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Facts Are Stubborn Things


Trading European power in the opaque world of global commodity flow is a risky business. It always has been; this is fact. At Global Energy Advisory we believe that significant value can be created or destroyed in this activity. Is the energy trading strategy at the top of the C level agenda?: Be honest, it should be.


By Aily Armour-Biggs


IN FUTURE, IF we don’t get energy trading and margining cash flows right, firms could fail. This is because the European power market is changing at great speed within a very short time-frame. It could also be exposed to obscure risks from events happening in other parts of the world.


Blown Off Course On November 6th


2012 Moody’s Credit Agency


produced a report, European Utilities: Wind and Solar Power Will Continue to Erode Thermal Generators’ Credit Quality. It warns that the rapid increase in renewable energy capacity in many European markets could seriously damage the financial prospects of coal and gas-fuelled power plants in the near to medium term. “What were once considered stable companies have


seen their business models severely disrupted and we expect steadily rising levels of renewable energy output to further affect European utilities’ creditworthiness,” Moody’s said. So what are the numbers (facts) to substantiate


this comment? The International Energy Agency (IEA) has just produced its World Energy Outlook 2012, and it shows (fact) that in 2011, in Europe, nuclear power had the largest market share at 27%, followed by coal at 26%, gas at 23%, renewables at close to 21% and oil only 2.5%. To be clear, these are energy numbers, not capacity. The IEA have a prediction, which could be quite


accurate, because they have modelled committed policies – the main thing driving investment – not demand. Their prediction is that for Europe, in only three years time, it’s renewable generation that will dominate the power mix with a market share of over 27%. Nuclear is next at close to 26%, coal 25%, gas at 19% and oil less than 2%. This market share is on a growth rate of the period of 2.3%, which could be optimistic, so the market shares could be less. This could suggest that in the next three years, it’s the gas generators who suffer. However, driven by government policy, investment


could happen quite rapidly and in only seven years, renewable generation could possibly increase its leading market share at close to 32%. Thereafter, it’s nuclear, with just over 24%, coal at just less than 22%, gas at close to 20% and oil at just over 1%.


Therefore, in the medium term it’s both gas and coal generators who have the highest erosion of market share, and this is a consistent feature.


Crisis Structurally ChangesEnergy Business We build models to represent reality – but they


are not reality. We build them to make sense of complex situations. The real value comes from an in-depth analysis of the facts. We do this so that C level executives can consider what could happen and then it’s for them to take appropriate decisions. This is not a simple or quick process and much


iteration is required. That’s why we model whole markets and player behaviour. Our energy trading discipline tells us that once you do a trade, you change the market, so you have to consider what you and other market participants are doing. It’s not a case of let the market sort it out, because European power as a market is dominated by large physical players that are “the market”. There is no point in playing catch up with energy trading strategy because, at all points in time, value could be in the process of destruction. As a leader you have to examine the facts (and have them to hand all the time).


... in the medium term it’s both gas and coal generators who have the highest erosion of market share


Reading the IEA publication in depth (690


pages), reminded me of how interconnected the European power market is to other parts of the world and other commodities, mainly coal and gas. It is now understood that shale gas developments in North America helped the United States to export 34 million tons1


of coal last year – some of


it finding its way to Europe, where it was eagerly consumed with the help of cheap carbon prices. This is just one dynamic that we now understand to be possible. There are many more. If value is to be maintained, firms simply have


to be proactive in positioning their asset portfolio whatever they may be – because they are under their care. It could take a large integrated utility at least three years to re-adjust to a market of low gas generation, which consequently could be a good


December 2012 43


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