Natural gas - the end of an era?
A year ago, we discussed in the blog whether the thesis of the dead combustion engine in 2025 was too daring. Almost a year later, this discussion seems strange to us: On the one hand, due to ever new sales records, on the other hand, due to carmakers and countries announcing the end of the combustion engine. Could something similar now be happening in the gas market? Is this the end of the natural gas era?
For a long time, gas was seen as a low-carbon technology of the future, then became a bridging technology in the transition to 100% renewables and is now seen by many as part of the problem of a "net zero" society. To quote the Intergovernmental Panel on Climate Change (IPCC), "The survival of mankind is at stake." The war in Ukraine, the associated uncertainty and the enormous increase in prices are currently further accelerating this change of mind. In this article, we will discuss how the change of mind came about in the first place and what this means for gas suppliers.
It should be noted in advance that the gas market is fundamentally different from the vehicle market. Gas, like electricity, is pipeline-bound and the infrastructure required for distribution is therefore subject to long investment and depreciation cycles (around 50 years versus 10 years in the vehicle sector). Gas pipelines therefore have roughly the same technical lifetime as new nuclear power plants. Furthermore, this article refers to the "area network" for supplying end users with heating energy (gas for cooking is not relevant in terms of quantity and can be replaced by electricity very quickly). The industry, which is dependent on large gas/energy quantities as process gas in a small space, will not be discussed in more detail here, since the focus there is not on the networks, but on the quantities.
The gas network has grown historically and was largely tackled before the climate change discussion, or rather in times when "net zero" was still a utopia. Moreover, the network was built for the needs of the time. New buildings, retrofitted insulation, more efficient burners, and milder winters are reducing the demand per building. Minergie (P) homes and/or the use of heat pumps, which draw much of their thermal energy from the environment, will further reinforce this trend. This does not always have to lead to lower gas consumption, but overall, it can be expected that the purchase density (kilowatt hours supplied per meter of pipe) will decrease. As a result, the existing network will lose value and will have to be written off prematurely because the yield will decrease (lower amount of energy passed through the same network). However, maintenance and replacement investments remain necessary at the same level. As a result, the (network) price per cubic meter of gas will increase. Together with such massive price fluctuations as we are currently experiencing, this could significantly accelerate a sales movement away from gas, independently or "on top" of the current political discussion.
Even before the war in Ukraine, gas suppliers had decided on the long-term phase-out. It is to be expected that this will now proceed more quickly and that the speed will increase - that is, that the "end date" will be pulled forward. An example: Zurich decided as early as 1992 that, apart from electricity, only one grid-based energy source would be available in the long term: Zurich Heat (district heating) from ERZ Entsorgung + Recycling Zürich. New gas connections are already no longer permitted in Zurich, and in addition, the first areas have already been taken off the grid (see Zurich North Energy Planning: https://www.energie360.ch/de/energie-360/wissen/energieplanung/zuerichnord/). By 2040, Zurich wants to be "natural gas free". As can be seen in the planning for Zurich North, an area-by-area approach almost imposes itself. This includes the development of the alternatives (district and local heating, other types of heating such as heat pumps) and - if necessary - a short parallel operation in order not to have to operate both the old and the new infrastructure side by side.
From our point of view, the question is not whether Swiss gas suppliers will have to say goodbye to (natural) gas for heat applications, but when and how. Of course, there are alternatives for fossil gaseous energy (for example, green hydrogen or biogas); effectively, however, the possibilities to produce the quantities of biogas or power-to-X needed today and to store them seasonally are still too limited to cover sales. Presumably, district heating and other forms of thermal power generation will become more prevalent. These also face the challenge of where to procure the energy volumes from (especially in winter). However, this is not the focus of this paper, as we will focus on the grid aspects.
- Cash cow:
As in the electricity network, good margins have been earned in the gas network in recent decades. These margins are threatened and - unless measures are taken - will disappear without replacement as soon as energy suppliers move away from gas. These profits are not only missing from the general "company budget", but also specifically for the conversion of the energy supply. - Long-lived infrastructure:
As mentioned above, however, gas networks are not depreciated to zero and never will be, due to necessary maintenance and replacement investments. This means that in the event of an exit, sunk costs (i.e., expenditures in the past) will inevitably have to be converted into stranded investments (extraordinary depreciation), possibly even increased by costs for dismantling the network. - Area-specific infrastructure:
The situation is complicated by the fact that no continuous decommissioning can take place. A pressure reducer from high pressure to low pressure is needed, even if only one building is supplied. This can lead to erratic stranded investments. - Reliable communication with customers:
Investments in heating on the house side are long-lasting, typically over 20 years. When building or renovating a house, it must therefore be clear whether gas will still be supplied for the next 20 years. If a premature end of supply occurs due to political or economic decisions, the gas supplier is obliged to find a solution with the homeowner or even to provide financial compensation.
What (generic) courses of action do gas utilities have to make the exit from gas and the entry into other forms of energy as "smooth" as possible?
Creating a data basis:
Without a reasonable data basis, all goals and plans are doomed to failure in advance, since it is not even possible to assess how the goals will be achieved-or even how no goals can be set at all. It is therefore important - also regarding operations - to know the existing data well, to identify the necessary data and to close gaps. In concrete terms, this can be both historical values and forecasts, for example consumption of areas, customer (groups) or household types, or data on the condition of the network and the upcoming maintenance and renewal costs.Communication internally and externally:
Through open, honest, and clear communication, employees, customers, residents, and voters can be involved; often these also occur in personal union. Clear communication of the goals, the approach, but also the associated costs and consequences, for example long-term construction noise, is central here.Set clear goals:
Without defining a simple goal (for example, a phase-out of natural gas by 2040), no clear communication or focused strategy can be created. Presumably, the target will be decided by the owners and thus by politicians. However, the knowledge is available in operations. By acting early, therefore, the company / management cannot determine the targets, but can decisively influence them.Long-term planning:
Goals must be implemented in a long-term plan. Staging, as already implemented in Zurich, is almost inevitable. Renewals that are not central to the security of supply may have to be replaced by temporary solutions, for example micro-heating networks with a heat pump and peak coverage with gas, which can later also be operated (completely) renewable or connected to a general district heating network.Creating security: In
addition to general communication (see point 2), the offer to customers that is to be created is central. Uncertainties ("Do I have to replace my gas heating again after five years?") can be countered by new service offers ("21° in the apartment"). This reduces potential resistance, increases the flexibility of the supplier, and generates long-term customer lock-in if the offer is attractive enough.
Conclusion
To answer the initial question: Yes, the natural gas era is about to end.
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