Themes of the year: Gas remains crucial, but debate needs nuance

Policymaking must tackle natural gas’ role in the energy system in a way that acknowledges its status as a fossil fuel and avoids greenwashing.

2021 was quite a year for the energy sector. February’s storms in Texas shone a light on grid volatility, hedging contracts and merchant power. Europe’s autumn power price surge has distorted a market that will likely be impacted at least until the end of Q1 2022. And decarbonisation pledges – or lack thereof, in some cases – in the lead up to COP26 provided considerable investment opportunities.

A key theme within all of these episodes has been the role of natural gas. In Texas, a lack of available capacity to plug the power shortage caused by the storms was partly the result, as was revealed subsequently, of at least 133 gas plants not having been signed up to a list of assets to be kept online, whatever the circumstances. They either failed to sign up or did not know the list existed, exacerbating the effects of the storm.

In Europe’s autumn of discontent, a restricted gas supply, in part due to geopolitical tensions with Russia, a shortage of gas storage and lower-than-expected wind generation sent electricity prices skyrocketing. Of the many things this highlighted, filling the baseload gap as Europe decarbonises and builds out more renewables was front and centre.

As COP26 came to an end in mid-November, a failure to even agree fully on when coal should be displaced meant that gas wasn’t even on the agenda of the final agreement, paving the way for the fossil fuel to continue to play a leading role in the energy sector.

Against this backdrop for much of the year has been the development of the European Union’s taxonomy for sustainable investments and its designations of what constitutes a ‘green’ investment. Much like the COP26 agreement, vested interests from various governments within the bloc have meant that investments in gas could well be included to meet the ‘green’ taxonomy agenda. At this point, the EU’s indecision on the matter has only hindered the development of the taxonomy and left it in a catch-22 situation as it battles against the uncertainty.

The hope for 2022, then, is that the debate around the role of gas in the energy sector and the energy transition becomes a bit more nuanced.

While it may sometimes be used as a somewhat disingenuous reasoning, the past 12 months have re-emphasised that, for better or worse, gas is a part of the energy transition as the search for cleaner forms of baseload electricity and decarbonised heating continues. Hydrogen is increasingly tipped as the answer to these questions, although its use case and economics remain under question. In addition, there is a need for hydrogen to be a solid shade of green to truly fulfill decarbonisation aims.

In the meantime, we need more effective policy mechanisms that guarantee security of supply while reducing emissions, discourage greenwashing and ensure the future of gas investment in writing. Policy action needs to also make sure gas is at least part of the conversation when the next COP conference comes along.

Yet, while some investors are playing their part, a quandary remains.

“It is hard to see who will build a combined cycle gas turbine plant or a gas storage facility,” Damian Darragh, executive chairman of Conrad Energy, a UK-based distributed energy and battery storage platform established by I Squared Capital, told us in November. “It’s a huge capital expenditure when there’s a 2035 or 2050 deadline looming. It’s a real policy dilemma and I don’t think anybody’s got a particularly good answer for that.”

A “good answer” in 2022, though, cannot be avoiding gas’ status as a fossil fuel.