European Energy Markets Observatory Key Findings

The 14th edition of the European Energy Markets Observatory (EEMO) covers the whole year 2011 and winter 2011/12. Key messages of this year's report are outlined below.

  • Electricity and gas future consumptions are difficult to forecast
  • Prices evolution discrepancies between the different energies and the different regions should continue
  • Energy transition, studied in many countries, will be costly
  • The EU 2020 “climate change” objectives will not all be met
  • Gas pipelines and electricity grids are key elements for security of supply
  • Utilities are facing challenging times
  • Conclusions

Electricity and gas future consumptions are difficult to forecast

The electricity and gas consumptions decrease in 2011 and H1 2012 has been less sharp than during the 2008/09 economic crisis. However, they have not recovered their pre-crisis levels yet. The poor economic perspectives in Europe are expected to last and are impacting negatively the electricity consumption projections.

 

Prices evolution discrepancies between the different energies and the different regions should continue

Geopolitical tensions such as the events in Iran impact significantly global oil supply and crude oil prices remained high despite the global economic slowdown.

As the gas market is not global, prices differ considerably from one region to another: in the US, producers are exploiting shale gas at a very competitive cost, which drives US gas prices down. The situation is different in Europe as long-term gas contracts oil price indexation has resulted in much higher gas prices, with continental Europe long-term gas prices approximately 300% higher than the US.

Coal prices have decreased in the US since April 2011 and since September 2011 in Europe. The low US spot gas prices (due to shale gas production) pushed generators to switch from coal to gas (coal-fueled electricity generation should decrease by 8.5% at the 2016 horizon) and had a negative impact on US coal prices. This trend created extra coal tonnages that were shipped to Europe where prices were also pushed down. In Europe, the low CO2 emissions prices combined with low coal prices result in coal being more competitive than gas for fossil-fueled plants. Launching “capacity markets” to allow gas-fired plants to remain viable is a priority measure for the industry.

Following the economic rebound in Europe, the average electricity spot price increased by 13% in 2011 compared to 2010. An 8% average decrease was observed in H1 2012 compared to H1 2011, in the context of economic slowdown and low coal prices, with the exception of Germany where prices growth is linked to the nuclear phase-out.

Energy transition, studied in many countries, will be costly

Following the Fukushima accident and the shale gas expansion, the European energy mix should evolve towards more gas, renewables and coal (in certain countries). By 2025, the nuclear share in the European electricity mix is projected to decrease from 14% to 11%, the gas share should be stable (20%) and the renewables share (excluding hydro) should increase from 18% to 36%. On the long-term, gas share should increase but the reverse is observed on the short-term.

One year after Fukushima accident, it appears that nuclear energy development is slowed down but not stopped. Renewable energies have continued their expansion in 2011 but subsidies are reduced in many countries.

The energy mix evolution should result in higher share of renewable, higher costs, higher temperature increase (more fossil fuels), lower energy independency.

The energy transition will be costly, as studies show in several countries. This is for example the case in Germany, which has decided in 2011 an energy transition including:
 

  • Total nuclear phase-out by 2022 (8 reactors immediately shut down after the Fukushima nuclear accident, closure of the remaining 17 reactors by 2022)
  • Greenhouse gas emissions reduction by 80-95% before 2050
  • 80% electricity production from renewable energy sources before 2050

It requires to build more generation capacity to replace the nuclear reactors. The plan forecasts a strong increase of renewable share – from 20% to 35% of the generation in 2020. It also requires to redesign the whole grid to cope with more and smaller injection points in addition to solving grid balancing issues and building HVDC lines to connect large offshore wind farms.

The energy transition investments needed in Germany from now to 2020 are forecasted between €350 and 415 billion (Estimation from German state bank KfW) out of which grid investments amount to about half these estimations. However, end-2011 the Professor Alfred Voss from Stuttgart University, has estimated the energy transition cost for Germans at more than €2,000 billion, an amount comparable to that spent on German re-unification.

As second example, extensive analysis has been carried out on energy mix scenarios in France. In all scenarios, end-users electricity prices and investments are bound to increase.

The EU 2020 “climate change” objectives will not all be met

In 2011, renewable energy investments continued to rise and as of May 2012, 18% of the European generation plants under construction are from renewable energy sources. In 2011, wind power still provided the largest output (172 TWh) and many governments have launched large offshore wind programs.

Despite the solar PV growth in 2011 (+73%), several solar companies went bust because of Chinese competition and  it is forecasted that in the short term at least half of the world’s existing solar photovoltaic manufacturers could be taken over or go bankrupted.

After the 2010 increase (+2.4%), GHG emissions decreased by 2.5% in 2011. Emissions from the combustion sector which accounts for 70% of the EU ETS emissions, showed a 2.2% fall linked to lower energy demand due to mild weather and the economic downturn. The 2020 objective should be met.

Because of the subsidies reduction, the renewables objective will be difficult to reach. The present ETS system needs to be amended to provide predictable and high enough CO2 prices.

In June 13, 2012, a new Energy Efficiency compromise text has been adopted and targets 17% decrease of EU’s primary energy consumption by 2020 instead of 20%. Among the measures adopted, Utilities are required to make energy savings equivalent to 1.5% of their annual sales each year from 2014 to 2020, if not, they will incur penalties. In 2014, the EU will re-assess the situation and impose a binding target if the progresses are insufficient. Efficient Demand response is key to meet the EU energy efficiency objective.

Gas pipelines and electricity grids are key elements for security of supply

In the absence of storage, with the increase of renewable energies generation share, the electrical grid’s management is facing new challenges as these energies provide unforeseeable and intermittent power generation that is thus not schedulable. Large renewable energy projects require reinforced transmission grids as wind and solar farms are connected to it.

Small scale renewable capacities (typically solar cells on a homeowner roof or a smaller wind mills) are connected to the distribution network and their output is even less predictable than large centralized renewable capacities. The distribution grid that is less sophisticated than the transmission network is not designed to manage those decentralized and sometimes bi-directional flows. In addition, customers could become occasional producers creating needs for bidirectional flow management.

The smart grids concept has emerged to manage a dramatic increase in data flow, data storage and exchanges both for grid balance and customer relations. They necessitate new equipments and will be more digitally managed. Communication protocols will need to be standardized in order to manage the information flow on the net and with the customers as well as within buildings. Forecasts of the cost of Smart grid rollout differ enormously.

Utilities are facing challenging times

Investments are required in generation, grids, LNG re-gasification facilities and pipelines and result from:
 

  • Generation plants’ construction to replace old plants (almost 9.5 GW were decommissioned in 2011 in Europe), nuclear reactors potential phase-out  and safety improvement
  • Electricity and gas grids reinforcement to improve security of supply, accommodate decentralized and renewable generation, transform present grids to smarter ones

The current economic instability and a lack of reliable projections for the euro zone’s future are however discouraging many Utilities from making the necessary investments.

Conclusions

Contradictory signals were observed:
 

  • Future infrastructure investments are huge but a slow economy and lower consumption could affect these needs
  • Energy efficiency objectives are difficult to meet but with the consumption slowdown they could happen naturally
  • The ETS system aimed at reducing greenhouse gas emissions has become inefficient, but the emissions reduction objective should be met thanks to the reduction in energy consumption linked to the economic crisis

European regulators and governments still consider Utilities as an easy source of revenues. However, governments should be careful not to kill the goose that lays the golden egg, especially as large Utilities are currently divesting from Europe. Undermining Utilities attempts to make much-needed investment in energy infrastructure could be costly once the economy rebounds and demand for electricity and gas increases again.