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Is using natural gas as a transition fuel the best choice?

Natural gas is an easy-to-deploy hydrocarbon producing 50 per cent less emissions than coal, but is transitioning to it really a step in the right direction?

Natural gas is widely sold as a transitional fuel, an easy to deploy hydrocarbon producing 50 per cent less emissions than coal. 

Yet, as the momentum to heed scientists’ warnings that carbon emissions must be halved this decade ramp up, questions are arising about the fossil fuel’s place in the energy mix. In particular, whether new investments in gas are, in fact, commensurate with the Paris Climate Agreement. 

“The net-zero targets mean there isn’t time for gas as a bridge fuel; it’s easier to replace coal globally with renewables,” says Jennifer Cogburn, Gas Americas lead at BloombergNEF.   “Gas is now on a similar downward trajectory to coal, just a little bit lagged.” 

What’s more, some are questioning the fuel’s stated climate credentials. According to a February briefing from Climate Bonds Initiative, an international NGO, evidence is emerging that the level of greenhouse-gas (GHG) emissions from gas-fired power is much closer to coal. It says previous calculations have not included the supply chain for gas, a significant omission.

At the production level, the high prevalence of leaked methane, a gas more potent than CO2, is well known in the industry. In January, the International Energy Agency estimated oil and gas operations create just over 5 per cent of global energy-related GHG emissions this way. At International Petroleum Week in February, Maarten Wetselaar, integrated gas and new energies director at Shell, said a failure to tackle this issue could be “existential” for the sector. 

Scientists largely agree, gas needs to be phased out of the energy mix by around 2035. Yet, in the UK and European Union, gas-fired power accounts for between 20 and 40 per cent of the energy mix, and in the UK meets around 80 per cent of homes’ heating needs. Most coal-fired power plants are expected to be phased out and replaced by gas-fired ones, which have a 25-year lifespan. 

However, it is well documented how investors are increasingly becoming nervous about the environmental, social and governance risks of fossil fuels, including gas. Some projects are already being impacted. In February, after legal challenges, energy giant Drax pulled out of a plan to build a large gas-fired power plant in the UK. The company had already sold some of its other gas assets. 

Juliet Davenport, founder and chief executive of Good Energy, thinks the move is significant. “The economics for gas power plants are being challenged by drops in load factors due to renewables, in some cases from 80 to 60 per cent,” she says. 

France’s Engie also recently backed out of a reported $7-billion, 20-year contract to import US liquefied natural gas (LNG) due to concerns about associated methane emissions.

However, most analysts see natural gas remaining strong in the market. Wood Mackenzie’s latest report says it will be resilient in Europe until 2030. It estimates LNG will account for 27 per cent of the EU’s gas supply mix by then, but adds it will face pressure to cut carbon and methane emissions.

“Our research finds overall emissions can be reduced significantly just by switching to gas quicker,” says Murray Douglas, research director at Wood Mackenzie. “We’re seeing companies take decisions to build new infrastructure, often entirely private investments; there’s still a requirement to satisfy gas supply needs. Realistically, we’re not going to suddenly halve our gas use in ten or fifteen years; it’s going to be slow progress.” 

He refers to gas projects such as the Baltic Pipe being laid between Denmark and Poland, and a new LNG terminal in the latter. 

The risks, however, “are heavily weighted to the downside”, he notes. These include, most notably, battery technology, says Rystad Energy’s head of gas and power markets, Carlos Torres Diaz. 

“Batteries are still in the very early stages and can only provide back-up to the grid for around one to two hours, but if the technology continues to evolve, then this could start displacing some of gas’s capacity,” he says. 

Let’s face it, it’s the lesson from COVID isn’t it: you listen to the scientists and act early

Along with increasing renewables, other technologies could also take capacity away from gas, such as hydrogen and heat pumps for home heating. The UK is targeting 600,000 heat pumps installed every year to 2028, along with phasing out gas boilers by the mid-2030s. How quickly some of these technologies are deployed and commercialised, however, depends largely on how stringent impending policy, including carbon pricing, will be.

“There’s a lot of interest in the detail, which is not yet there. How will we move along this [decarbonisation] path? There are questions to be answered about what all the regulations will look like and what impact they’ll have,” says Gavin Watson, a lawyer at Pillsbury energy practice. 

To shore up against these risks, SSE Thermal, a gas asset owner, is actively investing in carbon capture and storage (CCS). The company is currently working to deliver CCS-equipped power stations in the UK that will capture 1.5 million tonnes of CO2 annually by the mid-2020s. 

Wood Mackenzie’s Douglas says to secure gas’s future beyond 2030, there will need to be “more tangible progress” with CCS, which has been minimal so far.

There are those, however, who continue to argue the shift away from gas should simply happen quicker for the climate’s sake.

“Let’s face it, it’s the lesson from COVID isn’t it: you listen to the scientists and act early,” says Sean Kidney, Climate Bonds Initiative chief executive. 

Going forward, use of natural gas, in Europe at least, is likely to decline. According to BloombergNEF, it already peaked in 2019, with demand shifting primarily to Asia, where 47 per cent of energy consumption is met with coal. 

But given such pressing climate targets, once coal is gone, Rystad Energy’s Torres Diaz says: “Definitely, the next big focus will be gas.”