EU Energy Markets In Crisis

By Paul Homewood

 

http://www.cedigaz.org/products/coal-gas/coal-gas.aspx?n=183l-gas/coal-gas.aspx

 

 

CEDIGAZ have published a report on the mess that has become the EU energy policy. Their main points:

 

1) Gas power generation is increasingly becoming uncompetitive, in the face of low coal prices.

2) This is exacerbated because renewable energy from solar and wind has very low marginal costs, which acts to drive down wholesale electricity prices. Renewable operators can, of course, afford to do this because of the public subsidies they receive, which in effect cover much of their fixed costs.

3) As a result, gas generation has become a loss-making business, even for the most efficient plants.

4) Over the past three years, gas demand by EU power generators has decreased by a third, while coal demand has increased by 10%.

5) At the end of 2013, 14% of the EU’s installed gas fired capacity was idled, closed or at risk of closure.

If all gas plants currently under review are closed, this would amount to 28% of current capacity by 2016.

 

 

6) Because of the impact of the EU’s Large Combustion Plant Directive, a third of current coal power capacity could also be lost by 2020, (with about a quarter of that gone by 2015).

7) Altogether, a third of gas and coal capacity is at risk of closure by 2020, amounting to 120 GW.

8) In the UK, the consequences of this are expected to reduce reserve margins to as little as 4%, which they describe as “putting the UK system at risk”.

9) EU power utilities have, as a result, been forced into major write downs of assets, with some €15 bn in 2013 alone. Instead of building new plants in the EU, major utilities are investing in thermal power plants away from the region, in growth markets such as Turkey, Russia, Eastern Europe, Latin America and Asia.

10) They expect that gas and coal price trends will continue to favour coal.

11) In Germany, competition between gas and coal has been left to market forces, with the result that high efficiency coal plants are being built and lignite resources developed.

12) For reasons of cost, energy security and political independence, Poland are still pressing ahead with a coal strategy.

13) In the UK, however, climate policies, the introduction of a carbon tax, banning of new coal fired plants without CCS, and the Capacity Market mechanism are all expected to promote a shift from coal to gas.

 

Although the Report points out that intermittent power still requires an almost one-to-one capacity back-up, it concludes:

 

Regulatory uncertainties make the future role of gas in the power sector very difficult to predict. Projections by major institutions (IEA, EUROGAS, EURELECTRIC) show that a resurgence of gas demand in the EU electricity mix is not foreseen during this decade. At longer term, the role of gas depends on a complex interplay of global and European market forces, and of European and national energy policies and market designs.

While coal plant closures do not depict a bright future for coal use in the power sector, they do not mean higher gas demand by the power sector due to poor economics of gas-fired generation and regulatory uncertainties.

 

 To reverse the situation, they recommend three things:-

1) Reform of the EU’s Emission Trading System, or ETS. (Translation – increase the price CO2, so as to make coal less attractive).

2) Liberalisation of gas markets, and development of shale, to bring down gas prices.

3) Widespread roll-outs of Capacity Markets. (Translation – Subsidies for gas power plants to stand idle, as a back up for unreliable renewables).

 

It is a pity they did not address the real reason the market is so badly broken – governmental interference. Quite simply, the market has not been allowed to operate as one.

A toxic combination of subsidies, regulation, carbon taxes and the creation of an artificial market in carbon have left an energy market in crisis.