This article is part of our special report Gas storage in the energy transition.
Boasting 1,200 terawatt hours (TWh) of existing capacity, gas storage sites can be a formidable asset for Europe in the transition to a low-carbon economy, providing much-needed flexibility to a future energy system where gas and electricity will be more closely integrated, says Ilaria Conti.
Ilaria Conti is head of gas programme at the Florence School of Regulation, European University Institute. She spoke to EURACTIV’s energy and environment editor, Frédéric Simon.
- Gas storage remains a strategic issue for many countries, providing “insurance” in the event of a cold spell or a sudden supply cut
- But falling gas prices means there are fewer incentives to replenish stocks in the summer, which raises energy security issues
- In future, existing gas storage sites can easily be transformed to take low-carbon gases like hydrogen, at low cost
- Debate ongoing about whether power-to-gas installations should be considered a storage site or an energy generation facility.
How has the gas storage market evolved over time? What were the big trends in the past 10-20 years on that market?
Like for transmission pipelines, gas storage activities used to be vertically integrated with gas supply and generation activities before the Third Energy Regulatory Package was adopted in 2009. And now the two activities are supposed to be separate – or “unbundled” in EU legal jargon.
Now, like for transmission activities, the level of separation may still vary. Some Storage System Operators (SSOs) may be privately owned while others may be publicly owned, in part or in full. Additionally, access to storage can be regulated or negotiated.
You say storage is “supposed” to be separate from gas generation activities. Do you mean the unbundling process is not fully completed?
Just like for transmission activities, there are different levels of unbundling depending on the countries. Overall, we can say the process has been completed but there are some countries where it has gone further than others.
Additionally, SSOs can be publicly or privately owned. In Italy, for example, the main operator Stogit is part of SNAM (the gas TSO) which is partly public, but there are also 100% privately owned operators, like Edison Stoccaggio or Italgas.
So ownership unbundling has brought new operators on the storage market, which used to be dominated by state-owned companies, right?
Yes, that’s exactly the same trend that we saw in the transmission and distribution segment. Currently, we estimate that the largest majority of operators are privately owned and only a few are publicly-owned.
That also means increased competition on the gas storage market, which must be a good thing, I suppose?
Certainly, this is one of the benefits of liberalisation. On the other hand, liberalisation in the gas storage market has a different significance because it is strongly linked with security of supply and geography.
Gas storage remains a strategic issue for many countries, which may impose obligations for strategic reserves in case of a supply cut. In Hungary for example, there is a specific operator in charge of strategic storage.
Storage capacity in Europe is estimated at 1,200 terawatt hours (TWh). That must provide a welcome assurance in relation to exporting countries like Russia, correct?
The situation has dramatically changed over the past ten years. Gas is much cheaper now than a decade ago and that has considerably weakened the commercial value of storage.
Having gas storage sites full and ready to use was considered a great value for companies and for the states where the storage sites are located. Nowadays, with the declining price of gas, that value has fallen and storage sites have even become a financial burden in some cases, forcing some companies to close down unprofitable sites.
Still, the big value of storage today is in security of supply in case of disruption. It’s true that having European storage sites full is a relief for EU member states because we know we would be ready for a gas crisis, even though this would be enough for a couple of weeks maximum. All the simulations in the stress tests point in that direction, assessing European self-sufficiency by under harsh conditions like a two-week cold spell in winter time, for example, even when storage sites are completely full.
In a way, liberalisation has worked because prices have gone down. But it also had the undesirable effect of depressing the storage market, which forced closures in some cases…
It’s true that storage sites are planning to close down because they have become too costly and financially unsustainable. But I wouldn’t say liberalisation has worked because prices went down. It worked because we have a much better functioning market with harmonised rules and referenced pricing.
Gas prices used to be linked to oil prices but nowadays the main references are the hub prices in the UK and the Netherlands, where price formation is much more transparent. And this is one of the biggest achievements of the liberalisation process.
Prices went down as a consequence of liberalisation but it’s not the only reason. First among those is the European Commission’s push to aim for an energy mix based on renewable electricity. This has dimmed the long-term future prospects for gas demand in Europe.
Reducing Europe’s reliance on imported gas is good news, even though it brings worries for gas industry operators…
It depends on the point of view. Cheap prices are always welcome by final consumers. But there are other actors in the gas value chain, like Storage System Operators.
In fact, we are in front of a total paradox here – the gas storage paradox. On the one hand, the value of storage was clearly demonstrated last year during the cold spell – the ‘Beast from the East’. It was a clear demonstration that storage is still essential for security of supply in Europe.
But at the same time, that value of storage is not priced at the right level – there is currently a very low spread between summer and winter prices of storage. And therefore, there is no appropriate remuneration for operators to store gas when prices are low.
As an example, gas prices went through the roof after the cold spell but immediately dropped again afterwards. This is the gas storage paradox: prices go up when there is a need to tap into the storage sites. But there are no incentives to replenish them when the prices are low.
For gas storage, what’s the typical price fluctuation now between winter and summer? And how does it differ from ten years ago?
The summer and winter price spread at the TTF hub in the Netherlands used to go up to €10 or €12 in 2006-2007. Last year, it was around €2. And that’s too little incentive to invest in gas storage.
Looking ahead to 2050, the European Commission sees the future of gas as a complement to electricity. What will be the value of gas storage in such a hybrid energy system?
Traditional storage of natural gas will continue to play a role until 2030-35 and maybe a bit longer – mainly for supply security reasons, and also in a transition phase, as a backup to renewables.
So it’s important that the market recognises this insurance value and remunerates it. The ‘Beast from the East’ last year was a good example: Europe wouldn’t have been able to go through the cold spell without gas storage. So we should understand what the value is and properly remunerate it.
And that is something regulators can help achieve?
Yes, definitely – national regulators can help. But there needs to be political guidance at EU level to ensure consistency of the decisions taken with a long-term perspective.
Gas network operators say storage infrastructure will bring services to the future energy system – in terms of flexibility and in support of decarbonisation efforts. How can such “services” be rewarded in the future EU regulatory framework?
I would distinguish between the value that gas storage sites have at present – storing natural gas for supply security reasons – and the potential they will increasingly have in the future when it comes to storing other types of gas.
If you assume fossil fuels will be phased out by 2050, including natural gas, it’s important to remember that existing storage sites can be transformed to store other types of gas, at low cost. So in this sense, the potential they have is big. And this is particularly the case if the European Commission wants to promote investments in renewable gases and hydrogen.
You mentioned hydrogen. The European Commission says an energy system based on renewables will require a lot of green hydrogen and power-to-gas facilities. What are the key principles that policymakers should observe when regulating this sector?
There are two different dimensions. Natural gas is currently abundant whereas renewable gases – biogas, biomethane and hydrogen – are still in limited supply at the moment. So one of the first thing is to evaluate the real potential of these renewable and low-carbon gases.
One of the main features of the gas storage system today is that it is sizeable and can be tapped rapidly. But it’s not clear yet whether the future energy storage system will manage to keep this essential feature.
Then, future power-to-gas installations are still pilot projects. They will need to demonstrate how easily they can be activated for the needs of the energy system, which will become more volatile because of variations in renewable electricity coming from wind and solar.
So gas storage today has a real backup value. But it’s not clear yet what value it will have in the future, because technology is in constant evolution and the pace of change has proved unpredictable in the past.
In a way, you’re saying the future value of gas needs to be properly evaluated, which hasn’t been done until now.
The figures aren’t clear yet for renewable gas. There are a lot of studies but they all come up with different figures. If you take biogas, at the moment, production is very limited. In France, it represents only 1% of energy use. But some estimations indicate that in a couple of years, this could go up to 10%. And even though it’s a big increase, it’s only a small percentage of the total energy consumption.
So we have to understand the magnitude of the resources we’re talking about. Of course, new technologies will bring substantial changes to those numbers but at the moment it’s very difficult to have a clear assessment.
The jury is still out about future volumes of renewable and low-carbon gases. But the value they can bring to the wider energy system – has this been evaluated at all?
There is no definitive study yet. But in terms of decarbonisation, there is no discussion – switching to renewable gas brings unquestionable value.
What remains to be carefully assessed is how to extract this value at sufficiently low cost for society. And that is still being assessed at the moment. There are some promising technologies to get carbon emissions from energy down to zero but the choices that will be made in the next 5-10 years will be decisive. And those need to be based on a careful cost-benefit analysis.
Existing gas storage facilities don’t need much upgrading to host hydrogen or renewable gases. And that is a big advantage in the overall cost-benefit analysis, right?
Yes, that will be an advantage, definitely. But there is an ongoing discussion about how power-to-gas and hydrogen installations should be considered when they are being used as a storage site. Are they a storage site or an energy generation facility? And that has an important impact on how they will be regulated.
The EU’s internal energy market rules stipulate that gas transmission assets should be separated from generation assets, along the principles of ‘ownership unbundling’.
But how do we consider power-to-gas installations? Are they a transmission asset or a small energy production site? Depending on the answer, unbundling rules will prevent some operators from owning these facilities or manage them.
These are all valid questions for which there are no clear answers yet.
What are the options? If power-to-gas facilities are somewhere between transmission and generation, could a separate category be created for them?
Well, that’s one possibility. Or more traditionally, regulators could decide that only transmission system operators should be allowed to manage power-to-gas facilities. Because at the end of the day, TSOs are the ones making the biggest investments in these kinds of projects.
So you think TSOs should be allowed to enter the power-to-gas market?
The answer to that question is not clear, it’s still being debated. I tend to be in favour of transition measures. If it’s not possible to create a third category or make an amendment to the third gas directive, then one option could be to allow TSOs or DSOs to manage these facilities during a transition period. And then make regulatory decisions later when the market has developed. Because power-to-gas is still a nascent technology so it may be wiser to wait before regulating this sector.
Do you see a risk that TSOs rapidly dominate the power-to-gas market and become monopolistic?
I think it’s a matter of fairness. There has been a similar discussion with hydropower plants. TSOs are only in charge of managing hydro facilities because they are part of the transmission network and transmission is a monopoly by nature. So TSOs are asked to manage the system for the benefit of all. But the moment they become the owners of capacity, this changes things and might distort the market. TSOs are not supposed to enter the power generation market, except for network safety reasons.
This is why I think a transition period where TSOs manage power-to-gas facilities could help grow the market in the beginning.
In the short term, switching from coal to gas brings rapid emission cuts. But over time, the EU aims for net-zero emissions. So how can policymakers design regulations that will ensure a carbon lock-in is avoided?
I do not see a big threat of carbon lock-in. The way ahead is pretty clear: calls for decarbonisation are so strong that all efforts are focused on making the transition as smooth as possible.
Everybody is preparing for a changing energy system. There are some clear signs from the big oil and gas majors who have started diversifying into renewable energies some years ago. And new synergies are being found between sectors to push the decarbonisation agenda – in energy, transport and even agriculture. And the interactions between those sectors will become stronger and stronger.
To achieve that, you have to stop thinking in terms of commodities – gas versus electricity – and start thinking in terms of energy carriers. And along that view, it doesn’t really matter anymore how the energy is being transmitted, as long as it comes from renewable or low-carbon sources.
Environmentalists have called on the Commission to stop funding gas infrastructure for fear that it will prolong fossil fuels. Are you saying they are misguided in this case?
I understand the fears of environmentalists and I understand where they see the risk. But I believe a transition by all means is necessary. So I think all support to gas infrastructure should be seen in a temporary perspective, for a transition period.
It’s obvious that we cannot jump straight into a fully decarbonised system so a transition will be necessary in any case. And that transition will not take 5 years, it will take at least 20-25 years. So we have to make the transition as smooth as possible, and at a cost which is affordable for society. And if natural gas, in the transition period, brings energy security at an affordable price, then why not?
But the question then is how much these new types of gas contribute to decarbonisation. Because biomethane and hydrogen, depending on where they come from, don’t have the same carbon footprint.
That’s true. There is also the issue of methane emissions. These don’t come only from fossil fuels, but also potentially from the future types of renewable or low-carbon gases. I’m thinking of blue hydrogen with carbon capture and storage but also from biomethane and even biogas. Leakages can happen at any point
What the Commission often says is that if we don’t solve the issue of methane emissions, then basically all the efforts in reducing CO2 will be in vain. It’s such a big issue that it might compromise efforts made in other parts of the economy. And this is an issue that needs to be looked at because it won’t get solved automatically.