Europe's Natural Gas Guys: "Shocked by Own Predictions"

Just preceding an "Executive Leadership Panel" at the European Autumn Gas Conference, Stefan Judisch, CEO, RWE Supply and Trading, took exception with the results of an instant poll administered to delegates about the suitability of Europe's natural gas infrastructure. The answer which got the most votes stated that neither the necessary flexibility nor incentives in the natural gas system were available for profitable operation.

"What this assumes is that we need more infrastructure for gas in Europe. My opinion is we don't need it; we have more than enough and we will never need any new infrastructure," said Mr. Judisch.

He hearkened back to an earlier, more prosperous time for gas, when gas fired stations were to be built, gas consumption was set to grow, etc. but then showed a case which was indicative of the harsh reality: the utilization of one of RWE's gas fired power stations, comparing the summer of 2009 with the same period two years later.

"You see a typical peak load plant which works during the peak hours of the day and not at the weekends - relative to today, that was the 'good old world'."

His next slide of two years later was basically an empty graph.

Addressing the guffaws of the delegates, he said: "This is not a mistake. Two years later this power station was just used a little bit: 50 megawatts on one day for balancing energy. We're laughing about it, but the economic reality behind it is tremendous."

Judisch made reference to the share price of E.ON. "It is a utility stock that has fallen more than 15% in one day," he remarked. "The biggest ever fall of a utility stock in Europe. And the reason for that has something to do with renewables."

He said that this was what he had been pointing out to EAGC delegates for years.

"I've said that the competition is not coal or nuclear; it's solar. I'm shocked by my own predictions, because this has developed much faster than we ever anticipated, and that's why the utility industry as a whole has a problem because we have dramatically underestimated the cost curve of photovoltaics, specifically - a cost reduction of 90% in only seven years. And that obviously kills gas fired plants first, because their highest in the merit order, but the bad news is it won't stop. Even if the German government today decided to stop the subsidization of renewables, the building of photovoltaic would not stop."

Germany had 40% of the world's installed solar panels, he noted, with 30,000 megawatts - the equivalent of 30 nuclear power stations - of photovoltaic and 28,000 megawatts of wind.

"If German households put panels on their roof they pay about 17 cents per kilowatt hour for electricity. If they buy electricity from the grid, they pay 25-27 cents depending on how the local municipality passes on the subsidy costs. This gap will widen because more subsidies will be put on the normal tariff and therefore the incentive for households to put solar panels on their roofs will increase."

Every segment of society, from the greens to farmers, were all benefiting from this scheme, said Mr. Judisch, making this proliferation virtually unstoppable. Furthermore, taxpayers were happy to pay for these developments, which were likely to spread to other geographies where the sun shines more often.

He cited a study from Desertec which contended that 40,000 terawatt hours could be produced in North Africa per year from wind and solar, cutting the need for oil and gas to generate power.

"My summary is, the outlook for the gas industry is bleak. It looks nice in Asia at the moment, but the cost curve of photovoltaics will squeeze gas all over the world."

BG Group's Chris Finlayson, Executive Director and Managing Director, BG Advance, admitted it wasn't easy to give a presentation after Stefan Judisch's gloomy outlook.

"Clearly the turbulence that we've seen in the last few years - the political debate in Brussels about the future of the energy mix - is very much shaping what we're doing. Subsidies being put in place for renewables and then abandoned because they're unaffordable in the current climate have compounded the sense of nervousness and driven the feeling of 'how can we invest against this background?'

"And perhaps the other point that Stefan didn't touch on - the financial regulations which are coming from the Commission, and which potentially impact energy trading - also threaten to undermine energy liberalization."

Mr. Finlayson noted that the European gas market appeared to existed in something of a parallel universe from the rest of the world, which was talking about the "Golden Age of Gas."

He commented, "Europe's full of angst about its approach to gas and relationships with its single largest supplier, Russia. Should we embrace the gas era or is it going to be the market of last resort, with gas simply as a swing fuel?"

He said he found the resurgence of coal and its impact on climate change even more puzzling.

"In the end, the investments that the German taxpayers made in subsidies were intended to reduce the carbon footprint as much as control the price of electricity. And in Germany at the moment there are 11 gigawatts of new coal-fired power stations under construction. The subsidies have cut the EU carbon price to historic lows, basically zero.

"This reemergence of coal in the European energy mix has been the unintended consequence, so it's now the bedfellow of solar and wind energy, which seems extraordinary," he said.

This meant, contended Finlayson, that carbon emissions were rising in Europe as low gas prices in the US drove significant reductions.

He stated: "In the US, which is continually criticized for its failure to act on climate change, CO2 emissions have fallen by about 7.7% whilst coal exports have risen to Europe by about 24%"

A similar situation existed in the UK where coal consumption was up and gas fired plants were being mothballed; but no coal plants were being constructed.

"So whereas in Germany the lights will stay and will continue to pollute, in the UK were in danger of the lights simply going off."

Here was what he saw as the great contradiction: "As Europe claims leadership on climate change, coal's firmly back in business. Is there a way that Europe can be part of a 'golden age of gas'?"

There were regulatory obstacles to overcome. Mr. Finlayson suggested that forward gas transactions be classified as financial instruments, liquidity would reduce at hubs and bilateral contracts could re emerge as the dominant commercial model.

Regarding shale gas, he said: "You would be a big optimist if you think you can recreate the US success story in my view. The industry may be engaged in community outreach - townhalls across Europe - to make the project work, but there is a major barrier to overcome if Europe is to reach any part of the US success story.

"It's been a partnership between government and industry in the US that has transformed the energy market. Against that, in Europe we have national bans on fraccing, little sign of strong political backing and therefore it's very hard to see how shale gas could emerge in anything like the quantities required in Europe."

As for the IEA's "Golden Age," Finlayson noted that such revolutions were driven by new thinking and technological innovation. He said that had been present in abundance.

"Shale gas is an incredible game changer - the US will soon become a gas exporter with an LNG export capacity, but how will that impact on Europe? Europe is becoming more and more an LNG market of last resort - a place where you put the volumes that you can't place into more profitable markets."

He concluded, "If Europe is to gain the benefits of gas, opposed to the lowest fossil fuel for CO2 emissions, it's going to have to fundamentally change the way it looks at the game."