A lot of hot air? – To what extent could gas lose ground in the heating market in Europe

According to the latest CEDIGAZ report, the gas for heating market in Europe, for many years a stable and growing demand source, is on the cusp of significant change, which is likely to lead to major declines over the coming decades. Key uncertainties remain over the pace and extent of these declines, and gas utilities would be well advised to prepare for changes by involvement in district heating and other technologies which maintain gas as part of a lower carbon heating future.

Natural gas is the dominant fuel for heating residential and commercial properties in the EU, providing 47% of both input energy and useful heat in 2013. However, gas for heating faces major challenges in coming decades due to calls for greater energy efficiency and decarbonisation of the heating sector. Although, in the mid-term , expansion of CHPs and DHNs provide some opportunities for gas, long-term forecasts show gas demand for heating declining over the period to 2050, but there are significant variations in the future levels from a business as usual scenario which sees gas demand at 165 bcm in 2050 (compared to 195 bcm in 2013) to a high energy efficiency scenario which at only 44 bcm.

Gas for heating no longer a secure, growing market

Much of the history of the gas industry in Europe since the 1960s, the residential and commercial heating market has been a growing or at least stable sector, exposed to the seasonal and year-on-year variation caused by climatic effects but not greatly impacted by short-term pricing dynamics and fuel competition as in the case of power generation, or the state of the economy as in industrial gas demand. This situation is changing, albeit slowly, leading to greater uncertainty for gas utilities of future gas demand, particularly in the longer-term. Key factors in this trend include improving efficiency, development of heat pumps and other technology, extension of DHNs and increasing regulatory attention.

Mid-term opportunities – conversion of DHNs to gas

Whilst in all scenarios gas demand is expected to fall, there is an opportunity, in the medium-term and possibly the long-term, to mitigate this fall by the conversion of new and existing DHNs to gas. In many places there is an existing gas network capable of transporting gas to suitable locations for heat plants, and gas as a comparatively clean-burning fossil fuel has advantages over some alternative fuels, particularly where it can be used as part of CHP applications. Therefore in the medium-term there are opportunities for gas to slow its decline by CHP and DHNs applications.

Long-term threats – major decarbonisation of heat supply

In the longer-term, it is very difficult to see ways of the EU meeting agreed carbon reduction targets without a major decarbonisation of heat supply in Europe, which is likely to see gas demand for heating decrease dramatically, particularly in the long-term as existing gas equipment gets replaced with heat pumps, or DHNs are converted to gather waste heat, or other renewable heat sources. Therefore post-2030 the gas for heating market in Europe is likely to see significant and irreversible change.

Mitigating factors – impact of gas prices and economic drivers

Most studies of future heating have been based on assumptions that gas and oil prices will rise considerably from 2010-2013 levels over the coming decades. In many cases, it is only on the presumption of the rising costs of fossil fuels that investment in DHNs, heat pumps and other low carbon heating infrastructure is economically justifiable. The dramatic falls in oil and gas prices in 2014 and 2015 if sustained, call into question the fundamental pricing assumptions that underpin most modelling of the heating market in the future. This is not to say that gas will not increasingly be replaced by alternative low carbon heat sources – in all probability the EU cannot meet its carbon reduction targets without ensuring this occurs – but, if low gas prices endure, the economic incentives on individuals, companies and other organisations to invest in changing heating technology may may be significantly lower than expected. This in turn may lead to governments need to take stronger regulatory measures to enforce switch over to lower carbon heat sources, a process which may be considerably slower than had otherwise been expected.

A lot of hot air? – To what extent could gas lose ground in the heating market in Europe

Nick White, Ben Madden – CEDIGAZ June 2016 – 58 p. – PDF format – public price €300 (VAT excluded) for a one user license