Gas goes global

Unlike the highly liquid global oil market, natural gas has always been traded regionally. Asia, Europe and North America represent three different gas markets with their own unique dynamics.

Regional gas markets

Asia is very reliant on LNG (liquefied natural gas) imports. Natural gas demand significantly outstrips low levels of domestic production. Prices spiked after the Fukushima Daiichi disaster in 2011 when Japan began importing record volumes of gas for electricity generation to replace the output of nuclear power plants that were shut down.

North American gas production has always been strong, but exploded over the past few years. Hydraulic fracturing (or fracking) activity and the discovery of significant shale gas reserves halved North American gas prices between 2010-11. Prices remain at historic lows today. Henry Hub in Louisiana, where North American gas is physically delivered as well as virtually traded, is the world’s most liquid spot and futures market for natural gas. North America’s well-developed pipeline infrastructure also minimises transportation costs and promotes access to the market. And a high degree of competition lowers the barriers to entry.

Europe’s numerous trading hubs are still developing and are yet to match Henry Hub’s liquidity. Until recently the majority of European wholesale gas buyers maintained long-term contracts with mega-suppliers – namely Russia’s Gazprom and Norway’s Statoil. According to the Oxford Energy Institute, 2015 was the first year that more than fifty-percent of gas trades in Europe took place on the spot market. Demand has yet to return to pre-2008 levels and is still soft across the continent, but prices remain consistently higher than in the US.

Gas producers rely on pipeline infrastructure to connect supply with demand centres. This is why North America’s shale gas revolution and the subsequent decline in natural gas prices have not affected European prices – no pipeline crosses the Atlantic. But, LNG can easily be shipped between the continents. Why then are the world’s two biggest gas markets still disconnected?

Intercontinental LNG trade

LNG (liquefied natural gas) is made by cooling natural gas to -162ºC. This transformation to liquid shrinks the volume of the gas 600 times, making it safe and easy to ship. LNG is colourless, odourless and non-toxic. Nevertheless, the added cost of liquefaction, sea transportation in specialised vessels and regasification at the destination has so far limited global arbitrage opportunities.

Yet, a barrage of new LNG investment over the past few years has lead some to speculate that natural gas markets are globalising. The International Energy Agency claims that global liquefaction capacity will increase by forty-five percent between 2015 and 2021, with most of this growth coming from the United States and Australia. If this glut makes enough cheap LNG available then North American and European gas prices might slowly converge.

In February, the Cheniere Energy LNG terminal at Sabine Pass between Texas and Louisiana was the first to begin exporting. In anticipation of a LNG supply glut Eastern European countries, including Poland and Lithuania, have been building regasification terminals. Lithuania is testing floating regasification technology – offshore plants connected by pipeline to the shore. Spain, being part of a peninsula, is isolated from the European continent’s pipeline network. Historically, this has made it an important destination for LNG cargoes. In fact, the economic downturn since 2008 created an opportunity for Spanish buyers to reload LNG cargoes and sell them in Asia where prices are higher. This churn enhances liquidity. Otherwise, LNG is injected into the network all over Europe. There are important regasification terminals in the Mediterranean: Italy, Greece and France, as well as north-western Europe: the UK, the Netherlands and on France’s west coast.

US LNG producers are increasingly flexible too – offering variable volume contracts or FOB (free-on-board) cargoes. Variable volume contracts permit buyers to increase or decrease the amount of gas they take depending on their needs. They may purchase extra volumes to take advantage of high spot prices – reselling the LNG cargo or trading gas locally. Or they may reduce their volume off-take when local demand is low. FOB means a buyer has not yet been found nor locked into delivery. An LNG cargo leaves the liquefaction terminal and can be bought and resold “on board”. The cargo may eventually be dumped in a spot market at a loss if a buyer can’t be found, but LNG suppliers’ willingness to send out FOB cargoes shows liquidity to be improving.

Not yet a single market

European countries are keen to reduce their dependence on Russian gas for political reasons. However, uncertainty remains as to whether US LNG can compete with Gazprom on price.  Analysts at the Oxford Energy Institute estimate Gazprom’s cost of delivering gas to Germany to be 3.5 USD per mmbtu (million British thermal unit). Whereas the break-even price for the cheapest US LNG supplies is around 4.3 USD per mmbtu – even with Henry Hub still trading at historic lows. Gazprom, Europe’s largest gas supplier, has significant spare production capacity and some of the lowest cost production in the world. Given these conditions, LNG traders are unlikely to win a price war on the continent.

In sum, greater supply and liquidity in the global LNG market offers some opportunities for arbitrage between the continents and provides European gas buyers with options. This does have the potential to disrupt Europe’s monopolies and introduce greater competition into the market.  Yet, LNG and pipeline gas markets are not one and the same. Whilst the price gap persists, gas markets will retain their regional characteristics.


 

100% renewables

Two or three years ago European think tanks were asking if an electricity mix with a 50%, 60% or even 90% share of renewables was workable. What is threshold above which the electricity grids of Europe would no longer be able to absorb intermittent renewable energies?

Electricity grids have strict ramping constraints, which means the flow of electricity cannot change dramatically from one moment to the next. Solar and wind power introduce intermittency into the grid. We know when the sun will go down, so solar panels’ contribution can be gradually phased out every evening. Different sources of power will have to compensate during the night. Wind speed and direction is less predictable. For countries with a high penetration of wind generation, like Germany or Denmark, what source of power can be called upon to compensate for a sudden drop in wind? Nuclear power plants cannot increase or decrease their output in a timely manner – this takes hours. Efficient Combined Cycle Gas Turbines (CCGT) and other modern thermal generators are fit for the task, but would playing back-up be profitable for these units?

European thermal generators’ annual revenues have suffered over the past few years. The economic downturn since 2008 has had a role to play in this, but competition from renewables is the main source of the discomfort. Renewables generators produce electricity cheaply as they do not have the fuel costs that gas and coal power plants do. Renewables also have priority access to the grid in countries such as France and Germany that are looking to increase renewables’ share in their national electricity mix. This means renewable generators have the right to sell electricity before other producers.

Nevertheless, reliable generation is still required. Thermal generators could charge a heavy premium for electricity during periods of supply scarcity to make up for lost generating hours cannibalised by renewable generators. In this way an increased share of renewables was expected to cause frequent price spikes, as well as negative price events when renewables oversupply the market. Electricity prices would become highly volatile.

Paying thermal generators a ‘capacity’ fee to remain online and ready to increase output at short-notice has been proposed as a solution to their financial troubles.  And if more thermal generators remain in the market then competition between them will help to avoid price spikes.  However, these so-called capacity markets have not found many advocates. France intended to launch an organised market for capacity certificates this year – an initiative that has been put on hold by a European Commission investigation into the competitiveness of the measure.

Yet, more recent research has started to show it is feasible to have an energy-only market with a high penetration of renewables in Europe.[1] The concerns about grid instability and price volatility have not come to pass. Perhaps even 100% of electricity generation could be derived from renewable resources if other conditions are met. What are these conditions?

Firstly, diversity of supply is a tonic. A great number of interconnections crisscross the European continent allowing countries to import or export electricity from their neighbours. This allows surges in renewable supply to be sent elsewhere when needed. In periods of local supply scarcity one country can import from a neighbour. Where supply bottlenecks exist the European Commission incentivises investments in new interconnectors. This can be a slow process but the examples of supply bottlenecks are isolated. For most of the year French and German spot electricity prices converge. This shows that arbitrage is effectively taking place between the continent’s two biggest electricity markets.

Wind and solar capacity has a lower utilisation rate than thermal capacity that only technically need to be offline during maintenance. To ensure reliable electricity production in a system dominated by renewables a greater proportion of capacity needs to be installed – and in diverse locations – in order to increase the diversity of supply.

Disruptive technologies like batteries will eventually be integrated into wind and solar farms to improve control over their electricity output. Battery technology may even compete with thermal generators as back-up for renewable supply disruptions. Other technologies, such as tidal or wave energy, and smart grid management will eventually become commercial as well.

Further, liberalised electricity markets provide utilities and investors with trading opportunities to balance their production portfolios and hedge financial risk. Weather forecasts help to predict the output of a solar farm for the next day. If a producer expects  production to be much higher than initially contracted they can sell excess electricity in an organised, day-ahead auction at a European power exchange. On delivery day, if the producer’s actual output is lower than the contracts sold on the previous day, then they still have the opportunity to buy back the electricity on the intraday market.

European power exchanges are also innovating. New products on these platforms are being tailored to renewable generators’ needs. Previously electricity had to be delivered in one-hour blocks, which does not map onto solar farms’ ramping constraints. The ability to trade with a 15-minute or 30-minute resolution is a relief for traders balancing renewable portfolios. Certificates which guarantee the origin of electricity as renewable will soon be offered on the market too.

Today, a European electricity mix dominated by renewables seems feasible. Renewables’ intermittency has not lead to blackouts or high price volatility. If there’s no new investment in gas and coal-fired generation we may yet witness supply inadequacy in the future. Yet, European cooperation, diversity of supply, new technology and dynamic spot markets may be enough to avoid this fate.


 

[1] Such as the International Energy Agency’s 2014 report: The Power of Transformation

Another good resource for this topic: Dispelling the nuclear ‘baseload’ myth: nothing renewables can’t do better

 

Coal condemned

During the last decade, the majority of the OECD countries decoupled their economic growth from energy consumption. Normally these rise in tandem – a trend that persists in developing countries and world’s soon-to-be fastest growing and most populous nation, India.

This decoupling happened as developed nations shifted to providing services and building knowledge economies, which is less energy-intensive than industrial production and manufacturing. China too has started down this path. Policy-makers now talk of “decarbonising” the economy. That is, only producing and consuming energy which does not release greenhouse gases into the atmosphere and contributing to climate change.

Decarbonisation is currently focussed in the electricity sector where it is being helped along by policy incentives. Subsidies, guaranteed prices for electricity and tax-breaks dramatically boosted the growth in renewable electricity generation across Europe in the last few years. The liberalisation of Europe’s electricity markets and new regulation improving competition also played a role. Although, falling prices and technology gains spurred the sector’s expansion more than any government policy, particularly for solar power.

For renewables’ expansion to make any difference to greenhouse gas emissions coal-fired power production has to be tackled. Although it is cheap, burning coal releases significantly more greenhouses gases than other fossil fuels including gas in the electricity sector and oil in transportation. Europe’s aging fleet of coal-fired plants are also extremely inefficient at generating electricity compared to newer gas-fired units. A quarter of electricity in the European Union and almost forty-percent in the United States is still generated by burning coal. It is around two-thirds of the electricity mix in China where the resulting air pollution in its major cities is fuelling a sense of urgency.

Political leaders are aware of this danger and are acting to reduce coal production and consumption in many countries around the world. By 2025 all coal-fired power in the United Kingdom will be shut down according to current plans. New Zealand will close its two remaining large-scale coal-fired power plants in 2018. The provincial government of Alberta in Canada, where the tar sands industry alone produces more emissions than Portugal, has announced plans to phase-out coal power over the next fifteen years. China’s goal is to cap coal consumption in 2025 and accelerate its decline thereafter.

President Obama’s Clean Power Plan intends to restrict emissions from current coal-fired power plans, substitute coal with gas-fired or zero-carbon generation and impose strict emissions standards on new plants. The goal is to cut emissions in the electricity sector by a third relative to 2005 levels. Coal mining states have fiercely contested this “war on coal”, which is bound to be difficult for certain towns and regions whose local economy and workforce are dependent on coal mining, not just in the US. Nevertheless, coal needs to eventually exit the electricity sector if the commitments made by the US and 195 other countries at COP21 in Paris late last year are to materialise.

Yet, none of the above is enough to slow climate change. India is set to contribute the greatest share of growth in global coal demand in the future, mostly from increased domestic production. How it intends to reach its goal to produce forty-percent of its electricity from non-fossil fuel sources by 2020 is unclear. In Germany, coal’s resurgence in the power sector has cast a shadow over its achievements in increased generation from renewable resources. Angela Merkel’s government is working on a plan to phase out coal by mid-century. From the European Unions’s biggest economy this is too long to wait. Decarbonising electricity production by phasing out coal remains a long way off. Coal has been condemned by the world’s leaders but not yet replaced.

La question nucléaire: à la recherche d’une énergie parfaite

En 1985, deux agents français ont sabordé le navire Rainbow Warrior de l’organisation écologiste Greenpeace dans le port d’Auckland en Nouvelle Zélande. Cette opération, effectuée dans la mer territoriale néo-zélandaise, a été conduite sur ordre explicite du Président de la République Française, François Mitterrand. Le Rainbow Warrior faisait alors cap vers l’atoll de Moruroa, situé en Polynésie française, où les militants de Greenpeace avaient tenté d’empêcher des essais nucléaires menés par les militaires français.

Cet incident a marqué un tournant décisif dans la politique néo-zélandaise puisque la résistance au nucléaire est devenue une partie importante de l’identité nationale néo-zélandaise. Cela est toujours le cas aujourd’hui. Tandis que la France se montre toujours fière de ses prouesses technologiques dans le domaine nucléaire, également en matière de production énergétique.

En France, le nucléaire constitue deux tiers de la production électrique, alors que quatre-vingt pour cent de l’électricité est produite de façon renouvelable en Nouvelle-Zélande. Cela ne signifie pas pour autant que Nouvelle Zélande produit moins d’émissions de gaz à effet de serre. Au contraire, vu son immense secteur agricole, les émissions par habitant la place en 5ème position dans le monde, soit seize places devant la France. En outre, c’est grâce à sa géographie que les néo-zélandais parviennent à générer la plupart de leur électricité de façon renouvelable, par le biais de la hydroélectricité et de la géothermie. Peu de pays bénéficient d’un tel écosystème qui permet la production d’électricité par ces moyens peu polluants. Normalement, pour augmenter leur capacité à produire de façon renouvelable, les autres pays sont obligés d’investir dans le solaire ou l’éolien, qui ne sont pas sans coûts.

L’énergie nucléaire a clairement des avantages. Elle ne produit pas d’émissions GHG en générant de l’électricité. Deuxième avantage, les français paient un prix moyen d’électricité beaucoup moins cher que les néo-zélandais. De plus, sa capacité de production est très stable, alors qu’en Nouvelle-Zélande, pendant les années de précipitations inférieures à la moyenne, le risque de coupures d’approvisionnement augmente beaucoup vu la dépendance du pays à l’hydroélectricité.

Face à l’obligation de fournir de l’électricité à une population beaucoup plus importante en France qu’en Nouvelle-Zélande, le gouvernement français a dès lors choisi de se tourner vers le nucléaire. En revanche, la consommation néo-zélandaise ne nécessite pas les gros volumes d’électricité que les centrales nucléaires sont capables de générer. Même s’ils n’étaient pas politiquement contre l’énergie nucléaire, les néo-zélandais n’en auraient pas besoin. Cela rend cette décision politique plus facile pour le petit pays qu’est la Nouvelle Zélande.

Néanmoins, nombreux sont les peuples qui ne soutiennent pas non plus l’énergie nucléaire, compte tenu des risques associés trop graves pour être ignorés. C’est le cas notamment aujourd’hui en Allemagne et au Japon, où la majorité de citoyens s’élève contre l’énergie nucléaire, ainsi qu’en Nouvelle-Zélande. En plus de nombreux décès causés par une explosion nucléaire, des maladies graves frapperaient par la suite tous ceux se trouvant à proximité. Après une telle catastrophe, l’environnement local resterait toxique pour des décennies. L’économie agricole de la région serait détruite. Aucune compensation ne suffirait à couvrir les pertes humaines et les dégradations de qualité de la vie pour les survivants. Même si le risque d’accident est statiquement faible, cela ne règle en rien le problème des déchets radioactifs produits lors de la production d’électricité.

Pourtant, le nombre de gens tué dans les explosions des mines de charbon ou affecté par les maladies pulmonaires est plus important que le nombre de victimes des accidents et des bombes nucléaires combinés. À la fin, il faut comprendre que tous les choix ont leur compromis en énergie. Le peuple français ainsi que le peuple néo-zélandais, comme tant d’autres, font face à cette problématique et essaie d’allier l’abordabilité, l’accessibilité et la sécurité tout en limitant les polluants.

En reconnaissant sa violation de la loi internationale par rapport à le naufrage du Rainbow Warrior, la France s’est excusée officiellement en 1988 et les relations diplomatiques avec la Nouvelle-Zélande ont été rétablies. En 1991 un accord d’amitié a été signé entre la France et la Nouvelle-Zélande. Depuis cet accord les deux gouvernements consacrent des fonds à la promotion d’échanges culturels. Les bourses scolaires font partie de ce programme culturel. L’auteure de ce blog était bénéficiaire de cette bourse en 2013 et elle est venue en France pour étudier la politique énergétique. Ce blog vise à comprendre les choix politiques en matière d’énergie sans condamner pour autant, tout en réalisant que l’énergie parfaite n’existe pas.