By Logan Goldie-Scot
Head of Clean Power Research
There is a well-established narrative that natural gas is a transition fuel, an essential tool on the path to deep decarbonization. However, the present has a habit of getting in the way of the future. Low-carbon policies enacted today threaten gas. It faces competition from an expanding suite of technologies in each market it serves. To cap it off, the technologies the gas industry hopes will secure it a role in a future low-carbon economy either are laden with their own shortcomings, or are equally disruptive.
Natural gas is the fastest-growing fossil fuel. Demand grew 2.3% from 2018 to 2019, and global liquefied natural gas (LNG) trade will rise 7% in 2021. Gas is a versatile fuel, integral to the current operation of power systems, industry and buildings globally: 43% of primary gas consumption globally in 2020 went to power, followed by 20% for residential and commercial buildings. Gas-fired power plants produce fewer emissions than coal and can ramp faster to respond to changes in demand and in the output from renewable energy. Gas plants are a valuable source of reliability. In many markets, it is the most cost-competitive source of firm capacity today and offers much sought-after national security benefits in countries with domestic production or cheap, large storage options.
Economy-wide decarbonization efforts, however, put natural gas in an uncomfortable position. It is not a zero-emissions fuel. Natural gas contributed some 22% of energy sector CO2 emissions in 2020, excluding process emissions, and its share is rising. Fugitive emissions, notably methane leakage, are another issue. Methane accounts for 14% of global emissions and traps 84 times more heat than carbon dioxide over the first two decades after its release. The unspoken alliance between gas and renewables for power generation is fraying at the seams, as their mutual antagonist, coal, looks irrevocably weakened across Europe and the United States. In both regions, the narrative around natural gas is shifting from cleaner than coal to dirtier than renewables. Bans on new natural gas hookups for buildings or the repurposing of planned LNG terminals are currently edge cases, but they similarly threaten to dampen demand for the fuel.
The challenge of deep decarbonization
The U.S. is a useful case study of the challenge ahead. Natural gas accounts for roughly 40% of power generation, and roughly half of U.S. homes use natural gas to heat space and water. In absolute terms, the total number of households nationwide using natural gas for heating rose slightly from 2007 to 2017. Some 112GW of new gas power plants were commissioned in the U.S. between 2010 and 2020, a third of all new-build generation capacity that decade. Gas also remains cheap to finance in the U.S.: an April 2021 report by Oxford University found that loan spreads to North America gas power projects decreased 28% when comparing the 2007-2010 and 2017-2020 averages.
On April 22 this year, the Biden administration declared a target to reduce U.S. emissions by 50-52% from 2005 levels by 2030. If we assume the U.S. power system is on track to decarbonize by 2035 – a mammoth task in itself – then the remaining non-power emissions will still need to fall by 30% from 2020 to 2030 to achieve this goal. Non-power emissions rose around 7% in the past decade, not including the impact of the pandemic. This implies a huge reduction in the role for natural gas in the U.S.
Perhaps the U.S. is an extreme example. The recent U.S. targets give that country the third-most ambitious nationally determined contribution, or NDC – emission target set under the Paris agreement. It is behind only the U.K. and the EU 27, based on a BNEF aggregate scoring methodology. There may be a greater role for natural gas in other economies with less ambitious decarbonization goals. Even so, the disconnect between investments in natural gas infrastructure with lifespans counted in decades and the spread of climate commitments is widening. Other nations have also ultimately followed Europe’s lead on climate regulation, whether on coal financing or net-zero commitments. It is hard to imagine Europe and the U.S. remaining alone when it comes to natural gas.
Elsewhere, the European Commission released its EU Taxonomy for climate change mitigation in April 2021. It excluded natural gas for now, but will integrate it in a separate decarbonization framework by year-end. Any inclusion of gas is likely to involve reducing carbon intensity thresholds in order to align with carbon neutrality goals. The intense debate around gas’ inclusion in the framework is in itself a line in the sand, highlighting the frailty of the fuel’s social license.
Other, often local, regulatory challenges to gas are also emerging. The Netherlands and more than 40 U.S. cities, most of them in California, have already banned gas hook-ups in new buildings and Britain will do so as early as 2025. In November 2020, France announced what amounts to a ban on gas heating in homes: new stand-alone homes would need to limit annual CO2 emissions to 4 kilograms per square meter from January 2022. Utilities in Europe are searching for alternative uses for LNG projects: Germany’s Uniper decided in April 2021 to turn a planned terminal into a hydrogen hub. Similarly, French utility Engie pulled out of a deal in November 2020 to import LNG from the U.S., in part due to concerns about methane leakage in the U.S. value chain. These decisions have aroused significant opposition. One of three Texas Railroad Commissioners fumed against Engie’s decision, in a broadside against “environmental extremists”. Legislators in Arizona, Louisiana, Oklahoma and Tennessee have also passed bans on city efforts to restrict natural gas hookups. These actions are a warning sign of the transition risk associated with the technology rather than of its secure future.
The threat from technology
Wind and solar are set to eat further into the run-hours of natural gas power plants. Energy storage technologies make possible even higher penetrations of clean power. These zero-emissions technologies will displace gas that has been providing bulk generation, and will narrow the use case for natural gas to provide firm capacity. This use case does not sustain current levels of gas demand. In the U.K. for instance, combined-cycle gas power plants’ share of electricity generation drops from 39% in 2019 to 10% by 2030 in BloombergNEF’s Economic Transition Scenario. Open-cycle (peaker) gas power plants in the U.K. make up 5% of the installed capacity mix in 2030 but only 1% of generation. Globally, the renewal of investments in electricity network infrastructure, pumped hydro, geothermal and other such technologies, and the introduction of longer-duration storage further narrows the space where gas will play a role. Hydrogen would eliminate it.
Displacing gas used in residential and commercial buildings is the next frontier for decarbonization efforts. The main low-carbon options to decarbonize heating in this segment are electrification using heat pumps or direct electric heating, district heating, or green gases like biogas and hydrogen. Switching to any of these will not be cheap or easy, but simply necessary to achieve deep decarbonization.
So what now for owners, operators and investors in the current gas ecosystem? They can reject the likelihood of stricter decarbonization efforts, lobby against further regulation and keep stakeholders aligned with the notion that they are either transition-ready or likely to receive a transition bailout. They can reduce emissions of both carbon dioxide and methane. And they can future-proof their activities and investments by investing in transition-ready technologies.
The near-term imperative should be on methane monitoring and reduction and responsible practices across the value chain. An integrated approach using drones, satellites, aircraft and on-site sensors is required for accurate accounting of methane emissions. QLM, a BloombergNEF 2021 Pioneer, is one such firm, pitching here at the BNEF New York Innovation Forum in April. Alongside this, firms such as Project Canary, a U.S. startup, are aiming to provide more transparency across the gas value chain with a certification standard for Responsibly Sourced Gas (RSG).
In addition to these efforts, many firms are relying on offsets: The trade of ‘carbon-neutral’ liquefied natural gas cargoes is growing fast, with five reported as of April 2021. Regardless of whether you view this as green-washing or not, it shows the industry recognizes it has an emissions problem. Carbon offsets can deliver significant decarbonization but there is a risk that cheap offsets of dubious value to the environment are used to delay climate efforts. They may ultimately also be limited to sectors where the technical approach to deep decarbonization remains most challenging, such as agriculture or long-haul aviation.
Another approach to reducing gas emissions is Renewable Natural Gas (RNG), or biomethane. It can be easily dropped into the existing gas infrastructure and is a low-carbon option. It is a nice option if you can get it. And herein lies the problem: in a bullish scenario, RNG has the potential to provide up to 13% of current U.S. existing natural gas production. Helpful, but not enough.
Carbon capture and storage (CCS) also has a role to play here. In a narrow use case, it will be limited in a deep decarbonization scenario to specific applications, such as concrete production, since it is not a zero-emissions technology. Capturing 90% of emissions is good but insufficient (if extensively used) in the context of the need for net negative emissions on an annual basis. The role for CCS could expand if direct air capture (DAC) and forestry scale up to provide sufficient negative emissions, but this is not a sure thing. CCS will also be unsuitable in markets that lack either natural storage options or a natural market for the CO2.
This brings us to hydrogen, which straddles the reduction and readiness strategies. The near-term opportunity that reduces emissions without disrupting the industry is blending. Blending natural gas with 20% renewable hydrogen (by volume) would reduce CO2 emissions from combustion by 7%. The relationship is non-linear and a 50:50 H2-CH4 blend results in a CO2 emissions reduction of 22%. Blending is a partial, not complete, solution to deep decarbonization.
Countries will probably achieve deep decarbonization – if at all – with a combination of electrification and low-carbon molecules. Neither biofuels nor CCS will be sufficient on their own, which leaves hydrogen as a leading contender. This is where the transition becomes bumpier. The current gas infrastructure can accept blends of hydrogen but today’s turbines, piping materials, seals, compressors, valves and appliances are not able to run on pure hydrogen. Investments in natural gas infrastructure today risk being stranded tomorrow unless they are hydrogen-ready. In a speech to the World Economic Forum in January, U.S. Climate Envoy John Kerry stated, “If we build out a huge infrastructure for gas now and continue to use it as the bridge fuel […], we’re gonna be stuck with stranded assets in 10 or 20 or 30 years.”
There are early signs of action. Recent announcements suggest some 8.9GW of hydrogen-ready gas turbines could be operating worldwide by 2028, with some projects set to be commissioned as early as this year. Mitsubishi Power and GE already have contracts to supply turbines, and Siemens Energy is developing a product.
Investments in gas pipeline infrastructure today could also be made with a low-carbon future in mind. Up to 80% of the gas network of Cadent – the largest U.K. gas distribution company –is now plastic, which is suitable for 100% hydrogen. A recent paper by researchers at Columbia University’s Center on Global Energy Policy calls for similar action across the U.S. Elsewhere, some 23 gas infrastructure companies in the EU have come together on the European Hydrogen Backbone project to repurpose existing natural gas pipelines and to build new pipelines across the continent to transport hydrogen. Appliances such as ovens, boilers and heaters will similarly need to be hydrogen-ready versions.
There is a real danger here that gas companies sell a narrative that their infrastructure is relevant to a net-zero world, without making meaningful investments to deliver it. The net result is delay and doubt – and the climate does not have time for that. So gas companies need to lay out a clear roadmap to bring their systems in line with net zero. Everything else is noise. They will have to do this in the knowledge that meaningful action today is not a guarantee of future success. Transitions tend to be messy and disruptive rather than smooth.
More aggressive decarbonization goals threaten to curtail gas demand. The lack of global acceptance of this fact is in part because – stealing from Greg Grandin’s The End of the Myth – “the realization that it cannot go on forever is bound to be traumatic.” Coal-to-gas switching delivered clear emission benefits, but yesterday’s transition fuel looks like tomorrow’s stranded asset. There are actionable steps the industry can take to reduce near-term emissions of CO2 and methane, and additional investments in current and future business cycles should be transition-ready. It may well be that gas demand continues to grow but let us stop pretending this won’t come at the expense of carbon goals. Decarbonization and growing (or even flat) natural gas demand are contradictory outcomes.