Member of board of management for markets and services at E.On Leonhard Birnbaum: Gas needs negative developments in coal

Interfax spoke to Dr. Leonhard Birnbaum, member of the board of management for markets and services at E.On, about the energy balance in Europe and gas’s place in it.

Interfax: Gazprom has said it is keen to expand its European gas-to-power portfolio. Do you think we’ll see other upstream players, such as Statoil, moving in to pick up combined cycle gas turbines (CCGTs) at rock bottom prices?

Leonhard Birnbaum: Maybe at a bargain price we will see that, if they want to keep volumes up. But whether it really happens will depend on many factors and you will have to ask them.

Interfax: By how much would gas need to decrease in price by for CCGTs to make commercial sense?

LB: Gas prices would need to fall significantly, by something up to 50%, depending on your assumptions – especially those for CO2 and coal prices.

Interfax: Could upstream companies supply it at that price?

LB: Actually, gas is so much out of the money with cheap coal and cheap CO2, it will only move into the money if there is not just a positive development on the gas side, but a negative development on the coal side. This would mean either coal consolidating and becoming more expensive or by regulatory intervention – such as the emission standards discussed in the United States or whatever – that just pushes coal out. So it doesn’t just happen on a cost basis. That’s why, if this gas is required for security of supply, then we’ll need some capacity mechanisms.

Interfax: What are your thoughts on the European Emissions Trading System?

LB: The [EU allowance] prices are low because demand is low and because we have been pumping lots of money into renewables. Now why should customers pay a second time on the CO2 side if they’ve already paid on the renewables side? So, from that standpoint, the EU ETS is working – it delivers a low price for a low demand. If, however, the political sentiment is that there needs to be a higher price, then the target needs to be adjusted. Then you should go for a more aggressive target, which is what E.On is advocating: put in a 40% or 50% CO2 reduction target and you will see a higher price again. CO2 abatement via the ETS should be the key element of EU climate policy. All other targets should be coordinated with it to avoid distortions between the targets.

Interfax: Is that what you think will happen?

LB: The European Commission actually proposed a 40% target, which I think we’re going to see eventually. I still don’t believe that this is going to explode CO2 prices, but it is a step into the right direction.

Interfax: Is the trend of rising emissions in Germany likely to influence energy policy in future?

LB: It’s going to play a role. In Germany, we have paid €100 billion ($140 billion) so far for renewable subsidies. But emissions increase. The system is not efficient and subsidies do not incentivise intelligent technology. I believe the main concern right now is around competitiveness – I think we always have the three goals of security of supply, sustainability and affordability. And, while in the past few years we always had an overwhelming focus on renewables and sustainability, I think that has now moved to economics. I think the most relevant target function in society, and indeed even in politics right now, is competitiveness, so I don’t see a short-term a push against coal or lignite. You can always be proven wrong, but I don’t see that as the main issue in the next 2-3 years or beyond that.