Audio Markets - 07/February/2019

The Dutch Energiewende: Goodbye to natural gas

The Netherlands faces an unprecedented transformation as it aims in the next 30 years to switch off its gas supplies in favour of cleaner fuels

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In the 1960s, over a period of just five years, virtually all Dutch households were connected to the gas grid. Now, they have 30 years to switch off the gas in favour of cleaner fuels. The Netherlands is on the verge of an unprecedented transformation

 

WHAT’S HAPPENING The Netherlands wants to break free from its gas addiction and decarbonise its heating system

HOW COME? Public outrage against earthquakes produced from gas production and increasing pressure to reduce emissions and deal with climate change

REALISM OR FANTASY There are disagreements about the best ways of achieving this transition and who will pay, but the public is behind it and experts believe it can be done

KEY QUOTE “We need to stop talking and take action. We are talking about costs of some 0.5% of GDP. In the end the costs of doing nothing will be higher.”

 

“All our shops are off gas!” In the last week of 2018, the Dutch subsidiary of German discount supermarket chain Lidl came out with a remarkable public statement: all of its 410 supermarkets in the Netherlands had been disconnected from the gas grid. Over four years, they had swapped gas for heat pumps powered by electricity from renewable energy.

Lidl’s announcement is symbolic of a major transformation taking place in the Netherlands: the country is ending its more than 50-year old marriage with natural gas. It’s a shocking change. What coal is for Poland or oil for Saudi Arabia, natural gas is for the Netherlands.

The love affair started in 1963, when the huge Groningen gas field came online. It was one of the largest known at the time and it transformed the energy system in the Netherlands and even much of north-west Europe.

Initially, no one knew what to do with this incredible new resource, until one engineer from ExxonMobil — with Shell one of the two operators of the new field — had the bright idea of delivering the gas by pipeline to Dutch households.

The rest is history. By 1968, virtually all houses in the Netherlands were connected to a national gas grid. And the Dutch gas revolution did not stop there. The Groningen field also became the cornerstone of the country’s energy-intensive industry and the motor for a massive expansion of the agricultural sector. Gas-heated greenhouses turned the small country into one of the largest agricultural exporters in the world.

 

EARTHQUAKES

But now the Dutch want a divorce from gas. For two main reasons. One is decarbonisation. The other is earthquakes.

The Netherlands has been slow off the mark in transitioning to a clean energy economy. It has one of the lowest shares of renewable energy in the EU and the government allowed, even encouraged, three new coal-fired power plants to be built as recently as 2015.

It also authorised NAM, the Shell-ExxonMobil joint venture that operates Groningen, to ramp up its gas production to 54 billion cubic metres (bcm) in 2013, one of the highest levels since 2000. As a result, the area around the field started to be hit by more frequent and more violent earthquakes.

Until then, the government and the oil companies had downplayed the risk of earthquakes and even denied there was a connection with gas production. The Dutch state has long profited from the government’s gas partnership with Shell and ExxonMobil, pocketing some €300 billion in natural gas tax revenues over the years from the 3700 bcm of natural gas produced by Groningen and smaller fields. To compare: annual German gas consumption is around 90 bcm.

The Groningen field still contains some 700 bcm of proven reserves, but much of this will remain underground. In 2013, politicians misjudged the public mood. Local residents rose up in protest against the earthquakes. The government was forced to promise to ramp down production, but it was too late to appease the public. The uproar finally led to a historic decision by the cabinet, on 29 March 2018, to end production from the Groningen field altogether. By 2023, just 5 bcm will be produced and by 2030 the tap will be turned off completely.

 

 

 

URGENDA

The Groningen decision was historic, but earthquakes were only part of the reason behind the decision to phase out gas. The Netherlands continues to produce from its smaller fields (20 bcm a year, though this will gradually decline) and it could have turned to imports, even if increasing reliance on Russian gas is not an attractive prospect.

But the government appears to have finally woken up to the urgency of the climate problem and sees getting rid of gas as part of the solution. Triggered by the 2015 Paris Climate Agreement and the Urgenda court case of the same year, which forces the Dutch government to accelerate carbon emission reductions, the four-party coalition government, formed in October 2017, agreed a fairly ambitious climate policy. It targets a 49% reduction of carbon emissions by 2030, compared to 1990, as well as a phaseout of all coal-fired power.

Gas was not mentioned specifically, but the coalition committed to a climate accord showing how the Netherlands could get to a “climate-neutral society and a reliable, affordable, safe and low-carbon energy supply by 2050”. It was clear to everyone there would be little room for gas in such a future.

 

CLIMATE ACCORD

To draw up the climate accord, the government brought together a wide range of civil society organisations (labour unions, NGOs, business associations and local authorities). Negotiations started in March 2018, and resulted in a final (although still “provisional”) text published on 21 December 2018. A detailed document of 233 pages, it will form the basis for the Integrated National Energy and Climate Plan (NECP) that all EU member states must submit to the European Commission, the EU executive body, by the end of 2019, and for a Climate Act to be adopted this year.

The accord is explicit about gas, agreeing that the Netherlands will cut its use to zero by 2050, with the possible exception of some gas-based hydrogen coupled with carbon capture and storage (CCS) for heavy industry. The biggest change will come in the built environment: no new houses will be connected to the gas grid and all seven million existing houses and one million non-residential buildings will be off natural gas by 2050.

The gas phaseout did not come as a surprise. By 2018, “going off gas” had become a major talking point in the media, with announcements like that of Lidl becoming increasingly common.

In July 2018, six business associations, including those representing distribution system operators (DSOs), construction companies and housing corporations, announced they would disconnect at least 100,000 houses from the gas grid by 2021. In October, 27 cities presented a plan to each take one neighbourhood off gas by 2020. In November, DSO Stedin announced that from July, the majority of new houses built in the densely populated provinces of Utrecht and Zuid-Holland, including Rotterdam and The Hague, would no longer be connected to the gas grid. The province of Gelderland announced a competition promising an award of €5 million to the municipality with “the best plan to get a neighbourhood off gas”.

Meanwhile, Eneco, a major energy company, started a national advertising campaign “getting off gas”, enthusiastically proclaiming: “The whole country is switching.”

 

 

 

AMBITION VERSUS REALITY

Despite all this bravado, the realisation is sinking in that the country faces a daunting task. “The greatest challenge since the [post World War Two] reconstruction,” says Eneco. Whereas Germany has years of Energiewende behind it, for the Netherlands, “the train is just leaving the station”, says Koen Gommers, the company’s energy transition manager.

Up to now 2000 houses have been disconnected from the gas grid each year in the last five years in the Netherlands, states Gommers. “That should go up to 2000 a day,” he adds, if the country is to reach its climate targets.

And recent news on the emissions front is not good. The 49% emission reduction target for 2030 assumes that by 2020 emissions will already be down by 25%. But this looks unlikely to be the case. The Netherlands Environment Assessment Agency, a government institution, says in a recent publication that the country is highly unlikely to reach its 2020 target, making the climb to 2030 even steeper.

While the government prepared the climate accord with civil society organisations to help achieve broad public, and political, support, cracks are already appearing.

 

COST CONTROVERSIES

One of the major controversies is who will foot the bill. The government has committed to supporting the transition with €985 million a year in direct subsidies. Renewable electricity will get €200 million a year, renewable heat and green gas €135 million/year, small-scale renewable heat €100 million/year, and industry €550 million/year. On top of this, the government will make money available for research and infrastructure investments, though how much is not clear.

But these sums do not come close to covering the costs. The Netherlands Environmental Assessment Agency, in a preliminary analysis of the accord, estimates the measures proposed will cost €3-€4 billion a year until 2030 — €8-9 billion in investments minus €5-6 billion in savings. Some right-wing opposition parties say the costs are too high, while left-wing parties argue that industry will not be made to pay its fair share and households will be stuck with the bill. There is disagreement even among the four coalition parties.

 

 

HYDROGEN POTENTIAL

And there are other bones of contention, including CCS and the potential of hydrogen to fill the gap left by gas. The climate accord includes a whole section on hydrogen, in which the Netherlands intends to become a “leader”. It suggests using hydrogen as a fuel for high-temperature heating processes in industry, as a storage medium for the electricity sector, as a fuel for heavy transport and possibly in the built environment as a replacement for natural gas, although this option is at the bottom of the list.

The accord posits so-called blue hydrogen, produced from natural gas through steam methane reforming, in which carbon dioxide is captured and stored in empty gas fields, as an option for replacing natural gas, especially for energy-intensive industries. Environmental NGOs, however, are against CCS, because it will keep gas, a fossil fuel, in the picture, and want any hydrogen to be green, produced from solar and wind power through electrolysis.

Bert den Ouden from Berenschot, an energy consultancy, argues this opposition is short-sighted. He points out that wind and solar power, as long as they form only a small part of the energy supply, can be better used directly as electricity. “With electrolysis you lose 30% of your energy,” he states. It will take decades, says den Ouden, before there will be sufficient solar and wind power to make the production of green hydrogen profitable.

By contrast, he says, hydrogen from gas is already being produced in large quantities, although the CO2-storage part still has to be developed. Den Ouden argues that blue will eventually pave the way for green. “If we build up a hydrogen infrastructure now, then we can later use that with green hydrogen.”

 

ELECTRONS OR MOLECULES

Another debate has emerged on how to heat houses without natural gas. There is general agreement that district heating, which hardly exists in the Netherlands, will be a big part of the solution. The climate accord assumes that of the 1.5 million houses that will be off gas by 2030, 50% will receive their heat from newly built district heating networks. These will not be totally carbon-free by then, but should be by 2050, when they will be mainly fed by waste heat, geothermal and solar thermal.

District heating, however, requires large investments in infrastructure and is unlikely to be the best option in less densely populated districts. The climate accord projects that of the other half of the houses to go off gas by 2030, half will switch to electric heat pumps and the other half to hybrid heat pumps, which are electric but also have a small gas-fired boiler.

Environmentalists would prefer to get rid of gas altogether, but Den Ouden and other energy experts argue that hybrid heat pumps are a much cheaper solution than fully electric ones. “To go fully electric requires large investments in larger radiators, floor heating and better insulation, and in the electricity networks,” says Den Ouden. “Hybrid heat pumps are cheaper, easier to adopt and will reduce gas consumption from households from 16 to 4 bcm a year. That 4 bcm could be delivered with domestically produced biogas.”

Gommers of Eneco does not disagree with this argument. But, he says: “You won’t achieve your ultimate goal, which is to get rid of your gas infrastructure altogether.”

The question, though, is whether full electrification should be the goal. Den Ouden believes “molecules” will be needed in the energy system of the future, a stance backed, perhaps unsurprisingly, by the big energy companies. In a report Electrons and/or Molecules published in April 2018, Berenschot concludes that full electrification would cost the Netherlands €45 billion a year out to 2050, whereas a combination of electrification and gas (“molecules pathway”) would be cheaper at €31 billion a year. This “molecules” pathway has a major role for hydrogen made from natural gas in combination with CCS.

The problem with the latter, though, is that it would leave the country nearly as reliant on gas as today. Den Ouden and his team made a third scenario, published in September 2018, which shows that giving district heating networks a much bigger role and relying less on heat pumps than in the electrification scenario, would be less costly than the molecules scenario and would reduce gas consumption to 6 bcm in 2050, compared to 36 bcm in the molecules pathway.

 

LOCAL POWER

While such debates will rage on, many of the decisions about implementing the energy transition will be left in the hands of the local authorities. The climate accord sets out a prominent role for them. It stipulates the country will be divided into 31 “energy regions” to decide on regional energy measures, such as the construction of district heating networks. In addition, at the municipal level, all towns in the Netherlands will be required to draw up a climate and energy plan by 2021, which will have to be approved by the city council and will have to show how they intend to get off gas.

Despite differences of opinion, the public is generally in favour of ditching gas for cleaner energy sources and most experts agree that it can be done. Jillis Raadschelders, energy transition director at energy consultant DNV GL, is optimistic.

“The cost curves of renewables and storage are impressive,” he says. “There is a lot of technological advancement. We now need to start doings things at scale. We need to stop talking and take action.” He adds: “We are talking about costs of some 0.5% of GDP, according to estimates of the Netherlands Environment Assessment Agency. In the end the costs of doing nothing will be higher.”

 

TEXT Karel Beckman


This article is part of a series examining how to decarbonise heating and cooling systems

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