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How to Get Rich Investing in Stocks by Riding the Electron Wave

European Natural Gas Industry's Green Rage

Commodities / Natural Gas May 16, 2013 - 05:43 PM GMT

By: Andrew_McKillop


BusinessEurope president Jürgen Thumann speaking to EurActiv at the European Business Summit which opened 15 May, squarely blamed the European Commission for "the negative effects of green tape”, also saying EU regulations create ‘unnecessary burdensome legislative instruments in climate, energy and environment policies’. One of these is the so-called Third energy package, which is supposed to encourage Europe's gas importers, producers, pipeline transporters, distributors and users, because gas is cleaner-burning, lower emission and therefore preferable to coal for power generation. Gas-fired power is also the fastest-response, best backup power choice to run with renewable power.

 On the ground and in the real world however, the European gas sector is in a disastrous state and without policies to boost demand and more investment in gas supply, the power production of some EU countries could be at risk, with brownouts or blackouts at any time, top industry officials say.
Europe's gas sector has been mainly hit by low growth in demand for electricity, the renewable energy boom, the collapse of ETS carbon permit prices, and competition from coal-fired plants, Jean-Francois Cirelli, CEO of GDF Suez SA and president of Eurogas, which represents the industry in Europe said in an interview with Reuters on 15 May.

Cirelli said EU gas consumption dropped 2% in 2012 after falling 10% in 2011. Half of the decrease was caused by lower gas consumption by power plants, and the other half was attributed to the structural decline in final gas demand brought about by Europe's energy efficiency and fossil fuel substitution policies. Some EU countries, in the past 12 months have recorded declines in gas consumption, mainly due to reduced gas-fired power production, running at double digit rates.

He was bluntly honest about the outlook, saying "The state of affairs in the gas sector in Europe is disastrous". As Vice-chairman of French energy company GDF Suez, one of Europe's major gas-fired power producers, he is highly aware of the combined knockout impact of Europe's "green policies", the collapse of ETS prices, and the stubborn refusal of Gazprom and other major suppliers to stop "oil indexing" gas prices for exports to Europe, which cover around 60% of consumption. Oil indexing gas prices results in European prices running at up to 4 times current US domestic gas prices.

Natural gas supplies about 25% of Europe's primary energy consumption, and gas is the main fuel for heating of 200 million citizens, some 40% of the total population of Europe. By comparison, oil supplies about 34% of Europe's primary energy.

Gas for power production which in some countries covers more than 20% of electric power supply, and this end-use of gas expanded rapidly in some cases, as in Germany through 2005-2010 while ETS carbon permit prices remained high (prices have fallen about 90% from their peak in 2006), gas is simply no longer competitive in Europe for power production. Because of the influx of cheap American coal no longer needed in the US due to US utilities massively increasing their gas-burn, and rock-bottom CO2 permit prices, power companies in Europe which still use, or are forced to use gas-fired plants can lose money on every single kWh of power they produce from gas.

One example is Germany's biggest utility, E.On, which has about 19% of its total power capacity running on gas - and losing money on every plant. Earnings from E.On gas-fired plants dropped by 94% in the year April 2012-April 2013, E.On's CEO Johannes Teyssen said last week.

Cirelli's company, GDF Suez, has mothballed or closed 7.3 GW (7300 MW) of gas-fired power generating capacity since late 2009 and is set to take another 1.3 GW offline, a total equivalent to the effective operating capacity of two nuclear power plants. Countries with the sharpest drop in gas-fired power include the UK where, Cirelli said in his Reuters interview, the share of gas in the generation mix fell by 15% in one year, from 40% to 25%, mainly replaced by coal, resulting in a sizeable increase in total CO2 emissions of the UK. Coal-fired power production increased from 30% of total supply, to 42% in the UK through 2011-2012.

While the US has forged ahead with the "fracking" revolution, ignoring the claims of ecology and environmentalist groups, and the anti-global warming lobby, cheap shale gas is displacing coal in US power generation at double digit annual rates. US coal exports to Europe rose 23% in 2012, to more than as  international coal prices were driven lower by declining rates of coal consumption growth in China, India and other Emerging economies. In some EU countries, the amount of electricity generated from coal is rising at annualised rates running as high as 50%, Cirelli said.

Europe's "green policy set", enshrined in the climate-energy package voted by the European Parliament in December 2008, makes almost no mention of coal - due to King Coal being deposed, in policymakers imaginations, and replaced in Europe decades ago. Today, European imports of cheap coal - about 175 million tons a year supplied at typical prices of under $20 per barrel equivalent of oil energy, including transport - are running at the highest-ever rates. The increase rate of European coal imports is higher than coal import growth in any other region of the world. For Eurogas members like Cirelli of GDF Suez, these fast-growing coal imports "make a mockery of the green EU policy".

"We reject shale gas and we import coal!" he said. Adding yet more mockery, Europe will soon be importing shale gas from the US, in a deal brokered by Exxon Mobil and Qatar Petroleum, the small but arrogant gas-rich emirate which racks European users by oil-indexing its gas export prices!

Europe will therefore be able to import and use shale gas, and hand over profits to a renowned price gouger for current gas supplies to Europe - but is "forbidden" to produce shale gas itself, and liberate itself itself from dependence on greedy price-gougers.

Eurogas member CEOs and executives are especially critical about the European Parliament, the Commission and government leaders in Europe, abandoning all effective support to the ETS CO2 market, resulting in coal-fired power producers being able to buy "bargain basement" permits and operate their facilities on bargain basement priced coal imports. They say that Europe's main climate policy tool, the CO2 market, has now reached a state of "suspended animation" following the European Parliament's April 16 rejection of support for permit prices.

Pulling the European gas industry out of its nosedive is now urgent, the industry says, and this alone needs a major rethink of current "green policy" for Europe.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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