Interview with Dr Klaus-Dieter Borchardt, Director Internal Energy Market, DG Energy.

(First published Gas Strategies December 2018)

Q. Recently you have been outlining a decarbonisation plan for Europe that involves gas both as a transition fuel and a destination fuel. Can you briefly explain the plan?

A. Yes, of course. It’s useful in transition because as we expand renewable resources, their intermittency means we need a reliable back-up that can also contribute to emissions goals. We have nuclear, which is clean regarding CO2, but not fast enough to respond to renewable fluctuations in minutes and seconds. Coal has a high emissions problem. So, gas is the one that works and cuts emissions. It’s less polluting and can be ramped up in seconds.

Looking at time scale, natural gas can be used in the transitional period to backup renewables – but only out to 2030/35 – not longer, because it has too much carbon. Past this point, as a destination fuel, the gas must be decarbonised or renewable.

The alternative, of decarbonising through electrification only, will cost an absolute fortune and is technically not feasible. For example, certain areas of industry work at such high temperatures they cannot use electricity; while batteries are not always up to covering intermittency.

Q. And incorporating gas makes use of existing infrastructure?

A. If you kick out gas you make the whole gas grid a stranded asset. We are still investing heavily, but we should stop immediately if we were only looking at a 5-10 year use for the infrastructure.

So, if you want to do things in the most cost-effective way, you need to use both power and gas.

Q. Do you have wider support for this approach?

A. There is a lot of interest and sympathy. Last October the Madrid forum was organised around these issues, gathering all stakeholders including member states, industry groups and REAs. There was widespread agreement that we should go for a dual system with electricity and gas. Even Eurelectric – very much in the electrification camp – were saying they could account for only 65-68% of zero-carbon energy demand by 2050. They said there would be a seasonal storage problem if they didn’t have a “super-battery” and asked the gas sector to help them overcome this problem; potentially by using gas as energy storage.

But while there has been widespread agreement, politically speaking in the European parliament, some are still saying that gas has to go… two or three years maybe as a transition fuel, but after that it has to go. They are not even engaging in the discussion on renewable gas – biomethane, or even green hydrogen from surplus renewables…

Despite this, I am confident we will get the dual system established.

Q. Looking at the transition, how does gas win out over coal without more help if gas prices rise?   For example, in the UK there has been a rise in coal use over recent months?

A. Gas does have to win the competition with coal. You mentioned the carbon price; the ETS price has gone up, and we hope it will increase further, which will make coal less competitive compared to gas. If that does not happen, then more action may be needed.

We also believe that gas prices will go down again, and that the recent rises were not a long-term development. We’re working to bring more competition into the market to keep gas prices in check, but we will not directly intervene in the markets to achieve the desired result.

Q. Looking at the decarbonisation or “greening” of gas – how to you redesign the regulatory model to achieve this?

A. Ask me something easier… We are just at the point of launching studies and developing policy. The first thing we need to do is an in-depth assessment of each member state and their approach to producing these gases, for instance access to infrastructure and blending; then tackle the question of how to boost the production of renewable gases, for instance by setting targets. But no decisions have been taken yet. We are not sure what we can put into legislation at EU level. But targets and removing barriers is what we are looking at.

Q. How about the unbundled nature of the sector – are the challenges of decarbonisation so great we may have to bring the supplier and infrastructure parts of the sector back together?

A. We don’t have to give up on unbundling to achieve decarbonisation. The unbundling principle is still valid, and we should stick to it, but it should not become a dogma.

For example, one of the main parts of the sector-coupling is power-to-gas, which brings a lot of advantages. At the moment, we have interest in a bigger demonstration project, bigger than we have today, but it is coming from TSOs – both electricity and gas by the way. Now if you apply the unbundling rules strictly, then this should not be allowed – it should be left to the market participants.

But for the moment there are no market players developing such projects – so how long do you wait? We could do a market test, as we have proposed in the “Clean Energy Package for All Europeans” for batteries, where we see if market players will act, and if not then we allow TSOs and DSOs to step in.

We are also looking to plan power-to-gas development to ensure TSOs don’t become the owner of the molecules they produce, and only do the transformation from electricity to gas – so they are not involved in the contractual relationship between the supplier of the molecules and the customer. Whether that is enough we don’t know, but if TSOs and DSOs are allowed to participate in these activities, we have to make sure operating such a plant is an extension of an infrastructure business and not a market-related one.

Unbundling was a great success, and I don’t think anybody wants to go back to vertically integrated companies. But these are difficult and sensible questions, and we are looking into whether and how to adapt market rules. I think we can also take a forward-looking approach and adapt these rules for the future when justified.

Q. There is, of course, risk in that for companies involved… Some utilities have lost billions of Euros in value as they have sought to adapt to the on-going challenges of liberalisation and renewables. Will gas network businesses and other companies involved in this next stage be at similar risk should they attempt to advance your gas goals?

A. Difficult to say. It’s why we need a comprehensive proposal to frame the future of these processes in the best manner, at least at EU level, so these companies can benefit from a more predictable and stable framework within which they can work successfully. However, we cannot say the world will not change. We are trying to help, including on how we could decommission some infrastructure pieces and reduce the depreciation period or other things we identified at the last Madrid forum. Regulators at EU level are looking into that.

Q.  Do you believe market-based systems will be suitable for grids with large amounts of intermittent renewables – given that prices fall sharply during periods of high renewable output once a significant capacity is installed? Does green hydrogen provide an alternative revenue stream, lifting income (as well as stopping curtailment) during periods of high renewable output?

A. I do see it as an alternative revenue stream for these producers, yes. On the other hand, while the market prices may go down for renewable energy, there are other supply obligations that come with it. If there is no wind, those responsible must go to the spot market or have long term contracts with gas generators, who preferably use renewable gas.  

Q. Do you see a market developing for hydrogen, and will you be attempting to facilitate this?

A. Hydrogen is not a silver bullet, and not likely to be developed cross-border. It’s mostly likely to be developed close to big consumers in industrialised areas. Examples include the Leeds project or another in the northern part of Germany, where you have a huge amount of renewable wind power that often blows too much and has to be curtailed. It costs Eur260 million per year in compensation to curtail production at this site alone, which is money that could go towards investing in hydrogen production, which will be consumed in that region, with development of local demand and distribution. This makes economic sense as it is excess power that you are using to produce the hydrogen.

If you scale up these, for example in the North Sea with its planned wind grid: there we will produce so much wind that there will be plenty of capacity to use the surplus in this way – but only for specific regions and specific projects. How do we encourage it to happen? For specific infrastructure I would like to see the EU open up the connecting route facility and give those who are willing to test larger scale projects some support. If we want to make power-to-gas a success, we must scale up from current 50-100 megawatts to gigawatts. I would like to see most of the regulatory restraints stripped away, so a company can develop such a project more freely – on the condition that results are available to everybody.

Q. What do you think of the HyNet project in Northwest England, which is using reformed methane rather than making the hydrogen via electrolysis?

A. I’m not as familiar with that one, but I do know there are a whole range of different technologies that can be developed to reach the same goal, and it is important that we remain technologically-neutral to get the best result. There is another step to the hydrogen chain, where it is converted on to green methane, and this has the advantage that it can use the existing gas network infrastructure without any restriction.

Q. Going back to the sector coupling, how do you see the regulation developing to incentivise that?

A. We are issuing a study on this, with results in April 2019. We’re looking first at national regulatory frameworks where we can see barriers, both on the infrastructure and on the market side, and then we’ll identify gaps that can be filled at the EU level.

Now, how can we incentivise this? Well, it is not just about incentives, there are also obligations. For instance, for infrastructure planning ENSOs will have to come to us with an inter-linked model when they establish a ten-year network development plan – so not for gas and electricity separately but combined. And also make an assessment of where existing infrastructure could be used most productively in a possible future joint system, including storing hydrogen from surplus power in the gas infrastructure.

We will also have the TSO/DSO platform and we have created an EU DSO entity – these are the things we can use to help achieve this.

There will not be a major subsidy flow or public funds, that’s not our policy. I am completely against establishing new subsidy schemes, the transition has to come through the development of new technologies, from start-ups through to being proved in the market.

Q. What are the implications of Brexit?

A. Can’t comment on that…

Q. While the Greens are not yet on board in the EU parliament, the other side is getting the public on board… Are you concerned about public support for the development and funding of such ambitious plans, particularly given the Macron’s failed attempts to increase environmental taxes?

A. Yes, the transition will cost a lot of tax-payers money, so we need clear agreement from the member states, because if we want to develop this way the composition of the energy price has to change – the levy and tax component has to go down. We will see increases in network charges, but not so much in the commodity component, I expect. But with taxes and levies already at 50-60% of the final energy price, that is already too high and not the right means to fund the required investments in the energy transition – that has to change. We need to find other ways and means there.

We have discussed the ETS, carbon pricing, and then we are close to the issues seen in France. But you have to explain to the citizens what you are doing and take them along, because the support for the energy transition is very strong among the European population. But you have to explain, and you cannot expect the consumer to bare all the cost.

Q. Should national governments and the EU have a major communications exercise to inform the public of what it will take to get to the zero-carbon goals and how it’s going to be done?

A. That needs to be decided, but it won’t be done under the current Commission. The new Commission might want to put that into practise. We are still in the development phase of our duel plan, collecting information on the problems that are being brought to our attention. This will last through the first half of 2019, and then work on impact assessments will begin.

Q. Did COP24 have any impact on the plans?

A. Yes, it gives us a rule book, so we can move towards the Paris goals under common rules. But for the EU, we will implement our obligations, which increases pressure on the Commission to come forward with proposals of how we get to 85-90-100% carbon removal. It reinforces the need to look into these paths and processes and get a plan sorted out.

Q. The only thing you didn’t mention in June was demand side management – do you see any role for that?

A. I am a big fan of that, actually. In electricity it is one of our key flexibility tools. On the gas side the potential is not comparable.

Q. On reforming methane to make hydrogen, the Hynet Project Manager recently told me it was the only way to make a quick largescale decarbonisation gain – an easy win – in the heating system, and that electrolysis didn’t yet have the scale required. What do you think of helping this along for a quick early gain to help demonstrate to opponents, as well as moving us forward on decarbonisation?

A. It’s interesting and we should look at it and we do. We cannot reach the scale we need with electrolysis yet. I’m quite convinced that if we put this in the right regulatory framework the technologies will follow that we won’t even recognise today, and this could be the beginning of one of them.

Q. It involves CCS, of course, and given the six CCS plants that never got built there’s a risk. Could the EU be prepared to back more CCS plants in future?

A. The problem with those was that we combined CCS and CCU with power plants. Instead, we should combine it with industrial users, for instance using hydrogen in the steel or chemical industry, and then either using the carbon for other industrial purposes or storing it in the North Sea as the Norwegians are doing. The port of Rotterdam, too, has a CO2 pipeline for use in greenhouses, which is very impressive. We will see more of these combinations.

Q. And the motivation for those industrial users is of course the carbon price, the emissions prices?

A. Yes, exactly. We are on track to achieve our decarbonisation goals in our energy system so far, but it is clear we will not get to the overall Paris targets if we do not change industry, heating and transport too. We are realising that now. The higher carbon price helps.

Above all, we want this to be a comprehensive sustainable narrative and not just that we are defending the interest of the gas sector. We really want to achieve a more resilient, decarbonised dual energy system. Power is more digitised than gas and so more open to cyber-attacks. I would be happier if we had a second layer, which can help because it is physically there. It’s too early to give up on it and put all our eggs in one basket.       

It is important not to forget to ensure security, sustainability and affordability through the energy transition, but it is not easy to achieve all three.

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