OREANDA-NEWS. June 08, 2015. Natural gas demand in the EU fell 11.5% in 2014 to 417.5 Bcm, 21.9% lower than the 534.5 Bcm consumed in 2010. This was the fourth straight annual fall.

While gas demand trends in other parts of the world have largely met expectations, the EU's have not.

Just how far wide of the mark forecasters have been can be seen from the International Energy Agency, which predicted in 2011 that EU gas demand would hit 557 Bcm in 2014.

As recently as 2013, it forecast 506 Bcm for 2014.

Analysis continues below...

The Eurozone economy has not performed as well as anticipated and industrial demand for natural gas has suffered as a result.

Many commentators argue that the European Central Bank has been slow to react to the economic downturn and has failed to reassure investors over escalating concerns surrounding the possible exit of Greece from the Eurozone.

However, the largest contribution to falling EU gas demand has been the electric generation sector, one of the key areas of expected growth.

Gas burn in Europe has fallen substantially since the turn of the decade primarily because of the steep increase in renewable generation capacity and the ineffectiveness of the EU's Emissions Trading System.

But the single biggest factor has been the price of coal.

EU gas demand: forecasts and outturns (Bcm)

Competitive coal

Coal prices have dropped dramatically since 2011, owing to a surge in global mining capacity designed to meet what was seen as insatiable demand for the commodity from China and India.

Moreover, in the US, cheap shale gas meant switching away from coal, freeing up domestic output for export.

However, a combination of the rapid expansion of China's own domestic coal industry, combined with a slowdown in the country's rate of economic growth, has meant an abundance of coal across global markets from producing countries like Indonesia, Australia, Colombia and South Africa.

Even now, new exporters, like Mozambique, are coming into the market.

Month-ahead coal prices are currently trading around the \\$60/mt mark, less than half the levels of early 2011.

With no support to be found from the hugely in surplus ETS, coal burn has been a much more attractive proposition than gas for European power generators.

At the beginning of 2010, the German month-ahead clean spark spread -- the theoretical profitability of a 50% efficient gas-fired power plant -- averaged Euro11.25/MWh (\\$12.82/MWh).

The spread turned negative in early 2012, falling to as low as minus Euro22.50/MWh in June 2013.

Although the recent fall in wholesale gas prices has provided some relief, the spread was still minus Euro11.84/MWh in April.

Month-ahead clean spark spread average

The lack of profitability in running gas-fired generation plant is creating a downward demand spiral of its own.

Germany's largest utility E.ON has filed to close two high efficiency Combined Cycle Gas Turbine power plants on April 1 next year -- the 550 MW Irsching-4 and 846 MW Irsching-5 plants.

Irsching-5 has a fuel efficiency of 59.7%, making it one of Europe's most efficient, while Irsching-4 has an efficiency of 60.4%, making it one of the most efficient plants in the world.

With other utilities mothballing and closing gas-fired power plants across western Europe in recent years, gas-for-power demand is unlikely to recover in the short-term.

Forecasts for EU power demand growth are also low because of new energy efficiency measures.

In addition, what growth there is, is likely to be met by the continued expansion of renewable generation capacity across the region.