September 10, 2021

News in Charts: UK gas price spike a sobering reminder of climate transition difficulties

by Fathom Consulting.

Some sectors are easier to decarbonise than others. Given the fall in prices of renewables, for example, electricity is easier to decarbonise than aviation, since no-one has yet invented a low carbon means to fly passengers at scale. But the recent spike in UK electricity prices provides a timely reminder that there will be bumps on the path to decarbonise, even in the UK energy sector where a significant and growing share of electricity generated comes from renewable sources.

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The UK has been one of the global leaders at decarbonising its economy. Over the last 30 years it has managed to grow GDP significantly while also reducing CO2 emissions per capita at a brisk pace. Admittedly, some of this is due to an offshoring of emission-intensive manufacturing, with finished goods imported to the UK not figuring in the UK’s carbon budget, making the improvement a little less impressive. Carbon border taxes would be a way to address this inefficiency. But it remains true that a lot of the UK’s improvement in CO2 efficiency stems from its switch from coal to renewables (and to a lesser extent, to gas) as electricity sources. Indeed, if Britain keeps up this pace of decarbonisation, it will come close to meeting Paris goals and reducing CO2 emissions to zero by 2050.

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But the recent spike in UK electricity prices, created by a gas shortage in Europe, highlights some of the complications associated with the net zero transition. It is also a reminder that gas continues to play an important role, at least in the short term. Even though the prices of renewable electricity have fallen significantly and are now, in some cases, cheaper than fossil fuel-powered electricity (see charts below), they cannot entirely replace coal and gas yet. The electricity grid still requires sources which can be turned on or off on demand, since renewable electricity cannot effectively be stored at scale yet, and electricity is demanded at times when it is not sunny or windy. Heavy investment is going into storage solutions, such as more effective batteries and the use of hydrogen, which can be created using surplus renewable electricity and stored; but until these technologies become more affordable and scalable, coal or gas will be needed. And since gas is cleaner than coal, it is fast becoming the ‘on-off’ electricity source of choice around the world.



The switch from coal to gas is seen as a stepping stone on the way to a renewable energy future. Due to the huge scale at which this is likely to happen, demand for gas is set to increase significantly in the short to medium term. This is not just a UK story, it is global: see, for example, how the natural gas share of US electricity generation has more than doubled over the last 20 years. Technological advances, including improvements in liquid natural gas (LNG), have transformed the gas export market, which was previously constrained by pipe infrastructure. Gas can now be shipped across the world, opening up significant new sources of demand including China. The gas market might be more global these days, but localised short-term demand and supply dynamics still play an important role in prices, a point reflected by the relatively small rise in US gas prices compared to those in the UK and EU over the last year (US prices are up about 130%, while those in Europe have increased nearly tenfold).

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The bottom line is that although renewable energy remains the future, the transition is not going to happen overnight. Demand for gas is likely to remain strong, and perhaps even to rise, over the next few years. Longer-term solutions to electricity storage are needed, and are huge investment opportunities, but the net zero transition is complex, and producers of natural gas may be a surprisingly important part of the transition in the near term. Don’t write them off just yet.

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