Giant Bank Sees Natural Gas Plugging Gaps in Europe’s Energy Shift
One of the world’s biggest clean energy lenders see a future for European natural gas investments.
Government plans to quit coal and nuclear power may create openings for gas in the region, according to Thomas Brehler, global head of power, renewables and water at KfW IPEX-bank, the international export and project business unit of Germany’s development bank. Natural gas, the least polluting fossil fuel, offers the most practical backup for renewable generation until grid-scale storage arrives, he said.
“In Europe, lots of investments are going to offshore wind, also for onshore, and not so much is going to gas,” Brehler said in an interview in the bank’s headquarters in Frankfurt. “There are more chances for gas-fired power plants expanding further, starting for Germany where we will see a lot of nuclear and coal power plants being shut down.”
The remarks highlight the potential for natural gas to remain a key energy source even as European politicians work toward slashing fossil-fuel emissions. While gas plants burn more cleanly than coal ones, environmental groups are pushing for eliminating all fuels that contribute to greenhouse gases in the atmosphere. For KfW, that transition toward cleaner forms of energy will require gas plants as a way to make up for variable power supply from wind and solar farms.
Several European countries are tilting for an exit from coal and nuclear power, with Germany debating a plan to quit coal by 2038. KfW has provided $16 billion in loans to clean energy, trailing only the European Investment Bank in Europe, according to BloombergNEF.
“As much as we all love renewables, we all know that when there are only intermittent sources, the system can face difficulties,” Brehler said. “If there is no coal and no nuclear, the bridging technology in these times probably has to be gas.”
Some specialists argue that energy security can be maintained through a combination of a limited number of gas-fired stations and cross-border power lines known as interconnectors, as well as by shifting demand from peak periods and using energy storage. But some of these solutions might not be ready on time, according to Brehler.
“One would need some type of affordable large-scale storage for renewable power and I don’t see that technology being there yet in 2030,” he said.
Europe’s gas sector has not attracted much investment in recent years as an expected alliance between renewable energy sources and gas failed to materialize, according to Gergely Molnar, a gas analyst in Europe at the International Energy Agency. That left the fleet of plants using the fuel underutilized.
Europe’s gas power stations offer low margins to investors due to higher costs, such as for increasing carbon emission permits, and lower revenue amid declining power prices in the region, Molnar said. And renewable sources have received much greater incentives from European governments.
“Europe planned a marriage between renewable energy sources and natural gas for its energy transition plans,” he said by telephone. “But at the end, what really happened was a marriage between renewables and coal, due to low coal prices.”
It is “very probable” that gas power plants usage will increase as Europe transitions to low-carbon energy generation, he said. This year, utilization rates have already improved as natural gas prices in the region fell to their lowest in almost 10 years, making them more competitive against coal.
About 40 gigawatts of coal and nuclear capacity will shut down in Northwestern Europe countries by 2025, enough to supply 80 million households, according to announcements by governments and companies. While the KfW’s Brehler expects to see more gas power plants in countries such as Germany, the question is “on what commercial basis they will be built, what type of compensation schemes they will have.”
But even the replacement of dirtier sources of energy is expected to boost gas demand for power generation in Europe by only 0.6% per year in the coming five years, according to the IEA’s Gas 2019 report.
European gas consumption is expected to stagnate or even decrease until 2024 as additional demand from nuclear and coal phase-out plans is constrained by the development of renewables and limited growth for industrial and residential uses.
Gas demand in Europe decreased by 2% in 2018, after three years of consecutive growth, due to mild winter temperatures, while global natural gas demand grew 4.6% in 2018, its fastest annual pace since 2010, IEA’s report shows.
KfW IPEX-Bank is not only interested in the financing of gas-fired power plants and pipelines, but also sees growing opportunities in liquefied natural gas infrastructure, especially in Germany.
“The need of capital for the energy transition to an extent is largely on the way, we already see a lot of new investments happening,” Brehler said. “You see banks and financial institutions providing loans, opportunities in replacing existing power facilities. For investors, there is an abundance of opportunities.”