1.1 What Role for Gas?
The dialogue on natural gas is becoming increasingly politicised. This is intrinsically tied-in with the plethora of roles envisaged for gas by a range of stakeholders: a transition fuel bridging the transition to a low carbon energy future; a necessity to ensure security and diversity of supply in an increasingly unstable geopolitical landscape; and as a polluting fossil fuel partly driving anthropogenic climate change. Indeed, some have heralded a potential ‘Golden Age of Gas’ which is expected to reverse the decline in gas demand brought on by the shift to a low carbon future. Within the European Union (EU), the focus of much of this book, debate surrounding gas has resulted in disparity and a lack of meaningful communication between the industry, the European Commission (EC) and climate change lobbies. This book provides an experiential assessment of the impact of energy transitions on the future of natural gas in the EU energy mix, acknowledging that natural gas will continue to play a significant role in the heating, power and industry sectors in the EU in the medium to long-term, and the role of renewables as future partners in the transition to a low carbon economy.
In order to understand this, the book seeks to critically analyse current natural gas market policy and law in the EU. Essentially, the Third Energy Package was introduced in 2009 to promote market-based mechanisms, but in reality, its implementation has resulted in an increased role for the EU institutions in commercial decision-making. The case studies proposed in this book reveal that most of the gas infrastructure projects in the EU are not commercially attractive—often the projects that have strategic importance for security of supply (and diversification) get the go ahead, hence subsidies are available (the role of law and policy in this problem). This book questions whether gas infrastructure can be developed by the market without any subsidies with the concomitant risk of stranded assets and carbon lock-in taken by the private sector.
The problem, it is argued here, lies with the regulation and policy that leads to public funds being spent on gas infrastructure, lack of market mechanisms (for storage in particular) and the regulatory uncertainties that comes for instance with the Gas Directive amendment in 2019. Where there is a functioning market, the risks should be borne by the private sector. They can then assess whether to invest in liquified natural gas (LNG), storage and pipeline infrastructure, or diversify their portfolio (in renewable gases or renewable energy sources [RES]). Hydrogen, synthetic gas, biomass and Carbon Capture, Utilisation and Storage (CCUS) will require even higher subsidies to develop, but at least these projects are aligned with the EUs energy transitions agenda.
In the EU, currently, the recently adopted recast of Renewable Energy, Electricity Market Design and Energy Efficiency directives include elements relevant for hydrogen technologies and biomass. However in order to create a predictable environment for innovation and investment, clear definitions and binding EU level targets for renewable and low carbon gases along with Guarantees of Origin that would make the source of renewable and decarbonised gases transparent would be necessary. Guarantees of Origin would also be essential to demonstrate the carbon footprint and therefore contribution to the decarbonisation of each specific gas. These are expected to be addressed in 2020 under a new gas package with the new Commission taking office in Autumn 2019. This book is the first to cover these evolving issues, including a regulatory and policy framework for development and operation of hydrogen pipelines, injection of biomethane into the existing gas grid and for pipelines carrying carbon dioxide (CO2) gases.
As it will be highlighted in the sections below, for the future low carbon and renewable gases, the marketability is not yet present at this stage. There are currently only small amounts of green hydrogen and biomass production in the world. This book will endeavour to analyse then how to finance decarbonisation of the gas sector in the long term while at the same time maintain a security of supply in the short and medium-term. It will do so based on the recent experience with financing existing natural gas infrastructures which continues to benefit heavily from public funds and incentives, and whether the risks could be shifted to the private sector to minimise the burden on the tax payer. This is timely. At the moment the EU Agency for the Cooperation of Energy Regulators (ACER) is gathering consultation responses to make proposals to the EC for future gas legislation which is expected to be drafted in 2020.
1.2 Importance of the Research
The EU gas market regulation has been going through an evolutionary transition since the early 1990s, one that is still ongoing. The internal market rules are ever changing with a new gas package planned for 2020. The future role of gas in a low carbon economy needs to be reflected in both new legislation and market design. This involves enhanced sector coupling between gas and electricity markets. The EU is not an island, it operates within an interconnected energy system which requires maintaining the relationship with existing suppliers and future partners in delivering new technologies that are aimed at achieving not only the United Nations (UN) Paris Climate Agreement Goals but also the UN Sustainable Development Goals (SDGs), in particular SDG 7 on access to affordable and sustainable clean energy for all and SDG 13 on climate change. It is also important to maintain the competitiveness of the EU in global markets and ensure that the industry can continue to deliver economic growth, but facilitate an energy transition in a way that takes into account social justice.1
The decarbonisation ambitions of the EU by 2050, which despite remaining unsubscribed by all Member States, aims to deliver a net zero carbon economy in principle. The recent refusal of Poland, Hungary and the Czech Republic with Germany siding with them to commit to climate neutrality by 2050, has to be read carefully. The cost and burden of decarbonisation is significant. With this in mind, an objective of this book is to critically analyse and address incompatibilities between internal gas market legislation and the financing obligations of natural gas infrastructure projects in light of rising import dependency for the EU in the short and medium term. The EUs ability to attract new volumes of gas is also tighter than ever before with the removal of destination clauses in LNG contracts, initially in the EU but increasingly also in Asian markets. The development of effective regional and global transportation systems and flows of energy requires cooperation among the producer, consumer and transit countries as well as project financiers. While the integration of renewable gases into the system mean...