1. Challenges for Natural Gas in the Context of the Energy Union
Prof. Chloe Le Coq, CERRE and Stockholm School of Economics
Prof. Sebastian Schwenen, CERRE and Technical University of Munich
CERRE Executive Seminar
07 March 2017

2. Outline of the Report
1. Uncertain Times for Natural Gas
2. Recent Market Developments
3. Regulatory Uncertainty
4. Challenges ahead
5. Recommendations

3. 1. Uncertain Times for Natural Gas
The role of natural gas in the EU’s energy future is unclear:
Gas often viewed as the fossil fuel candidate to support the energy transition
Low-carbon footprint relative to coal
Beneficial in terms of sustainability
New supply sources and origins of import
Beneficial in terms of security of supply and affordability
Yet, role of gas unclear
Recent market developments
Regulatory uncertainty

4. 2. Recent Market Developments: Demand
Increase in EU gas demand in 2015, but varying trend by sector:
Power market:
Competition with other fossil fuels (coal)
As renewable back-up: competition with storage, demand, VPPs, interconnectors, …
Future deployment of nuclear, availability of CCS
Heating market:
Market penetration of renewable heating technology
Development of energy efficiency in buildings
Transport:
Alternative fuels in transport?
By Member State AND by sector:
Power market:
Shale and US coal story
Nuclear in France and Germany, Fukushima
CCS: maybe have a good example here of how costly it is
Mention that back-up needs overall may decline if balancing becomes better across borders
Heatint market:
Mention that this also differs by MS
Mention EU directives

5. 2. Recent Market Developments: Supply
Abundant supply, different levels of reliability and affordability:
Origins:
Decreasing EU production, shale in the EU?
Abundance of natural gas at global level, but limited number of suppliers
Diversification gas transport routes:
Reverse flows
LNG
Storage
Import prices:
Import prices differ by origin (LNG as price cap for pipeline gas)
Open how we substitue falling EU production
US LNG could be discussed under diversification

6. 2. Recent Market Developments: Price
Taken from BP (2016).
Open how we substitue falling EU production
US LNG could be discussed under diversification

7. 3. Regulatory Uncertainty
Organizing competitive markets:
Usual reply to uncertainty is to write long-term contracts
In recent years, move to short-termism observed
Short-term market design still “under review”
Ensuring security of supply:
Reliance on natural gas differs across the EU
Implementation of solidarity rule may depend on political will

8. 3. Regulatory Uncertainty cont’d
Achieving sustainability:
Efforts to implement “high” carbon prices differ across Member States
Together with oversupply of allowances, persistently low ETS price
National ETS price floor initiatives
Might boost demand for natural gas again
Depending on implementation of winter package proposals, support for
Renewable deployment in power and heating sectors
Energy efficiency measures
Use of gas in transport

9. 4. Challenges ahead Supply and Demand Risk Infrastructure Development
Regulation
Incentives for low-carbon (gas-fired) power generation
Facilitating short-term gas trading
Development of diversified gas transport
Efficient use and provision of infrastructure
Gas Sector
Understand future gas needs
Innovation in infrastructure usage

10. 5. Recommendations (Market Regulation)
Avoid “too low” ETS prices to incentivize gas-fired generation
Power market key driver of gas demand
Currently, favourable-to-coal carbon content of gas undervalued
Better integration of liquid gas and power markets
Guarantee liquid virtual gas hubs (where needed)
Allow for active short-term market trading, holds especially for trades close to delivery and system operation
On power markets, allow for energy prices to recover costs

11. 5. Recommendations (Infrastructure Regulation)
Diversification of import routes
Via local infrastructure investments , e.g. Central and Eastern Europe
Assessment of network capacity allocation
Review efficiency of current system within entry/exit regime (Target Model)
Make rich data available in allocation processes
Amortization time for gas networks
Avoid stranded assets
Avoid vicious circle of consumer leaving market prematurely

12. 5. Recommendations (Gas Sector)
Invest in innovative gas products
Biogas and biomethane
Hydrogen
CCS
Innovative usage of infrastructure
Possibility to use existing infrastructure for transporting hydrogen