Flagship reports

Ivan Pavlovic, Radek Jan

Executive summary

 

•   The reflection into the possible complementarity between gas assets and electricity assets fits into initiatives that have been launched to combat climate change, in particular further to the 2015 Paris Agreement. One of the objectives of this Agreement is to avoid dangerous climate change by “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels”. The widely-held view within the scientific community is that achieving this objective implies achieving carbon neutrality by 2050, before going on to reverse the global carbon footprint (i.e. negative carbon emissions in the second half of the 21st century).

 


•   The Paris Agreement has led to an intensification of energy transition initiatives in many countries. These initiatives can be defined as a reconfiguration by the public authorities of existing energy systems aimed at a decarbonisation of the economy. This pathway to zero-carbon has two financial implications: for new assets, a rechanneling of capital into less carbon-intensive infrastructures; and, for existing assets, the risk of stranded costs given the assets’ lesser merit in the new energy system. Under development by the Technical Expert Group (TEG) set up by the European Commission to serve as the foundation for the elaboration of an EU Green Bond Standard, the EU’s so-called taxonomy fits perfectly in this process. Its purpose is not to draw up a list of “green” and “non-green” activities, but rather to define conditions under which certain activities can be considered as sustainable at environmental level, in other words that will contribute to the carbon neutrality objective set for 2050. The EU taxonomy therefore offers an energy transition “toolbox” that is both holistic and coherent. In this approach, what stands out is: (i) the central role ascribed to the electricity sector in the decarbonisation of the European economy (notably in the transport sector), along with (ii) the de facto exclusion of fossil fuels (oil, coal, natural gas) from activities considered to be sustainable given the emission thresholds set by the TEG (100g CO2e/KWh currently, declining to zero in 2050). From this standpoint, the energy scenarios drawn up by the International Energy Agency (IEA) propose less “disruptive” perspectives, highlighting two key trends: (i) one is the growing electrification of energy systems, but also (ii) the still preponderant place of fossil fuels in the primary mix. Theoretically the one most closely aligned with the Paris Agreement’s “well below 2° centigrade” climate goal, the EIA’s Sustainable Development Scenario (SDS) anticipates that fossil fuels will still account for a significant proportion of the primary mix (around 60%), the intention being to reduce gradually their carbon footprintthrough carbon capture & storage (CCS) technology.

 


•   These potentially different strategies for energy systems in turn cast much doubt as to the extent of the complementarity that will exist between gas assets and electricity assets in the future. However, what we would point out first of all is that an observation of energy policies currently being pursued in OECD countries indicates that the probability is slight there will be a mass rollout of disruptive initiatives in the foreseeable future (i.e. before 2030). Rather, what is being witnessed at the moment is a gradual exit from coal and oil, through increased complementarity between gas and electricity, involving mainly; (i) the substitution of coal by gas in electricity generation, a case in point being Spain, which, at the start of the year, ended government subsidies to the country’s coal mines; and (ii) the introduction of capacity systems, as done in Germany, in favour of specific gas-fired power plants to ensure the operational security of the electricity system on the supply side in the context of the ramping up of renewable energies, which by nature are intermittent. This gradual transformation of energy systems should not be allowed to mask the emergence of new technologies that are potentially more disruptive. One is biomethane and even more so “green” hydrogen, these offering the prospect of using gases that are both renewable and a totally carbon-free source of energy.
 

 

•   However, the emergence of these alternative sources of energy is a slow process, as underlined by the investment plans of the main players in the European gas infrastructure industry (i.e. transmission system operators, storage system facilities and methane terminal operators). An analysis of the capital expenditure programmes of Enagas, Engie, Fluxys, Gasunie and Snam reveals that investments in biomethane and hydrogen are very limited, the only notable initiatives being of rather limited scale or in the form of pilot projects to evaluate as yet untested processes (one example being the proposed conversion of one gas turbine at the Magnum power plant in the Netherlands to run on hydrogen as part of the partnership between Gasunie, Vattenfalland Equinor).

 


•   This initiative does have, however, the merit of underlining the prospects offered by “green” hydrogen, namely hydrogen produced via electrolysis from renewable energy sources. This decarbonised process is in stark contrast to steam methane reformation (SMR), which is more efficient financially, but carbon intensive given the inputs (natural gas or coal). Green hydrogen opens the way for the integrated management of electricity and gas value chains. Once electrolysis has reached commercial viability vis-à-vis SMR, one could imagine a system where, in theory, electricity generated produced by wind or solar power plants could, depending on market conditions, be injected into high or medium voltage grids, or supplied to power electrolysers for the decarbonised production of hydrogen for which there would be multiple end-uses in both the industrial sector (production of plastics, ammonia, glass, etc.) and energy sector, alternatively after being injected into infrastructures (networks, underground storage facilities), serve a variety of purposes (mobility, used by vehicles powered by fuel cells, electricity generation, domestic heating, etc.). Better still, as it could potentially be injected into gas infrastructures, green hydrogen could in fact offer a large-scale storage solution for electricity generated from intermittent sources, which otherwise risk destabilising the electricity system.

 


•   Offering a “systemic” answer for the decarbonisation of the economy, green hydrogen’s development comes with potentially significant implications for the different assets making up contemporary energy systems. It is in the gas sector that the associated risk of stranded costs is most significant, with infrastructure assets chiefly exposed. This stems from hydrogen’s properties, as injections into natural gas networks and storage facilities in proportions exceeding 20% will be problematic. On the other hand, for decarbonised electricity generation assets, green hydrogen’s development offers the prospect of new complementarities between gas and electricity. For renewable energies, and as indicated above, hydrogen not only addresses the physical challenge posed by their intermittence, but will also attenuate attendant financial risks, by: (i) creating new potential sources of demand emanating from the industrial and mobility sectors; (ii) curbing volatility in the electricity wholesale markets; and (iii) reducing the risk of curtailment or subsidy suppression for assets in receipt of state aid in the event wholesale prices fall into negative territory, etc. Furthermore, electrolysis reaching commercial viability offers a possible outlet for the production of nuclear power plants.


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