EGM comment: Europe’s gas policies are fragmented, but global carbon pricing may not solve all industry’s problems

Gas is enjoying a brief moment in the sun in Europe, its profitability coming neck-and-neck with that of coal thanks to weak demand and low prices.

But the industry is aware that the resurgence could be temporary.

In a letter to the UN in June, a group of six oil and gas majors called for a global carbon price. This could push down demand for coal and favour gas as a companion fuel for renewable generation.

A single lever to apply across regions is undoubtedly appealing in contrast with the mishmash of policies currently at work in different European states. There are huge differences in attitude to the fuel from country to country, and in certain cases glaring inconsistencies that have seen gas sidelined.

Britain has become a rare bright spot for producers and owners of gas-fired plants, with support for shale production in the country (although this has hit legal snags); tax cuts for producers and a carbon tax on top of the EU emissions trading scheme (ETS).

This is in stark contrast to the political stance in France, where gas has largely been ignored despite potential for it to play a role in ambitious goals for cutting emissions. Following several years of consultation and debate, the energy transition bill is still being scrutinised by France’s legislature. One of the cornerstone targets of the bill is a reduction of the share of nuclear in the French generation mix from 75% to 50% by 2025.

Critics argue this is not compatible with a reduction in emissions – another key target – as the resultant gap in output could not be replaced wholly by renewable sources.

While gas plants would be an appropriate replacement for some of the nuclear assets to be shut down – particularly given its ability to act as a flexible back-up for intermittent wind and solar – there appears to be little political enthusiasm for the fuel.

The situation is little better in Germany. Although the government is doubling subsidies for gas-fired combined heat and power (CHP) plants to €1.5bn, this will mostly benefit existing facilities.

And German policies that favoured renewables as a means to cut emissions have caused frustration, as they paradoxically led to a higher amount of coal being burnt to balance the grid. This to the detriment of more expensive – but cleaner – gas.

The signatories of the June letter took a bold stance, but achieving the “widespread and effective” carbon pricing they envisage will be a tough challenge.

The EU’s ETS scheme is now seen as a cautionary tale, given the low price of carbon permits and stalled reforms of the system.

Even if such a programme could be successfully introduced, recent experience in Britain shows that even with a high direct tax on carbon, gas is only more attractive for power generation when accompanied by lower wholesale prices. These, in turn, were brought about by changes in the oil complex and increased global supply, which demand has not yet caught up to.

Political and legal structures can help shore up gas’s share of the generation mix to a certain extent but this is not a magic bullet. The commodity will still be at the mercy of supply, demand and price competition factors. emma.slawinski@icis.com