Bio Methane, Energy Security, and the Winter Energy Crisis

September 8, 2022 89 1

Doug Wood, Chair of the Gas Committee at EFET recently joined Ben Hillary, Managing Director at Commodities People for an interesting discussion about developments of markets for bio methane and hydrogen, the fit for 55 package and energy security requirements.

Ben Hillary: We are absolutely delighted to be joined by Doug Wood, Chair of the Gas Committee at EFET, the European Federation of Energy Traders, a role, which I'm sure is keeping him very, very, very busy at the moment. Doug, Welcome, and thanks so much for being here with us. Well, diving right in, what do you think is critical to ensure Europe is really prepared for the winter ahead?

Doug Wood: Well, there's certainly a lot going on at the moment in a number of camps, and the Commission has been working full scale and so have member states and are looking at many of the options available. Certainly storage will be important. And storage filling has been progressing across summer during the objection period pretty well. But we must remember that storage doesn't bring any more gas over the year just gives you optionality when it will arrive, it's not the same as bringing on new deliveries. So that's not going to be enough.

What we are certainly focusing on is in the first instance, energy efficiency is a bit of a no brainer, measures to encourage people to save consumption, to introduce energy efficient vendors, to invest in energy efficiency, and price signals are very important for that. But going beyond that, if we need to protect vulnerable customers and critical industries, during what could potentially be a greater supply shortfall, and not only for Russia interruptions, but also the risk of just general supplier outages, then there needs to be further measures, and this is where the commissions or the measure of interruption of self interruptions or mandatory demand reductions of 15% could become critical in order to allow us to continue. What's important at the moment, is we will need some flexibility around that. We don't know what's going to go on in the outside world and what will continue to affect this, whether winter is going to be a cold winter, a warm winter. So it's going to be really important that we keep a lot of options on the table and we keep some flexibility on the team.

Ben: Absolutely. Well, one of the bright spots right now is that there is there's a lot of excitement around hydrogen and bio methane as vital components of the path to net zero, and also a really major aid potentially for our energy security requirements. How can we kickstart the development of markets for bio methane and hydrogen?

Doug: Well, of course they're going to be of limited help in the short term as it's going to take a bit longer, particularly in the case of hydrogen, because of the levels of investment that will be required, both on the production side, on the storage side, conventional transportation side – and of course, what consumers need to do to be able to burn hydrogen instead of methane. So there's still a lot of discussion going on about how to make that happen. Bio methane is a bit easier given the chemicals constituency of that. But one of the things that are really taking a lot of industry effort at the moment is how we create a good certification regime so that people who buy renewable hydrogen or bio methane can be assured that they are supporting the environmentally green aspects of these things, because once you get hydrogen in the system, you can't tell where the molecules are coming from, whether it's green hydrogen, or it's been produced by some other source – so that can only be done by certification.

At the moment, we have a very complex regime in infancy around guarantees of origin and proof of sustainability around the fungibility between products, and that could be very worrying on two counts. One, unless we can improve standardisation of these kinds of instruments, it will prevent an international market developing whereby we can get clear price signals or: what is greenness worth, and how does that relate to carbon trading, for example. The other concerning thing is how the certificate gets affect commodity markets. You have one avenue of thought that was attempting to track molecules so that if you buy bio methane or green hydrogen, for example, you know exactly where the product is being manufactured or produced and how that gets to you.

Now, of course, when gas gets into the system, it's optimised substituted, so the molecules never actually travel along those notional parts. So, unless we make clear that the certificates can be independently tradable of the underlying commodities, then we can inhibit the markets going forward. But that means we're going to need other solutions to make sure we're not open to accusations of greenwashing, or fraud or double counting.

Ben: Interesting! One final question from my side would be: at Energy Trading Week in London in September, we've got a rather interesting panel that ties into what we've been discussing, to an extent. The panel will be ‘Security of supply vs. fit for 55', moderated by your colleague, Peter Stiles. What are your considerations on the current situation with gas supply in Europe and the Nexus with fit for 55 package?

Doug: Well, Peter will do a great job I'm sure. There are some things, as I mentioned earlier, that are on the nexus of the two things that are certainly something that will contribute to both agendas. For example, energy efficiency, and energy savings. So that's an obvious one that we should be focusing on, and I think that could potentially be a lot more done at Member State and at European commission level – about encouraging people to see that. It's not only about price, but it's about people who can afford to get in the car and drive a bit further or keep the heating turned up. It's helping encourage those people to engage, as well as vulnerable people for whom your energy prices are critical, and you will need some level of assistance.

However, in the longer term, it's a bit different, and we're stuck with the old dilemma of how do you prioritise the urgent versus the important? What I do think is it's a critical period at the moment, as we are developing the building blocks, or encouraging investment in renewables in order to meet the five targets, that we don't lose sight of this, and just forget about it for a few years, or it will be much harder to catch up. So it's important we leave the building blocks know, that we don't get in a situation where whoever would otherwise make investments now be deferring because of uncertainty around the regime, or they don't know how they're gonna be able to monetise the environmental value of those assets.

So it's important we continue to work on these things, and make sure we don't build on any adverse market design issues. But, we have people who could be short of energy this winter, prices have risen to unsustainable levels, we're not really going to have significant additional gas coming on until maybe 2026 and beyond, so we could have a period of tightness for some time. That's why it's important to keep other options on the table; so not only gas, but other sources of energy may need to be extended as well – coal and nuclear.

We've also got the need to continue to invest in other forms of energy efficiency, and this is where price signals will remain important, and the EFET certainly is much more supportive of allowing wholesale prices to continue to be able to signal the need for more imports of LNG or production of higher marginal cost gas or other fuels, and we should really be targeting assistance where it's needed only on vulnerable consumers with direct assistance, but not through price caps. So, there's a number of measures that are possible here, but we shouldn't be compromising achievement of the long term objectives by unmuting investments signals by interfering in wholesale markets in the short term. So it's a difficult balance, and we're engaging with the commission and national authorities in making sure that they're taking advantage and making use of, for example, the EU toolbox that was published earlier this year, so that we can continue to have a market going forward, and we don't throw that out.

Ben: Excellent. Well, Doug, thanks so much for joining us today, and thanks for those fascinating insights. Also, thanks for the really good ongoing work that you and EFET do for the community. We'll hopefully see you and certainly see a number of your EFET colleagues at Energy Trading Week in September. Thanks again for your insights and hope we speak again soon.

Written by: Commodities People

ESG LNG

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