Natural Gas Demand in Europe: What’s the medium-term scenario?

Gas demand in Europe has been characterized by extreme optimism and success when the business started to run in the early 60’s. After the discovery of the Groeningen gas field in the Netherlands in 1959, gas started to be seen as the potential centre of the energy policies not only for the country but for the whole continent.

Europe still remembers the year of exponential gas demand growth, largely driven by the expansion of gas in the power sector, in the 1990s and early 2000s. The investment in the sector were heavily supported by the newly liberalised markets.

Expectations of growing gas demand were largely undisputed, at least until 2008, when the major shock happened: the financial and economic crisis.

The energy world is, of course, not isolated from what happens in the rest of the economy, and after the financial breakdown, it seemed that gas demand in Europe could not recover to its pre-crisis levels. In fact, since then, gas has been losing its market share, especially in the power sector.

The market share of gas rose significantly from early 70’s to the first years of 2000, passing from 10 to 24%, and becoming a valid substitute for oil and coal in power generation. Obviously, the penetration of gas in the energy mix of the different European countries was quite jeopardized.

In countries such as the Netherlands, Italy, Hungary and UK gas touched a participation rate of 30% in the energy mix, while countries like France and Poland, historically know for relying on different power generation sources, counted on gas for a 15% of their energy mix.

The financial crisis and the consequent recession experienced by the market in 2008 reshaped the scenario for gas demand. As a result of the crisis many factories closed down, or reduced their output causing a sharp drop on commodities’ demand. It took a long time for European economies to go back to its pre-crisis levels.

Gas demand dropped by almost 6% in 2009, and by 2013 it was still below 5% with respect to 2008 levels, with the most affected markets being UK and Spain.

What is interesting to notice is that the power generation sector was the main driver of decline, counting a total loss in OECD Europe of almost 24% between 2008 and 2012.

Source: IEA

Apart from the economic downturn there is an amount of significant changes that somehow supported the fall in gas demand in the power generation sector.

First of all the environmental policies and the switching to the green economy. European countries have committed significant investment in renewable energies.
The development of renewables, and the investment on solar and wind power eroded part of the gas market share. From 2009, gas started to compete with coal, as fossil fuels plants are usually dispatched after nuclear, hydro and renewables, which are “must run” capacity with low marginal costs.

Source: IEA

Since 2011, the gas plant profit margin, also known as spark spread, dropped significantly in many countries, while coal plants remained pretty competitive during the same time, putting gas plants at disadvantage in the merit order.

No wonder why most of utilities decided to prefer coal to gas when it came to power generation.

The drop in CO2 prices worsen the competition between the two commodities, further strengthening the attractiveness of high emitting coal over gas. As the economic crisis depressed the need for emission, most of the Co2 emissions permits were distributed for free at that time, factor that generated a surplus of permits that the ETS system is still discounting. Consequently, CO2 prices fell sharply from 28 €/ton before the crisis, to 20 €/ton in 2011, down to be 5€/ton in 2017.

As results of all these changes – Low demand, gas competing against renewables and coal at the margin, drop in the price of CO2 emission permits- gas lost its market share in almost all European countries.

Only in 2016 a change in the trend was detected: gas demand growth accelerated in the fourth quarter of the year driven by low temperatures.

In the generation mix, gas gained momentum after the sharp rise of coal prices due to the drop in the Chinese production, the closure of some coal plants and the French nuclear issues. The low hydro availability experienced by many countries in Southern Europe also helped the increase of gas deliveries to the power sector.

Gas demand was higher in 24 of the 31 European countries, with the seven biggest markets demand (UK, Germany, France, Italy, the Netherlands, and Tureky) covering more than 80% of the total consumption.

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Is it then safe to think of a lasting recovery of the gas market?

It is difficult to give a one homogeneous scenario for gas demand across Europe. Every market has its own peculiarities, with various factors at play.

If we consider the role of gas in power generation, there is room for hope especially if we consider the following issues:

• The abundant supply of LNG that is coming back to Europe, after the drop of LNG prices in the Asian markets
• The switching from coal to gas, in order to meet the 2020 targets of CO2 emissions set by the Paris agreement. This topic is particularly sensitive for some countries in Europe, such as UK, Poland, Romania and Greece, that rely heavily on coal for power production
• The phase out of nuclear plants, again a sensitive topic for countries such as France and Germany
• The capability of renewables to fulfil the gap left by coal and nuclear power

In the medium term, gas seems to be in a favourable position, although it will have to “make its case”. Gas can be an excellent “transition solution” for most of the markets abovementioned. The reason is that it can save emissions now, backing up renewable intermittency and/or provide energy when other options are not sufficient.

Apart from the power generation sector, other sector like industrial, residential and transport show little signs of recovery. There some key issues limiting gas demand from these businesses.

In the case of these sectors the main factors affecting demand are:

• The weak economic recovery experienced by the EU, that does not allow companies to substantially increase their production and consequently their commodities demand.
• The energy savings and efficiency measures: less gas is used in production process. Energy efficiency has taken a central stage in many companies’ policies.
• The saturation of the markets: markets in Northern and Central Europe have already reached an important level of maturity. It will be quite unlikely to see a further expansion of gas demand in these economies. Except in few markets were small growth may happen at regional level, gas demand in the industrial sector will be flat or in decline by the end of the period.
• Transportation sector may experience a fast growth rate in the coming years, especially for what concerns the marine and the HGV sectors. Although the growing potential can be good, the base where it is coming from is too low to turn into a breakthrough for the gas market.

In conclusion, it is difficult to say that gas will experience a constant and smooth growth in demand in the coming years. The European markets have potentially very different paths, but considered the present scenario, there is room to believe that gas future growth will be modest in the coming years, with a low probability to go back to the 1990-2000s growth rates.

The transition towards a sustainable economy is also overwhelmed by an anti-gas sentiment, particularly true if we consider that even the greatest gas field in Europe, Groeningen, is going through a progressively shut down.

The change in the outlook will probably take time but, with all probabilities gas will turn into “the default fuel” in Europe backing the transition to a green economy.

Maria Mura | Energy Consultant