Christoph Frei: carbon and gas prices pose key market uncertainties

Posted on 23 July 2012

The future of carbon pricing poses the greatest uncertainty for energy investors in the next 5–10 years, according to WEC Secretary General Christoph Frei.

The current lack of a carbon price is “the single biggest reason for people ending up with stranded investment,” Frei told diplomats and energy analysts at the Global Energy Security Conference, held in London on 23 July.

A related uncertainty is how governments will deal with incentives for renewables. “Having greater clarity on this would provide long-term visibility for investors and unleash investments in renewables,” he said, referring to the WEC’s annual World Energy Issues Monitor.

Earlier at the conference he spoke about the abundance of US shale gas driving a “huge transformation” in the energy markets in the US and also globally.  But its impact on future gas prices represents a major uncertainty in terms of affordability and national competitiveness.

Unlike oil, there is no fully developed global gas market due to the high cost of transporting gas across continents.  Gas price varies widely in different regions, where it is set under very different mechanisms.  At one extreme, gas is traded in the US on the open market where price reflects supply and demand. At the other, gas-poor Asia relies on LNG imports, and so price is at the highest.  In continental Europe, gas is sold across borders under long-term contracts where its price is linked to that of oil.

The recent surge in US gas supplies has pushed US gas prices to a 10-year low.  This has meant that European gas price is now three times higher than in the US, while Asian gas price is another three times more costly than European gas.

The unanswered question is how long it would take for a global, competitive gas price to emerge and how that will affect oil prices, said Christoph Frei. “There is an opportunity to trade between the three [gas] hubs and arbitrate between oil and gas, at least in the US. So how long will it take until we have [price] convergence?”