European Gas Demand Response

Exploring the possible

With the Ukraine invasion continuing everyone is now asking the important question: how can Europe manage if the gas is cut off from Russia? This is not a summer problem as gas demand seasonally drops but there needs to be a plan for towards the end of this year. IEA has come out swinging with estimates of how much demand response is possible along with increasing LNG imports and more renewable energy.  

Included in these numbers are:

• 70TWh of delayed nuclear closures for 13bcm of savings

• New import sources for 20bcm of savings 

• Measures to diversify gas storage I discussed earlier

• Accelerated renewable deployment including solar for 46TWh and 6bcm

• Replace gas boilers with heat pumps - 2bcm

• Energy efficiency for 2bcm 

What isn’t included here is gas to coal and gas to oil switching outlined here:

The main near-term option would involve switching away from gas use in the power sector via an increased call on Europe’s coal-fired fleet or by using alternative fuels – primarily liquid fuels – within existing gas-fired power plants.

Given that these alternatives to gas use would raise the EU’s emissions, they are not included in the 10-Point Plan described above. However, they could displace large volumes of gas relatively quickly. We estimate that a temporary shift from gas to coal- or oil-fired generation could reduce gas demand for power by some 28 bcm before there was an overall increase in the EU’s energy-related emissions.

This is where I would like to point out something about the situation Europe and the world currently find themselves in. While medium term analysis always leads to harder and faster decarbonization and never taking a step back on reducing carbon the short term is very different. In the short term you can’t build solar plants or wind farms that quickly. When one of the world’s largest oil producers starts a war and triggers a massive supply shortfall the game is very different to strategic planning for reducing dependence on a five year view. I suspect Europe is going to have to do some “icky” things from the environmental movement’s point of view in coal and nuclear or face some horrific economic impacts. 

I’ve spend some time poring over the literature on heat pumps and there are a few conclusions that can readily be drawn on the opportunity for Europe to rapidly reduce gas consumption. 

Firstly, the technical potential is enormous. Before delving into academic papers here I want to show the intuitive math of heat pumps versus gas boilers for heating. 

As you can see even in a gas heavy grid like the UK or Spain the reduction in gas demand by switching is substantial. For places like France or Germany the numbers are even better. I have averaged them out to a blended 10% grid.

So, on a simple level you can install one hundred million heat pumps and get rid of about 100 bcm of Russian gas demand. Simple right? Sadly not because the European Heat Pump Association’s latest sales data indicate that will be challenging - only ~3.9mm heat pumps were installed in 2019 (latest market data here) and it is unclear how quickly this capacity can be ramped up. Heat pumps are not that complicated but it will take wartime or defense production act level of procurement to get this to double or triple in order to make a difference. It also will increase peak electricity demand - something which solar can help with in Southern Europe and even, according to this paper in Poland. So in broad brush terms in Southern Europe every 1mm heat pumps combined with 5GWh of solar (one pump and 5kW per dwelling) gets rid of about the following:

The unit economics are great but the real constraint is how quickly this can get rolled out. China produces about twenty million air conditioners per month and the component and materials mix of air conditioners is very similar to heat pumps. There may be an opportunity here for China to burnish itsimage if they were to facilitate a rapid expansion in heat pump output and replacement here, assuming they care about that. Alternatively the US Defense Procurement Act could be invoked with similar impacts. Heat pumps in similar climates have similar performance and every molecule not burnt in the state of Georgia can be shipped to Europe so if the US stuck to an aggressive domestic rollout it would still help global balances. 

Do heat pumps work well in other climates in Europe? Spectacularly. The paper “Energetic and Ecologic Heat Pumps Evaluation in Poland” has the following chart showing the performance of various heat pump designs. GSHP and WHSP are ground source and water source respectively, AHSP is an air source heat pump.

Ground source and water source pumps work very well even in the depth of winter with excellent coefficients of performance (heat energy out divided by energy in). All in all - there is plenty of gas demand to cut here, and it really comes down to how many pumps Europe can get and how quickly they can be installed.

Engineering studies of district heating are particularly favorable. Many of the lower income people in Europe who are most adversely affected by energy price inflation live in large apartment blocks that have not undergone significant refurbishment and which operate on centralized gas boilers. This paper outlines the savings here and they are enormous - along with having carbon abatement costs well under current prices and as low as three euro per ton. Similarly another paper used optimization to design systems optimized for each city in Europe - all found low enough costs, well below retail gas and power prices before August 2021. 

The problem of course is capital cost - ground source systems can cost approximately 10,000+ Euro and to get rid of all that gas we are looking at one trillion in spending - a lot. It may be wise to focus on using geothermal for district heating system refurbishments in the short term as being done Aarhaus by Innargi. Given district heating is such a major source of heat and that much of the installation is already complete these projects are appealing both on a returns basis and speed of deployment basis. This is especially so in lower income Eastern European countries where rising energy prices will hurt a lot: Poland’s 2018 household space heating energy breakdown is below for an example.

Geothermal district heat requires deep drilling but also can provide the temperatures required by much of industry as seen below. According to Large Scale Heat Pumps in Europe excluding very high temperature gas users and requirements like metals, chemicals and cement most heating demand can be covered by geothermal district heating.  District geothermal heating also has a side benefit of giving gas utilities something to do rather than trying to slow down a switch to zero carbon heating.

 The real question at this point for geothermal district heating is how many land rigs can be deployed to drill the geothermal holes. According to a Turkish study on geothermal drilling, you can drill these holes pretty quickly but the quantity required and the timeframes are going to prove challenging. 

The other low hanging fruit in cutting demand is simply better weatherizing and refurbishing older units. The NREL Restock models and simulations are excellent work that I have not found an equivalent for in Europe. As you can see in the NY tearsheet simple things like drill and fill wall insulation can save large amounts of energy and the difference in energy requirements by age of stock is telling: Jimmy Carter’s presidency represented a structural break in energy efficiency that you can still see in the data today between homes built prior to 1980 and those after.

Insulation and multipane windows are unlikely to suffer outright shortages especially in the United States so this along with the heat pumps is all manifestly doable if Europe can mobilize the labor force to build it. In the future perhaps transparent aerogels can be put onto older windows but for now the game is deploying what is available.

Given that Europe is receiving significant refugee inflows of people who do not like Putin and do not like Gazprom there may be an opportunity to give these people a job and one with meaning. Many of these demand responses are going to face labor constraints of various kinds - this is at its core labor intensive stuff. Some constraints will be more skilled than others like drilling, others less so for which people can be trained up quickly like digging holes, laying pipes and blowing in insulation. It would be an awful shame to miss this opportunity to put in place a massive capital works program to get Europe off Russian gas once and for all and for Ukrainians to solve whatever short term labor constraints that might emerge. This would also forestall any of the nasty anti refugee sentiment that tends to rear its ugly head as soon as Newscorp gets back to being its unpleasant self. Its hard to be anti-refugee when the refugees just did your insulation and heat pump backed by a government grant that saves you a few thousand quid or euro the next twelve months. Many people have gone back to fight but you don’t need to hold a weapon to hurt a petrostate. Over the course of a few years Russia could be ejected from the EU gas market - it would be great if Ukrainians could take a large share of the credit for that. 

For policymakers the question is how to ramp these markets hard, and provide incentives to do so. In places like Germany KfW was born for this and is already an active lender the Netherlands also has active programs. The challenge is going to be lending or providing grants to people to spend when their disposable income is being hit hard and consumer confidence is poor - in this situation going big on this stimulus is wise as it is inherently deflationary in the medium term and should not pose any threat to monetary stability. In the end Europe will have energy price stability, less dependence and be much more master of its own destiny. That is something worth pursuing.