LONDON (Bloomberg) — Europe wants its industry to burn more natural gas instead of coal to reduce global warming. The problem is, there isn’t enough gas at the right price.
Depleted gas stores after the coldest winter since 2012, coupled with pipeline constraints on flows from Russia and Norway, have driven prices to their highest level in at least five years. The result: generating electricity from gas is unprofitable for many utilities, according to Bloomberg calculations based on the cost of fuel, power and emission permits.
The upward drift in gas prices complicates the plans of policy makers from German Chancellor Angela Merkel to UK Prime Minister Theresa May, who have set their sights on reducing the emissions blamed for damaging the atmosphere. That requires utilities to switch away from coal in the coming years toward a fuel that isn’t making them money at the moment.
“It’ll become harder to achieve the European fuel switch if there’s not enough gas flowing,” said Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects Ltd., an industry consultant in London.
For decades, the European Union has worked to drive up the cost of polluting in hopes that utilities from RWE AG to Uniper SE will shut off their coal plants and switch to gas and renewables. They started a cap-and-trade system for carbon dioxide emissions in 2005 that for the first time in years has produced a cost on pollution that theoretically should push utilities away from burning coal, as the chart below shows.
Emission permits have doubled this year, rising more than any other major commodity, to their highest level since 2011. They’ve sailed through the 13-to-15-euro-per-ton band that utility Fortum Oyj says should produce a benefit for those who shut their least efficient coal plants and fire up more modern gas stations.
And yet utilities are clinging to their coal plants, reluctant to shut off assets that required billions of dollars of investment. At RWE, Germany’s biggest power generator, executives have mothballed some gas plants as a flood of electricity from wind and solar plants made more of their traditional plants unprofitable.