The Outlook for Natural Gas Demand in Europe
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June 2014 The Outlook for Natural Gas Demand in Europe Anouk Honoré OIES PAPER: NG 87 OIES Senior Research Fellow The contents of this paper are the author's sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2014 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-78467-003-0 June 2014: The Outlook for Natural Gas Demand in Europe 2 Acknowledgements My grateful thanks go to my colleagues at the Oxford Institute for Energy Studies (OIES) for their help and advice, and in particular Howard Rogers, Jonathan Stern and John Elkins for their careful reading, very helpful comments and editorial corrections of the draft. A big thank-you to the sponsors of the Natural Gas Research Programme (OIES)1 for their support and useful remarks, in particular Joshua Prentice from the Swedish Energy Agency for reading the whole draft and giving me valuable comments. I would also like to thank our colleagues from Gasunie and National Grid for their constructive remarks on the draft. It is a particularly difficult time to work on natural gas demand scenarios in Europe, and I am very grateful to everyone who accepted to share their opinions and knowledge with me. Last but not least, many thanks to Kate Teasdale and Hannah Shipton who made all the ar- rangements for the production of this paper. The contents of this paper do not necessarily represent the views of the OIES, our sponsors or of the people I have thanked in these acknowledgments. All the opinions expressed and any remaining errors are my sole responsibility. Anouk Honoré Oxford, June 2014 1 For more information about the OIES Natural Gas Research Programme, see http://www.oxfordenergy.org/gas-programme/ June 2014: The Outlook for Natural Gas Demand in Europe 3 Preface The discovery and development of European indigenous conventional natural gas came later than in North America, and in the 1960s and 1970s, it soon became evident that imports would be required to meet demand across the European geography. Northern European markets, closest to the onshore Dutch discoveries and those offshore the UK, Norway and Denmark were the first to develop at scale, displacing coal and oil products in the space heating and industrial sectors. These supplies were supplemented by import flows of pipeline gas from the Former Soviet Union and North Africa, and LNG supplies from a growing network of suppliers, allowing south and central European national markets to develop and grow. The widespread adoption of the highly efficient combined cycle gas turbine from the 1990s onwards provided an additional spur for European gas demand in the power sector, again taking market share from coal and oil products. In the early 2000s prospects for a continued healthy future growth of European gas demand seemed assured and industry participants took every opportunity to urge Russia in particular to ensure a brisk pace of upstream investment to meet the anticipated rapid growth in European demand for gas. Even before the financial crisis of 2008 and subsequent financial recession, European demand growth had slowed, however a product of both a maturing market, low population growth, higher gas prices (in large part due to the oil price linkage in much of its contracted imports) and the migration of manufacturing industry to other world regions. Assessing the long term prospects for European gas demand against this backdrop would be challenge enough. The additional dimensions of EU renewables and decarbonisation policy, the Large Combustion Plant Directive, the Industrial Emissions Directive, the German Energiewende and other country-specific policies and diverse national power generation mix ‘starting points’ take the challenge into ‘formidable’ territory, especially in the current uncertain post-economic crisis landscape. I am immensely grateful to Anouk Honoré for taking on this challenge and creating this paper which addresses all the major ‘known unknowns’ as far as this is possible. Her determination to apply a consistent analytical approach at a time of data flux and uncertainty is admirable and in keeping with the spirit of the OIES Gas Programme in producing quality research on gas markets of critical importance in terms of their place in the developing global gas system. In particular, readers will find in the appendix all the key assumptions set out in detail at a national level which, when aggregated, form the basis for Anouk’s demand outlook scenario. Howard Rogers Oxford, June 2014 June 2014: The Outlook for Natural Gas Demand in Europe 4 Table of contents ACKNOWLEDGEMENTS .................................................................................................................................... 3 PREFACE .......................................................................................................................................................... 4 TABLE OF CONTENTS........................................................................................................................................ 5 LIST OF FIGURES ............................................................................................................................................... 7 LIST OF TABLES ............................................................................................................................................... 10 LIST OF MAPS ................................................................................................................................................. 10 INTRODUCTION ............................................................................................................................................. 11 PURPOSE OF THE PAPER .................................................................................................................................... 11 STRUCTURE OF THE PAPER ................................................................................................................................. 12 I. NATURAL GAS DEMAND IN EUROPE: CHARACTERISTICS AND LATEST DEVELOPMENTS .............................. 13 1.1. A DIVERSIFIED AND MATURE MARKET ....................................................................................................... 13 1.1.1. The role of natural gas in total primary energy supply ............................................................ 13 1.1.2. Main characteristics of the gas market(s) .............................................................................. 14 1.1.3. A context of already slow demand growth ............................................................................. 15 1.2. THE ECONOMIC CRISIS OF 2009 AND ITS AFTERMATHS ................................................................................. 17 1.2.1. Economic crisis and GDP changes 2009-2013 ......................................................................... 17 1.2.2. Impacts on industry and energy/electricity demand ............................................................... 18 1.2.3. Impacts on gas demand ......................................................................................................... 18 1.3. THE POWER GENERATION SECTOR... AS THE MAIN DRIVER OF DECLINE .............................................................. 20 1.3.1. Rising renewables as part of the transition to low carbon economy ........................................ 20 1.3.2. Rising competition from coal due to effects of US shale gas and low CO2 prices ...................... 22 1.3.3. Change of the generation mix: major impacts on the CCGTs ................................................... 25 II. CHALLENGES AND OPPORTUNITIES IN THE 2010S AND 2020S.................................................................... 35 2.1. MAIN DRIVERS AND CONSTRAINTS............................................................................................................ 35 2.1.1 Economic growth and energy demand ................................................................................... 35 2.1.2. Gas prices: uncompetitive inside and outside Europe? ............................................................ 37 2.1.3. The role of energy policies: focus on the renewable and the CO2 targets ................................. 38 2.2. MAJOR CHANGES TO BE EXPECTED IN THE POWER SECTOR .............................................................................. 43 2.2.1. Expected changes in existing capacity .................................................................................... 43 2.2.1. Wrong market signals to invest in new gas capacity............................................................... 47 2.2.3. Is there a future for gas-fired power plants in Europe? ........................................................... 50 2.3. KEY ISSUES IN THE OTHER SECTORS: INDUSTRY, RESIDENTIAL AND COMMERCIAL, AND TRANSPORT ............................ 52 2.3.1. The industrial sector .............................................................................................................. 52 2.3.2. The residential and commercial sector ..................................................................................