In October 2014, EU leaders agreed on common climate and energy targets for 2030. These included a 40% reduction in GHG emissions relative to 1990 levels, along with targets for renewables deployment and energy efficiency. However, Europe’s main decarbonisation instrument, the EU ETS Phase III, is well out of step with her stated ambitions. The 20% reduction in GHG emissions by 2020 should easily be achieved. However, the 2030 target requires credible commitment to much more stringent policies, particularly in power, where the economics dictate much of the emission reduction burden should be borne.
At the core of the European Commission’s strategy to achieve these targets is a substantial tightening of the EU ETS cap as it enters Phase IV (2021-2028). The new cap is expected to be formally written into legislation in the lead-up to the Paris summit, along with the introduction of a Market Stability Reserve to provide a quasi-floor to the price of EUAs.
In light of this, a switch from coal to gas emerges as a key source of affordable emissions reductions over the coming decade. A credible policy shift could raise the carbon price above today’s level of €7.5/tCO2 and bring the end of coal nearer. In the long term, the cost and availability of RES, nuclear and CCS technologies are key uncertainties.
Yet, many investors remain willing to bet big on a carbon price that remains low. Additional lignite power stations and open cast mines are being planned in Central and Eastern Europe, and the share of coal-fired electricity has remained stubbornly close to 30%. All the while, much of Europe’s gas-fired generation fleet remains idle.
This report assesses the potential of natural gas to be a low-cost, low-carbon alternative to coal in Europe, in the 2020s and beyond. Specifically, it answers the following questions:
- Will the tightening of EU’s carbon budget be enough to cause a switch in base load generation technology in the 2020s? Who are the winners and losers?
- Which countries will see the largest shift from coal to gas or gas-fired electricity? What will this do to power prices?
- What will a phase-out of coal imply for Europe’s underutilised CCGT capacity? How much new build is needed to replace closing coal plants?
- What would a shift in policy do to European gas demand? What does this imply for infrastructure build-out, import dependency and security of supply?
- What are the implications for global coal and gas prices?
- How effective are unilateral EU decarbonisation efforts when there is potential for coal and carbon ‘leakage’ to other countries? What are the alternatives?