European gas pipeline companies mislead investors by underreporting CO₂

Reporting loophole means midstream operators aren't following the same guidelines as upstream or downstream sellers

December 14, 2020 (IEEFA) — European pipeline companies are using a loophole to market themselves as low-carbon businesses and avoid reporting on the climate effects of the natural gas they transport, according to a new report from the Institute for Energy Economics and Financial Analysis (IEEFA).

The report, Hiding in Plain Sight—European Gas Pipeline Companies’ Greenhouse Gas Emissions, found that a weakness in guidance by CDP, the London-based non-profit Carbon Disclosure Project that sets rules for carbon accounting, allows transmission system operators (TSOs) to mislead investors who are searching for greener investment opportunities.

“This loophole makes it much easier for TSOs to market themselves as leaders of the energy transition, aligned with European Union emission reduction targets,” said Arjun Flora, an IEEFA energy finance analyst and co-author of the report. “They are talking about net-zero targets while completely ignoring their largest source of emissions – end-use of the fossil fuel gas they transport. By raising billions of euros in ‘sustainable financing,’ they are diverting investor funds from more sustainable energy value chains.”

This behaviour allows the five TSOs studied to under-report emissions by a factor of at least 100. It also prevents potential investors from visualising the magnitude of emissions reduction efforts. 

“TSOs are really missing an opportunity to demonstrate their commitment to energy transition,” said Flora. “By providing full disclosure they could set meaningful targets and demonstrate a successful transition to zero-carbon gases over the coming decades.” 

The position of the TSOs is in contrast to upstream fossil fuel exploration and production companies. Eight of the largest 39 oil and gas production companies, for example, already target reduced emissions from the downstream use of their products, allowing investors to measure real progress made in meeting renewable energy goals.

Gas TSOs only provide transport and storage services. They do not own the natural gas that they transport. However, their entire business is built to distribute fossil fuel, primarily methane, a major greenhouse gas, which emits another greenhouse gas, carbon dioxide, when burned. Moreover, as members of the European Network of Transmission System Operators (ENTSOG) they are highly influential in deciding which energy infrastructure projects qualify for public EU funding, under a regulation called TEN-E. This regulation is under review, with a proposal due to be published this month. Campaign groups such as Global Witness have called for ENTSOG to be stripped of these powers, given their obvious conflict of interest, and for gas projects to be disqualified, given their reliance on unproven decarbonisation strategies that risk locking in fossil fuel use. 

All five TSOs studied in the report—Snam (Italy), GRTgaz (France), Enagas (Spain), National Grid (United Kingdom) and Fluxys (Belgium)—are members of ENTSOG. All began life as vertically integrated gas companies and are touting investments in alternative fuels such as biomethane and hydrogen. None are reporting emissions from use of fossil fuels flowing through their pipelines.

“By not reporting the end-use carbon emissions of the gas they transport, these TSOs are effectively saying that they do not care how the gas is used, including whether it is burned, emitting carbon dioxide, or used in other ways that entail lower emissions. Such indifference is outdated in the energy world in which we live today,” said Gerard Wynn, a co-author of the report and IEEFA finance consultant. 

The report noted that in November 2020, Italy-based Snam committed to be “net zero” by 2040. However, the company did not consider end-use emissions, and clearly has no intention to stop transporting the fossil fuel natural gas by 2040. The term “net zero” was coined by the 2015 Paris Agreement on climate change, referring to the global goal of reaching zero net greenhouse gas emissions in the second half of the twenty-first century, and sooner in more affluent countries, for a post-fossil fuel economy.

“It is nonsense for a company to refer to plans to continue transporting fossil fuels as a net-zero goal,” said Wynn. “Snam’s statement highlights the insufficiency of carbon reporting rules for gas TSOs today.”

Actual emissions from burning fossil gas versus the carbon content of transported gas, 2019

Change in Total Reported and Unreported Emissions, 2019 vs 2017

Source: GCP Carbon Budget 2019, company information, IEEFA estimates. Unreported means emissions from final combustion of transported gas. Midstream includes five European TSO companies: Snam, Enagas, Fluxys, GRTGaz and National Grid. National Grid’s reported emissions from downstream operations in the U.S. have been excluded.

Full report: Hiding in Plain Sight—European Gas Pipeline Companies’ Greenhouse Gas Emissions

                                                                                ***********

Pakistan announces ‘no new coal-fired power’

Implications for coal across the Belt and Road Initiative

At the 12 December Climate Ambition Summit hosted by the U.N., the U.K. and France, Pakistan’s Prime Minister Imran Khan announced that his nation “will not have any more power based on coal”.

On the face of it, this is a highly significant statement for a nation that was until now intending to exploit its domestic coal reserves and reach 38,000 megawatts (MW) of coal-fired power by 2047.

It is not yet clear whether the statement means that existing coal projects that have not yet begun construction will be cancelled or that no new coal proposals will be added to the current development pipeline.

Either way, Pakistan’s latest long term power plan – the Indicative Generation Capacity Expansion Plan (IGCEP) – will need to be re-written.

According to IGCEP published in April 2020, 27 gigawatts (GW) of new coal-fired power (all fuelled by domestic coal) was to be added between 2030 and 2047. It now seems this proposal has been dropped.

Although it is a developing nation with growing power demand, Pakistan can easily do without more coal-fired power plants. The nation already has surplus capacity – its thermal power fleet operated at just 37% utilisation in 2019/20.

This overcapacity looks set to worsen going forward. Under the IGCEP’s Base Case scenario, the 5.3GW of coal-fired power plants fuelled by imported coal expected to be operational by 2030 will have a collective utilisation of just 14%.

Under this scenario these coal plants are stranded – they cannot operate commercially at such a low utilisation rate without very generous capacity payments paid to them whilst they sit idle most of the time.

Furthermore, the IGCEP is overestimating future power demand growth. The base case demand forecast is based on annual GDP growth reaching 5.5% in 2025 and remaining at that level out to 2047. This is despite GDP growth of just 3.3% in 2019, before the impacts of COVID-19 were felt.

As a result, the IGCEP’s planned power additions to meet over-estimated demand growth will lead to even more surplus capacity. Abandoning plans for more coal power additions will be a good first step to address this problem.

Opportunity to avoid expensive coal power and overcapacity

Avoiding overcapacity is key to keeping Pakistan’s expensive power tariffs down.

Thermal power plants must be paid capacity charge regardless of whether they are utilised or not. Capacity payments are now soaring in Pakistan, contributing to higher per unit cost of power generation. This comes on top of the already high cost of coal-fired power.

The result of increasing cost of generation will be higher tariffs for consumers and businesses.

With wind and solar already the cheapest source of new power generation in Pakistan, the nation would be better off focusing on these technologies that can also enhance energy security.

In his summit announcement, the Prime Minister stated that Pakistan is aiming to reach 60% ‘renewable’ energy capacity by 2030. Large-scale hydro power is being included as ‘renewable’ here.

The IGCEP already has the contribution of wind, solar and hydro reaching 59% of capacity by 2030 so this part of the announcement is not a new commitment.

The announced plan to use domestic coal for coal-to-liquids (CTL) and coal-to-gas (CTG) was also not new.

Whilst most of the Prime Minister’s announcement was positive, the CTL and CTG statement was an obvious negative. If the plan is to capture and store carbon during these processes, they will be unviably expensive. If not it’s hard to see how carbon emissions are being significantly reduced relative to coal-fired power.

South African company Sasol has long been a global CTL leader, propped up by significant government subsidies. A look at Sasol’s performance and investment outlook highlights why a move into CTL is ill-informed.

Sasol’s CTL plant at Secunda, Mpumalanga province is the largest site-specific greenhouse gas emitter in the world, exceeding the emissions of more than 100 nations. It’s also a contributor to Mpumalanga’s major air pollution problem – one of the very worst air pollution issues in the world.

These issues, along with Sasol’s significant underperformance relative to the rest of the Johannesburg Stock Exchange over the last five years are major problems challenging the company’s future.

With investor pressure growing on the company in the wake of poor performance and significant environmental impact, Sasol has recently unveiled a “transformation” plan that includes a move towards gas as a feedstock. It also has an eye on green hydrogen as it seeks to join the energy transition that it is a long way from leading.

Coal and China’s Belt and Road

Although any move into CTL and CTG is likely to prove to be an expensive failure for Pakistan, the commitment to end further coal-fired power is meaningful, particularly given the strategic importance of the China-Pakistan Economic Corridor (CPEC) under which most of the coal plants are being developed.

CPEC is the centrepiece of China’s Belt and Road Initiative (BRI) which has been criticised for pushing the development of outdated, expensive and polluting coal power plants on developing countries in Asia and Africa.

If coal power is being de-prioritised within CPEC it can now happen right across the BRI program.

This now appears to be a growing trend within the BRI. Bangladesh is reportedly considering abandoning its coal power development pipeline – much of which was to be financed and built by China.

In Kenya, the Industrial and Commercial Bank of China has reportedly withdrawn from the controversial Lamu coal-fired power project, leaving the proposal teetering on the edge of cancellation.

Japan and South Korea have both indicated that they will end the financing of coal-fired power overseas in 2020. If China is now moving in the same direction then all three of the main enablers of coal power in developing nations are shifting.

One of the few positives to come out of 2020 has been the accelerated shift away from expensive and polluting coal-fired power development.

Simon Nicholas is an Energy Finance Analyst at IEEFA

                                                                                ************

Pakistani prime minister says country will not approve any new coal-fired power plants

Pakistan’s Prime Minister, Imran Khan, announced over the weekend that as part of a number of efforts to counteract the effects of climate change, his administration will not approve new coal-fired power generation projects.

“We have already scrapped two coal power projects which were supposed to produce 2,600 megawatts of energy. [We have] replaced them with hydroelectricity,” Khan said during his address at the Climate Ambition Summit 2020, which was hosted virtually by the United Nations, the United Kingdom, France, Chile and Italy.

“We have also decided that by 2030, 60% of all energy produced in Pakistan will be from clean energy, renewables, and also 30% of all our vehicles will be [powered by] electricity,” the PM said. 

Over the last five years, the South Asian country has seen 18 wind power projects of 937MW, six solar power projects of 418MW and six bagasse projects totaling 201 MW achieve commercial operations and provide electricity to its grid. Yet, renewables and nuclear only make up 9% of the energy mix, while hydropower produces 27% and fossil fuels – natural gas, liquefied natural gas, and coal – generate 64% of the electricity.

There is also still a gap between current demand and supply of approximately 2,000 MW in peak season, as the annual consumption rate has grown by almost 7%. Filling this gap while limiting emissions has been on Khan’s agenda since he took power back in 2018.

Both at the Summit and in other international fora, the politician has pointed out the fact that Pakistan is the fifth most vulnerable country to the effects of global warming, despite its contribution to global emissions being less than 1%.

                                                                                     ***********

Anglo American to exit thermal coal sector by mid-2023

Anglo American will divest from its South African and Colombian thermal coal operations by mid-2023, the miner said on Friday as it sought to demonstrate to investors its commitment to a shift towards clean energy sources.

The global miner said a de-merger and listing on the Johannesburg Stock Exchange was the most likely route for its South African thermal coal assets.

Anglo American, which produces platinum, copper, diamonds, iron ore, and thermal and metallurgical coal, highlighted its green credentials as the mining industry faces increasing scrutiny over its carbon footprint.

“With the bulk of (growth) options in copper, PGMs, and now also crop nutrients, we are increasingly positioned to supply those metals and minerals that enable a cleaner, greener, more sustainable world,” Chief Executive Mark Cutifani said on Friday in an annual update to investors.

Cutifani said the company planned to exit its Cerrejon thermal coal mine in Colombia within 1 1/2 to 2 years, while the South African thermal coal exit will happen within 2 1/2 years.

                                                                                      *************

Wood Mackenzie: Renewables, green hydrogen to limit growth of global LNG market

More than 75% of new liquefied natural gas (LNG) global supply could be at risk because of quickly expanding renewable energy resources, according to an analysis by Wood Mackenzie.

In a forecast issued [last] Wednesday, the consultancy said its scenario for worldwide gas demand is going to come under pressure as power sector investments increase in renewables and energy storage. More gas consumption also would be sapped by efficiency improvements and as new technologies are adopted beyond the power sector. 

The scenario laid out by the Wood Mackenzie team is tied to greenhouse gas reduction goals set by the United Nations, which have been adopted by most developed nations. The basic goal is to keep global temperatures from rising above 2 degrees C to reduce the impacts from climate change.

Among the alternative options, look for hydrogen to play a bigger role in the world’s energy mix, which also would pressure gas demand. Green hydrogen could become a “gamechanger in the long term, emerging as a key competitor to gas consumption toward the end of 2040 and achieving a 10% share in the total primary energy demand by 2050,” researchers said.

“With weaker global gas demand, the space for new developments will be limited,” said Wood Mackenzie principal analyst Kateryna Filippenko. “This is a significant challenge” as companies consider final investment decisions (FID) for potential projects.

Using the 2 degree scenario, “only about 145 billion cubic meters/annum (bcma) of additional LNG supply is needed in 2040 compared to 450 bcma in our base-case outlook,” Filippenko said. “And if we consider imminent FID for Qatar North Field East expansion, the space for new projects shrinks to 104 bcma, down 77% from our base case.” 

 

 

 

 

14 December 2020

IEEFA