LNG macro analysis, page-42

A good example of Germany's quest to change its energy mix. Reducing consumption of coal while maintaining safe energy supply will be difficult for many countries. Indeed it will be a process that unfolds over decades not years and analysts predict gas will play a pivotal role. Gas is cleaner and cheaper than renewables and will be for decades to come.
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Germany’s energy transition and its gas outlook
German gas demand has been on the rise in recent years, but mid-term growth in the market will need the support of government policies
By Catriona Scott23 April 2018
Further declines in coal-fired power generation are anticipated this year. (Vattenfall)

Germany’s energy transition is facing challenges. Early investment in renewables and the push for change in the country’s energy mix has resulted in high electricity prices. Yet the country – seen as a leader in the fight against climate change – will miss its nationally set emission reduction targets for 2020, and even its 2030 targets are in question. Germany has a clear plan to phase out nuclear and coal-fired power generation is set to be reduced. This will substantially change the country’s power generation mix, and potentially its electricity trading position, with implications for countries that import German electricity. While there are opportunities for gas as Europe’s largest energy market manages the next phase of its energy transition, clear government policy will be needed for growth of the gas market to be realised.

Gas demand
Germany’s gas demand increased by 3% on an annual basis last year, to 92 billion cubic metres. This is lower than the growth for OECD Europe, where gas demand increased by 5% year on year in 2017, to 527 bcm. Nevertheless, Germany still accounted for 17% of OECD Europe’s gas demand last year. Although growth has not been steady in recent years – with demand dropping by 15% year on year in 2014 – Germany’s gas demand has grown by 3.5% since 2010.


Power generation accounted for roughly 45% of Germany’s gas demand in 2017, with demand growth from the sector supporting overall gains in consumption.

The country’s gas consumption received a boost at the start of 2018 from cold weather, which supported heating-related demand. However, while changes in residential, commercial and industrial use will have an impact on demand, it will be the power sector that continues to largely direct trends in Germany’s gas use in the mid-term.

Power sector gas consumption is estimated to have been limited in Q1, and this will cap potential gains in total gas use for the quarter. Total gas demand growth this year is expected to be moderate, at around 1%.

The amount of power Germany generated from gas rose by 6% on an annual basis in 2017, to 86 TWh, equivalent to 13% of the power mix. This followed stronger annual growth of 31% in 2016. However, Germany’s power output is estimated to have grown by less than 1% on an annual basis in Q1 2018. This is due in part to lower requirements for electricity exports, not just domestic supply. Low growth limited the requirements for gas in the sector. Gas-fired power output is expected to fall by roughly 38% on an annual basis over the quarter. The rise of renewables in the power mix has also hit requirements for gas at the start of this year, despite the continued decline of coal-fired power.


Changing generation
Coal-fired generation fell by 7% on an annual basis last year, to 242 TWh. Although coal still accounted for 37% of the power mix, its share had dropped from 42% in 2015 and 40% in 2016. Further declines in coal-fired power generation are anticipated this year, with a year-on-year drop of around 8% in coal-fired output estimated in Q1.

The government is aiming to reduce coal-fired generation by 50% by 2030. The planned closure of some of Germany’s older and most polluting coal-fired plants will help reduce coal’s share in the German energy mix. Policy support for reducing the role of coal in the power mix is anticipated to continue under the new government as it will be essential for Germany to meet its emission reduction targets.


While a complete phase-out of coal looks unlikely for the foreseeable future, the country’s nuclear capacity has a date for shutdown. All of Germany’s nuclear plants are to be taken offline by 2022. Nuclear accounted for around 12% of Germany’s total power generation last year – generating 76 TWh – and is estimated to have accounted for around 13% of generation in Q1. The closure of all of Germany’s nuclear capacity is set to create a higher dependence on generation from other sources – including gas.

Developing policy
While the German government has not been explicitly against gas, it has not introduced policies explicitly supporting it either. Nevertheless, there is room for growth in German gas demand in the short term. The country’s economy is forecast to expand by around 2.4% this year and by 2.2% next year. While growth in total power demand is expected to be limited, rising power sector gas consumption is expected to support growth in Germany’s overall gas demand. And gas taking a larger share of the power mix – at the expense of coal – could help emissions in the short term.

German emissions fell by 0.5% on an annual basis in 2017, to 904.7 mt of CO2 equivalent, with power sector emissions dropping by 4.1%. However, the country is set to miss its nationally set target of reducing emissions by 40% compared with 1990 levels by 2020. The government had pledged to reduce emissions by that level as soon as possible and has not formally abandoned its 2030 target, although reaching it will prove challenging. However, the pressure on the new German government to get the country back on track in the fight against climate change is expected to be strong – and potentially favourable for gas even if prices rise.

European hub gas prices increased last year, but so did German gas demand. The Gaspool day-ahead averaged around €17.4/MWh in 2017 compared with €14.1/MWh in 2016. Prices last year were still comparatively low – the Gaspool day-ahead averaged €19.9/MWh in 2015 and €27.2/MWh in 2013. But while GGA forecasts a likely rise in European hub prices over the next five years, the gains are expected to be modest. GGA forecasts the NBP month-ahead will average 46.6 p/th in 2018 and around 50 p/th in 2020. With European hub prices - including those in Germany - likely to make similar moderate gains, gas is expected to remain relatively competitive through the end of the decade.


However, policy support – either direct or indirect – will be needed for gas to continue to gain market share in the mid-term. Germany does not look likely to implement a carbon floor price as the UK has done and as the Netherlands plans to do in 2020. This is despite the call from France to help support an EU-wide carbon floor price. Additionally, while carbon prices have risen and could continue to see gains, it is questionable whether they will consistently be around the price needed to encourage fuel switching – which is in itself variable. Consequently, solid policies supporting gas are likely to be needed for demand to see stable growth in the mid-term.

In the longer term, the closure of Germany’s nuclear capacity, along with the reduction in its coal-fired generation, will not only increase opportunities for other sources of power - including gas - but will also likely change Germany’s power trading position. Germany is a major net exporter of electricity in Europe, meaning there will be ramifications for other major markets in the region should it become a net importer. It could also have implications for the region’s power generation mix in the mid-term.

How the newly formed government moves forward with environmentally friendly yet economically sound energy policies will be closely watched. And while economic and energy demand growth are likely to support gas through the short term, policy will be needed if gas is to play a growing role as the energy transition evolves.