Fuel for Thought – Nov 11th

11 Nov, 2011

Gazprom gas contract indexation compromise:  Gazprom has indicated that it may allow an additional 5% spot indexation to European Utilities as a compromise in its ongoing dispute over long term gas contract pricing.  The gap between spot and contract prices has widened over the last few months as a result of falling spot gas prices and the lagged impact of oil price rises feeding through into contract indexation.  Gazprom may see it as a good time to strike a deal as a renewed recession in Europe would almost certainly result in a further widening of the gap between spot and oil-indexed prices, a situation that would strengthen the case for further compromise on their part.  All good news for the development of European spot hub liquidity.

European Grid investment must double:  A report published by the European Carbon Fund this week emphasises investment in grid infrastructure as a key hurdle to Europe progressing its decarbonisation goals.  The report places a particular emphasis on how the EU can improve access to finance given the capital constrained environment investors are facing.  Europe is awash with Commission, government and consultant generated ‘roadmap’ reports exploring theoretical decarbonisation scenarios decades into the future.   It is a positive sign that some time is also being spent addressing the practical obstacles to delivering that vision this decade. 

Make or break for European CCS: Shell has rightly pointed out that the credibility of CCS technology development for commercial roll out in the 2020s is at a critical juncture.  The assumptions behind EC and government decarbonisation targets rely heavily on CCS technology to decarbonise the thermal capacity that will be required to balance the increasingly large volumes of intermittent renewable capacity.  But European CCS demonstration projects continue to suffer from a loss of momentum and capital constraints, with yet another UK project fighting for survival.

The future of gas in Britain:  The UK government is again struggling to define its position on gas in the context of its decarbonisation agenda and concerns about security of supply.  Gas security of supply has been moved up the agenda with the government instructing Ofgem to undertake a review of the UK’s gas supply position.  This may be positive if it leads to regulatory changes to sharpen price signals for flexibility (particularly demand side response), but it would be a big blow to UK gas market credibility with investors if the government intervened to support storage development.  Meanwhile the government pays lip service to the importance of gas fired generation flexibility while it pushes ahead with its Electricity Market Reform package, which increases the risks for gas plant owners and investors.   

Picture of the week:

The official opening this week of the first line of the Nordstream pipeline, a Baltic subsea connection between Russia and Germany.  Turning the valve must have been a pleasant distraction from a week otherwise dominated by yet another escalation in the European debt crisis.