Natural gas will fast become the fossil fuel of choice to complement renewable energy for the foreseeable future, after long being regarded as merely a step on the way to a greener energy mix.
Especially in electricity generation, natural gas has so far stood in competition with coal-fired and nuclear production.
But coal’s high carbon emission levels have reduced its market allure, while the crisis at Japan’s Fukushima plant following an earthquake in March has put a serious dent in the prospects for global nuclear power generation.
At the same time, new technologies in extracting gas have sharply raised reserve forecasts, and it emits less carbon and is not as potentially dangerous as nuclear power.
“Natural gas is a bridge fuel from fossil to renewable, but there is a lot of discussion now of gas as a destination fuel,” Steve Bolze, president and chief executive of General Electric’s power and water unit (GE Power and Water), said this week.
The International Energy Agency (IEA) said in a special report in June that increasing gas supplies from unconventional sources could encourage demand to rise to levels exceeding coal by 2030 and close to oil by 2035 if certain conditions are met.
The IEA also expected the growth of nuclear power generation to slow as governments review their energy policies following Fukushima.
GE’s Bolze said there was potential to increase gas production by more than 150 billion cubic meters a year, or by 5 percent, by making use of flare gas coming from oil extraction.
Banks shorting coal
A similar view is emerging on the trading floors of some banks, which are positioning themselves to favor gas over coal, especially in emissions-sensitive Europe, where utilities, industrial companies and air carriers have to cover their emissions through European Union Allowance certificates.
“We are taking the long-term view that coal use - especially in Europe - is going to see zero to negative growth in the mid to long-term and are positioning ourselves accordingly,” a coal trader with a leading bank said.
“The outlook for coal demand in all of Europe’s major economies is extremely weak because of climate reduction targets and the improving outlook on gas, and that means that the coal market is overpriced,” he said.
Although Germany plans to exit nuclear power by 2022, most analysts say they do not expect the shift to benefit coal. Instead, they see the country increasing renewable energy production, supported by a boost in gas generation.
In nuclear-dominated France, gas also trumps coal.
In June, Electricite de France, Europe’s biggest power generator, said it would invest 1 billion euros ($1.4 billion) in a new liquefied natural gas (LNG) terminal in Dunkirk, expected to be operational in 2015.
And in Britain, the future of coal-fired power generation also looks bleak as companies are likely to replace around 7 gigawatts (GW) of coal capacity, which will be phased out by the end of 2015, with gas-fired power stations, rather than state-of-the-art coal plants.
Italy and Spain are also set to raise production of gas, rather than coal.
In a post-2020 scenario, the development of carbon capture and storage (CCS) technology could alter this bearish outlook for coal, but the technology is not yet commercially viable and has little popular support.
“We are positioning for an anti-coal, pro-gas scenario in Europe for 2020 and beyond,” the bank trader said.
Many analysts cite German utility RWE an example of a potential loser, because it relies heavily on coal and nuclear power generation but relatively little on renewables and gas.
Between early 2010 and early 2011, RWE’s share prices declined in line with falling coal power generation revenue margins (known as dark spreads).
But the company’s strong reliance on nuclear generation also meant that when the dark spread recovered after Fukushima, RWE shares failed to follow.
