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Gas comes into play

One of the effects of the crisis caused by the pandemic is the reduced availability of economic resources. In the current context of uncertainty, gas arguably has a bigger role to play in the energy transition than before. However, the contribution of this abundant energy carrier to reducing polluting emissions does not convince everyone and its potential varies by region.

by Luca Franza (IAI)
24 September 2020
12 min read
byLuca Franza (IAI)
24 September 2020
12 min read

The COVID-19 pandemic has brought public health to the fore. One of the most pressing public health challenges that countries have been facing, for quite some time now, is air pollution. Even if conclusive evidence still needs to be produced, several scientific studies show that the two issues are linked,  as particles of pollutant may act as carriers of the virus, facilitating its spread via the boost effect. Pollution is not only responsible for more cases, but also for more deaths. Long-term exposure to pollutants results in chronic respiratory conditions that weaken people infected with COVID-19, aggravating its lethality. Studies of the US and The Netherlands revealed that an increase in PM2.5 of 1 microgram per cubic metre – a small amount – raises COVID-19 death rate by as much as 8-16%. COVID-19 should further strengthen the resolve to cut pollution, particularly in non-OECD Asia and Sub-Saharan Africa, where 83% of the world’s pollution-related premature deaths take place. India and China alone together account for 57% and 49% of the world’s premature deaths caused by household and outdoor pollution respectively. Limiting the use of small-scale coal boilers and creating access to modern energy sources to eradicate indoor use of biomass is crucial to cut death rates.

We cannot afford not to pick low-hanging fruits

But COVID-19 is not only a public health crisis. It also triggered the biggest economic downturn since World War Two, and global GDP is expected to shrink by 5.2% this year. This reduces resources available for new investments, including those needed to create a more sustainable development model. Even if governments are implementing ambitious stimulus packages, private investors will be reluctant to invest in a context of uncertainty. A V-shaped economic recovery looks unlikely. Instead, the recession will have a long tail. Consumer spending on innovative products (including less polluting ones) will also be muted. Besides, not every country has the necessary financial firepower to compensate for reduced private investment.

While the focus is on spending money, the importance of saving money should not be dismissed. All the more so because the negative socio-economic effects of the crisis have not yet been fully unleashed. As resources become scarcer, it will be particularly important to use them wisely. This also means using and extracting maximum value from existing energy infrastructure, including power plants, storage sites, transmission lines and distribution lines. Affordability should indeed be one of the guiding principles for policies aimed to redress the multiple crises that COVID-19 has triggered.

The role of gas

Natural gas has an important role to play in this because it can be used to reduce both air pollution and CO2 emissions as one of the most affordable options available. Natural gas prices are at a historical low and they will probably remain low for most of the next decade because when demand starts growing again at pre-crisis rates, a new wave of LNG capacity will come on stream (around 2025 or earlier).

Of course, natural gas is not the silver bullet solution to the energy transition challenge. Assessments of its ability to deliver environmental benefits are both time and space sensitive. In other words, using natural gas is not necessarily helpful everywhere (in terms of achieving cost-efficient decarbonisation). And using unabated natural gas will not necessarily be helpful in the long term.  The focus needs to be on decarbonizing gas, through the capture and storage of CO2, without diverting attention from the commitment to invest in renewables and energy efficiency.

But we cannot afford to prevent natural gas from making a contribution to emission reduction now. We could not afford it before COVID-19, and now we can afford it even less. Just like we cannot afford to prevent biogas, biomethane and hydrogen from playing a key long-term role in the energy transition. All-electric scenarios are much more expensive than scenarios where clean molecules play a part.

Since 2010, coal-to-gas switching has avoided 500 million tonnes of CO2 emissions. To achieve a similar result, 200 million extra electric vehicles running on carbon-free electricity should have been added on the roads over the same period. Gas emissions are much lower than coal and oil emissions (link to Margherita’s article).

Coal-to-gas switching

The ability of gas to benefit the environment varies by geography. In the US and in the EU, the biggest potential contribution lies in switching from coal to gas in existing power plants. Dispatchable sources of electricity are needed particularly in advanced economies where flexibility requirements are rising with the adoption of intermittent renewable energy sources. While renewables installation costs have dropped, system adaptation costs will become more sizeable. Gas has an important system function to play here, also because prospects for alternative clean dispatchable sources of electricity are not rosy. Several EU countries have adopted nuclear phaseout plans, or have made decisions that will make nuclear plants shut down before they reach the end of their lifetime, such as Spain and Sweden. Investment in nuclear is sluggish. As many as thirteen nuclear plants have closed in just one year in advanced economies. Plants to build new ones keep on being postponed as power prices are low and utilities are faced with significant long-term uncertainty. The room to significantly expand hydropower capacity is limited.

In Emerging Asia, its biggest contribution lies in coal displacement in heating and industry. In this region, gas starts from a much lower basis than in the OECD (in terms of share of total primary energy consumption). Room for growth is thus much bigger and the use of gas can expand, while helping decarbonisation, for a longer period. For example, in the Sustainable Development Scenario (SDS) scenario, Chinese and Indian gas consumption grows by 600 bcm by 2040, while European and American gas consumption drops by approximately 300 bcm over the same period.

What changes with COVID-19

Prior to the COVID-19 outbreak, the IEA estimated that 1.2 gigatonnes of CO2 emissions could be reduced quickly by switching from coal to existing gas-fired power plants globally, provided that relative prices and regulation were supportive, with the bulk of the switching potential lying in the US and in the EU – where there is spare capacity in new and efficient Combined-Cycle Gas Turbines (CCGTs).

Post-COVID, relative prices and regulation look, in fact, quite supportive. Coal phaseout plans in the EU have not been shelved because of the crisis as the emphasis is actually on the need for a green recovery; the ETS price has recovered after an initial contraction and the Market Stability Reform reassures that CO2 prices will not fall in the next months; Henry Hub prices have been between 1.5 and 2 $/MMBtu in the first half of 2020; and TTF prices have fallen from 4 $/MMBtu to 1 $/MMBtu. In the US, gas outcompetes coal on the market. Coal-to-gas switching in fact continued in the US in the middle of the pandemic, taking place even in coal strongholds such as the country’s Midwest. US weather-adjusted gas consumption actually grew by 0.4% in the first half of the year. To be sure, 2020 is not going to be a good year for the gas industry, but the resulting affordability of gas might help its uptake later.

Spare capacity in power plants is lower in Emerging Asia, where an additional problem is that the prices of imported gas have made it difficult for gas to become an attractive alternative to coal in the power sector so far. Gas has even started to struggle against new onshore wind and solar photovoltaic (PV) in Emerging Asia. Prior to the COVID-19 outbreak, the IEA had estimated that Chinese import prices should go below 4$/MMBtu for gas to stand a chance to displace coal based on competitiveness. As of July 2020, average gas import prices in Asia remain relatively high because of oil indexation in contracts. However, they will probably fall below the 4$/MMBtu threshold in the second half of the year as a result of the oil price fall in spring (and the 6-month lag with which oil indexed formulae are applied in gas import contracts). If China adopts a CO2 price as it had annonuced before the crisis, the position of gas could improve further.

Of course the future of gas in countries like China and India largely depends on policy decisions, and policy decisions (to embrace natural gas or not) depend (also) on long-term expectations of affordability rather than temporary gas price drops. But if oil hovers around 40$ for a while – and given that the current gas oversupply is unlikely to give way to tightness before the new wave of LNG that received FID in 2018-2019 comes to the market – there are good prospects for competitively priced gas for most of the 2020s. The current market phase could also be used by countries of Emerging Asia as an opportunity to negotiate favourable long-term gas import contract terms. If policy-makers are reassured that gas will be priced competitively for a while, they will be more likely to embrace it as part of the solution to limit urban pollution and CO2 emissions. 

Is there a stronger case for gas after COVID-19?

The COVID-19 crisis creates room for logical arguments in favour of gas. First, the urgency of abating air pollution, and the importance of the role of gas in doing so. Second, the need to use scarcer resources wisely, with a renewed focus on affordability and the need to capitalise on low-hanging fruits such as gas and its existing infrastructure. In practice, it remains quite difficult to make a case for gas, particularly in the EU, where arguments against gas include that new gas investments create carbon lock in and that gas is not a long-term decarbonization solution and distracts resources from renewables, energy efficiency and system integration.

Of course saying that gas can help containing pollution and CO2 emissions in certain geographies and in certain time horizons does not and should not create excuses to defer investments on zero-carbon solutions. The gas industry should channel its efforts to crafting a role for itself in deep decarbonisation scenarios by betting on decarbonised gases such as biogas, biomethane and especially hydrogen.

 

The author: Luca Franza

Luca Franza is the Head of the Energy, Climate and Resources Programme at Istituto Affari Internazionali (IAI). He is also a Research Fellow at the Clingendael International Energy Programme (CIEP) in The Hague (The Netherlands) and a lecturer in the Energy Master of the Paris School of International Affairs (PSIA) – SciencesPo.