While players like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are looking to explore opportunities to exploit unconventional gas reserves in Europe, the demand for gas-to-power electricity generation remains low in Germany, the region’s economic powerhouse. Despite several advantages of gas-based power plants, the low cost of coal is making gas-powered plants economically unattractive for players. Germany is looking to phase out nuclear power, but unlike in Japan, the shift is not resulting in a major boost in the country’s plans to drive gas demand. However, new sources of cheaper gas and evolving gas power generation technology could result in a shift in the dynamics of the country’s gas market.
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Germany is looking to shut down about 13 GW of nuclear power generating capacity over the next 10 years.  Although gas is looked at as a cleaner alternative to coal, gas prices in Europe are higher than those in the U.S., making gas-powered plants less attractive economically than coal plants in Germany. According to Reuters, coal plants are 16 Euros/MegaWatt Hour more profitable than gas plants in the region, and despite Germany’s commitment to reduce carbon emissions by up to 40% by 2020 over 1990 levels, coal seems to be winning the battle in replacing the country’s aging nuclear power plants.
This is in contrast to other markets like Japan and the U.S., where gas-powered plants are gaining popularity over other forms of electricity generation, resulting in a significant upside in the demand outlook for natural gas.
Since gas plants are cleaner and more efficient than coal plants, governments are providing incentives such as tax cuts and carbon emission certificates to make gas more attractive commercially. However, despite these measures, coal enjoys a distinct cost advantage in the European market. According to the Reuters report, carbon emission costs would need to be increased fivefold from the current level of 7 Euros / metric ton to tilt the balance in favor of gas plants.  However, gas plants are becoming more efficient and with new technology such as shale exploration unlocking new reserves of gas at low costs, we expect to see more interest in gas-powered plants in the future as countries move away from nuclear power.Notes: