Europe 'faces serious energy challenge'

Paris - Europe faces a "serious" threat to its energy supply as a slump in gas demand could see almost 30 percent of production capacity shut in the next two years, industry lobby group Cedigaz said Monday.

European Union gas demand has fallen by a third in the past three years due to competition from cheaper coal imports from the US, increasing use of renewable energy sources and weak demand, the International Centre for Natural Gas Information said in a report.

The price of coal dropped 32% between the middle of 2011 and the end of last year as it lost out to surging US shale-gas supplies.

At the same time, rising oil prices dragged up the cost of gas by 42% between 2010 and 2013.

As a result, gas is rapidly losing its share of Europe's energy production market and close to 30% of gas production capacity could be shut or mothballed by 2015-2016, according to the association.

"The European paradox: despite the numerous advantages of gas over coal, the evolution of gas, coal and CO2 prices dictates a preference for coal," Cedigaz said in a report.

"Gas demand lost 51 billion cubic meters in the past three years, the equivalent of the total annual demand on the French gas market. By contrast... coal demand (increased) by 10% between 2010 and 2012."

An additional challenge for energy supply in Europe is that old coal plants are also expected to be shut down due to more stringent environmental standards and the development of renewable energies.

Cedigaz warned that EU regulations on pollution emissions could mean between 65 to 70 gigawatts (GW) of old coal power capacity is retired by 2020-2023.

"Altogether a capacity of 115-120 GW, representing a third of gas and coal capacity in the EU, is closing or at risk of closure, posing a serious challenge for security of supply," said the report.

In order to stave off a potential power crisis, the organisation called for a new market design, including a rise in the price companies pay for CO2, lowering gas prices and restoring confidence in the market to attract investment.

"In the absence of a carbon price signal, a resurgence of gas demand in the EU electricity mix is not foreseen during this decade," said the report.