Gas will remain part of the energy mix. The crisis has not changed that, says gas industry chief

The natural gas market has undergone a fundamental transformation in recent years, affecting all of Europe, including the Czech Republic. In an interview with Josef Kotrba, CEO of the Czech Gas Association, we discussed the current situation on the gas market following the end of gas transit through Ukraine, the future of natural gas in the energy mix, and the challenges associated with the transition to renewable energy sources.

How prepared is the Czech Republic for the end of Russian gas transport? What changes does the rise of LNG bring, and what does it mean for Europe’s long-term climate goals?

Let us return to the beginning of this year. A major event in the gas sector was the end of Russian gas transit through Ukraine. Did you expect this scenario?

From my perspective, until the very last moment there was some chance that a last-minute agreement would be reached. Historically, there have been cases where the situation appeared hopeless, but a solution was ultimately found. For example, during the most recent extension of the gas transit agreement through Ukraine. It is important to say that Europe’s ability to deal with similar challenges is now at a completely different level than it was in 2022.

We saw that merely restricting supplies from Russia, rather than stopping them completely, was enough to create chaos on the markets. However, now that supplies through Ukraine have been fully halted, the difference in exchange-traded gas prices between the end of December and the beginning of January was minimal. The market had already prepared for this possibility – storage facilities had been filled in time and alternative routes secured.

Of course, it has had a certain impact. Summer prices were almost half as high, which is naturally negative for European consumers. However, the global LNG market is so extensive that it will absorb the situation in Europe over the long term. I believe that within a few months everything in the market will be arranged so that prices fall again.

Do you believe that the Czech Republic is sufficiently prepared for a similar situation? I do not mean just this winter, but the years ahead as well.

I do not think we will have a problem in the Czech Republic. Gas import capacity is sufficient, and Czech suppliers are commercially well prepared for such situations. I therefore do not expect any significant impact.

As regards supplying the east, for example Slovakia, the situation is somewhat different. Slovakia currently imports gas only from the south and is making extensive use of its storage facilities. However, this is not a permanent solution, as storage facilities are not infinite. I assume that, over time, gas supplies will increasingly flow through the Czech Republic as well. But if this concerned Slovakia alone, it would not pose a problem – either in terms of gas volumes or transmission capacity.

However, if routes had to be reconfigured so that gas flowed through the Czech Republic for the whole of the east – including Ukraine and Hungary – the situation would be different. Cross-border capacity from Germany would have to be increased, and the question remains how quickly the Germans would be willing to expand that capacity.

So, thanks to its proximity to the North Sea and LNG terminals, is the Czech Republic still in a relatively secure position?

Exactly. However, if there were a new development, for example if it became necessary to supply eastern Europe including Ukraine, bottlenecks would emerge at the German-Czech border. So far, though, nothing indicates that such a scenario will occur.

Can it therefore be said that the Czech Republic has freed itself from dependence on Russian gas?

Yes, we can confirm that. We have already had a full-year period during which no Russian gas flowed to the Czech Republic through Lanžhot. And since then, the situation has improved further. The Czech Republic now benefits from a greater number of LNG terminals, and Czech suppliers that previously bought directly from Russia are now operating on the global LNG market. We are handling it better, processes have become more routine, and it does not represent any fundamental problem for the Czech Republic.

The energy market has undergone significant changes since the second half of 2021. Before that period, natural gas was seen as a transition fuel. Does this perception still hold after the crisis?

Yes, it still holds. Natural gas remains a cornerstone of Europe’s energy transition, which envisages moving away from coal towards renewable sources. However, prices have changed significantly since 2021. At that time, we were talking about 5 to 10 euros per megawatt-hour; today, we are talking about 50.

I believe that short-term low prices of around 5 euros were the result of market manipulation. Russia released large volumes of gas onto the spot market at the time, which led to lower prices but also laid the groundwork for their subsequent extraordinary rise. Such low prices were not sustainable in the long term.

So nothing has changed regarding the need for natural gas as a transition fuel?

No, the need for gas as a transition fuel remains the same. What has changed, however, is sentiment. Alternatives have started to emerge in district heating, such as large-scale heat pumps. The economics of operating them are questionable, however, and may not always work out, which is why gas technologies remain the preferred choice for now. To my knowledge, investors still favour this direction as well.

Of course, as long as heating plants could use coal and allowances were not too expensive, they delayed the shift to gas. Nevertheless, natural gas is the main alternative.

What about electricity generation?

When it comes to dispatchable electricity generation to complement renewable sources, there are currently no viable alternatives to gas at the required scale – pumped-storage hydropower plants naturally also play a role in balancing fluctuations in output, but their development potential is limited. Hydrogen may gain traction over time, but its production is currently too costly.

How is this reflected in households?

In household heating, we have seen strong pressure to replace gas with heat pumps, particularly during the period when pumps were supported by substantial subsidies. However, when subsidies are absent, households return to using gas despite relatively higher gas prices, because heating costs are still lower once the investment is taken into account.

If I understand correctly, high prices are not yet a fundamental problem for natural gas as a transition fuel. But we have no other alternative. Do you see any other option besides hydrogen?

Hydrogen is one alternative, but its price remains significantly higher. When we look at heat pumps, whether ground-source or air-source, the cost of purchasing them often substantially exceeds their operational benefits. The payback period is therefore very long, and for most households it is not economically worthwhile. Even at current natural gas prices, gas heating remains the cheapest option for ordinary family or apartment buildings.

It is somewhat different for passive houses – their low energy consumption means the choice of heating source is not as crucial. For standard homes, however, gas remains the most sensible economic alternative for now.

And what about large-scale energy? Gas is mainly expected to replace coal.

Yes, gas is to replace coal, as reflected in several projects under preparation. Government strategy documents set the end of coal use by 2033. I consider this deadline realistic from the perspective of replacing coal with gas, at least for projects that are already awaiting approval. These projects are generally well prepared and often have secured their place in manufacturers’ production queues for the required equipment, which has long manufacturing lead times.

Conversely, for projects only starting now, meeting the 2033 deadline would be rather unrealistic. Moreover, I do not think that replacing coal has to be addressed on a 1:1 basis – meaning every gigawatt of coal replaced by one gigawatt of gas. Together with renewable sources, gas can serve more as a peaking source and does not need to cover the entire baseload.

Does something similar apply to district heating? Its specific feature is that it operates more on a seasonal basis.

Exactly. District-heating capacity is primarily sized according to peak demand. Coal in this sector will not be replaced by gas alone. More and more projects focus on waste processing or the use of biomass, an area that has seen considerable growth recently. New models combining multiple sources are also interesting – for example, heat pumps for heating water in summer, and smaller gas boilers or cogeneration units for autumn and winter.

How will the transition to gas change overall gas consumption? Have you made any internal estimates of future gas demand for 10, 15 or 20 years ahead?

Yes, the projected increase in consumption is substantial, but we are certainly not talking about replacing coal with gas on a 1:1 basis. This applies to installed capacity and even more so to gas consumption. Detailed studies by ČEPS, OTE and others show that there would be a significant increase if district heating switched entirely to gas. If we were talking about a full replacement of coal with gas, gas consumption in district heating could rise by up to a quarter. But that is not realistic – the replacement will be only partial. I would estimate an increase in total gas consumption in the electricity sector of 10–15 %, and a similar, perhaps slightly larger volume in district heating.

Do we have sufficient capacity for such an increase?

If we compare peak gas consumption in the Czech Republic in 2019 with last year, there is a difference of around 30 %. This figure clearly shows how significantly consumption has fallen over the past several years – the increase resulting from replacing coal with gas will bring us back to the original level.

Even with the gradual expected increase in consumption, the gas sector therefore remains prepared in terms of both capacity and trading. Most gas is now purchased on the global LNG market, which is very robust. The Czech Republic is a relatively insignificant player on this market, so changes in our consumption have no impact on the global market. Europe as a whole does have some impact, without a doubt.

What impact do global markets have on the situation in the Czech Republic?

The shift from pipeline gas to LNG has exposed us to new challenges. For example, when a severe winter begins in China or elsewhere in Asia, gas prices on the global market surge, which is also reflected here. We felt this as early as the end of 2021, when prices were first artificially reduced before rising dramatically. However, the LNG market does not have the same nature as Russian pipeline gas. It is more expensive, but also more dependent on global trends.

Does LNG have a long-term advantage over pipeline gas?

A number of countries have always relied solelyon LNG – Japan and South Korea, for example. We long enjoyed the advantage of cheaper pipeline gas, which we have lost. On the global LNG market, we must now contend with higher prices and greater dependence on developments around the world.

How do you view the long-term future of natural gas? European targets are aimed at climate neutrality.

Natural gas will certainly play an important role for a long time to come. In addition to its use in energy, it is also an important industrial feedstock that cannot be easily replaced in some sectors. Even the most ambitious “green” projections do not envisage natural gas being completely eliminated by 2050. Rather, there is talk of its emissions being offset through CO2 capture. However, this is still an expensive technology, and it will depend on how it proves itself economically.

What is your view of the targets set by the European Union?

I have had the opportunity to study in greater detail the assumptions of major companies in the petroleum products market and their future plans. Most of them assume that European targets cannot be fully achieved. The direction Europe is taking is clear, but meeting these targets within the specified deadlines will be very difficult – and that applies to natural gas as well.

For example, by 2050 households are expected to switch to heating with heat pumps and district heating. However, this requires most buildings either to be new, built to the ZEB (zero-emission building) standard, or deeply renovated. One only has to walk through the historic parts of cities to see that this is not realistic. This is partly due to heritage protection and partly due to the financial cost.

So what is your forecast for 2050?

I believe gas will remain part of the energy mix – in the electricity sector, district heating and households. Its share will probably decline, but it will not be eliminated. In district heating, gas consumption may actually increase, while in the electricity sector it could decline slightly overall. However, gas will play an essential role in peak capacity.

I also expect that by then there will be overcapacity in renewable sources, enabling their wider use. However, natural gas will remain crucial wherever peaks need to be covered or grid stability ensured.