The Role of Natural Gas in a Low-Carbon Europe: Infrastructure and Supply Security.

Author:Holz, Franziska
Position:Report
 
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  1. INTRODUCTION

    The role that natural gas will play in the transition to a decarbonised European energy system is unclear. There is a broad range of perspectives on natural gas in the future European energy mix: natural gas could play the role of a "bridge fuel" during a transition phase, or serve as the main "backup fuel" for intermittent renewable power generation. However, natural gas could also be steadily phased out and substituted for by non-fossil fuel alternatives, which will quickly become economic under stringent climate policies. (1) While the European Energy Roadmap to 2050 proposes development in the latter direction with natural gas consumption declining over the next few decades (EC, 201la), the International Energy Agency sees a consistently large role for natural gas in Europe in the coming decades in its New Policies Scenario (IEA, 2015).

    In this paper, we focus on potential infrastructure needs within the European natural gas sector and investigate to what extent the current natural gas infrastructure can accommodate the transition towards a low-carbon energy system. Even at current consumption levels, depleting domestic reserves will cause European net imports to increase, a potential case for more infrastructure. In recent years, several academic and policy studies have argued that more interconnection in the European natural gas network may be necessary, although often to enhance the strategic security of supply situation (e.g., van Oostvoorn et al., 2003; Lise and Hobbs, 2008; EC, 2006). The European Commission has recognised the need to strengthen infrastructure in a transitioning system to a climate-friendly economy in its proposal for a "Connecting Europe Facility" (EC, 2011b), similar to its earlier TEN-E program (EC, 2006), and in the European Economic Recovery Plan (EU, 2009). In particular, Central, East, and South East Europe are still not connected well enough to other parts of Europe and to exporters other than Russia to diversify their supplies. Moreover, it is argued (e.g., EC, 2011c) that additional infrastructure is needed to facilitate a level playing field for all market participants and to reach a competitive market in the EU. Following the "dash for gas" of the past decade, and with the European Commission and Member States aimed at improving supply security after several disruptive episodes (e.g., Stern, 2010; Richter and Holz, 2015), many infrastructure projects with completion dates before 2020 have been proposed, agreed, or started (ENTSO-G, 2015).

    In order to investigate the need for investment after 2020, we follow a well-established tradition of using numerical modelling. Applied modelling approaches of natural gas markets can basically be divided into optimisation models and complementarity models. Optimisation models often include a great level of technical detail in linear formulations. The EUGAS model (Perner and Seeliger, 2004) and the TIGER model (e.g., Lochner and Bothe, 2007; Dieckhohner, 2012) are two of the most detailed optimisation models of the European natural gas sector, where dispatch is optimised in a network based on a complete representation of European pipelines of different pressure-levels. Andre et al. (2009) present an infrastructure analysis based on nonlinear optimisation. Midthun et al. (2012) develop a systems optimisation approach taking into account the impact of pressure drops on network capacities. Complementarity modelling (also called equilibrium modelling), on the other hand, allows for the inclusion of imperfect market structures that well characterise the European natural gas market (cf. Holz et al., 2008). This literature stream was initiated by Mathiesen (1987) and, after improvements in the computational capacities and the solvers, carried forward by Boots et al. (2004). Egging and Gabriel (2006) and Lise and Hobbs (2008) provided an extension of this model (the GAS TALE model), while Egging et al. (2008) developed an alternative model with a more detailed market agent set-up (European Gas Model). Egging et al. (2010) introduced a multi-period perspective in the World Gas Model, allowing for endogenous infrastructure investment decisions.

    In this paper, we apply the Global Gas Model (GGM), a multi-period complementarity model of the world natural gas market with a detailed representation of Europe. The three pathways detailing the future role of natural gas in Europe mentioned above are the frame for this paper.

    i) Natural gas use will be gradually reduced in relation to other energy sources, which are dominated by low-C[O.sub.2] alternatives such as renewable energy, nuclear, or coal with carbon capture and storage (CCS).

    ii) Natural gas will be increasingly used, substituting other fossil fuels with higher carbon content per generated energy, particularly coal. This effect may be intensified by the advantageous balancing properties of natural gas-fired power generation in an increasingly intermittent electricity system in which natural gas acts as a "backup fuel". In addition to electricity generation, the transportation and heating sectors may also experience increased penetration of natural gas.

    iii) Natural gas will play a vital role as a "bridge fuel" during a transition period until C[O.sub.2]-free technologies are economically viable. The relatively low carbon intensity of natural gas and the flexibility of gas-fired power generation lead to a short-term increase in natural gas consumption followed by a phase out in the long-term.

    In the first part of this paper, we base our analysis on two scenarios of the EU Energy Roadmap 2050 (EC, 2011a). This Roadmap triggered a vivid academic debate and motivated the Energy Modeling Forum (EMF) to devote a round of model comparisons of European decarbonisation scenarios: EMF 28 on "the effect of technology choices on EU climate policy" (cf. Knopf et al., 2013). (2) We use data from both the EU Energy Roadmap and EMF 28 as a starting point for our sectoral analysis, where we focus on the impact of climate policy on the European natural gas infrastructure.

    To this end, we construct four scenarios. Our first scenario (Reference) complies with the EU 2020 targets. (3) It is, hence, a moderate climate scenario. The second scenario (HRes) is a more stringent climate scenario with high shares of renewables in line with the EU 2030 targets. (4) Both scenarios foresee a decreasing importance for natural gas in the European energy system (pathway i above). We define two alternative scenarios to investigate other possible developments of the European natural gas sector (pathways ii and iii): The first alternative scenario (Backup) allows us to investigate infrastructure needs in an environment of increasing natural gas consumption. The second alternative scenario (Bridge) focuses on natural gas as a transitional fuel towards a decarbonised European energy system.

    Our main results suggest that the pipeline and LNG capacities already in place or currently under construction are sufficient to accommodate future European demand for natural gas in all scenarios. This holds particularly for scenarios with declining natural gas consumption. However, allowing for a more diverse natural gas supply, and taking into account competition with Asia for Russian natural gas, new connections are advisable. In particular, pipeline connections from Africa and the Caspian region towards Central Europe could be significantly expanded. Moreover, within Europe, there is need for small but important infrastructure investments for improved interconnection between regions (e.g., between the Iberian Peninsula and the rest of Western Europe) and for reverse flows (West-East direction). These small additional capacities do not only serve to import additional volumes, they also considerably improve supply security by diversifying trade flows. An increasing natural gas consumption (Back-Up Scenario) is characterised by the most significant pipeline expansions. In contrast, the Bridge scenario suggests lower investments in pipelines but higher expansions of LNG import facilities to accommodate the temporary increase in consumption.

    The remainder of this paper is organised as follows. In Section 2, the GGM and its dataset are presented. In Section 3, we discuss results for decreasing European natural gas consumption (pathway i). The two alternative scenarios, pathways ii and iii, are discussed in Section 4 and Section 5 concludes.

  2. THE GLOBAL GAS MODEL

    The Global Gas Model (GGM) is a partial equilibrium model of the natural gas market. It numerically simulates regional natural gas production, consumption, and patterns of international trade. (5) The model is set up with a high level of detail featuring demand seasonality, market power exertion vis-a-vis final consumers, as well as endogenous investments in storage and transport capacity, both of pipelines and along the LNG supply chain. While Egging (2013) presents a stochastic version of the model, in this paper, we use a deterministic version with a particular focus on, and a more detailed representation of, Europe. Twenty-five of the EU member states are incorporated individually among the global total of 45 regional nodes. (6)

    2.1 Model Description

    The GGM represents all important market agents along the natural gas value chain. These comprise producers, traders, storage system operators (SSO), and transmission system operators (TSO), while final consumption is represented by aggregate inverse demand functions. All agents operate rationally under complete information and maximise the sum of discounted profits over the entire model horizon under operational constraints (such as production capacity limits) and technical and infrastructure restrictions (such as pipeline capacities and loss rates). All agents are price takers, except for selected traders who can exert market power vis-a-vis final consumers by taking into account the effect of their...

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