Academic: We are probably entering a long period of high gas prices

The gas crisis provides an opportunity to accelerate existing policies – such as the diversification of gas supplies, electrification, energy efficiency, and hydrogen development, says Ilaria Conti. [63ru78 / Shutterstock]

This article is part of our special report Gas decarbonisation.

With Russia’s war in Ukraine, the European Union is probably entering a prolonged period of high gas prices, warns Ilaria Conti, saying the EU should use the crisis to mandate a storage obligation on EU member states and push for higher targets on renewable energy.

Ilaria Conti is head of the gas area at the Florence School of Regulation. She spoke to EURACTIV’s Frédéric Simon.

INTERVIEW HIGHLIGHTS:

  • Gas storage obligation should be mandatory – countries that already have it were better prepared when the gas crisis started last year
  • Long-term supply contracts for LNG “is definitely something to look into” because Russian gas will otherwise always remain cheaper in principle
  • Harmonised definition of low-carbon and renewable gases is “absolutely paramount” for EU single market
  • 35 bcm biomethane target by 2030 sounds “pretty ambitious” in view of “limited expansion potential”
  • “Founding pillars” of current gas market should also apply to future hydrogen markets, including ownership unbundling rules and third-party access

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The European Commission outlined a plan in March, called REPowerEU, to reduce the EU’s imports of Russian gas by two thirds before the end of the year – with increased imports of LNG, more diversification of supplies, more biomethane and hydrogen production, among others. Is this plan realistic, and how can it be achieved?

At Florence School, we generally welcome the recent initiatives proposed by the Commission to address this unprecedented energy crisis, which has been exacerbated after the invasion of Ukraine by the Russian federation’s army.

RePowerEU provides the correct approach to tackle this crisis and has, first of all, the scope of accelerating some energy policies and objectives which were already existing – such as the diversification of gas supplies, electrification, energy efficiency, and hydrogen development.

To do this, the RePowerEU plan scales up some targets, and therefore some of them become now more ambitious.

The European Commission has proposed voluntary joint procurement for strategic gas stocks by member states and recently launched a platform to organise this. Which countries are likely to take part?

The new proposed gas regulation included in the December package introduced the option for EU member States to participate in the joint procurement of strategic gas stocks. But it’s not mandatory. It’s an option for the TSOs of member states that choose to do it.

And it is quite specifically regulated. First, they need to put forward their interest, and then the European Commission performs a general coordination role, ensuring, among other things, that the request is in line with the EU law and competition rules. The Commission’s Gas Coordination Group is also involved, so it is a rather precise mechanism.

Since December, the debate has, of course, evolved and revolved around the details of how to organise joint procurement in concrete terms.

Now, the idea is not new. Eastern EU member states have already proposed the joint procurement of strategic gas reserves mainly to face the threat of a gas supply shortage coming from Russia after the 2006-2009 crisis with Ukraine.

The idea was set aside for a while, but lately, as supply security again started catching the attention even before the war in Ukraine, joint procurement of gas stocks became one of the most debated ideas as a possible means to ensure the security of supply to Europe in the medium-long term.

Security of supply is always a chief concern, so why was the idea shelved? I understand the European Commission was never a big fan of joint procurement because of competition concerns…

I would slightly disagree with you that supply security is always a top concern. Before the big Ukraine-Russia crisis of 2006-2009, it was not at all an issue. It was almost neglected in European energy policy and regulation.

These two crises triggered the security of supply regulation in 2010 and other initiatives like creating the Gas Coordination Group. So, I think security of supply is an issue that is addressed only when really needed, unfortunately. Because addressing it during quieter periods would probably allow to regulate and think about solutions with a cooler head and not under pressure or fear.

This situation is also related to the market. When gas prices are low, there is no urgency and security of supply seems like a remote problem. But when an economic crisis, or even worse, a dramatic war in our neighbourhood, takes place, these issues are immediately back on the table.

In March, the European Commission tabled proposals obliging EU countries to fill up their gas storage at least 80% ahead of next winter. This raises issues in terms of solidarity between countries with storage capacity and those without. How can those issues be resolved?

How gas storage is managed in Europe varies quite significantly across member states. In many countries, demand and supply of storage is totally left to the market, and the market usually delivers very well.

But there are some specific objectives that policymakers cannot expect the market to deliver by itself and have to intervene with some regulation. I think this is a typical case, on which I have written before.

On the other hand, it’s also true that storage levels in 2021 were lower than the average, particularly in those countries where storage is not regulated. The overall lower level of storage across the EU after the summer of last year has impacted current energy prices.

So yes, I think such a measure, if it is decided, should be mandatory and wouldn’t cause too much market distortion as it would equally apply to all market operators.

Actually, the obligation to fill up gas is already in place in some EU member states like Italy. And the system showed its effectiveness. At the beginning of Autumn, countries which had such a regulation in place had higher gas storage levels and were, therefore, better prepared when the crisis started.

So I would see more benefits than problems in imposing this obligation – particularly in the current emergency situation. However, our strong recommendation is that the obligation to refill storage is designed to impact the everyday market functioning as little as possible. We suggest a market-based mechanism (auctions) supported by a pre-defined burden-sharing mechanism between member states.

Europe has started looking for alternatives to Russian gas. But in the short term, it seems it can only rely on potential additional LNG supplies from places like the United States and Qatar, which will always be more expensive than pipeline gas from Russia. Will this lead to a prolonged period of high gas prices?

In principle, yes. I am afraid that the dynamics that brought us to the current energy crisis will not be eased in the coming months. So I think that Europe should really try to equip itself with the best solutions that are available.

We already talked about the obligation to refill storages before the beginning of the cold season. Another important focus remains investments in renewable energy because, eventually, this is the only long-term solution that will finally make Europe more resilient to imports.

And then LNG will be fundamental, and that’s where energy diplomacy also has a role to play. Because indeed, Russian gas is always the cheapest option for Europe. But there is a need to diversify, and we need to intensify those efforts and reinforce commercial agreements with other supply countries.

LNG suppliers like Qatar are likely to ask for guarantees from European buyers in the form of long-term contracts. But this is something that the European Commission has resisted for years because long-term contracts distort competition on the market. Is it time to revisit this policy? 

I don’t believe it’s necessary, at least when it comes to pipeline gas. I think the Commission’s efforts to link European gas markets more to spot pricing rather than long-term contracts were good measures that went in the right direction.

Of course, there’s always a flip side, but overall, the balance is positive. What Europe has achieved thanks to these measures is much greater than the problems we have today. So I wouldn’t make any step back when it comes to long-term contracts, at least for pipeline gas.

LNG is different. It’s a global market now, and there are possibilities to have long-term or short-term agreements ensuring cheaper LNG from some countries. I think the option of considering long-term agreements for LNG is definitely something to look into at this point in time.

Talking about decarbonisation now, the Commission’s December gas package sought to promote new low-carbon and renewables gases like biomethane and hydrogen. What is your overall assessment of this package when it comes to decarbonisation? Do you believe it brings the sense of urgency needed to meet the EU’s 2030 climate goals?

Overall, we think that the December gas package is a very good step forward. Whereas the July ‘Fit for 55’ package addressed electricity markets, the December package complements it on the gas side.

The main goal of the Commission is to have a substantially different gas market from what we have today, with the integration of other types of gas, like biomethane and hydrogen. And the proposal provides the basis for this integration to be successful. Overall, I think there are many positive things to say about this package.

Now, when it comes to the sense of urgency, my impression is that this is something that is very clear in the mind of the Commission. That said, some rules will still require some time to be completed – I’m thinking particularly of the definitions of low-carbon fuels and low-carbon gases, for which we will have to wait a little bit longer.

This could be perceived as a lack of urgency. But we have to be realistic and consider that this package is now under consultation by the European Parliament and EU member states. At the same time, new priorities have emerged meanwhile. So it will probably take a while before it actually enters into force. And when it does come into force, 2024 will probably not be that far away.

Indeed, only gases that can demonstrate a greenhouse gas emission saving of 70% will qualify as “low-carbon” under the Commission proposal. Yet, the Commission says it will propose a methodology to calculate those emission savings only “before end 2024”. The industry says this is too late to kick-start the market. What is your take on this?

I’ve been following the whole discussion on the sustainable finance taxonomy since the beginning, and I can only say that it’s very, very complicated. There are many elements to consider.

With natural gas, it’s quite straightforward, there is only one way of extracting it. But when it comes to these new types of gases, the situation is much more complex: you may produce hydrogen in at least three to four different ways, starting from plenty of different feedstocks, with or without CO2 emissions or carbon capture and storage.

This is true also for biogas and biomethane – there isn’t just one way of producing them. All these elements obviously need to be taken into account, they can’t be neglected. And coming up with a general definition that puts all these different types of feedstock in the same basket with different levels of emissions wouldn’t help anyone. And it wouldn’t allow the final customer, who will be even more confused about the product he is actually buying.

The December package pays attention to this by developing a workable design for future gas markets. And markets work at best when they trade standard products. This is why it’s very important to have harmonisation in gas products that are traded across EU member states. And to do this, a careful assessment of the technologies and infrastructure available in the member states is absolutely paramount.

The gas package likely won’t be adopted before end of 2023. And I guess the European Commission needs to have those rules in place first before it can decide the technical implementation details, right?

Yes, and probably also to give time for market operators to get prepared. Let’s not forget that biogas and biomethane constitutes a significant part of the gas flowing in some member states, but it’s almost inexistent in others. And the same goes for hydrogen – it’s only reality in a few member states while others have to start from scratch.

On the business side, it also means investors will stay put until they have regulatory certainty, which could be 2025 when the rules are finally in place. Or do you believe the market will get moving before?

Yes, this is the flip side of the coin. It takes more time if you want to have absolute certainty on the features of the markets you want to regulate. And that may delay investment signals, which is bad for the industry.

On the other hand, we’ve seen that the industry is ready to make those investments in recent months. And we have clear evidence of that from the European Hydrogen Alliance, which has identified a pipeline of investments in renewable hydrogen projects. It remains to be seen how many of those will see the light, but I think this is an important signal that the industry is ready to invest.

The European Commission’s REPowerEU plan will boost biomethane production to 35bcm by 2030. Is this achievable, and is there hope extra supplies could become available for the next winter heating season?

Biomethane is already being injected into the European gas network. So it’s not a novelty. It doesn’t need to be developed from scratch. And there are some countries in Europe – like France – which have great ambitions in upscaling biomethane.

The technology is improving, and there is momentum for some member states to invest more and upscale biomethane production capacity. So, there is potential, for sure – although 35 bcm may sound like a pretty ambitious target because the potential for expansion is limited.

So in the current situation, biomethane will help, but it will be challenging to reach the new target.

Regarding hydrogen, the Commission has chosen to replicate existing rules applicable to the gas market, notably regarding ownership unbundling and third-party access. Do you believe this is the right approach to stimulate investments in hydrogen? Or do you believe looser rules are needed to stimulate hydrogen production in the early days?

We agree with the Commission here. We believe the founding pillars of the current gas market should also remain for future hydrogen markets – such as third-party access, unbundling, ensuring a level playing field, etc.

But obviously, we’re talking about a market that doesn’t exist yet – it’s a nascent market. That means regulators must bring some flexibility to avoid stifling the market, which the Commission has done by planning a transitory phase until 2030 when rules become stricter.

This concerns ownership unbundling, cross-border tariffs, third party access to hydrogen storage and terminals, etc., which will be addressed with some flexibility before 2030. It is a phased approach.

This is a rather short regulatory holiday. Do you believe the Commission got it right in terms of the timing?

Yes, we believe this is the right approach. Now, one can question whether 2030 is the right date. But it all depends on how fast the market will develop. Currently, there is no certainty that real demand for hydrogen will develop.

Infrastructure should be demand-driven – there will be a market if there is enough demand. Currently, what we have in hydrogen is just some limited industrial clusters running on hydrogen and the infrastructure there mainly consists of private networks. We don’t really know how the situation will evolve.

The Commission said it wants to create “a competitive hydrogen market with a dedicated infrastructure”. Do you think this is necessary and the right approach? 

As I said, the infrastructure should be demand-driven. Hydrogen is most efficiently used when there is dedicated infrastructure for using hydrogen. And we agree with the Commission that blending is not the most efficient way of using hydrogen, which should be considered only as a temporary solution.

Ultimately, we believe the Commission is right to promote a dedicated infrastructure. This is the only way to ensure a hydrogen market develops and is exploited to its fullest.

You say infrastructure must be demand-driven, but that’s a bit of a chicken-and-egg situation, no?

Yes, absolutely. That’s why there’s a need to be flexible and to apply a gradual regulatory approach. Building new hydrogen infrastructure but even repurposing the existing gas infrastructure are expensive operations, the cost of which will eventually be borne by EU citizens. Therefore, a careful ex-ante assessment is required to ensure that the repurposed or new infrastructure is useful for the market.

On hydrogen, the Commission proposed creating a new regulatory body, the European Network of Network Operators for Hydrogen (ENNOH), which is supposed to start operating as of 2024. The industry says it is too early to create a dedicated body and would prefer current arrangements, basically leaving ENTSOG in charge. What is your view?

This is a very difficult question because, again, it is very much linked to how fast the hydrogen market will develop. If the market grows fast, then it will very quickly deserve an independent body in charge of looking after infrastructure.

I believe the Commission’s offer is a good compromise. No one can deny that ENTSOG is well equipped to provide the proper knowledge and expertise to start developing infrastructure for hydrogen.

But I believe the Commission’s proposal is a good compromise because it foresees the creation of a platform specifically dedicated to the development of hydrogen infrastructure. And this platform will be phased out and become ENNOH.

I think it is a good system, which will hopefully ensure a shift gradual in the governance of the new hydrogen infrastructure, which at the moment is being managed by the gas infrastructure operators and coordinated at the EU level by ENTSOG.

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