Some of Europe's largest utilities say the clock has not run out on gas-fired power generation yet, although in many cases burning the fuel will only stay economically viable with some kind of regulatory support.
Two of the industry's heavyweights, Spain's Iberdrola SA and France's Engie SA, have both sold their LNG businesses in recent years, but believe that gas will continue to play a large role for them further downstream.
Its deal with Singapore's Pavilion Energy Pte Ltd. earlier this year "does not mean that Iberdrola has abandoned its gas activities," José Simón, the utility's senior vice president of global gas, said during a panel discussion at the Oil & Money conference in London on Oct. 8. Simón noted that the company still supplies gas to its end consumers and also burns it in its own combined-cycle gas turbines, or CCGTs, for example in Spain, Mexico and Brazil.
"The point is that we decided to change our strategy of how to secure that supply. So rather than being a midstream player ... we just decided to move downstream in the gas value chain," he said.
According to Simón and other industry executives, gas will remain part of the power generation mix because of several favorable properties, including lower carbon emissions than coal, high efficiency and the capability to provide cheap seasonal storage.
Laurence Borie-Bancel, managing director of Engie's global thermal generation, said the flexibility of gas plants also makes them critical for balancing variable renewable generation. But power plants burning natural gas today will have to be fueled with biogas and hydrogen in the long run.
"In additon to renewables, which we are developing a lot, and energy efficiency, natural gas has a role to play in this transition," she said. "But we are convinced that it should be gradually replaced by greener gas."
Until batteries become cheap enough to take over the role of complementing renewables, "there is still room for fossil fuel generation," she added.
'A rock and a hard place'
Simón agreed that rather than as stable baseload capacity, the sweet spot for gas plants will be to run for about 5,000 hours a year as a backup when renewables generation is low.
"My personal experience of CCGTs running baseload is it finished about 16 years ago," he said. "The real battlefield is in the mid-merit order."
But even that business model is only feasible with some regulatory support, he said, for example from capacity mechanisms that pay generators to keep their plants in a security standby. That is despite the fact that commodity price dynamics mean gas generation has become more economical in Europe this summer, at the expense of coal.
Gas generation in Spain has doubled this year from 2018 levels, Simón said in an interview on the sidelines of the conference. But he added that the regulatory framework in the country — with gas plants subject to a concession regime, but without a capacity market — means generators like Iberdrola find themselves "between a rock and a hard place."
"We can't operate them economically, and we can't shut them down," he said. Iberdrola is not looking to build new gas capacity in Europe, but what happens on a political level will determine the survival of its existing fleet. The utility operates around 12,500 MW of gas capacity around the world, although more than half is in Mexico.
Boom or bust?
Uniper SE is one utility building new gas-fired capacity in Europe, and its experience illustrates the sometimes bizarre economics for the fuel.
The company recently won a tender for a 300-MW plant in Irsching, Germany, which will serve as a grid safety cushion for emergencies. At the same time, Uniper is planning to shut down two existing, high-efficiency gas plants because it says running them will be uneconomical "beyond autumn 2020."
Peter Abdo, chief commercial officer for LNG within Uniper's trading business, said Europe has emerged as a "balancing point" for the global LNG market and will continue to need the fuel in the future.
"If you look at the fundamentals, with the political drive to exit coal ... Europe is a growth market for LNG. It has to be," he said.
Although plans to phase out coal or nuclear might provide an option for gas, national and EU-wide goals for complete decarbonization may displace the fuel from power generation sooner than some expect, he said.
