Tumbling natural gas prices have set the power generation industries in the U.S. and Europe off to a greener start this year.
Triggering the latest decline was a mild winter in Europe and China, which curbed demand at the same time as supplies were abundant, pushing contracts for the fuel near their lowest in three years. That, along with higher costs on pollution coming from both regulations and a surge in carbon emission allowances in Europe, has pushed utilities to burn more gas instead of coal.
The trend is most apparent in Germany, where Chancellor Angela Merkel’s government is working to close the most polluting power stations. But there are also signs that Asian and U.S. utilities are taking advantage of cheaper gas to clean up their own emissions, confounding President Donald Trump’s vow to increase coal use and scrap the Paris Agreement on climate change.
“This year is becoming greener than 2018 and that’s before the rules for linked markets under Paris have been settled,” said Daniel Rossetto, managing director of Climate Mundial Ltd., a London-based company that advises on climate-protection programs and emissions trading. “As these rules come into play they’ll make it profitable to reduce climate impact.”
In Germany, power from lignite, the dirtiest form of coal, has dropped 16% so far this year. Electricity coming from stations that use harder black coal fell 22%, according to data from the European Energy Exchange AG. Meanwhile, gas power generation has jumped 16%.
There’s a similar story in the U.S., where coal generation dropped 7.8% in the first quarter while gas power jumped 10%, according to the Energy Information Administration. Low natural gas prices are among factors that are this year continuing to push coal out of the U.S. market, said Hannah Hess, who helped author a report on 2018 emissions for data provider Rhodium Group LLC.
“Cold winters in the U.S. Northeast and Midwest once meant increases in coal production,” Hess said. “Today, natural gas is more likely to meet this need — we are now starting to see this trend have a negative impact on carbon emissions.”
Trump and Coal
“Trump’s plan to bring back coal isn’t working,” said Jahn Olsen, an analyst in London at BloombergNEF, the research arm of Bloomberg LP. The company’s owner, Michael Bloomberg, has funded efforts to close coal power plants in the U.S. through his philanthropic arm.
Even in China, the world’s biggest emitter of greenhouse gases, natural gas demand is set to jump another 12% this year after an even faster increase in 2018, with a substantial portion of new demand coming because of a switch away from coal, according to BNEF. It also helps that the cost of liquefied natural gas, or LNG, has plunged across Asia. That’s made the fuel more competitive in emerging markets like Pakistan and Bangladesh, which have signed up for more cargoes of the fuel.
“This near-term potential to deliver the same energy services with a lower carbon footprint should not be overlooked,” said IEA analysts including Sara Moarif. “There’s ample potential for further switching in established power markets like the U.S. and Europe — there could be continued downward pressure on natural gas prices for quite some time as global gas markets work through a wave of new LNG capacity.”
The shift is key for emissions because gas is about half as dirty as coal for each megawatt hour produced. So the switch is likely to reduce greenhouse-gas production, which at a global level remains near record highs. Around the world, nations are struggling to deliver energy and climate policy in line with their commitments under the Paris accord. Switching fuels is an easy way to make quick reductions.
“Moving to a less polluting fossil fuel is always going to be beneficial from the energy-transition perspective,” said David Hewitt, head of oil & gas at Macquarie Group Ltd.’s research unit in London.
In the U.S. there’s only a few regional markets that put a price on carbon emissions. Europe by contrast has a number of policy tools tightening the ratchet on polluters, starting with the Emissions Trading System that requires polluters to turn in allowances covering what comes out of their chimneys.
The cost of those allowances has surpassed 25 euros ($28) a ton, more than triple since the start of 2018. While utilities are allocated some of their allowance for free, they also see policymakers working to reduce that benefit and find other ways to close the most polluting plants. The result has shifted the economics of the power generation industry, making gas a more profitable fuel than coal for the first time in some places.
EU greenhouse gas output covered by the ETS fell 3.9% last year, the European Commission confirmed Wednesday. Policymakers are discussing tightening the target for 2030 and in the past few years have implemented reforms that boosted the price of carbon in the ETS, winning praise from utilities that appreciate the clarity.
“Markets work and I like the ETS because it’s defining a clear carbon dioxide reduction,” said Andree Stracke, chief commercial officer at the supply and trading unit of RWE AG, the region’s biggest emitter. “It delivers as promised.”
Further fuel switching may come from a mix of stronger regulations and more carbon markets as well as the incentive provided by cheap gas.
The International Energy Agency is urging stricter post-2020 carbon targets to meet Paris commitment. Those “need to be taken seriously to regain momentum behind the Paris Agreement,” said Andrew Prag, who leads the IEA’s climate change unit.