all the attempts made to reduce CO2 emissions. The market sometimes works very well, and the environment can also benefit greatly.
The author: Davide Tabarelli
Is Chairman and co-founder of Nomisma Energia, an independent research company in Bologna that deals with energy and environmental issues. He has always worked as a consultant for the energy sector in Italy and abroad, dealing with all the major aspects of this market.
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