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Should natural gas still be considered a transition fuel?
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Should natural gas still be considered a transition fuel?

December 16, 2022
According to gas and oil companies, natural gas has “enormous potential” to reduce near-term CO2 emissions and air pollution by using gas instead of coal.

Source: Connected Energy Solutions

However, while some see gas as the transition fuel necessary to bridge the gap until renewables can take up the baton, others view the idea as anathema to the transition, as natural gas is still a fossil fuel. With the global energy crisis and war in Europe, the conversation around whether natural gas should be considered a transition fuel hangs in the balance. 

Companies such as Shell say that gas is now so widely available through LNG (liquefied natural gas) – natural gas that has been cooled down to liquid form for ease of non-pressurised storage or transport – it can help countries deal with short-term supply disruptions, and provide a lower-emission alternative to diesel and heavy fuel oil in the transportation sector. In Japan, for example, the country turned to LNG to make up much of its lost electricity supply after the Fukushima nuclear disaster. 

Additionally, they highlight a report from the International Energy Agency which shows that in some cases, gas is cheaper to produce than coal. The most efficient gas-fired plant has investment costs of $1100 per kilowatt, compared with $3700 for the most efficient coal-fired plant. 

Also advocating for natural gas to be used as a transition fuel is Gabor Molnar, head of renewable business development at MET Group. He says that, given the huge potential difference between the increasingly renewables-generated power supply and demand, we still need conventional power generation units to maintain network stability when renewables are not available. 

“Within the conventional power generators, gas-fired power plants are considered to be the most flexible ones, hence they are the best positioned to support the green transition by being able to quickly and reliably supply power at the times needed.”  

According to Molnar, compared to other conventional power generation types such as coal and oil, the gas-fired power plants emit substantially lower levels of greenhouse gases. This is supported by statistics from Shell, who say that natural gas emits between 45 per cent and 55 per cent lower greenhouse gas emissions than coal when used to generate electricity. 

“Until new, flexible power generation and storage technologies, such as green hydrogen and battery storage, mature and roll-out and massive scale, gas-fired power generation is the best available option we have to enable more renewable power integration, stability of power supply, and cost efficiency,” continues Molnar.  

“In addition, several new technologies are currently in development to decarbonise conventional fuel such as natural gas, for instance to produce so-called ‘turquoise hydrogen’ for industrial processes instead of natural gas, and at the same time fully capture the produced carbon residual in its solid form. As such, this solid carbon is then used as valuable raw material in construction components, like carbon filaments in buildings, meaning that no climate-damaging carbon emissions are emitted.” 

Geopolitics is changing the conversation 

The conversation, however, is changing. The war in Ukraine has led to record price spikes for natural gas, creating great uncertainty in energy markets as Russian pipeline gas supplies have been almost completely curtailed. 

In October and November of this year, the European Commission proposed a series of measures to curb these price spikes, including a wholesale gas price cap, joint purchasing of gas, and the calculation of a European LNG price benchmark by the European energy regulator. 

An assessment of these proposals by the Oxford Institute for Energy Studies found that wholesale price caps will make it more difficult to balance supply and demand until more LNG supply becomes available; will likely benefit richer households and energy inefficient companies; may reduce competition within wholesale gas markets, making it likely prices will remain higher for longer; and, crucially, could jeopardise security of supply if less gas flows to the EU, or by harming intra-EU gas flows. 

Time spent on discussing gas price caps has a real opportunity cost for European energy markets, the report continues, as proposals do nothing to solve the fundamental problem underlying price increases. Time would be better spent, it says, on measures which reduce gas demand or support those who suffer most from high gas prices, including targeted subsidies to vulnerable households and specific industry sectors, or investments in energy efficiency, energy storage, and alternate energy sources. 

“The current gas supply crisis could, and should, provide a boost to the EU’s efforts to decarbonize via greater use of renewables, and improved energy efficiency,” says Alex Barnes, senior visiting research fellow at the Oxford Institute for Energy Studies, in the report’s conclusion. “The Commission has published many increased targets in this regard, for example as part of the REPowerEU Communication. But a lot more work is required to ensure that these targets can be met, in terms of effective market design and financial support for new technologies such as electricity storage. Policy makers’ time would be far better spent on such efforts. Measures which distort the gas market, such as price caps which increase demand and discourage supply, should be avoided.” 

Carbon Price Index 

This only become more apparent when you consider that the price of enabling these alternate energy sources has dipped below the cost of new gas infrastructure for the first time. In his post, ‘Fuel switching 2.0: Carbon Price Index for Coal-to-Clean Electricity’, Matthew Gray, co-founder and CEO at Transition Zero, says that carbon pricing, whether through trading or taxes, is considered one of the most important policies to reduce emissions. A price on carbon increases the operating costs of high carbon fuels relative to lower-carbon alternatives. 

Gray introduces the ‘Coal-to-Clean Carbon Price Index’ (C2PI), which approximates the carbon price required to leapfrog fossil gas and support an electricity system predominantly supplied by variable renewable energy. The Index shows how the carbon price to switch from coal-to-gas, and from coal-to-clean, has consistently narrowed between 2010 and 2022.  

According to their most recent Coal-to-Clean Price Index (C3PI) data from April 2022, which tracks the carbon price required to incentivise fuel switching, coal-to-gas came in at $488/tCO2, and coal-to-clean came in at -$44/tCO2. 

“While commodity prices will continue to go up and down with investment cycles and geopolitics, supply chain disruptions and dated market regulations have highlighted the energy insecurity issues associated with coal and fossil gas,” writes Gray. “There are several reasons why this volatility could continue into the future, independent of Russian aggression in Europe. For one, investment cycles are likely to continue to shorten as producers remain under pressure from investors and policymakers to avoid stranded assets from overinvestment. And secondly, trade bans from Indonesia and the EU imply that trade is increasingly used to support energy security and enforce environmental goals. 

“Zero-carbon technologies are not immune to supply chain gyrations, but they are unlikely to suffer from the same volatility as fossil fuels due to the fact that they have near-zero marginal costs” Gray concludes. “For this reason, these technologies need to be at the heart of supply-side strategies to reduce the impact of the energy crisis.” 

With no sign of an end to the war in Ukraine, and an energy crisis that will continue on the back of it, the argument in favour of using fossil-gas as a transition fuel seems to be losing momentum.