High European gas prices not caused by energy transition: IEA

The energy transition and clean energy sources like renewables are not to blame for the high natural gas and power prices seen in Europe this week, according to the International Energy Agency (IEA).

Spot gas prices at the NBP (National Balancing Point) benchmark in the UK reached $5.28/MMBtu in the fourth quarter of 2020 and are forecast to nearly triple to $15.14/MMBtu this quarter.

The strength of UK wholesale gas prices, which have risen 250% since January, led to small UK energy suppliers ceasing to trade and to industrial producers that use gas closing temporarily.

The counterpoint to the rising controversy is that the UK has been awash in cheap gas since at least 2019, when prices reached their lowest level in five years, according to the UK government.

This month's sharp gas price recovery reversed the global trend of low gas prices and came because post-lockdown demand rebounded, boosting spot gas prices in Asia, say experts.

While OPEC Secretary-General Mohammed Barkindo told CNBC that the energy transition was driving higher prices, IEA Executive Director Fatih Birol dismissed the idea in a statement on 21 September.

"Recent increases in global natural gas prices are the result of multiple factors, and it is inaccurate and misleading to lay the responsibility at the door of the clean energy transition," Birol said.

Demand recovery

The rise in European gas prices is the result of a strong recovery in demand matched with lower supply, as well as several weather-related factors, said the IEA.

The IEA cited, for example, "lower-than-usual availability of wind energy in recent weeks."

The prices could persist—or even rise much higher—with colder weather this winter, it added.

Globally, unusual weather drove gas demand higher, including the recent long winter in Europe and cold spells in East Asia and North America in the first quarter of 2021. Heatwaves in Asia and drought around the world, including in South America, were also a factor.

Rising demand for gas is playing a role, said Birol. EU pressure to move away from coal has spurred European gas demand.

Throttled gas imports are worsening the crunch. Birol noted that exports to Europe from Russia are down from their 2019 levels, and Russia "could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter."

In July, Russia curbed discretionary gas exports to Europe via its Yamal Pipeline amid delays to its Nord Stream 2 pipeline project, which is expected to start shipping gas to Europe in the fourth quarter of this year.

Apart from exports via pipelines, Russian producers also limited exports via LNG ships. Producers of LNG in Russia, Australia, and Papua New Guinea have recently curbed exports for various reasons. These included scheduled maintenance, increased domestic gas demand, or feedstock supply issues, possibly due to lower investment in the sector.

But an LNG shortage is just one culprit in this story, according to an analyst at UK consultancy Cornwall Insight. "There have been many outages, including in the Norwegian gas supply, British nuclear and gas power stations being offline longer than expected, and a fire shutting down a French [power] interconnector," wrote Lead Research Analyst Kate Hill in a blog.

The oil and gas industry might seize this moment to gain access to capital. UAE Energy Minister Suhail Al Mazroue told CNBC that international oil companies had trouble financing new projects, implying that gas supply shortfalls could continue without more backing.

But the picture is not so grim. For part of the past decade, there has been a gas glut as a result of growth in the financing of unconventional extraction, or hydraulic fracturing in the US, according to a blog by Nikos Tsafos with the research nonprofit Center for Strategic and International Studies last year.

Gas investors have rushed to build projects before governments pass decarbonization regulations that limit them, he said.

Investment options

While gas players argue more investment in their sector is needed, renewable energy companies say the market is sending a different signal: Investment is needed in biofuels and hydrogen.

This month's volatile gas prices point to the urgent need to diversify and decarbonize energy in the UK, according to the Association for Renewable Energy and Clean Technology (REA).

Renewable energy could be source of energy security, advocates argue. "The ever-present risk of high and volatile … gas prices demonstrates the importance of a diverse decarbonized energy system—using all the different renewable and clean technologies available to us, including bioenergy, energy storage and marine, all working together to ensure a resilient system and lowering exposure to international prices and lowering emissions," said Frank Gordon, director of policy at REA.

Renewable energy developers say they are poised to pick up the slack from the oil and gas industry. GA Drilling, a geothermal developer, wrote an article arguing that Europe's move from coal made it more "sensitive to the demand for LNG in China and the reduced gas supply from Russia," and renewable power like geothermal was a "viable long-term solution to this problem."

Birol agreed that the energy transition should continue. "Well-managed clean energy transitions are a solution to the issues that we are seeing in gas and electricity markets today—not the cause of them," he said.

EU legislators are currently mulling proposals targeting carbon neutrality including in bloc-wide power markets. In a January presentation, European Investment Bank President Werner Hoyer appeared to signal a shift in the bank's investment strategy when he said, "To put it mildly, gas is over."

Posted 23 September 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability