Upgrading the EU gas market: the ultimate challenge?
November 2018 Topic of the Month by Ilaria Conti (FSR)
Part I: Target number one: “decarbonisation”
The latest European Gas Regulatory Forum, which took place in Madrid on 16–17 October 2018, stood out from the previous ones. Time will tell if, to some extent, it will be remembered as historic.
It was the Madrid Forum where the focus of discussion shifted from “gas” to “gases” — plural.
It was also the Madrid Forum where, for the first time, the electricity sector was represented and invited to discuss on equal footing — a very first practical implementation test for “sector coupling”.
But, above all, it was the Madrid Forum where the word “decarbonisation” vehemently entered and steered the debate over the course of the two days — to remain, probably forever.
Furthermore, an additional — yet not marginal — issue was brought to the table. Decarbonisation will not only mean reducing CO2, but also methane emissions. Methane leakage from all gas transported worldwide is around 3% — a pretty serious issue which might compromise climate policy efforts and that the EU Commission is planning to address in a joint effort between DG Energy, DG Climate and DG Environment. Just two days before the Madrid Forum, a FSR-GIE workshop addressed this issue.
From (conventional) gas to (renewable) gases
Abating CO2 emissions and “greening” the energy mix has been a firm European energy policy target for the last 15 years. In a relatively short time, the EU electricity system went through a deep (and ongoing) transformation to accept and integrate (not effortlessly) an increasing share of energy produced from renewable sources.
Today’s news is that, in the next years, this is due to become a target also for the EU gas system.
The European Commission at the XXXIst Madrid Forum has indeed renewed its serious commitment to pursuing the ambitious post-2020 targets outlined in the revised Renewable Energy Directive and included in the 2016’s Clean Energy for all European citizens package.
Traditional (or conventional) gas will need to make space for gas produced from renewable sources and to other energy carriers originating from processes such as anaerobic digestion, electrolysis or methanation: biogas, biomethane, green hydrogen and synthetic natural gas (SNC).
Source: European Commission, October 2018
This did not take the FSR by surprise, as we dedicated a Topic of the Month , a workshop and a Policy Brief to “Renewable gas” this year.
Until recently, the share of so-called renewable gas (mostly biogas) in the EU gas market has been very limited (around 4%) but the estimated potential for renewable or “low carbon” gases are impressive. Discussions will now need to go more in-depth on existing technical limitations and how to overcome them, cost-benefit analysis and, last but not least, on how to regulate (and support) this blooming potential.
Conclusions: new role for gas(es), hence new challenges
Decarbonisation is and will be the driving ratio for future EU energy policy initiatives — so much so that it was declared a “no-regret option in the Forum conclusions.
The shift to these “new targets” for the gas system implies a re-assessment of the future role of gas (both renewable and conventional) in the EU energy mix. Last year, several studies (EU Commission’s Quo Vadis, CEER’s FROG study — just to mention two of those) investigated the issue and provided possible — sometimes more realistic, sometimes less — development scenarios for the EU gas market (see our Topic of the month on the EU Gas market’s “snake’s dilemma”).
The discussion on the role of gas quickly moved from “Gas as a back-up fuel?” to “Gas as a destination fuel?” and now, “Gas as a decarbonised fuel”.
One year, a few studies and several workshops later, my main takeaways are the following:
- Decarbonisation calls for the coupling or integration of the gas sector with electricity and other sectors (more details on this will come in the 2nd instalment of this Topic of the Month)
- Integration with other sectors will be welcome and might lead to win-win outcomes. Transport is an obvious sector to be increasingly integrated with gas and electricity.
- However, electrification is not the right answer to achieve decarbonisation and an all-electric system is less efficient than an integrated one (estimated savings for Europe ranging from 94 to 138 billion euros per year according to Poyry and Ecofys studies)
- Power-to-Gas technology currently seems to be the preferred or most viable instrument to achieve decarbonisation via sector coupling (see our new Policy Brief on this topic).
As we turn a new page in the history of the European Gas market, all stakeholders should assess what the existing challenges are and how to overcome them. A lesson can certainly be taken from the electricity sector about the potential threats of embracing the “green wave” with too much enthusiasm and too little quantitative analysis on technical limits, costs and opportunities. On the other hand, meeting the renewable and decarbonisation targets is essential and will ensure a more sustainable future for all European citizens. The big challenge in the short term will consist in making the right regulatory and economic choices so that the efforts to reach those targets are also made socially sustainable.
Part II: Sector coupling and sector integration[1]
It is now widely understood that a full decarbonisation of the EU energy system cannot be achieved without coupling the electricity and gas sectors as well as closer integration with other sectors (namely transport and heating). The debate is now shifting focus on how to reach these targets in a sustainable way — or with the least harmful impact.
So where do we start? Various challenges in these processes lay at the infrastructure and regulatory levels.
In 2017, the Florence School of Regulation started looking into these topics, with a workshop on the possible “interaction” between electricity and gas networks. As explained in the workshop’s Conclusions video, we focused on the regulatory questions that coupling gas and electricity might generate: how to harmonise and coordinate frameworks — as to avoid, for example, multiple charging for the same capacity transported cross-border or across networks in a different form (electricity, hydrogen, gas). A few months earlier, a joint (or shall we say “coupled”?) FSR Energy+ FSR Transport workshop on Electric vehicles had debated the functioning marriage between electricity and mobility, and on the implications of the use of batteries for electricity storage. This year, another FSR workshop addressed the challenges posed by network development and system operation in coupling the power and gas infrastructure more specifically. It particularly focused on the utilisation of so-called “Power-to-gas” technology.
Decarbonisation does not rhyme with electrification
According to DecarbEurope 2017 Report, “switching the most-energy intensive industries in Europe from fossil fuels to electricity would allow saving approximately 5 billion tons of CO2 by 2050”.
But is electrification the way forward? Probably not. At the Madrid Forum last October, few studies[2] comparing the costs and benefits of an all-electric system versus a hybrid one were presented. All the studies concluded that the latter is a more efficient option. Electrification appeared as a pretty single-minded and superficial answer to the question “How to make sector coupling work?”.
Moreover, a total switch to electricity currently seems like an unsustainable choice: a study by Cerre concludes that the planned growth in RES is insufficient to meet the future electricity demand because of the expected electrification of heat and transport. Also, because of the volatile nature of RES electricity, the contribution of other back-up generation sources would remain essential in terms of system stability.
Power-to-gas, the technological bridge?
Power-to-gas (P2G) is the technology which allows for the conversion of electricity into hydrogen via electrolysis and then into synthetic methane via methanation. A few pilot P2G installations are already operating and are connected to the distribution network in some EU countries (France, Germany, Denmark etc.). P2G technology is currently observed as one of the main enablers of the energy transition towards a more and more integrated energy system. Nevertheless, further research and testing about their real potential in terms of costs-benefits seems to be essential at this early stage.
Conclusions: Why coupling?
The sector coupling experiment will not only result in a more decarbonised environment. As a recent FSR Policy Brief also suggests, the whole energy system will benefit in terms of network optimisation and efficiency. The synthetic methane generated through Power-to-gas technology is not much different from natural gas, hence fit for transport via the existing gas networks. Additionally, turning electricity (or gas) into hydrogen will make it applicable to other sectors (heating, transport) in a sustainable way.
However, sector coupling will not just happen by itself.
The very first step for the achievement of common results will require setting aside our traditional silos-structured mindset and re-thinking the energy system in a different way. The energy dictionary of the future will certainly impose the use of new words such as “energy carrier” and “hybrid system” instead of “commodity” and “power/gas networks”.
Finally, one should not forget that the current debate on sector coupling and sector integration is no doubt the son of digitalisation and “democratisation.” These disruptive trends will continue shaping the energy market in different and sometimes unpredictable ways.
The huge potential represented by the increasing application of digitalisation and platforms might facilitate and speed up the creation of “bridges” between the sectors and should therefore not be underestimated in this picture.
[1] While no widely-accepted definition of sector coupling exists as of yet, in this article I will refer to sector coupling as the process of interconnecting electricity and gas. I will refer to “sector integration” as the interaction between electricity and gas with other sectors (i.e. electricity and transport, gas and transport, electricity and gas with heating etc).
[2] See OGE- Amprion, CERRE, ENTSOG and Eurogas presentations at the 31st Madrid Forum
Part III: Does the “coupled dimension” imply a greater flexibility gap?
Flexibility is not a new term. It entered the energy debate when the amount of RES-based injections into the electricity network became considerable and brought new opportunities as well as new challenges (see FSR workshop in 2015). In a transitional energy system largely based on intermittent electricity generation (such as renewable electricity), the possibility of keeping a continuous flow of energy becomes a vital issue for the safety and reliability of the energy system. Therefore, the need for flexibility becomes an indispensable element also in the transition towards a coupled/integrated energy sector.
We can identify at least three aspects or “dimensions” of the flexibility dilemma, which concerns how to integrate intermittent RES with baseload generation (or with batteries/storage) as efficiently as possible.
- First, it is essential to assess which flexibility sources and infrastructure would best provide “back up” services (storage? gas-fired power plants? nuclear?)
- Second, the debate on flexibility in the electricity sector is often linked to a “management question”: who is in charge of managing flexibility in the electricity grid? TSOs, DSOs? Or should a third actor activate/monitor the switch? Despite having been addressed in the recent EU Clean Energy Package, the topic is still pretty much open (Read recent FSR publications) to further elaboration in a hybrid system.
- Third, if flexibility has a value for the system — should it be regulated and remunerated (and, if so, how? via Capacity Remuneration Mechanisms (CRMs)?) or should the market simply be allowed to generate its value?
By transposing these dimensions onto the gas sector and coupling process, the flexibility dilemma can only grow in size and complexity. Not only because the number of actors involved (from both sectors) increases, but also because regulators and policymakers are challenged to make decisions on a future system and on future technologies which haven’t been thoroughly tested yet in complex systems (i.e. P2G).
The debates revolving around “which flexibility sources” extend to become hybrid RES (=electricity+gas, also intermittent, or hydrogen) versus “available conventional gas” (storage, LNG, CCS, CCU) and how they can cooperate. How can this interaction be virtuous while keeping in mind system efficiency, on one side, and the well-traced decarbonisation path on the other side?
Additionally, the infrastructure dimension will include another fundamental question: which new infrastructure will ensure greater flexibility? The calculation of the flexibility value needs to be re-assessed based on the concept of a hybrid system: which existing (gas or electricity) infrastructure is worth being dismantled and which can best exploit the flexibility value in a coupled system? Is hydrogen a sufficiently flexible energy carrier? Which hybrid sources can be stored and are easy to access/use/inject into the system?
In an attempt to answer some of these questions, the EU Commission launched a critical study to assess “The role of Trans-European infrastructure in the light of the 2050 decarbonisation targets”, whose findings were presented in Madrid last October. Also, the International Association of Oil & Gas Producers (IOGP) was invited by the Latest Madrid Forum to coordinate an analysis of the potential of Carbon Capture and Storage and Carbon Capture and Utilisation technologies.
FSR contributes to this debate by looking into the potential and perspectives of conventional gas in the energy transition: in July we organised a workshop on the role of storage and next week we will host an online debate on the perspectives for LNG in the energy transition.
Concerning the value of flexibility in a coupled system, I very much agree with Jean Michel Glachant’s view that the system and insurance values provided by the gas sector do foster (potentially greater and greater) flexibility to the whole energy system and, as such, this value cannot be ignored. This shouldn’t necessarily be understood as a plea for subsidies, but rather as an invitation to regulators and policymakers to openly recognise the role of each of the sources that are currently available. Although the decarbonisation route is traced now, the infrastructure supporting “conventional” technologies are still largely functioning, economically efficient and could, therefore, be useful in the path to a decarbonised energy sector. Ignoring their existence and forgetting their cost for the operators won’t help or accelerate the energy transition — and might rather have the adverse effect of slowing it down.
To conclude, sector coupling and the decarbonisation targets oblige a re-assessment of the role and value of flexibility for the energy system. While some lessons can be learnt from the flexibility debate in the electricity sector, assessing how to ensure flexibility in a coupled, hybrid system obliges to a greater effort. This will imply a careful cost-benefit analysis of the flexibility instruments and sources that are currently available, as well as of the potential brought by new technologies.
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