The current gas price shock (and any future ones) raises the question: if we had invested more in renewables, efficiency, buildings renovation, and green gases, would we be actually saving money instead of losing it? Looking at the EU, Dolf Gielen, Michael Taylor and Barbara Jinks at IRENA urge governments to do something they’ve not done before and factor in the negative impacts of volatile fossil fuel prices. Moreover, they should calculate the true price of gas and coal by including their health and environmental costs. The authors summarise the current gas and coal prices alongside those of renewables as well as the “too expensive” green gases (biogas, biomethane, green hydrogen). Given today’s high gas prices, significant volumes of biomethane and green hydrogen would be economic now, until prices subside. But by 2030, at scale, they should be competitive against even stable gas prices. Revealing the true cost of fossil fuels is long overdue, say the authors. Done properly it will open our eyes to the benefits and savings of accelerating the transition. So the current crisis is a wake-up call to get future-proofing our economies against fossil fuel volatility and all its costs.
Synopsis
- Fossil fuels pricing is volatile and not “cheap”, no short-term remedy.
- Higher gas/coal prices in EU caused by supply issues, compounded by low gas storage levels and policy inadequacies.
- Negative impact on the cost of power and heat for businesses and households, raising macroeconomic concerns with the inflation impacts, causing government reaction.
- Renewable power is competitive with fossil fuels, even before the price spike. Green gas prices have been considered expensive, but the fossil gas price spike raises the question: will they be competitive sooner as volumes increase.
- Renewable power and green gases insulate consumers from price spikes, provide long-term stability to governments and business.
- Conclusions…
- – With the latest surge in fossil fuel prices, the dialogue about “cheap” fossil fuels or the “expense” of the energy transition needs to change.
- – Investing in the energy transition, notably renewables and energy efficiency, can insulate us from the economic cost of volatile fossil-fuel cost increases.
- – With natural gas prices so high over winter in Europe, significant volumes of biomethane and green hydrogen would be economic today.
- – Policy makers need to ensure price spikes and volatile fossil fuel prices are factored into evaluations of the economics of the energy transition. Today they are largely ignored, with predictable costs to consumers that could have been avoided.
- – The lessons from the current fossil energy crisis in Europe are clear: rapidly increase renewable energy production, ensure true accounting of the cost of fossil fuels, reduce gas demand through electrification of heating and building energy efficiency renovation, and robust policy that supports the use of green gases in industry.
High fossil fuel prices: externalities, volatility, 15-year trend
After COP26 there is renewed commitment to addressing climate change and the role that decarbonising energy plays in reaching net-zero emissions. We need to stop basing the mantra of the benefits of “cheap” fossil fuels that relies, even at the best of times, on the willful dismissal of the economic costs of unpriced externalities, such as the health, environmental and climate costs. As we face winter in the northern hemisphere, fossil fuels cannot be called cheap on any terms.
…Gas
Since January, the prices of thermal coal and natural gas for power generation and heat have skyrocketed. The short-term cost of gas increased by a factor of 6.5 from EUR 18 to EUR 116/MWh on 5th October, before dropping back to a low of EUR 64/MWh on 29 October, before surging to EUR 180/MWh on December 21 (Figure 1). In 2022, the derivatives linked to the Dutch TTF have ranged between EUR 75 and 97/MWh in 2022 (ICE, 2022[1]). And there is no short-term remedy that might see prices fall, short of another extended period of warm weather. This volatility, although record breaking, is not new – average gas prices have been trending higher over the last 15 years.
…Coal
Landed thermal coal prices in Europe increased by a factor of 3 from USD 72 per tonne at the beginning of the year to USD 274 per tonne on October 5th. Prices saw a correction at the beginning of November, and have since traded in a range between USD 104 and USD 137/tonne, being at the upper end of that range at USD 132/tonne and now having dropped back to USD 149 per tonne at the beginning of January (ARGUS-McCloskey, 2022).
…CO2 price
At the same time, up to the beginning of December, the cost of CO2 emissions allowances in the European Emissions Trading ETS) scheme increased from EUR 33.7/t CO2 to EUR 76.8/t CO2. With just over two tonnes of CO2 in each tonne of coal, this caused thermal coal prices including CO2 emissions permits in Europe to double over 2021. The purchase price for natural gas for sectors covered by the ETS rose from EUR 25/MWh to EUR 132/MWh over the same period.

Figure 1: Daily Dutch “TTF” fossil gas prices, 2020 to 2022. Note: Data is for February 2022 contracts / SOURCE: ICE, 2022. TTF denotes Title Transfer Facility.
…Electricity markets
These eye-watering price increases have flowed through into electricity markets in Europe where coal and gas-fired plants usually set the marginal cost in real time wholesale markets, despite their share in total generation falling as renewable power grows. Between 21 and 27 September 2021, the German wholesale day ahead price averaged EUR146/MWh, a factor 3.3 times higher than in the same calendar week in 2020 and 4.2 times higher than the same week in 2019. For the first week of December, this had risen to EUR 176/MWh, 3.3 times higher than 2020 and 4.1 times higher than in 2019. For comparison, the average cost of new onshore wind in Germany in 2020 was around EUR 48/MWh and that of utility-scale solar PV EUR 59/MWh.
Fossil fuel supply and demand factors have driven price increases, not renewables
Renewables are not to blame for today’s current high fossil fuel prices and volatility, as already noted by the IEA, ACER and others. As has been identified by numerous analysts, the key driver has been lower natural gas supply to Europe, ill-planned gas storage and soaring global LNG prices as consumers scramble to secure supplies ahead of winter.
Indeed, the trouble for Europe has been brewing since April 2021. As vaccination rates rose and economic activity picked up around the world, so too has pressure on global supply chains after the disruption of the COVID19 pandemic in 2020. In July, prior to the gas price hike, the International Monetary Fund expected global GDP to grow by 6%, a rapid acceleration, relative to the negative 3% contraction in 2020. The United States economy was at that point on track to expand by 7% this year and the economies of emerging and developing Asia by 7.5%. Demand for energy and raw materials was accelerating as well.
In Europe, a recent analysis by Mike Fulwood and Jack Sharples at the Oxford Institute for Energy Studies highlights some of the key drivers of the natural gas supply crunch. Firstly, structural decline in production in Europe continued in 2021, with production in the period January to August 24% lower than in the same period in 2019.[2] At the same time, pipeline supplies from Russia and Norway, as well as LNG cargoes have been down. As a result, Fulwood and Sharples point out that Europe has had to manage a supply-demand gap of over 30 billion cubic metres (bcm) compared to January-August 2019. With Asian customers bidding aggressively this year for spot cargoes, in particular to China to avoid the low storage situation they struggled with last winter, Europe has been outcompeted for supplies.
Whilst this may appear insignificant in terms of volume, the negative economic impacts were quick to emerge as the summer ended; energy-intensive industries felt the pinch after ammonia producers announced a halt to production in the United Kingdom and the government stepped in to subsidise production as the knock-on impact of reduced commercial CO2 availability could threaten fresh meat supplies. Elsewhere around the world, production in some energy-intensive sectors is being curtailed to some extent where price hedging has not mitigated the price rises.
Consumers are also feeling the ill effects of higher prices. In the United Kingdom, the price cap was increased 12-13% in October and 25 suppliers have gone out of business, representing over 3 million households -– meaning roughly one-in-five households have seen their supply fail – since August. France plans to send EUR 100 support to almost six million low-income households, Italy’s government has warned that households could see an increase up to 40% in their household energy bills over the next few months and Spain has asked for a coordinated EU-wide response to avoid the worst impacts.:
This supply crunch has been visible since April and it is remarkable how little discussion of the inevitable repercussions had taken place prior to the price increases in August. Figure 2 shows the trend in Europe’s gas storage levels. Somewhat hidden is the almost unprecedented drop in average injections into storages in Europe in April 2021, which led to the drawdown of gas stocks in the first half of that month.
Behind the curve already in April, net injections needed to rise rapidly over the period May-September as in 2013, 2017 and 2018; but the supply crunch meant that in the critical months May-July, injections consistently lagged well below the levels needed. Combined with high LNG spot prices, this saw fossil gas prices soar as competition for supplies rose and the tightness of storage levels suggested a potential cold winter crunch.
Crucially, with supplies remaining below average into the EU, not only did storage levels peak at lower levels (77%), but drawdown also started somewhat earlier compared to the average in the last decade, which will have serious implications for storage levels if Europe experiences a cold winter. Drawdown accelerated on 20 December, before mild weather intervened. However, Europe entered 2022 with historically low storage levels and at the mercy of the weather and LNG supplies.

Figure 2: Monthly (gross) injections into EU natural gas storage by year, 2016-2021 / SOURCE: GIE AGSI, 2021
It does not need to be this way: renewables and energy efficiency offer solutions
The majority of solutions to meet the Paris Agreement goals are based on renewable technologies, low or zero carbon fuels and energy efficiency. However, progress in Europe and elsewhere in deploying renewables and accelerating energy efficiency has been patchy, to say the least. Progress in a number of countries with solar and wind power has been impressive, but deployment still lags behind what is needed and energy efficiency progress almost everywhere is nowhere near what is needed. This is proving more costly than predicted, not only due to the rising costs of addressing health and environmental damages from fossil fuels but also the rising direct economic costs of fossil fuels.
Most of the solar and wind power capacity in Europe (and around the world) has been procured under a form of fixed-cost mechanism, whether payments are feed-in-tariffs or contracts-for-differences, a form of power purchase agreement. For instance, in Germany in September 2021, 36% of power generated came from bioenergy, solar and wind – almost all contracted at fixed prices – plus a further 5% from hydropower and 14% from nuclear – also insulated from fossil fuel price increases. This has moderated the increase in total system costs whilst fossil fuel prices have soared.
With solar and wind power now consistently being procured competitively in the range of €30 to €55 per MWh in most of Europe (with some outliers), the folly of not going harder and earlier on climate targets now has immediate economic cost penalties. Greater investment in renewable power generation earlier over the last decade would be saving European and Asian countries billions.
Similarly, in industry and buildings, the lack of progress in deploying renewables and scaling up energy efficiency programmes is now costing these sectors significant amounts of money. Energy efficiency, building renovation, increased renewable power and electrification of heat (namely heat pumps) can help reduce vulnerability to fossil fuel price swings, but what about green gases?
Green gases: have we underestimated their competitiveness?
Today’s fossil-based energy crisis should fundamentally change what we think about green gases being “expensive”. Renewable gases are currently predominantly biogas and, to a lesser extent, biomethane that has been upgraded from raw biogas that can be injected into existing natural gas grids, such as in Denmark, where the gas grid transported just under 25% biomethane by the end of 2021.
There is also discussion today about the role of green hydrogen (produced using renewable electricity) and, although there are only tiny commercial volumes currently being produced, there is a large potential for hydrogen production to replace fossil fuels in the hard-to-decarbonise sectors of heavy transport, aviation and heating in certain industrial and commercial applications.
…Biogas, Biomethane
Different countries have supported different routes for green gases; in Europe most of the biogas is combusted for local electricity generation and fed into the electricity grid, mostly at CHP plants in towns where half the biogas is consumed as heat.
Biogas production is increasing and, although only providing under 3% of EU total electricity generation, has the potential to scale up if feedstock cost supply curves are managed. As an example, in Germany, host nation to over 9,000 biogas plants (more than half of all plants in the EU), 7% of national power was produced from biogas plants in 2019.
The World Biogas Association estimated in June 2019 that the potential to generate energy from currently available and sustainably grown/recovered major feedstocks in the world is between 10,000 and 14,000 TWh/year or up to 9% of the world’s primary energy consumption. If converted to biomethane, this would be equivalent to 37% of the natural gas consumed in 2019.
…costs
The fragmented, decentralised supply structure of biomethane means that supplies are less affected by major supplier dynamics; there has been no reduction in biogas production in Europe during the pandemic. As an example, German biomethane production costs are estimated to range from EUR 60-90 per MWh (lower than today’s natural gas spot price), whilst analysis by Engie suggests 600 TWh of potential in Europe within the range of EUR 37-70 per MWh. IRENA has estimated production costs in Europe to be between USD 2.6-6.0 per kgH2 today (~EUR 70-160 per MWh) and declining over time, depending on renewable electricity costs, and could be lower elsewhere.
This means that for end uses that cannot be directly electrified (direct electrification for power being the most efficient use of renewable energy), with natural gas prices expected to average around €90 per MWh over the winter as of 8 October 2021, significant volumes of biomethane would be economic today.
…Green Hydrogen
In parallel, the costs of producing green hydrogen are coming down steadily and are expected fall below fossil-based alternatives by 2030. IRENA estimated in late 2020 that up to 40% of the costs can be reduced by 2030 (bringing the cost to under EUR 2 per kg (~EUR 60/MWh), and up to 85% in the long term (under EUR 1 per kg or EUR 30/MWh). A more recent paper at the end of 2021 estimated that the cost of green hydrogen could fall to as low as EUR 0.7 (median EUR 1.6) per kg, depending on carbon pricing and falling renewable electricity costs, and become cost competitive with blue or grey hydrogen.
If the northern hemisphere escapes with a mild winter across North America, Europe and Asia, gas prices should recede from their peak today, although forward prices suggest lower, but historically high prices over 2022. However, by then the economic damage will have been done from the price spike and ongoing higher costs will be a drag on the economy. It is a timely reminder that volatile fossil fuel prices can have wide-ranging economic impacts and are almost certain to be repeated at some point. Crucially, less reliance on fossil gas (due to electrification and energy efficiency) and a greater reliance on hydrogen in hard to abate sectors will not lead to similar price volatility or impacts on the economy because green hydrogen’s key input is renewable electricity, which can be contracted for 20 years or more.
The upward trend in fossil gas prices experienced over the last decade can also not be ignored. In addition, in Europe at least, GHG emissions pricing is likely to continue to add to the price of decarbonising the hard-to-abate sectors. If, or when, coal and gas prices fall, we cannot claim that fossil fuels are cheap by only looking at today’s prices, whilst investment in gas-fired power plants, heat and steam systems last 30 years or more. The repeated systematic failure to adequately price fossil fuel price volatility is holding back investment in viable renewable alternatives.
Conclusion
With the latest surge in fossil fuel prices, the dialogue about “cheap” fossil fuels or, more insidiously, the “expense” of the energy transition needs to change. We are trapped in the short-term with high fossil fuel prices hurting the poorest households, directly through fuel bills or indirectly through rising prices, and energy-intensive industries are feeling the pinch. The risk of inflation and an economic slowdown just after the economic costs of the pandemic in 2020 could exacerbate these impacts.
The irony here is that this is not a new conversation, but we cannot let this most recent price surge lapse into another round of inaction the moment prices ease. It is therefore a timely reminder, that investing in the energy transition, notably renewables and energy efficiency, can insulate us from the economic cost of volatile fossil-fuel cost increases.
We may already today be underestimating the value of green gases; we know they must play a key role in providing decarbonised energy to replace fossil fuels and that there is significant potential volumes, but this recent price shock has shown their economics maybe a lot more compelling, sooner than anticipated. With natural gas prices likely to average around EUR 90 per MWh, or more over winter in Europe, significant volumes of biomethane and green hydrogen would be economic today. Taking into account the rising natural gas prices and CO2 pricing in Europe, green hydrogen at USD 2/kg would likely be competitive. With competitive solar and wind costs plus falling electrolyser costs, this could be a reality by 2030 and make green hydrogen a viable economic alternative to fossil-based fuels for the hard to abate sectors such as industry.
From power generation to heat provision in industry and buildings, renewables, building renovation and energy efficiency measures offer a solution to future-proofing our economies against the negative impacts of volatile fossil fuel prices, whilst aligning emissions with the Paris Agreement goals. Policy makers need to take into account the negative economic consequences of fossil fuel price volatility when evaluating the economics of the energy transition and ensure that we avoid myopic investment decisions that lock-in expensive and environmentally-damaging fossil fuel infrastructure – and redouble efforts to put together policy packages and supporting measures to accelerate the energy transition.
These include rapidly increased renewable energy production, accounting of the true cost of fossil fuel price volatility and environmental impacts, reduced gas demand through electrification of heating and building renovation and robust policy that supports the use of green gases.
***
Dolf Gielen is the Director of the Innovation and Technology Center in Bonn, IRENA
Michael Taylor is a Senior Analyst at IRENA
Barbara Jinks is a Programme Manager at IRENA
REFERENCES:
- Data for February 2022 futures contracts. ↑
- Comparison with 2019 allows a more normal demand/production comparison than the pandemic affected 2020. ↑