Natural gas continued to play a leading role in the energy markets in 2023. Having overcome the pricing crisis of the previous two years, there was a notable drop in the perception of a possible scarcity in supply, and prices started moving in the direction of normalisation and stability, albeit at higher levels than before the crisis.

Three important events shaped the European market. The first of these was how governments reacted, by putting demand reduction measures in place, keeping reserves at high levels, and diversifying supplies, which has helped prevent any foreseeable scarcity following the drop in supply of gas from Russian pipelines. Secondly, by increasing the capacity for LNG storage and regasification (by installing floating regasification plants over a very short timeframe and starting work on further plants on land), pipeline supplies have largely been replaced, resulting in the ongoing rise in global LNG market volumes, which will be of decisive importance in both the short and medium term. Finally, although Russian gas supplies fell, they were not completely suppressed. Despite the formally imposed sanctions, Europe has needed to rely on Russian gas to ensure the annual gas balance, particularly during winter.

Prices in Europe ended up settling at manageable levels for the European economies, albeit at considerably higher levels than before the two years of crisis. From prices of less than €20/MWh between 2014 and 2020, over recent months prices have sat between €28 and €35/MWh. There are three main reasons for this increase. Firstly, the negotiating position of supplier countries has been strengthened by the disappearance (in part) of the supply from Russian pipelines. Secondly, the major change in European procurements is the growing supply from the EU, the world’s leading producer, which has become one of the main suppliers for Europe, albeit at higher prices, above the breakeven levels of fracking producers, which ensures an essential supply for European buyers but strengthens North America’s position with regard to the European natural gas market. Finally, increased demand for LNG has forced prices to rise in this market.

This all undoubtedly affects the Spanish market. As well as the impact on businesses and families in terms of prices, demand has weakened, and the amount of gas used to generate electricity has fallen, due to the reduced dynamics of industrial demand and the increase in electricity generated from renewable sources, with the subsequent reduction in the thermal gap. Supply diversification remains high, with the US, Algeria, Nigeria and Russia the main suppliers.

However, despite having shrunk due to rising prices and the fall in disposable income, demand in the residential sector remains relatively robust, as in the short or medium term there is no easy replacement, either in Spain or across the rest of Europe, despite the political directives, which fail to reflect the reality of the sector. Furthermore, there is still margin for growth, by replacing other more pollutant fuels.

In this context, Madrileña Red de Gas continues to grow in terms of supply points, at rates that outstrip those from the rest of the sector. Although this organic growth is structurally limited, the financial results continue to reflect the solidity of previous years, and form a hugely positive basis for the company’s future development.

The biggest challenges we face stem from how the sector is regulated and from legislation guided by European and Spanish climate policy

As in recent years, the biggest challenges we face stem from how the sector is regulated and from legislation guided by European and Spanish climate policy.

In terms of the gas sector, European climate policy is geared towards fostering the development of renewable gases and hydrogen, in detriment to natural gas as the basic energy vector, and increasing the economy’s electrification, supported by the generation of renewable electricity sources. This means we have moved beyond the stage in which gas was perceived as just another fossil fuel to be removed from the energy grids of countries committed to the policies of the Kyoto Protocol.

In the latest version of the National Integrated Energy and Climate Plan (PNIEC), the forecasts for 2030 include a 10% drop in demand for natural gas in the residential sector, and a 20% drop in the industrial sector. A drastic fall is expected in the consumption of gas for electricity generation, as the load factor is forecast to drop from 25% to 7%, while still maintaining the same energy generation park, which raises serious doubts as to the reliability of these forecasts and their underlying hypotheses.

As a consequence, these targets to reduce demand for natural gas by 2030 face considerable challenges.

Both renewable gases and hydrogen have their own determining factors for any appreciable development to be a success. In other words, while the policies to foster these targets are achieving significant results, supported by the technical and financial maturity of the pertinent infrastructures, among other elements, natural gas is still the leading fossil fuel, due to the technological maturity of its infrastructures, its abundance, its affordability and the inherent environmental advantages in comparison with carbon or oil-based products.

By definition, biogas and biomethane are transition options before hydrogen technology reaches the necessary maturity for its use to become generalised, although they may both maintain a supply quota in the future. In this regard, there are two key issues: the relative economics of hydrogen in comparison with electrical options, and adapting existing networks to the use of hydrogen, as the final goal of the transition. In the meantime, demonstration projects and pilots will need to be subsidised in order to produce and use hydrogen, biogas and methane.

Whatever the scenario, it is essential to take into account that the same networks that transport methane today, regardless of its origin, are the same ones that must be used to transport biomethane or hydrogen tomorrow. In the case of MRG, these networks are 100% ready for this

Whatever the extent to which each gas category can contribute to meeting demand, Spain has competitive advantages for producing hydrogen at affordable prices, as the country is widely considered one of the leaders in potential in this area. This vision should be contextualised, however, through a strictly realistic analysis of the possibilities for using hydrogen on the national market and for exporting it, given the transport difficulties and costs involved. The competition to occupy strong positions on the hydrogen market can already be felt.

The PNIEC review, which is under way at the time of writing this letter, is an opportunity to improve forecasts for the production of and demand for natural gas, biogas and biomethane, and hydrogen, based on realistic scenarios and contrasted with the industry’s view and with the state of the relevant technologies within the sector.

Whatever the scenario, it is essential to take into account that the same networks that transport methane today, regardless of its origin, are the same ones that must be used to transport biomethane or hydrogen tomorrow. In the case of MRG, these networks are 100% ready for this.Extending the analysis to Spain as a whole, the costs of adapting distribution networks to make up for certain current limitations, particularly in terms of flows, are moderate and perfectly absorbable.

Madrileña Red de Gas has an infrastructure that is fully capable of channelling renewable fuels. Our networks are ready to supply both green hydrogen and biogas, without having to alter existing supply conditions. The results of the CavendisH2 study conducted by SEDIGAS and its associates show this to be the case. The study analyses the competitiveness of renewable gases and the investment needed to adapt current gas infrastructures, concluding that the required investment to adapt existing transport and distribution networks to operate with hydrogen would amount to €2.344 billion, a figure equivalent to only 6% of the revenue collected by natural gas transport and distribution companies over the past 20 years.

In the field of transport, MRG has provided pioneering support in the use of natural gas in vehicles, with excellent acceptance, which currently at least compares very favourably with electric vehicles, in terms of features, autonomy, safety and pricing

In thinking about the future of hydrogen and the need to develop projects that will ensure the appropriate learning and preparation for a hydrogen-based scenario, Madrileña Red de Gas is at the forefront in terms of innovative projects, such as the Pryconsa initiative (green hydrogen supplied to almost a hundred new-build homes for heating and hot water), the Inspira Madrid project (decarbonisation through the use of green hydrogen in public urban transport, with a network of five publicly accessible refuelling stations, in an initial phase, supplying both light and heavy vehicles at a competitive price compared with conventional fossil-based alternatives) and a plant to valorise farming and agro-industrial waste, and the first domestic hydrogen-based heating plant is now operational.

In the field of transport, MRG has provided pioneering support in the use of natural gas in vehicles, with excellent acceptance, which currently at least compares very favourably with electric vehicles, in terms of features, autonomy, safety and pricing. These refuelling stations form part of the comprehensive service to help customers adopt mature and practical solutions at affordable costs with anotable reduction in emissions.

In the immediate future, MRG and the sector as a whole must not only adapt to energy policy but also meet the challenges presented by how the sector is regulated.

The first of these challenges is to strengthen the current payment structure in order to create the most appropriate system for a network that still needs to grow, because the full electrification of homes is not yet viable given the current conditions in large parts of Spain. Following years of extraordinarily high inflation, the second challenge is to recognise the costs involved, to ensure that appropriate levels of profitability remain in line with those of other comparable countries, whose charges are in fact higher than those applied in Spain.

Thirdly, the limitations on installing residential gas heating need to be removed, by giving users the option of choosing between alternatives based on how attractive they are in terms of costs.

Every day, Madrileña Red de Gas shows its commitment to decarbonisation and its willingness to continue investing in infrastructures capable of adapting to energy policies that are geared towards future scenarios that are more consistent with both the reality of the industry and with how production and energy-use technologies are evolving, all in support of ensuring sufficient supply. This requires ongoing dialogue with public administrations and regulators alike.

Once again, I would like to express the company’s gratitude to the shareholders for their support in this delicate and difficult context, and for their full support in ensuring we meet our strategic goals, which form the basis of the successes we hope to achieve in the future. I would also like to express my gratitude to the team of professionals who form part of MRG for their commitment, hard work and dedication in 2023, and for their trust in our vision for the future. Finally, I must thank our customers and suppliers for their loyalty and for their trust in our project.

Thank you to each and every one for making the success and continuity of our company possible.

 

Pedro Mielgo