The "Silver Age" of Gas in Europe?

It was his organization that declared a "Golden Age of Gas" across the globe.

But Keisuke Sadamori, Director for Energy Markets and Security, International Energy Agency (IEA) admitted to attendees at the opening of Gas Week 2013 that the characterization may not, in fact, apply to Europe.

"Frankly," he said, "the mood in the European gas industry does not feel like a 'Golden Age'—demand is being squeezed by coal and subsidized renewables—a stark contrast with other parts of the world."

Was there a way, he queried, for the European natural gas industry to find its way to the Golden Age? He said there were two factors working against it: a bad economy, which had been hit by the euro crisis, and the large-scale deployment of renewables and their improving cost efficiencies.

Of the latter, he said: "As you know, wind and solar, offshore wind are increasing, which has a huge implication on the gas industry in Europe."

Still, Mr. Sadamori noted that natural gas and renewables were a "match made in heaven."

"In the US, home of the 'shale gas revolution', there's no evidence that cheap natural gas crowds out renewables," he explained. "They're a good match, because of flexible gas-powered electricity generation, which will be needed as an energy source to complement variable renewable sources."

Concurrently, he said, in order to provide that flexibility, gas would also need to show flexibility. "The new role of gas is complementary, which is inconsistent with the business model based on the rigid, oil price-indexed contracts, and gas plants trying to run baseloads."

Gas turbine capacity, said Mr. Sadamori, would be needed, and EU gas-fired capacity would grow, but it would run at a very low and very volatile load factor.

He explained, "This leads to the legitimate debate: What kind of electricity market design can maintain the economic viability of gas plants?"

He reported that the IEA was working on this issue in the form of a so-called "Electricity Security Action Plan," which should be released this fall.

"Gas itself will need a flexible infrastructure and efficient spot markets as demand fluctuation will be influenced by sunshine and wind. For gas to make its contribution, we need a well functioning market for carbon emissions, providing a meaningful price signal, which will provide investor incentives to the mature renewable technologies," he said.

Europe needed an 'honest debate' on the post 2020 design of carbon and renewables policies, he said. "However, I don't think Europe should have a policy to raise carbon prices until oil-indexed gas imports regain their competitiveness vis a vis coal."

Two functioning markets were necessary, according to Sadamori: for carbon, and for gas itself—where prices were determined by supply and demand.

"In this respect, the European bottle is half full and half empty—the EU gas markets are far more efficient than they've every been, but the real test will be the new upstream and infrastructure projects, which have yet to be passed on the basis of European hub prices."

He said he believed new upstream sources of gas would be needed despite the "doom and gloom." Neither coal nor nuclear were set to expand, according to the IEA.

"That means the growth of gas will be needed in order to fill the gap and take care of variable renewables being integrated into the grid."

While he saw shale gas as having little chance of reaching the same scale as in the US, Mr. Sadamori said the decline of European natural gas production appeared irreversible. He added that LNG was needed in Europe, but had been redirected to Asia; normal EU demand would have made for a tight situation.

He explained, "Current weak demand is a kind of window of opportunity to complete the single market, build up the infrastructure platform for new diversified sources and execute the necessary market design and policy reforms.

"Hopefully, by the time the euro crisis is confined to bad memories of the past, we'll be able to debate whether this is a 'Golden Age of Gas' or the 'Golden Age of Renewables', and I'm quite sure it will be both," concluded the IEA's Keisuke Sadamori.