MERCHANDISER
Europe Needs Major Energy Investment
EUROPEAN UTILITIES NEED to invest around one trillion euros by 2020 in new infrastructure to ensure the region’s energy supplies as ageing power plants close and gas imports rise, according to a new report from IHS CERA, a leading global source of energy information and analytics. The study highlights that the investment climate has
deteriorated markedly over the last year as a number of countries faced a double-dip recession and the financial strength of utilities has weakened dramatically due to higher debt levels and weaker credit ratings. “Europe’s energy sector faces a large and pressing
investment challenge,” says Michael Stoppard, chief researcher, global gas, at IHS and co-author of the report: The Energy Investment Imperative: Toward a Competitive and Consistent Policy Framework. “Today the required investment is lacking. However, because of the long lead time to develop energy assets, it is imperative that the right investment framework be put in place as soon as possible to ensure long-term stability of Europe’s energy system,” says Stoppard. The investment through 2020 equates to around €750
billion for power generation, €90 billion in transmission lines and around €150 billion to expand gas supply and build new pipelines to cope with rising imports as Europe’s domestic output declines. Europe is due to close around a quarter of its fossil fuel power generation capacity by 2023 to meet tighter environmental rules while the rapidly expanding renewables sector needs back-up supply and better grid interconnection, the report notes.
The challenging investment environment means that
new approaches to corporate and project finance will be needed to attract institutional investors, and regulators will need to take major steps to reduce uncertainty for these investors. “The current market structure is unlikely to attract the necessary risk-bearing investment,” says Fabien Roques, head of European Power Research with IHS and co-author of the report. “Premiums to cover significant regulatory and market risks threaten to drive up the costs of capital in an already capital-intensive industry. “National reforms to implement capacity mechanisms
risk undermining progress so far with market integration at the European level. Unless the investment framework is fixed urgently, Europe will fail to deliver on its low carbon agenda,” Roques concludes. IHS CERA has identified four policy enablers that are
key to meeting the investment imperative and has made policy recommendations around each enabler.
• Carbon Market Reform – Short-term supply adjustment of allowances for Phase 3 followed by a
structural reform for a credible long-term price signal have become urgent and inevitable if the EU ETS is to be the cornerstone for defining the generation mix across European power markets. Without reform, the EU ETS risks being pushed into a mere backstopping role to assess the progression toward the EU emissions reduction targets, rather than acting as an agent of change.
• Clean Technology Support – The deployment of clean power generation technologies is essential to the European
Capacity Additions & Retirements in EU27 Power Sector to 2020 30 Net Renewable Capacity Additions 20 10 GW 0 -10 -20 Fossil Fuel & Nuclear Capacity Additions & Retirements -30
Oil Gas Coal Nuclear Hydro Wind Solar Biomass Other 2013
2014 2015 2016 2017 2018 2019 2020
Today, a total of 945 GW of power generation capacity is installed across the EU27 member states, half of which is conventional thermal power generation. This share is likely to decline
to 40% by 2020 as 90 GW of oil, coal, and gas-fired generation is retired. Only every second gigawatt is replaced with new conventional capacity. At the same time, up to 160 GW of renewable power generation is added, with close to 90% of this being wind and solar.
Source: IHS CERA 14 March 2013
Union’s move to a low-carbon economy; but current support frameworks need to be critically reviewed to keep costs affordable to consumers. Support costs for renewable generation alone will reach at least €50 billion by 2020, an increase of 40% over today’s €30 billion, which calls for clear trajectories and thresholds for subsidy removal as technologies mature. Additional costs arise from accommodating intermittent renewables in the system. Gradual market integration of renewables through exposure to short- term market imbalance signals is required to ensure that the system integration costs of renewables are minimized.
• Power Market Reform – The implementation of the Third Energy
Package needs to remain a priority, with market integration to be completed as soon as possible. In the meantime, short-term challenges need to be met for conventional power plants to address the need to reward better operating flexibility
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