Europe's gas bridge to energy transition is crumbling: S&P Global report

Western Europe's "gas bridge" to the energy transition is at risk of collapse, S&P Global Commodity Insights says in its latest long-term European electricity forecast.

Renewed political will to disengage from Russian gas implies high gas prices for the remainder of the 2020s, leading to a swifter-than-expected decline in the bloc's gas-fired generation capacity, the report says.

Under a New World Case reflecting today's market and geopolitical turmoil, S&P Global assumes unabated gas capacity across Western Europe falls by over 25% by 2030 and around 50% by 2035, while gas-fired generation falls by 60% by 2030 and 80% by 2035 versus 2021 levels.

"An accelerated gas phase-out poses additional risks of a capacity crunch in the medium term across Western Europe," report co-author Bruno Brunetti said April 5.

"We see Germany capacity balances tightening considerably in this decade relative to the rest of the Continent, given that declining gas capacity coincides with the phase-out of coal and nuclear," he said.

Italian wholesale power prices are seen at a premium over the next decade given the country's reliance on Russian gas, with the report forecasting 2030 prices averaging around Eur64/MWh versus Eur56/MWh in Germany, Eur46/MWh in France and Eur40/MWh in Spain.

Not only are the prospects for new gas generation drastically reduced, the appetite to fit carbon capture to CCGTs is also likely to be low, reducing a key source of flexibility post-2030 and ushering in the hydrogen era, Brunetti said.

Bullish renewables, batteries

While gas is a victim of the conflict in Ukraine, renewables and battery storage stand to benefit.

Driven by a new urgency in policy, solar capacity additions across Western Europe of up to 27 GW/year and 18 GW/year of wind (split equally between onshore and offshore) are roughly three times the growth seen in the past decade.

Higher renewables penetration will lead to cannibalization risks for plant revenues, with solar PV the most exposed technology, even with substantial additions of co-located storage/batteries, Brunetti said.

This was most evident for Spain, where S&P Global forecasts solar capture prices falling just below Eur30/MWh in 2030, or 75% of baseload power prices.

"Offshore wind projects also face these risks post 2030," he said. "In the GB market, wind projects will capture a higher percentage of baseload prices; however, the capture price achieved sits at a discount to the other major markets by 2050."

From more than Eur80/MWh in 2025, UK offshore wind capture prices are forecast to fall below Eur40/MWh by 2030, and below Eur20/MWh by 2050.

Nuclear reprieve

While nuclear benefits from increased investment under the New World Case, reactor closures across Western Europe still outweigh additions to 2050.

"We see some upside to the investment appetite for new nuclear build in markets such as France and the UK and life extensions in markets like Belgium and Spain, with Germany seemingly still steadfast against extensions to its fleet," Brunetti said.

Only UK capacity is seen growing over the full period, from 6.1 GW in 2023 to 9.4 GW by 2050 -- inclusive of a significant capacity dip between 2025 and 2035.

Meanwhile, French nuclear capacity is forecast to drop from 61.4 GW in 2023 to 43.8 GW by 2050.

Powering heat

The gas crisis has made electrification of heat more attractive, with S&P Global assuming total power demand from heat pumps will average 20 GW by 2030 and more than 60 GW by 2050 across the EU 10 under the New World Case.

"Higher electrification of heating more than offsets risks of power demand destruction and is a key driver of further tightening in the winter balances across Northwest Europe," Brunetti said. "Additional growth in power demand from space heating (along with green hydrogen production) exacerbates the tightness in most electricity markets."

Finally, an accelerated exit from gas results in a greater reliance on green hydrogen, notably for ammonia and industrial applications, but also as a form of power system flexibility.

Electrolyzers account for over 40% of power demand growth in the New World Case, becoming the largest provider of flexibility in the power sector.

"While we see significant ramp up in renewables rich regions such as GB, Spain and Portugal, we see the growing need for hydrogen to be partly met by imports from outside Europe," Brunetti said.

S&P Global's hydrogen price wall shows the cheapest sources of renewable hydrogen to be in the US, Australia and the Middle East.