CERRE Executive Seminar 07 March 2017

1. Challenges for Natural Gas in the Context of the Energy Union Prof. Chloe Le Coq, CERRE and Stockholm School of Economics Prof. Sebastian Schwenen, CERRE and Technical University of Munich CERRE Executive Seminar 07 March 2017

2. Outline of the Report 1. Uncertain Times for Natural Gas 2. Recent Market Developments 3. Regulatory Uncertainty 4. Challenges ahead 5. Recommendations

3. 1. Uncertain Times for Natural Gas The role of natural gas in the EU’s energy future is unclear: • Gas often viewed as the fossil fuel candidate to support the energy transition • Low-carbon footprint relative to coal • Beneficial in terms of sustainability • New supply sources and origins of import • Beneficial in terms of security of supply and affordability • Yet, role of gas unclear • Recent market developments • Regulatory uncertainty

4. 2. Recent Market Developments: Demand • Increase in EU gas demand in 2015, but varying trend by sector: • Power market: • Competition with other fossil fuels (coal) • As renewable back-up: competition with storage, demand, VPPs, interconnectors, … • Future deployment of nuclear, availability of CCS • Heating market: • Market penetration of renewable heating technology • Development of energy efficiency in buildings • Transport: • Alternative fuels in transport?

5. 2. Recent Market Developments: Supply • Abundant supply, different levels of reliability and affordability: • Origins: • Decreasing EU production, shale in the EU? • Abundance of natural gas at global level, but limited number of suppliers • Diversification gas transport routes: • Reverse flows • LNG • Storage • Import prices: • Import prices differ by origin (LNG as price cap for pipeline gas)

6. 2. Recent Market Developments: Price Takenfrom BP (2016).

7. 3. Regulatory Uncertainty • Organizing competitive markets: • Usual reply to uncertainty is to write long-term contracts • In recent years, move to short-termism observed • Short-term market design still “under review” • Ensuring security of supply: • Reliance on natural gas differs across the EU • Implementation of solidarity rule may depend on political will

8. 3. Regulatory Uncertainty cont’d • Achieving sustainability: • Efforts to implement “high” carbon prices differ across Member States • Together with oversupply of allowances, persistently low ETS price • National ETS price floor initiatives • Might boost demand for natural gas again • Depending on implementation of winter package proposals, support for • Renewable deployment in power and heating sectors • Energy efficiency measures • Use of gas in transport

9. 4. Challenges ahead

10. 5. Recommendations (Market Regulation) • Avoid “too low” ETS prices to incentivize gas-fired generation • Power market key driver of gas demand • Currently, favourable-to-coal carbon content of gas undervalued • Better integration of liquid gas and power markets • Guarantee liquid virtual gas hubs (where needed) • Allow for active short-term market trading, holds especially for trades close to delivery and system operation • On power markets, allow for energy prices to recover costs

11. 5. Recommendations (Infrastructure Regulation) • Diversification of import routes • Via local infrastructure investments , e.g. Central and Eastern Europe • Assessment of network capacity allocation • Review efficiency of current system within entry/exit regime (Target Model) • Make rich data available in allocation processes • Amortization time for gas networks • Avoid stranded assets • Avoid vicious circle of consumer leaving market prematurely

12. 5. Recommendations (Gas Sector) • Invest in innovative gas products • Biogas and biomethane • Hydrogen • CCS • Innovative usage of infrastructure • Possibility to use existing infrastructure for transporting hydrogen