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European Energy Markets Observatory 2013


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Capgemini's European Energy Markets Observatory is an annual report that was initiated in 2002. It tracks the progress of two subjects: the establishment of an open and competitive electricity and gas …

Capgemini's European Energy Markets Observatory is an annual report that was initiated in 2002. It tracks the progress of two subjects: the establishment of an open and competitive electricity and gas market in EU-27 (plus Norway and Switzerland) and the reaching of the EU's 3x20 climate change objectives. The report looks at all segments of the value chain and analyzes leading-edge energy themes — digital revolution, customer experience, smart grids and demand response management — to identify key trends in the electricity and gas industries.
The 15th edition of the report covers the whole year 2012 and winter 2012/13 on the following areas: Energy Regulation, Electricity Markets, Gas Markets, Customer Transformation, Renewable Energy Sources & Local Energy Transitions and Companies’ Overview.

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  • 1. © Capgemini 2013 Capgemini has used its best efforts in collecting the information published in the 15th European Energy Markets Observatory to make it accurate and complete. Capgemini does not assume, and hereby disclaims, any liability for any loss or damage caused by errors or omissions in the 15th European Energy Markets Observatory, whether such errors or omissions result from negligence, accident, or other causes. The information contained in the 15th European Energy Markets Observatory and provided to the user by Capgemini is protected by copyright law. The user is responsible for any breach of copyright law it may commit. The user: ■■ ■■ ■■ ■■ Cannot modify, translate, alter, amend or disassemble any information contained in the 15th European Energy Markets Observatory in any way; Cannot alter, delete or conceal the copyright notices contained in the 15th European Energy Markets Observatory; Cannot store the 15th European Energy Markets Observatory in a shared electronic archive or database; and Cannot communicate or transmit the 15th European Energy Markets Observatory in any form or by any means electronic or mechanical, or in any other computer networks systems such as any intranet and/or the Internet. If the user wishes to cite or reproduce some portions or extracts of the 15th European Energy Markets Observatory: ■■ ■■ It must obtain a written permission from Capgemini and; If such permission is given, it must ensure that all such material or information is clearly attributed to Capgemini, and bears a notation that it is copyrighted by Capgemini with the year of copyright.
  • 2. em g ap C © ht ig yr p o 2012 AND WINTER 2012/2013 DATA SET - FIFTEENTH EDITION C EUROPEAN ENERGY MARKETS OBSERVATORY S 2012 and Winter 2012/2013 Data Set Fifteenth Edition, October 2013 In collaboration with i in European Energy Markets Observatory 20 13 Utilities the way we see it
  • 3. in ap C Gas Markets Upstream Gas Gas Infrastructures Gas Wholesale Markets g Electricity Markets Electricity Generation Electricity Infrastructures Electricity Wholesale Markets em Energy Regulation and Policies Overview Governance and Coordination across Europe Sustainability and Climate Change Targets Customer Transformation © 4 i A Strategic Overview of the European Energy Markets 20 13 Contents 18 18 24 28 28 38 45 50 50 58 64 68 78 Companies’ Overview Finance and Valuation Strategy and Organizational Challenges 84 84 90 ig ht Renewable Energy Sources & Local Energy Transitions Appendix Tables 93 100 Country Abbreviations and Energy Authorities 103 p yr Glossary C o Team and Authors ©2013 Capgemini. Reproduction in part or in whole is strictly prohibited. 2 European Energy Markets Observatory 104
  • 4. Utilities the way we see it Tables Table 2.3 Map of generation capacities projects in MW (as of May 2013) ...................... 32 Table 2.4 Current (2013) and future (2020 and 2030) electricity capacity mix (as of June 2013) .............................................. 37 Table 3.1 Investments from selected electricity TSOs in their national grid (2005 to 2012) ................................................... 38 Table 8.5 Aggregated European electricity switching rates (2012) ....................................... 73 Table 8.6 Aggregated European gas switching rates (2012) ....................................... 73 Table 9.1 Growth rate of renewable energy sources for electricity production (2005 to 2011 or 2012)...................................... 79 Booming activity in Smart Grid pilot projects across Europe .................................................. 41 20 Table 2.2 Installed and decomissioned generation capacity per type of source (2012 versus 2011) ............................................ 30 An unprecedent wave of investments requires Excellence in Capital Project Management..................................................... 34 ..................................................... Capgemini Consulting’s approach for selecting the right smart meter communication solution ................................... 43 Digital Revolution is forcing change for Utilities.. 49 The Smart Operations Centre: the key to smart meter rollout in the UK ........................... 61 i Table 2.1 Peak load, generation capacity and electricity mix (2012) .................................. 29 Table 8.4 Residential electricity prices – all tax included and with PPP (H2 2012 and % change with H2 2011) ................................... 71 Spanish energy reform: a high risk mission ...... 21 in Table 1.2 3x20 European Union climate change objectives (status as of 2011 with 2012 provisional data) ............................... 25 Table 8.3 Residential gas prices – all tax included and with PPP (H2 2012 and % change with H2 2011) ................................... 71 Table 9.2 Growth rate of renewable energy sources for heat production (2008 to 2011 or 2012)...................................... 80 Table 10.1 Utilities sector EBITDA margin evolution (2000 to 2013e) ................................. 85 em Table 1.1 Major energy events (2012 and H1 2013)........................................... 22 13 Topic Focus Table 10.2 Utilities sector total debt evolution (2005 to 2013e) ................................................. 85 Table 3.3 Map of interconnections levels and interconnections projects (2012)................ 40 Making Demand Response Management a real business model – discussion on the challenges through the German example......... 82 example Table 10.3 Utilities sector CAPEX to revenues ratio (2000 to 2013e) ......................... 86 Table 3.4 Smart meters deployment status in Europe (as of July 2013)................................ 42 Utilities: the customer experience goes digital ... 76 Table 10.4 13-year Utilities sector performance versus the MSCI Europe index (base 1 on 1 January 2001) .............................. 88 Table 4.4 Electricity futures prices (year ahead) on the main European markets (2012 and H1 2013)........................................... 48 Table 5.1 Domestic gas production versus piped gas and LNG imports (2012) .................. 51 Table 5.2 Proven conventional gas reserves in Europe (1980-2012)....................................... 51 Table 10.6 Utilities sector P/E, Europe and US. 89 Appendix Tables Table A.1 Map of electricity distribution (2012) . 93 Table A.2 Map of gas distribution (2012) .......... 93 Table A.3 I&C electricity prices – VAT excluded (H2 2012 and % change with H2 2011) ............ 94 Table A.4 Status of electricity price regimes (as of July 2013) ................................................ 94 ht Table 5.3 Technically recoverable shale gas resources (2012) ............................................... 52 ap Table 4.3 Electricity spot prices on the main European markets (2012 and H1 2013) ............ 47 Table 10.5 Utilities sector dividend yield (dividend/stock price) since 1 January 2000 .... 89 C Table 4.2 Yearly (2011 and 2012) and winter (2011/2012 and 2012/2013) average electricity spot prices .......................... 46 © Table 4.1 Commodity prices (2012 and H1 2013)........................................... 45 g Table 3.2 Investments plans for selected electricity TSOs ................................................ 39 The competitiveness dilemma for Europe’s energy-intensive industries ............................... 70 Table A.5 Electricity retail market size (2012) .... 94 Table A.6 Residential electricity price breakdown (as of June 2013) ........................... 95 Table 5.5 LNG imports to Europe (2012) .......... 54 Table 5.6 Map of gas imports (2012) ................ 55 Table A.7 Potential annual savings from switching electricity retailer (H1 2013) .............. 95 Table 5.7 Map of pipelines and LNG terminals projects (as of May 2013) .................. 57 Table A.8 I&C gas prices – VAT excluded (H2 2012 and % change with H2 2011) ............ 96 Table 6.1 Investments from selected gas TSOs in their national grid (2008 to 2012) ........ 58 Table A.9 Status of gas price regimes (as of July 2013) ................................................ 96 Table 6.2 Investments plans for selected gas TSOs .......................................................... 59 Table A.10 Gas retail market size (2012) ........... 96 yr ig Table 5.4 Shale gas development status in Europe (as of July 2013)................................ 53 p Table 6.3 Smart gas meters rollouts status in Europe (2012) ................................................ 62 Table A.11 Residential gas price breakdown (as of June 2013) .............................................. 97 Table A.12 Potential annual savings from switching gas retailer (H1 2013) ........................ 97 Table 6.5 Gas storage projects (as of May 2013)................................................ 63 ................................................ Table A.13 Main financial characteristics of European Utilities (2012) ................................... 98 Table 7.1 Gas spot prices (2012 and H1 2013)........................................... 64 2013)........................................... Table A.14 5-year Utilities sector performance versus the MSCI Europe index (base 1 on January 1, 2008) ............................. 99 C o Table 6.4 Gas storage capacities (2012) ........... 63 Table 7.2 Gas futures prices (summer 2014 and winter 2014/2015) .............. 67 Table 8.1 Total gas consumption and size of I&C and residential markets (2012) ........ 68 Table A.15 H1 2013 Utilities sector performance versus the MSCI Europe index (base 1 on January 1, 2013) ............................. 99 Table 8.2 Total electricity consumption and size of I&C and residential markets (2012) ........ 69 3
  • 5. 20 13 A Strategic Overview of the European Energy Markets em in i Editorial by Colette Lewiner E uropean and global energy demand © C ap g In Europe, the economic crisis worsened during 2012 with a GDP1 negative growth of -0.4% and a forecast zero GDP growth for 20132. While the US has started to recover (with a 2.2% GDP growth in 2012 and a 2.4% growth in Q1 2013), the BRICS growth, still significantly higher than in advanced countries, has slowed down. C o p yr ig ht The present feeling is that while the US will accelerate its growth in 2014/2015, Europe should have only a modest recovery in 2014. Hopes of a quick and strong recovery have vanished and forecasts on global and European economies are prudent. The primary global energy demand is still growing, triggered by emerging countries. The primary energy demand share of non-OECD compared to OECD has increased significantly (42% in 2000 to 56% in 2012). This trend will continue, fueled by growing populations and standard-of-living improvements. 1 Gas consumption is correlated to direct usage and to the needs of gas-fired generation plants; the latter represents currently 27% of total consumption. This share that had increased in the past should start to decrease with numerous gas plant closures in Europe (see hereafter). Source: Eurostat 3 4 5 4 Economic recession and energy efficiency measures are limiting growth in electricity consumption but new electricity usages are fueling it, with Information Technology and mobile communication needs, for example, now accounting for around 10% of global electricity consumption5. GDP: Gross Domestic Product 2 The crisis impacted both electricity and gas consumption. In 2012, European electricity consumption decreased slightly year-on-year by 0.2%. This decrease was more pronounced in H1 2013 (-1.2% in H1 2013 vs. H1 20123) while gas consumption decreased more significantly year-on-year by 2.2% (and -0.4% in H1 2013 vs. H1 20124). For an aggregated group of countries comprising France, Belgium, the Netherlands, the UK, Germany, Spain, Italy and the Nordics, and representing almost 80% of European total electricity consumption For an aggregated group of countries comprising France, the UK, Spain and Italy, and representing almost 50% of European total gas consumption Digital Power Group Study, August 2013 A Strategic Overview of the European Energy Markets
  • 6. Utilities the way we see it While energy efficiency is generally satisfactory in the industrial sector, the problems lie in the transportation and buildings areas. Since a few years, regulation has imposed low energy consumption norms on buildings, with success on new projects. The main problem remains with existing buildings where progress in energy efficiency is slow. In countries like France, subsidies and various types of financial help exist. However they are not well known by the potential users, and their costs compared to the end results are not good enough. A simplification and clarification of this complex system is needed. ig yr p o 7 13 20 i F ossil fuels situation The global oil demand is still growing but modestly (1.2% CAGR10 from 2000 to 2012). While demand in developed countries is forecast to stay flat, emerging countries will continue to absorb more oil. Their total demand share is continuously growing from 37% in 2000 to 49% in 2012 to a forecasted 54% in 2018. While global gas demand has grown twice as fast as oil (2.5% CAGR over the same period), growth in coal demand has been triple that of oil (3.6% CAGR on the same period). Despite this slower oil consumption growth, the unsettled situation in Arab countries and Iran’s continuous nuclear military program development, triggering fears of conflict, have impacted oil prices that stayed around $106 per barrel over the last 12 months (September 2012 to August 2013). The shale revolution is also impacting oil production and will change the landscape drastically. US crude oil production is growing at a quick pace (4.2% CAGR from 2007 to 2012) and C 6 With no doubt, the best energy is the energy that you don’t consume, so implementation of energy efficiency policies is the right long-term action to take. However such policies involving financial help (in a difficult economic situation) and cultural behavior changes (that are slow to happen) will probably take more time than expected. Their results should not be overestimated in the energy transition scenarios. in em g ap Capgemini Consulting’s Demand Response (DR) study9 shows that electricity peak consumption shaving potential is significant (12-14%) as customers are re ady to shift their use of electrical devices from peak to non-peak hours while electricity savings potential in absolute terms, is more limited (2-3%). ht After studies performed by the EC6 in 2012 showing that the 2020 energy efficiency (non binding) objective would be difficult to meet7, the EU8 adopted in October 2012 a new Energy Efficiency Directive. This Directive sets compulsory objectives of a 17% decrease in EU primary energy consumption by 2020, and requires Utilities to make energy savings equivalent to 1.5% of their annual sales each year from 2014 to 2020. If this objective is not met, the latter would have to buy white certificates for the missing savings. The cost of acquiring those certificates could be important and reach €1 billion per year for large Utilities. According to a compilation of the national estimates reported to the EC covering 80% of European consumption, it is believed that the Member States’ commitments in energy efficiency should lead to a 17-18% decrease in consumption. However to obtain these results, many actions need to be successfully implemented. Successful energy efficiency programs leverage passive and active actions: • Passive measures include: home insulation, improved energy efficient appliances (e.g. low-energy lighting), C Energy efficiency: The European energy efficiency results are a combination of national energy efficiency measures and the economic crisis (mainly impacting industrial consumption and to a lesser extent tertiary and residential consumption). stand-by modes reduction (notably for computers) and eco-designed construction & equipments, • Some active measures aim to increase the financial benefit of energy savings through dynamic tariffs (e.g. “time of use” tariffs) and higher energy prices. Other active measures are designed to increase customer awareness by launching information campaigns or by providing more accurate information through the deployment of smart meters that give hourly consumption. Focused and intensive information campaign, deployed in Japan during the 2011 and 2012 summers when nuclear plants were closed, were efficient and helped avoid blackouts during this peak consuming season. © Forecast scenarios of future electricity and gas consumption are below those established one year ago, reflecting a pessimistic view of the European economic future and probably an optimistic view of energy efficiency. EC: European Commission The 2020 target was at 1,474 Mtoe (toe: tons oil equivalent) for primary energy consumption. After years of growth, primary energy consumption peaked at 1,825 Mtoe in 2005-2006 and started to decrease in 2007 reaching 1,680 Mtoe in 2012 8 EU: European Union 9 Demand Response study 2012 - Capgemini Consulting, VaasaETT and Enerdata 10 CAGR: Compounded Annual Growth Rate 5
  • 7. ig yr p o i 20 13 isolated in Europe. Other countries, such as Germany and the Netherlands, having performed preliminary studies, are moving closer to shale gas exploitation. Moreover the British government is adopting very advantageous fiscal condition in order to develop fracking. Finally some countries are launching exploration activities, such as Poland and Ukraine. In the latter countries, shale gas development is strategic as it would decrease their very high dependency on Russian supplies. There are a few pre-requisites for rapid shale gas development in Europe among which: • A dense gas pipeline grid able to gather the numerous gas flows, • A legal revision of the underground ownership rights16, • Highly protective environmental legislation notably regarding waste water treatment, well casing security, suppression of toxic gases releases, • Operators improved transparency notably regarding the composition of ”slick water”, used for fracking, • Objective and simple information for decision makers and public. in em g Could such successful shale gas development occur outside the United States? According to the EIA recent study14, China and Russia followed by certain Latin American countries, South Africa, Australia and Canada are the countries with the largest reserves after the US. In Europe, many countries, including France, have significant unconventional gas reserves. However fears linked to the consequences of fracking15 technology are slowing down shale gas development in Europe. France and Bulgaria have embargoed this technology and they are now ht Non conventional gas12 growth in the United States Since the beginning of the 21st century, American shale gas production has grown in a spectacular way. In 2000 it accounted only for 2% of the US gas production. In 2012, its share grew to 34% and it should grow to 50% by 2040. This spectacular growth has led to a significant decrease in gas spot prices. This price bottomed at $2/MBtu in April 2012 to grow again at $3.3/MBtu in August 2013. These low prices are favoring gas usage instead of coal in electricity generation plants, leading to decreased US greenhouse gas emissions (-2.4% in 2011 vs. 2010 and -1.6% in 2012 vs. 2011). These gas prices have triggered an American industrial renaissance by allowing the repatriation of gas intensive industries (e.g. chemicals or fertilizers). Around 600,000 new industrial jobs have been created in addition to more ap It is no exaggeration to say that this last decade, the rapid development of American shale gas is THE revolution in energy. C Surely, this will impact geopolitics, probably lessening the global influence of the Middle East oil producing countries. However many events could occur in the two coming decades, making it difficult to forecast today what will really happen in 2030. than 1.7 million direct jobs linked to oil and gas unconventional activities13. Shale gas producers want to export their gas by converting re-gas facilities into gas liquefaction plants. American gas-intensive industries are trying to oppose these projects, fearing that the US gas price would grow to reach an international price and that consequently, they would lose their competitive edge. In May 2013, the Department of Energy authorized the Freeport LNG project in Texas to export to countries that do not have a trade agreement with the US, including Japan and the members of EU. It was the second such approval after the Cheniere Energy’s Sabine Pass project in Louisiana. Out of the 27 applications, some other exports terminals projects should be approved. With low gas prices and consequently lower electricity prices, US industries are getting more competitive than their European peers and especially their German peers who will suffer from increased electricity prices following Germany’s nuclear phase out policy. © according to recent IEA11 forecasts it should surpass Saudi Arabia, becoming the number one worldwide oil producing country by around 2020. By around 2030, North America (including Canada and Mexico) could even become a net exporter. In an optimistic scenario17, shale gas production could compensate European gas production decline and allow to keep (and not deteriorate) the present level (60%) of gas importations dependency. Impact on prices As gas exchanges are highly dependent on heavy pipeline infrastructure and as LNG18 represents only a fraction (10%) of the gas flows, the gas market is very fragmented and prices level discrepancy between different regions is high. Thanks to International Energy Agency, World Energy Outlook 2012 12 Non conventional gas includes shale gas, tight gas and coal bedded methane. Shale gas has the most abundant reserves. 13 Bruce Bullock SMU COX presentation at Düsseldorf Montel Energy conference June 5-6, 2013 CO 14 C 11 EIA (Energy Information Administration, USA) study ‘Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States’, June 2013 15 Hydraulic fracturing or fracking, is the fracturing of rock by a pressurized liquid 16 In the US, the underground belongs to the surface owner while it is generally different in Europe 17, European Commission, September 2012 18 LNG: Liquefied Natural Gas 6 A Strategic Overview of the European Energy Markets
  • 8. Utilities the way we see it o p yr ig When US exportations will be effective and if the gas price in Asia keeps a premium compared to Europe, the main flow of shale gas (under a liquefied form) exported from the US should go to Asia. According to a recent study19, 6 Bcfd20 US shale gas exportation to Europe would narrow US and European price differences by increasing the US price by $0.20/MBtu and decreasing the European price21 by $0.70/MBtu. While narrowing the US-Europe price 13 i 20 However, presently the situation is not rosy in Europe. The gas market is depressed and the situation is deteriorating for many reasons: • Because of the economic crisis, gas consumption decreased in Europe by 2.2% in 2012 (compared to 2011) after a decrease of 9.2% in 2011 (compared to 2010). During H1 2013, a slight decrease of 0.4%23 was observed, • The growth in renewable energies (sometimes uncontrolled) and the priority given to them in the electricity generation merit order (see later) has reduced the gas-fired plants utilization rate, making many of them uncompetitive. In Spain, for example, their utilization rate dropped from 66% in 2004 to 19% in 2012, while the IEA believes that gas plants require a utilization rate of 57% to be profitable. The Spanish Industry Ministry may introduce a legislative reform to mothball gas plants (10,000 MW could be impacted). In Germany, as Combined Cycle Gas Plants utilization rate has dropped below 21% in 201224, Utilities may close as much as 6,400 MW of gas stations or 25% of the nation’s gas plants capacity by 201525. In a recent study IHS estimates that about 130,000 MW of gas plants across Europe, around 60% of the total installed gas-fired generation in the region, are currently not recovering their fixed costs and are at a risk of closure by 201626. These plants – that are indispensable to ensure security of supply during peak hours – are being replaced by volatile and non-schedulable renewable g em in A dynamic debate is occurring around the future long-term contracts indexation to oil prices. In the past, gas production was closely linked to oil production (gas was very often a by-product) and the gas price indexation to oil could seem logical. Thanks notably to shale gas, it is no longer the case and US gas spot contracts evolve independently of the oil price. As wholesale gas market places have developed in Europe and improved their liquidity, they become credible alternatives for long-term gas contracts prices index as is the case in nearly all commodity markets. ap However, gas suppliers such as Gazprom who want long-term visibility to develop the needed heavy pipelines infrastructures are inclined to defend oil price indexation (especially when it leads to high prices22). One can forecast that the share of gas price indexation on spot prices will increase in long-term contracts. As an illustration, in November 2012, Norway’s Statoil signed a 10-year agreement with Germany’s Wintershall to supply gas linked to EU wholesale spot prices. Presently about 40% of Statoil’s gas exports to Europe are based on the EU spot gas price. ht Shale gas development in Europe will probably take time and while the cost due to the different constraints listed above will be higher than in the US, they should be still cheaper than today’s oil-indexed long-term contracts. surpassing coal market share and nearing oil share. C However, German Utilities followed by others have successfully re-negotiated their long-term contracts indexations notably with Gazprom and obtained a share of around 50% of spot price in the indexation. These contract prices are now “only” about three times more than the US spot price. difference, this impact stays small as it represents less than 6% of existing European NBP price. © shale gas, prices are low in the US. In Japan, the March 2011 Fukushima accident and the consequent closure of nearly all nuclear plants resulted in increased gas importations and high prices. In September 2013, these prices were more than four times the US price. However, if some nuclear plants were given the authorization to restart, following the new government position, these prices would decrease. European Utilities are supplied mainly through long-term contracts indexed on oil prices. As the oil price has remained high (see above), European gas prices are much higher than in the US. Short-term gas market situation in Europe In 2011, the IEA was quite optimistic on gas development. In its Golden Age of Gas scenario, it forecast that gas consumption would reach in 2035 a 25% market share of primary energy, Global impact of LNG Exports from the United States, 2013 report by Deloitte Center for Energy Solutions 20 To be compared with the total US market (65 bcfd) and the UK gas markets (9 bcfd) 21 UK NBP reference 22 C 19 Long-term prices have not always been higher than spot prices: between 2002 and 2006 these prices were similar, however with spot prices spikes as in January 2006. Source: ”The future European Long-Term Natural Gas Contract” by Kjersti Hegde -Eirik Fjeldstad 23 For an aggregated group of countries comprising France, the UK, Spain and Italy, and representing almost 50% of European total gas consumption 24 JP Morgan Cazenove study, 2013 25 Deutsche Bank study March 2012 26 IHS May 2013 study 7
  • 9. ig yr p o em in Triggered by the Energy-Climate package objective of 20% renewable energy sources (RES) in the final energy consumption mix by 2020, renewable projects have continued their development in the EU that accounted in 2012 for 45% of renewable energy used worldwide. 20 13 stayed more or less constant: 13% increase in 2012 over 2011 and 11% increase in 2011 over 2010. There is a debate around the cost competitiveness of onshore wind electricity generation. A direct comparison with schedulable electricity generation costs is not correct as wind energy requires additional grid investments and new management rules. Up to a wind penetration rate in the electricity mix of 15%, no additional generation back-up is needed. It is also generally accepted that up to a 20% penetration rate, the needed adaptation solutions are at a reasonable additional cost32. Beyond this threshold, back-up generation (usually gas-fired plants) and investments in grids allowing to operate them in a smarter way are needed. Just as an illustration and without including the additional costs mentioned earlier, in France the cost of the electricity generated by onshore wind farms (at €80/MWh) is similar to the Flamanville EPR33 (that is a first in kind) future probable cost. i R enewable energies ap g Renewable electricity generation should continue to grow in Europe and in developed countries and they should provide 60% of the electricity production growth during the next six years30. C Because of the crisis, triggering reductions in subsidies, the growth path of renewables has slowed down: RES installed capacities grew by 21% in 2012 compared to 2011 while this growth was 29% between 2010 and 2011. Many European governments including Germany31 are looking at reducing the RES subsidies. For example, in July 2013, the Spanish minister for industry has introduced an energy reform allowing a €1.5 billion reduction in renewables and cogeneration subsidies. ht A few short-term measures should be taken including: • Launching capacity markets allowing rewarding available generation capacity even if the plants don’t run. A few countries including France have decided to launch such markets, however they will be in place only in a few years, their mechanism is complex and there is no uniform approach in Europe thus distorting the competition, • Restoring the ETS29 market credibility: The July 3, 2013 EU parliament decision to backload not more than 900 Mt CO2 certificates to the end of the phase III period, resulted only in a very small price increase. In August 2013, CO2 certificates prices stood at around €4.4/t. © energy installations that are heavily subsidized, • In addition, the low gas spot price in the US has resulted in more gas and less coal utilization in fossil fuel plants. It has pushed coal prices down, creating overcapacities that were exported to Europe, where coal prices dropped by 30% between January 2012 and June 2013. As a result, the utilization rate of coalfired plants is far better than for gas plants27, • These low coal prices combined with the low level of CO2 certificates prices, have made coal-fired plants more competitive than gas-fired plants, with a clean dark spread28 reaching €20/MWh while the clean spark spread stood at -€7.3/MWh in Germany in February 2013, • Measures should be taken to restore a more satisfactory situation regarding the EU priorities i.e. to favor low carbon energies and to ensure security of energy supply. Status of wind and solar energy development After hydropower, wind energy represents the largest share in renewables (11% of total installed capacity in 2012) and wind farms installed capacity growth rate has As many coastal regions in Europe are already equipped with onshore wind farms and as local populations are opposing these installations, the new projects are moving offshore. During the first six months of 2013, more than 1,000 MW new wind offshore capacity was connected to the grid34. This is twice as much as for the same period in 2012. But the financing of new projects has slowed down, reflecting regulatory uncertainty in key offshore markets (including Germany and the UK) and highlighting the significant challenges faced by the offshore wind sector. For example, in Germany in 2012, coal-fired plants utilization rate was in the 43-71% range; a far better utilization than gas plants 28 See glossary for the definitions of Clean dark spread and Clean spark spread 29 ETS: Emission Trading System 30 IEA International Energy Agency June 2013 publication 31 C 27 German Chancellor Angela Merkel promised in July 2013 to scale back Germany’s generous system of subsidies to the renewables sector if she is re-elected in September 32 L’intermittence et les aléas météorologiques, un frein au développement de l’électricité renouvelable ? L’exemple de l’éolien 04 / 2007 33 EPR: European Pressurized water Reactor (3rd generation French nuclear reactor) 34 EWEA (European Wind Energy Association) July 2013 publication 8 A Strategic Overview of the European Energy Markets
  • 10. Utilities the way we see it ig yr p C o Moreover, the massive importations of solar panels, mainly from China, have accentuated this decline and it is forecast that in the short-term at least half of those European 13 should not reduce significantly the Chinese importations and the European manufacturing industry is dissatisfied. i 20 Thanks to cheap imported solar panels38 and to technology improvements, the price of electricity generated by solar PV has significantly decreased. For example, in the sunny US State of New Mexico, the Macho Springs project (owned by First Solar) agreed to sell power to El Paso electricity at $57.90/MWh (compared to less than $65.6/MWh for an advanced gas plant39). If this price decrease trend continues, if there is a real breakthrough in solar panel efficiency and if affordable large scale electricity storage solutions finally emerge, solar energy could provide in the long-term a significant share of electricity generation mainly in sunny regions. in em g Moreover, as solar PV projects are small and geographically dispersed, it is difficult to assess the right installed capacity and even more difficult to forecast it. For example, in Germany in 2006, solar energy installed capacity was forecast to reach around 5,000 MW in 2011: the reality was in excess of 20,000 MW, four times more! This has led to wrong estimations of the needed extra power capacity and thus to increase the power generation overcapacity. ht As for wind energy, the installed capacity growth has slowed down mainly because of changes in public policies resulting in decreased subsidies. For example, the recent German solar power feed-in tariffs were reduced by 1.8% a month between May 1, 2013 and July 31, 2013 because solar expansion is proceeding more rapidly than specified in the Renewable Energy Act (EEC). These changes are putting at risk the European solar panel manufacturing industry. Investing in upstream photovoltaic Research and Development would have been a much better trade off. ap Solar energy is growing faster than wind energy but it represents a smaller installed generation capacity in Europe’s generation capacity share (7%). It is much more costly even than offshore wind. In 2012, solar photovoltaic (PV) energy cost in France was estimated between €240 and €400/MWh compared to onshore wind at €80/MWh and offshore wind between €150 and €200/MWh36. In a snapshot, the huge amounts of subsidies given by Member States to the solar industry and paid by the European citizens, have helped the Chinese industry to develop instead of triggering the emergence of a solid European first class solar industry. This waste of financial resources is linked to the short time imposed on EU Member States to reach 20% renewable energy share in their end consumption while these generation modes are not mature and need to be heavily subsidized. C On the positive side, thanks to these new large projects, an offshore wind turbine industry is developing in Europe: Alstom is building a new plant in France (Saint Nazaire) and Areva is building new plants in France (Le Havre) and Scotland. Manufacturers could be taken over or go bankrupt globally37. © The cost of electricity produced by offshore wind farms should be around three times larger than for onshore wind. Series effect should push this cost down; however the gap is very important. Moreover there is a need to build the electrical link to the continent using HVDC35 new cable technologies. Under the pressure of its solar manufacturing industry, the EU decided in June 2013 to follow the US example and to impose duties on imported solar panels. In reaction, China has decided to take retaliatory measures against EU products. So negotiations with China have been opened and resulted by July 2013 in an imposed minimum sale price of 0.56 per watt for Chinese solar panels. This minimum price is 25% lower than the average sale price of panels in 2012. So this agreement Even if many governments are now less bullish on renewable subsidies, the increased share of these energies in the energy mix is triggering higher and higher subsidies amounts. This is becoming a burden for heavily indebted countries, and the higher electricity prices paid by consumers are damaging their standard of living already threatened by the economic crisis. For example in France the CSPE40 that includes the increasing RES cost amounted to €3 billion in 2002, it should reach €10 billion in 2013 and grow to €20 billion in 2015. In Germany the EEG Levy41 increased from ct€1.31/kWh in 2009 to ct€5.28/kWh in 2013 and represents a 18% share of residential electricity prices compared to 10% for France. This significant electricity prices increase is triggering a political debate in Germany that could be tackled after the September 2013 general elections. 35 HVDC: High Voltage Direct Current 36 French Energies 2050 Commission report published on February 13, 2012 37 Ernst & Young and BNEF, May 2012 38 Solar panel prices dropped by 80% over the last 5 years 39 Financial Times, June 3 2013 40 CSPE: Contribution au Service Public de l’Electricité. Tax contributing to public service of electricity, created by the French government in 2003. 41 EEG Tax for the promotion of renewable energy 9
  • 11. ig In the present market conditions, very high consumption on cold, dry and dark days with no wind could lead to supply disruptions. C o p yr The question is how long this chaotic market created by the combination of the European market deregulation, the Energy-Climate package and the economic crisis will last This is a vital question for the financial health of European Utilities. In the near future, capacity will be withdrawn from the market as a result 20 13 There will be a dual flow on these smarter grids: energy and information. Data gathering, exchanging and managing will be of utmost importance and thus TSOs44 and DSOs45 will have to evolve towards Digital Enterprises. i Many stakeholders are involved in this new market design: Utilities, customers, equipment manufacturers, standardization bodies, national and European regulators. in em ap g However, extra capacity is continuing to be built, notably through renewable and thermal plants. For example, in Germany, from 2013 to 2015, the renewable energies installed capacity should grow from 80 to 100 GW and an additional cumulative 9 GW installed thermal capacity (mainly coal) should be built. Moreover the European economy could stay slow, with flat consumptions, thus prolonging the erratic and low wholesale prices for a few years. S ht The price difference between “peak hours” and “off peak hours” has also considerably flattened making investments in hydraulic storage much less attractive. If the economy rebounds, we could get a similar situation to 2000-2006 when, after an overcapacity period, generation capacity was withdrawn from the market (2000-2004) by the Utilities. In 2005 the economy rebounded and – thanks also to high oil and CO2 certificate prices – wholesale prices grew significantly. C As a consequence of this generation over-capacity, prices on wholesale markets have decreased and become erratic. Positive price spikes (in winter for example) have nearly disappeared and new type of negative prices spikes have appeared during some hours interval (in 2012 there were more than 70 hours during which wholesale European prices were negative42). of gas plants closure and of old coalfired plants withdrawal from the market in 2015 following the implementation of the “Large Combustion Plants“ Directive43. © Impact on wholesale markets Renewable energies have high investment costs (that are subsidized) and very low operational costs, as sun or wind cost nothing. Thus they come first in the power generation plants merit order and they are operating all hours when they can produce. With growing renewable production and relatively low consumption (due to the crisis), the utilization rate of gas-fired plants (that come after RES in the merit order) has dramatically decreased. Many of them are not covering their fixed cost and will be closed (see above). marter grids Because of the increase of RES share in the electricity mix and in the absence of large scale storage, grid management is facing new challenges. Balancing demand and supply becomes more complex as RES provides volatile power generation that is difficult to schedule (despite progress in modeling) and, in addition, customers can become momentarily generators. So bi-directional and unforeseeable flows have to be managed and, for that purpose, there is a need to better equip the present transmission and distribution grids. Despite many technical and economic pilots launched in Europe46, very little progress has been achieved on the new market design and financing rules for the new equipment and systems. Regulators have a key role to play. The first step in smart grids implementation is smart meters deployment. According to the EU Third Energy Package, 80% of electricity customers in EU should have smart meters by 2020, unless the analysis performed by the Member States proves that the cost/benefit is uneconomic. Smart meters implementation impacts all value chain segments: • Generation: by triggering a better demand response, they contribute to decrease investments for peak capacity and decrease hence CO2 emissions (as the fossil-fueled plants are providing the peak generation), • Distribution: by improving field service management, reducing meter reading activities, reducing technical and non-technical electricity losses on the grid and allowing a better outage management, • Retail: all meter-to-cash processes (including cash management) can be digitally optimized allowing a better service, 42 Dr Torsten Amelung presentation at Montel Energy Days, Düsseldorf 5-6 June, 2013 43 Adopted on October 23, 2001 44 TSO: Transmission System Operator 45 DSO: Distribution System Operator 46 According to the EC, during these last ten years more than €5.5 billion have been invested in around 300 projects in Europe. 10 A Strategic Overview of the European Energy Markets
  • 12. Utilities the way we see it In August 2013, the French government approved the 11 million gas smart meters47 deployment to take place on the 2016-2022 period. ig yr p o 48 13 20 i em g In fact the financial and economic crisis that started in 2008 was not anticipated and too many certificates were allocated in National and European Permit Rights Allocation, leading to an over-allocation of around 1,500 Mt of CO2 equivalent53 for the third period (2013-2020) This surplus is even increased by numerous rights resulting from the CDM54 mechanism (created by the Kyoto protocol) that are traded on the European market. Back loading the auctioning of a maximum of 900 million CO2 permits was backed by the European Parliament on July 3, 2013. In the absence of this ETS structural revision, carbon prices will stay low in the future. In March 2013, the EC adopted a Green Paper to launch a public consultation on the content of a 2030 framework in order to give visibility to investors and to stimulate demand for low carbon technologies. The aim is to build the path to meet the “necessary long-term goal”55 of cutting emissions by 80-95% by 2050. The new energy policy framework is intended to take into account the consequences of the economic crisis. It is indispensable that this new framework takes into account all lessons learned regarding the flaws in the present system, as the ETS system design and the EU directives impacts on the energy markets. The present policy has notably led to: • Chaotic wholesale markets with negative prices giving the wrong economic signal for the needed investments in energy infrastructures, • Very high and growing renewable energy subsidies that will become unsustainable in the future, • No clear financing of the smart grids that will be indispensable when renewable electricity output share grows over 20%, Gazpar project C 47 This decision is not sufficient to allow the ETS to deliver the right economic signals in a sustained way. A deep reform is needed as for example, there is no mechanism allowing the limitation of emission rights in case of an economic crisis. in Presently, the ETS49 is not effective in giving the right economic signal for investments in low carbon technologies. In five years, the CO2 price has decreased from around 5/t €20/t in 2007 to less than €5/t in August 2013. This very low price is to be compared with: the floor price of £16/t (announced by the British government in 2011 and introduced on April 1, 2013), the shadow carbon value €45/t estimated at around €45/t in 202050 and prices enabling competitive CCS51 systems to be implemented that are estimated at €40-55/t for coal plants €40-55/t and €80-110/t for gas plants52. 80-110/t ht As a conclusion smart grid implementation is slow and no clear economic model has emerged. With the increase of RES share in the electricity mix, it is urgent to accelerate the industrial development of large scale competitive electricity storage solutions and funds should be re-directed to these developments. Thanks mainly to the economic crisis, the 2020 European target of 20% reduction in greenhouse gas (GHG)48 will be achieved and even exceeded as in 2012, the EU GHG emission reduction is already at 19.9% compared to 1990. ap Nevertheless, smart meters rollout is progressing. In addition to Sweden and Italy that have already fully deployed electrical smart meters, many Nordic countries, Spain and the UK have started their deployment. The decision to install 35 million smart meters in France was taken in early July 2013 with a first phase of 3 million meters to be installed by 2016. The deployment cost for the 35 million smart meters is estimated between €5 and 7 billion. While the CO2 prices increased immediately by 11.6%, they are staying at a very low level (less than € €5/t). C However with the present unbundled situation, return on Investment is only relevant on the grid part of the value chain which is not as good as on the whole value chain. C limate change © • Customer retention: smart meters implementation enhances the Utility’s competitiveness and provides better customer information and notably more accurate bills. Greenhouse gases include many gases in addition to dioxide carbon CO2 such as methane (CH4), (N2O) and CFCs. Their toxicity on the global temperature increase varies from one gas to the other. For simplicity, we will refer to CO2 as CO2 equivalent for all Greenhouse gases (GHG) 49 ETS: Emissions Trading System 50 Rapport Quinet « valeur tutélaire du carbone », Documentation Française, 2009 51 CCS: Carbon Capture and Storage 52 ZEP « Zero Emission Platform » estimations 53 Berghmans in Club Tendance Carbone, CDC Climat Recherche, April 11 2013 54 CDM: Clean Development Mechanism 55 If this goal would be met, our planet temperature increase would be limited to 2°C 11
  • 13. 13 Japanese nuclear status According to recent reports56, it is unlikely that there will be any serious immediate or long-term health effects from radiation exposure following the March 2011 Fukushima accident to either the general population or workers at the nuclear plant. However, the report also says that the evacuation had a “very significant impact” on the social and mental wellbeing of the population. in The good news is that other large nations are expressing their intention to cut their emissions. 20 Moreover, until recently, Europe was isolated in its desire to limit emissions, as atmospheric pollution is global; EU efforts were a drop of water in the ocean! Nuclear energy Despite the slowdown in its development after the Fukushima accident, nuclear energy is still a sizable part of the needed energy technologies for reducing CO2 emissions. i • Low carbon prices enabling coalfired plants to regain share in the electricity mix! ap g em It is the case of China where Shenzhen has become the first city to pass a bill that will cap CO2 emissions from factories and power plants. Shenzhen’s emissions market, one of seven pilot schemes to be rolled out in the nation over the next two years, began CO2 trading in June 2013. According to the climate plan released by the White House, the US will make continued progress in reducing pollution by leading the way in the development of clean energy technologies such as efficient natural gas, renewables, clean coal technology and nuclear. C o p yr ig ht © C In June 2013, President Obama announced an ambitious plan to deal with climate change by directing the Environmental Protection Agency to establish carbon pollution standards for both new and existing power plants. These new standards will almost certainly face legal challenges. The American goal is to reduce carbon pollution by at least 3 billion tons cumulatively by 2030, more than half of the annual carbon pollution from the US energy sector, through these efficient standards. 56 57 12 The situation at the Fukushima site57 is still challenging. Although a relatively stable cooling of the fuel in the reactors and spent fuel pools has been established and is adequately removing decay heat, there are several challenges to achieve a sustainable situation including the treatment of enormous amounts of radioactive liquids that have accumulated. To draw lessons from the accident – its root causes and its management – the Japanese government has created an independent Nuclear Regulation Authority (NRA). In June 2013 the latter approved the final draft of the New Safety guidelines which cover three main areas: safety standards, severe accident measures and emergency scenarios for earthquakes and tsunamis. Nuclear plant operators will be obliged to take concrete steps to mitigate the possibility of serious accidents. Until now, such actions were voluntary. The United Nations Scientific Committee on the Effects of Atomic Radiation (Unscear) report, which is currently being finalized. IAEA: International Atomic Energy Agency reports A Strategic Overview of the European Energy Markets
  • 14. Utilities the way we see it ig C o p yr There are 65 nuclear reactors under construction around the world. Of these, 47 are being built in Asia: China (26), Russia (10), India (7), and South Korea (4). Many countries such as China changed their plans to focus on safety. New projects are also emerging in the Middle East (Emirates, Saudi Arabia), Turkey and South Africa. 58 59 13 Difference”59, is a central point of the discussions. A decision could be taken by EDF in 2013. i 20 As investments amount to 80% of the total nuclear electricity cost there is a real need to master new nuclear plants construction delay and costs as these plants will have to compete, in the future energy mix, with renewable energies (that are experiencing cost decreases) and, in the US, with gasfired plants using cheap shale gas. in em g However, with this delay the total Flamanville construction time should amount to 8-9 years which is not extraordinary long for a first-in-kind “generation 3” project when compared to the average construction time for French “generation 2” reactors of 7.5 years. ht The longer-term global impact of the Fukushima nuclear accident on the nuclear industry will be less than was anticipated in the immediate aftermath of the disaster. Presently, the International Atomic Energy Agency forecasts that global expansion of nuclear power post-Fukushima will be moderately slowed, but not reversed. Before the Fukushima accident, there were 484 planned or proposed new reactors; in July 2013 this figure was 478. In February 2013, Olkiluoto delay was estimated at 7 years and costs overrun at €5 billion. Flamanville is now forecast to be operational in 2016 (instead of 2012/2013) and its cost is estimated at €6 billion (instead of €3.3 billion initially 6 €3.3 forecast). ap It is clear that Japanese nuclear reactor restart and, in the longer run, potential new reactors built would have a big impact on the gas markets as presently Japan is importing large amounts of LNG in order to compensate for its lack of nuclear energy. These importations have deteriorated Japan’s commercial balance and the country posted in 2011 its first trade deficit in 31 years. A few reactors are being built in Europe including two EPRs: one at Olkiluoto in Finland and the other one at Flamanville in France. While the same reactors built in China at Taishan (Guandong province) should to be on time and within initial investment projections, the European EPR reactors are experiencing delays and cost overruns. C In March 2013, Japan’s prime minister, Shinzo Abe, told parliament that idled nuclear reactors will be restarted if it is proven safe to do so. In July 2013, four power companies submitted applications to the nuclear regulation authority to restart 10 nuclear reactors. As a consequence of the very long freeze on new nuclear reactor58 construction in Europe, human competencies are missing including the ability to master very large projects. Also the eco-system of nuclear quality level subcontractors has to be upgraded. © Only two of Japan’s 50 operable reactors, Ohi-3 and Ohi-4, have restarted since the Fukushima accident. Negotiations are going on between EDF and the British government for the construction of 2 EPRs at Hinkley Point (Somerset). End June 2013, the UK government announced a bid to encourage investment in nuclear power by offering £10 billion (€11.6 billion) of guarantees. The electricity price level at which this nuclear electricity would be sold, that is defined by the new “Contracts for No existing nuclear plants were stopped except in Germany (for political reasons) and in Japan. In order to implement the lessons learned from the Fukushima accident, Nuclear Safety Authorities required design upgrading and revisited operational practices. These additional safety measures are resulting in new investments that can be sizable, as in France, where EDF will spend an additional €10 billion to upgrade its 58 nuclear reactors. Some existing plants were awarded lifetime extension as Asco 1&2 in Spain and Fessenheim, Tricastin and Bugey 2&4 in France. In 2012, EDF Energy in the UK announced that it expected 7 years life extension on average across all AGRs60, including the recently lifeextended Heysham 1 and Hartlepool. Even if their costs are increased by these safety upgrades, existing nuclear plants are competitive. In France for example their total cost of electricity generation, including life time extensions, dismantling and radioactive waste management & storage, has been estimated at €57/MWh, which is lower than electricity costs generated by gas-fired plants and RES61. More than one decade Contracts for Difference (CfDs) are intended to stabilize revenues for investors in low-carbon electricity generation projects - renewables, new nuclear or Carbon Capture and Storage 60 AGR: Advanced Gas-cooled Reactor 61 Cour des Comptes study « Les coûts de la filière nucléaire » January 2012 and « Energies 2050 Commission » conclusions February 2012 13
  • 15. 13 20 in After the Fukushima accident, many European countries decided to revise their energy policy in order to decrease or to phase out nuclear energy. Even if two years later, confidence in nuclear energy is improving, those debates are continuing. Italy decided by referendum in 2011, not to build the four nuclear reactors that were planned. This energy transition plan requires Germany to: • Build more generation capacity to replace the nuclear reactors. The plan forecasts a strong increase of renewable share – from 20% presently to 35% in 2020 generation mix share, • Redesign the whole grid to cope with more and smaller electricity injection points in addition to solving grid balancing issues and building HVDC lines to connect large offshore wind farms, i E nergy transition g em In June 2011, the Swiss parliament resolved not to replace any reactors after the end of their lifetime, and hence to phase out nuclear power by 2034 (with the assumption of a 50-year lifetime for the newest unit). © C ap Belgium‘s position is to phase out nuclear energy by limiting the reactors’ lifetime to 40 years: so Doel 1&2 should close in 2015, Tihange 1, although reaching 40 years operations in 2015, should be prolonged until 2025 and the remaining 4 reactors will reach 40 years lifetime between 2022 and 2025. C o p yr ig ht We will examine in more detail the French and German cases: In 2011, just after the Fukushima accident and mainly for political reasons, Germany decided upon an energy transition with the following objectives: • Total nuclear phase-out by 2022 (8 reactors immediately shut down after the Fukushima nuclear accident, closure of the remaining 9 reactors by 2022), • Greenhouse gas emissions reduction by 80-95% before 2050, • 80% electricity production from renewable energy sources before 2050. 62 14 The energy transition investments needed from now to 2040 are forecast around €1,000 billion62, an amount comparable to that spent on German re-unification. Mid-2013, there are significant deviations from this energy transition plan: After the closure of 8 nuclear plants in 2011, and in order to meet the electricity generation needs, a number of mothballed coal and lignite plants were re-opened. In 2012 those plants increased their generation output by more than 6% leading to an embarrassing 2% increase in CO2 emissions. But the crucial problem resides in social acceptance: notably the construction of numerous wind farms, grid redesign and the construction of new power lines. As there will be fewer large generation plants but more renewable decentralized units, notably wind farm that are in the Northern part of Germany while the large industrial consumption is in the South, a grid overhaul is required. This new grid construction is late compared to plan as it is encountering local public opinion opposition that is made worse by the fragmented grid organization in Germany. According to M. Altmaier, German Environment Minister A Strategic Overview of the European Energy Markets
  • 16. Utilities the way we see it 13 20 i in em ap g The energy transition debate that took place in H1 2013 should lead by 2014, to a new energy policy for France. As in Germany this energy transition should: • Have a high investment cost: €592 billion of new investments are forecasted67 among which €170 billion for energy efficiency and €422 billion for the electrical system (€262 ( billion for generation and €160 billion for the grids), • Lead to an electricity cost increase by €30-40/MWh in addition to a €30-40/MWh similar increase linked to Grenelle’s68 commitments, • Encounter social opposition issues for wind mills or high voltage lines construction, • Deteriorate French trade balance if no RES industrial policy is successfully implemented. ig ht Similarly and despite sizable exemptions that they are getting on electricity transportation fees and on the EEG levy, large industrial consumers of electricity fear a loss of global competitiveness. According to a recent study66, electricity prices for big industrial customers should grow in Germany from €90/MWh in 2012 to €98-110/kWh in 2020, while thanks to cheap shale gas, they should only grow from €48 to 54/MWh on the same period in the US, giving a global competitive edge to US industry. A successful French energy transition will need to: • Meet French energy policy objectives: security of energy supply, environmental performance and competitive electricity prices, • Consider the continued operation of the current nuclear power plants fleet (as long as it is economic and subject to the authorization of the French Nuclear Safety Authority) as a viable option as it would be the least costly policy, • Maintain a competitive power generation mix, by adopting a reasonable pace for the development of renewable energy, • Finally ensure value creation for France (growth and employment) by implementing sustained industrial and R&D policies. C Another important point is the resulting increase in electricity prices linked to the EEG levy and the grid costs increases. This price increase, which could reach 70% by 2025 for residential customers, is becoming unpopular. Thanks to its 58 nuclear reactors that are run safely, electricity prices in France are among the cheapest in Europe and CO2 emissions per kWh are the lowest among European countries. However François Hollande, the new French socialist president made the following commitments during his election campaign: • Cut France’s reliance on nuclear energy from more than 75% share in the electricity mix presently to 50% by 2025 and close the Fessenheim reactor by 2016, • Accelerate RES development, • Improve the energy efficiency of buildings. © More grid construction delays can be expected as 10 years at least are needed in Europe to build63 a new high voltage overhead line. To try to overcome these important difficulties, the four German TSOs have decided to cooperate on four HVDC underground North-South network lines deemed crucial to the success of the country’s energy transition64. The exact pathway of these future corridors, that will be between 5 and 10 times more costly than overhead lines65, is still to be agreed with the network regulator. C o p yr It is difficult to predict how the German energy policy could be modified after the September 2013 German general elections. It is very unlikely that the nuclear phase-out policy would change; however RES subsidies and the EEG Levy financial limitations could well happen. 63 France-Spain interconnection required 20 years of consultations before being launched partially underground 64 Montel Magazine Vol 12, N02, June 2013 65 RTE: réseau de Transport d’Electricité « Les lignes souterraines et la mise en souterrain» 66 BDI (Bundesverband der Deutschen Industrie) report (November 2012) 67 UFE (Union Française de l’Electricité) estimations 68 Grenelle de l’Environnement is the Energy-Climate Directive transposition in France 15
  • 17. U tilities situation i 20 Even if electricity and gas demand/ supply gets better balanced again (see above), the situation will be different than before the RES fast development. There is already a trend of local demand/supply balanced clusters (eco cities for example) and this trend will develop. in As already stated in the 14th European Energy Markets Observatory, major European Utilities are negatively impacted by a difficult environment, with a weak demand and low wholesale market prices. Their revenues are structurally decreasing69 as RWE CEO Peter Terium stated recently, by announcing that “80% of the company revenues will be gone in 2-3 years”. 13 to divest – notably their RES assets or their high margin network activities. C ap g em Utilities EBITDA70 margins are under pressure because of deterioration in power generation margins, rising overcapacity due to stagnating consumption and the growing burden of RES taxes. In some countries, this situation is worsened by additional taxes (such as nuclear taxes in Germany, Spain and Belgium) or by very limited tariffs increases allowed by governments attentive to their electors’ standard of living. © On a sample of large European Utilities, the average EBITDA margin has decreased from 19.4% to 18.7%. Incumbent Utilities present models with large centralized generation plants and quasi- uniform supply offerings to residential customers will have to evolve towards more decentralization (including generation), differentiated offerings and better competitiveness. This challenge could be met, by analyzing and exploiting the large amount of available new data (notably through smart meters) and by taking advantage of innovations in Information Technology. A courageous human management policy aiming at modernizing collaborators behavior at work is for sure a key success factor. Those companies should become lean digital enterprises. C o p yr ig ht Utilities still need to restore their balance sheets by accelerating their operational excellence efforts and by continuing 69 16 At normal weather conditions 70 EBITDA: earnings Before Income Taxes, Depreciation and Amortization A Strategic Overview of the European Energy Markets
  • 18. 20 i in em Paris, September 6, 2013. Colette Lewiner Energy and Utilities Advisor to Capgemini Chairman C o p yr ig ht Energy markets have to be rethought by: • Reforming the ETS market or creating (as in the UK) a CO2 floor price, • Creating capacity markets coordinated at the European level, • Designing and implementing a new retail market enabling the financing of smart grids, • Establishing a more reasonable growth pace in RES capacity and limiting the related growth in subsidies, • Keeping in operation plants that are safe and economically viable, • Limiting the taxes and other burdens on Utilities. If the right reforms are not implemented in a timely way, the physical electricity system will deteriorate, and when the economy and consumption grow again, energy supply disruptions could happen. The needed reforms will perhaps not be implemented until then! g On the wholesale electricity markets, prices are very erratic and even negative during some hours, CO2 emission prices have reached low levels that give no signal to invest in low carbon technologies and finally Europe is impacted by the US shale gas boom but does not benefit from it. Regulators and governments have to play their role and establish rules enabling the market to evolve from a liberalized market to a managed market (as is happening in the UK). ap The deep economic crisis, combined with deregulation of electricity and gas markets, and with the EnergyClimate Directive that favored a rapid renewable energies expansion, have led to chaotic electricity and gas markets. C onclusion © C Without these reforms, security of energy supply could be threatened as there are no long-term economic incentives to invest in new and vital energy infrastructure, and as the financing power of Utilities is shrinking. 13 Utilities the way we see it 17
  • 19. in i 20 13 Energy Regulation and Policies Overview S ap g tandstill and questions on the European internal energy market © C The European Commission’s discourse on the completion of the internal energy market becomes paradoxically stronger, as its mandate runs to the end In its Communication of November 15, 2012, the European Commission (EC) insisted on the “clear deadline of 2014 for completion of the internal energy market”, that was decided by the market” Council of Ministers on February 4, 2011. The EC has actually brought Bulgaria, Estonia, the UK and Romania before the European Court of Justice during H1 2013, for failing to fully transpose the Directives of the Third Energy Package. These procedures illustrate the EC’s willingness to respect and implement the timetable it had set, even though its attempt to open to competition the award of distribution contracts in the Concessions Directive failed. C o p yr ig ht The current market design is more and more criticized, not mainly as not having achieved the full liberalization, but because it has created a major uncertainty for the economic players, without apparent benefits for consumers. em Governance and Coordination across Europe* * This chapter has been written in collaboration with CMS Bureau Francis Lefebvre 18 However, this may well be self-delusion. The legal actions might mainly illustrate the end of life of this Commission as it faces the political consequences of the financial and economic crisis, and the swing back in favor of the Energy Regulation and Policies Overview - Governance and Coordination across Europe Council, if not of the Member States, in energy and climate change matters. The complete absence of coordination as regards nuclear production after the accident at Fukushima, as well as the ongoing competition between the major European Utilities to realize a gas pipeline between the Caspian Sea and the heart of the EU, are just illustrations of the discrepancy between the ambitions of the European Energy Policy and the growing temptation to re-nationalize energy policies. The Commission could not avoid either the multiplication of projects to introduce capacity remuneration mechanisms at national level, including the four main economies (Germany, France, the UK and Italy); after having steadily opposed what appeared as the demonstration of a design defect in the energy single market, and questioned in principle the consistency with State aid regulation, the Commission issued a consultation paper on “generation adequacy, capacity mechanisms and the internal market in electricity” on November 15, 2012. Indeed, the European Energy Policy undoubtedly faces a problem of market design The current market design undoubtedly results from the EU legislation. As regards power, it has been summarized by the Commission as follows: “the
  • 20. Utilities the way we see it Fourthly, the gas market design has mirrored the electricity, ignoring that 85% of the gas is currently imported; therefore, more market power has been given to foreign producers and to the traders. It also tends to neglect the congestions and to discourage investment in the networks. 13 In this growing debate, four main criticisms are made. The three elements of the current market design (market, CO2, and renewables) have been developed without coordination. C © Finally, the three elements of the current market design (market, CO2, and renewables) have been developed without coordination, and the interactions with the rest of the world underestimated. As a result, the Commission is being pressed to review some basics of its doctrine, like the priority to renewables and the relevant incentives, or the prohibition of longterm supply contracts and destination clauses (especially to avoid carbon leakages). And energy efficiency is likely to remain the poor cousin, at least up to the milestone set in June 2014 by the Directive of October 25, 2012. C o p yr ig ht First, the EU intended to create a single market by competition on supply, and by unbundling of the TSOs/DSOs, in order to reduce prices and ensure their uniformity. Apart from the persistence of numerous regulated tariffs, prices are increasing everywhere in Europe for end-consumers notwithstanding low prices on the wholesale market. The differences between domestic and non-domestic consumers remain significant, as does the difference between countries (in a range from 1 to 2.5 for gas prices to domestic customers). To the Utilities, the main reasons for this are twofold: the absence of the European regulation on generation, paving the way to very different and uncoordinated national policies; and the absence of an industrial strategy, in particular to avoid carbon leakage, where the regulated tariffs produced cross-subsidies from domestic customers to industries. ap g em in Thirdly, the priority given to renewable sources of energy is more and more disturbing electricity systems, because of both their priority right and their lack of flexibility, with an increasing occurrence of negative prices on spot markets, with peak prices sometimes lower than baseload, and disturbance of networks. 20 allowances. But the Commission could neither turn the carbon emissions into the driver of the Energy and Climate Change policies, nor keep the price of the ton of carbon at a meaningful level, in a context where the EU has convinced nobody to make the same efforts. i internal market should in principle allow the development of deep and liquid electricity markets, both longterm and short-term that can drive the investments for a low-carbon electricity system”1. It is more and more criticized, not mainly as not having achieved the full liberalization, but because it has created a major uncertainty for the economic players, without apparent benefits for consumers. This uncertainty proves to be inconsistent with the large investment needs. Needs that have been postponed for more than a decade, that are increasing with the development of renewables, and that may now become urgent to avoid black-outs. Secondly, the European carbon market has formally survived thanks to the European Parliament’s vote of July 3, 2013 in favor of the EC’s proposal to backload the auction of 900 million 1 Consultation paper on Environmental and Energy Aid Guidelines 2012-2020 19
  • 21. i 20 13 of its generation capacity abroad), and the most enterprising are developing their business in emerging countries or in the US (GDF SUEZ, Iberdrola…). The cross-border mergers have vanished, and the recent buyers are setting aside provisions for depreciation (ENEL, Vattenfall…). More and more power plants, mainly gas-fired, have been closed or mothballed (9,000 MW for GDF SUEZ, 11,000 MW for E.ON...), even those which had been newly commissioned. It may raise problems in terms of security of supply, security of the networks, or even distortions of competition. Indeed, some of the major European Utilities have launched massive redundancy plans, like E.ON, Vattenfall, EDF Luminus, or Alpiq. Almost all of them are concentrating on their traditional national markets (probably even Vattenfall, that has currently half C o p yr ig ht © C ap g em in Alarm grows at European Utilities over the sustainability of their business in the EU and the absence of positive long-term signals The economic crisis has deepened the questions upon the profitability of the energy business in Europe for the Utilities. The absence of economic growth, more than the efforts on energy efficiency, has brought a stagnation in energy consumption, and even a decline for gas (-2.2% in 2012). At the same time, the incentives on renewables have worsened the global overcapacity, whereas the gap between low wholesale prices and retail prices was not filled: the endconsumers are not even seeing benefits from the situation in their energy bills, and the Utilities and investors have no incentive to make new investments. Finally, wholesale prices are often set below the production cost of amortized efficient power plants (whereas flexible thermal plants are necessary for the back-up of solar and wind farms), and the low prices of coal (subsidized or exported by the US) and CO2 allowances have reversed the merit order between gas-fired and coal-fired power plants, which sends out poor economic signals. 20 Energy Regulation and Policies Overview - Governance and Coordination across Europe On May 21, 2013, in an unprecedented initiative, the CEOs of eight European Utilities dramatically called on the European Heads of State or Governments, who met the day after in a European summit on energy, to take “urgent action” on EU energy policy, which they considered “a failure” at the moment as regards climate change, security of supply and competitiveness. The eight CEOs met with the Heads of State or Governments, representatives of the European Parliament, and the Commission during the summer, to argue for long-term visibility, fixed objectives and stable common rules. In this framework, one can hardly imagine them deciding to invest €1,000 billion in generation of electricity (€750 to 800 billion) and networks (at least €200 billion, according to the EU Commission itself), which remain at the heart of the hotly contested regulation issues.
  • 22. Utilities the way we see it Spanish energy reform: a high risk mission 13 20 i Although consumers cannot support all costs related to the development of renewable energy sources, a drastic cut of subsidies might undermine, in the long-term, Spain’s competitive advantage in the renewable industry. Long-term stability of the regulatory environment has always been of paramount importance for the Utility industry to develop efficiently; it has been probably one of the weakest points of Spanish policies over the past years. ap C ht For customers: • Increase of 3.2% of the electricity bill (still as a draft). An increase up to €900 milliona in total. © Listed below are some of the main changes introduced (officially or as a draft) by the energy reform towards the main stakeholders: the customers, the utilities and the state. yr ig For Utilities: • Temporary suspension of all new renewable capacity registration to deal with the excess generation capacity in the system (Royal Decree-Law 1/2012), • Capped profit for renewable power producers at around 7.5%. This should cut system costs by about €1.5 billion, • Subsidies reduction by up to €1 billion (in transport €1 and distribution of electricity, capacity payments, coal subsidies, system operation and payments to interruptible customers). By Royal Decree-Law 13/2012, transmission and distribution earnings will be limited to about 6.5%, • System cost reductions by €200 million in 2012 (in support to small and isolated systems) and revenue increase for 2013 (from regional taxes and additional p Renewable companies have been especially hit by these measures, together with the main Utilities. Thus, after the reform announcement, stock market valuation of energy companies immediately went down. g Under severe pressure from the European Union and the power sector, the Spanish government finally came up with a new and bold reform aiming at solving the power sector imbalance. On the one hand, the power sector is strongly pushing to establish market mechanisms that would enable cheaper and more efficient technologies to displace more expensive ones. On the other hand, there is no doubt that development of sustainable renewable energies has become predominant in energy policy, therefore it is important as well to establish clear incentives for future low carbon investments. Long-term stability of the regulatory environment has always been of paramount importance for the Utility industry to develop efficiently; it has been probably one of the weakest points of Spanish policies over the past years. In order to avoid this pitfall again, some voices call for decoupling energy policy from general policy. This idea is supported by the fact that regulatory changes and instability might worry investors, weaken industry and endanger the external image of the country as a stable area for investment. The work undertaken by the Spanish government is very challenging: balancing stakeholder economic effort in the short and long term; prioritizing urgent financial affairs over competence, competitiveness and industry development; taking into consideration security of supply and sustainability. Many opposed interests and the need for a good solution make it a high risk mission indeed. C o 900 On its side, the state will cover about €900 million from general budget. em To tackle the situation, several measures have been taken already, such as the creation of new taxes for the activities associated either directly or indirectly with electricity, and a drastic cut in subsidies on new clean energy projects. Nevertheless, the tariff deficit kept on growing by up to €4.5 billion per year. access charges to transmission network) by Royal Decree-Law 20/2012. in Since the beginning of 2012 the Spanish Government has been working on a reform to manage the so-called tariff deficit which totaled about €28 billion as of mid-2013. This deficit has been built up from 2000 onwards when governments from any political party set regulatory electricity tariffs at levels which made it impossible to recover total system costs including renewable subsidies. a Spanish goverment estimates that electricity bills would have risen by 40% in the last two years to balance the current deficit if nothing had been done. 21
  • 23. Jan 1 - June 30: Denmark leads the EU Council Presidency March 11, 2011 - May 5, 2012 All 54 Japanese nuclear reactors progressively stopped for safety reasons or for planned maintenance December 2, 2011 - April 26, 2012 July 1 - Dec 31: Cyprus leads the EU Council Presidency June 16 Restart of units 3 & 4 Ohi's nuclear reactors March 9 Endesa Distribucion Electrica condamned by the Spanish competition regulator (CNC) for abuse of a dominant market position (€25 million fine) March April ht 2012 Feb January 21 - March 31 ig 2nd period of the 100-250 kWp solar PV tender (30 MW target) yr March 1 Renewables FiTs cut by 10% p January 1 Renewables FiTs cut by 8% January 1 German solar PV FiTs cut by 15% o C 22 20 ap May 3 Newly elected Romanian government bans hydraulic fracturing for the exploration of shale oil and gas May June July September 21 French government reaffirms its opposition to fracking September 11 The EP publishes the study 'Impacts of shale gas and shale oil extraction on the environment and on human health' calling for stricter fracking rules Aug Sept 2012 2012 June 4-6 Rio+20: UN Climate Change Conference in Rio de Janeiro, Brazil April 1 - June 30 3rd period of the 100-250 kWp solar PV tender (30 MW target) April 1 German solar PV FiTs cut by between 20 and 29% May 1 Draft decree for the 5th national solar PV FiTs scheme January 27 Moratorium on financial May 30 support for all new Solar PV FiTs cut from renewable power £21p/kWh to £16p/kWh assets (from August 1st on) April 16 The Italian government introduces its 5th renewable energy package (Conto Energia V) reducing solar PV FiTs FITs: EC: EP: MS: Source: i g ns on buildings © January 27 No need of new EU-wide shale gas rules in the foreseeable future (conclusions from a study commissioned by the EC) Electricity in is c lack of tr its tariffs August 2009 to June 14 Bulgarian Parliament eases shale oil and gas fracking ban C January 18 Bulgarian Assembly bans hydraulic fracturing for the exploration of shale oil and gas Oct Post-Fuku safety improve to the EU nuclear powe units esti to cost be €1 25 Czech cabinet stating that n provide 50% of June 13 Endesa condamned by the Spanish competition regulator (CNC) for anti-competitive practices (€5.475 million fine) January 1 ARENH price increases from €40/MWh to €42/MWh Jan July 4 France confirms plans to reduce the nuclear power share from 75% of the generation mix to 50% by 2025 em April 26 All stress tests completed: improvements to carry out on natural hazards prevention, safety review, containment integrity and human/ environment protection in case of accident January 3 ASN (French nuclear safety authority) calls for safety improvements for the 58 reactors (€10 to 15 billion investments required) September 13 Similar flaws than in Doel 3 are found in the Belgian Tihange 2 reactor August 11 Flaws are found in the steel tank housing the Belgian Doel 3 reactor in Peer reviews of all nuclear stress tests 13 Table 1.1 Major energy events (2012 and H1 2013) July 1 - September 30 4th period of the 100-250 kWp solar PV tender (30 MW target) July 1 New solar PV FiTs cut (a 20-30% reduction in support for wind farms and 50% for solar PV) September 19 Bulgaria imposes retroactive FiTs cuts to wind and solar PV projects September 1 July 1 Bulgarian solar PV FiTs cuts by 35% French solar PV FiT cut by for large roof installations and 28% between 4.5% and 9.5% for ground mounted installations August 1 Greek solar PV FiTs cut (-12.5% for installations < 100 kW + acceleration of disgression rate from 5 to 7% every 6 months) June 14 Energy Efficiency Directive approved with new target of 17% instead of 20% by 2020 Octo Poland re support to so install Janua 20 Octob Adoption o Directive 2012/2 on energy effic May 22 UK publishes its draft energy bill to reform the electricity sector Feed-in-tariffs European Commission European Parliament Member States Capgemini analysis, EEMO15 Energy Regulation and Policies Overview - Governance and Coordination across Europe The EC open probe in Chinese sola
  • 24. October 5 Post-Fukushima safety improvements to the EU's 134 nuclear power plant units estimated to cost between €10 and 25 billion July 6 Spanish Garoña nuclear reactor is definitively shut down January 28 Launch of UK's energy-saving Green Deal scheme to stimulate households efficiency improvements g January 1 November 30 Spain approves The Swiss Federal Office of Energy a final draft of a new launches the 4th public tender for 'Sustainable Energy Law' stimulating energy efficiency programs (budget: €15 million) April 3 The UK regulator (Ofgem) fines SSE £10.5 million (€12.5 million) for misselling (€ (€12.5 March 18 Italy ratifies new energy strategy targeting a more competitive and sophisticated gas market ap October 24 Electricity incumbent EDF is condamned for lack of transparency in its tariffs applied from August 2009 to August 2010 April 24 Germany renounces to freeze EEG renewable tax March 12 Germany presents a draft second law to speed up expanding electricity networks November 8 Czech cabinet adopts energy policy stating that nuclear energy should provide 50% of electricity generation by 2040 April 11 French court rejects progressive energy tariffs January 18 France’s national assembly approves government’s amended progressive energy tariffs em December 18 French government issues a decree setting up the electricity market capacity mechanism in i April 5 The UK commits more than €35 million to support nuclear research and development March 1 The Spanish government approves draft legislation permitting shale gas exploration via fracking Oct 2013 Dec Jan Nov March 21 The UK introduces a new tax regime designed to promote shale gas investments Feb March ht November 26-December 7 UN Climate Change Conference in Doha, Qatar October 1 - December 31 C November 8 The EC opens a competition probe into subsidies for Chinese solar panel makers April May June July 2013 June 3-14 UN Climate Change Conference in Bonn, Germany Launch of a solar PV tender for plants above 250 kWp (400 MW target) ig yr November 15 The EU issues a Communication on the internal energy market reaffirming its will to have it achieved by 2014 o October 25 Adoption of the Directive 2012/27/EU on energy efficiency November 1 German solar PV FiTs cut by 2.5% p < 100 kW very 6 months) November 8 Italian ministries approve €900 €900 million/year green heat incentives April 5 Romanian moratorium on the exploration and exploitation of shale gas by fracking expires March 13 - September 16 5th period of the 100-250 kWp solar PV tender (30 MW target) October 9 Poland reduces support to large solar PV installations (from January 1st, 2013 on) May 22 Regulator AEEG proposes power capacity payment mechanism April 8 Spain's northern Cantabria region unanimously votes to ban fracking C February 1 German upper house passes resolution to tighten fracking rules December 13 The UK lifts the moratorium on fracking of shale gas 2012 20 May 17 Belgian nuclear safety authority (AFCN) authorizes Doel 3 and Tihange 2 restart ts of shale gas ronment and on acking rules s by 35% nd 28% tions July 1 - Dec 31 Lithuania leads the EU Council Presidency er 21 firms cking ve FiTs cuts cts 13 Jan 1 - June 30: Ireland leads the EU Council Presidency © r 13 han the ctor Utilities the way we see it March 5 UK solar PV FiTs cut by 3.5% for installations up to 5 MWp (from May 1st on) December 4 Entry into legal force of the new binding measures to boost energy efficiency March 6 The EC launches a competition probe on exemption from power grid fees for German large industrial customers July 1 Romania cuts incentives to renewable energy producers (hydro, wind and solar) April 16 The EP rejects EU ETS backloading March 27 The EC issues its Green Paper "A 2030 framework for climate and energy policies" July 3 The EP agrees EU ETS backloading June 5 The EU imposes provisional anti-dumping duties on Chinese solar panels July 31 German government agrees to reduce power grid fees exemptions benefiting large industrials 23
  • 25. P I i ap C Meanwhile the 2012 global land and ocean surface temperature was estimated to be 0.45°C above the 19611990 average. This is the ninth warmest year since measurements started in 1850. The last 12 were all among the top 13 hottest years ever recorded. The IEA again sent a wake-up call, highlighting that the path currently followed by the world leads to a global temperature increase between 3.6°C and 5.3°C, well above the necessary 2°C target. In 2012, global GHG emissions continued to increase by 1.9%. ht reduction of EU-27 greenhouse gas emissions in 2012 ig 1.1% C o p yr decrease of EU-27 primary energy consumption in 2012 24 At European level, EU-27 GHG emissions decreased by 1.9% in 2012 (-3.3% in 2011). Thus, they were 19.9% below the 1990 reference year, meaning that the 2020 objective is already met (see table 1.2). in em The outcomes of the UN Climate Change conference at Doha in December 2012 were poor. The Kyoto protocol was extended to 2020, but only the EU-27 and a few other countries, covering no more than 14% of the current global GHG emissions, agreed to comply. A figure to compare with the former 64% of global GHG emissions covered by annex I countries in 1990 in the first Kyoto protocol, which came into force in 2005. Indeed, Japan, Russia, Canada and New Zealand stopped their participation. © 1.9% 20 n Europe, the economic crisis reduced GHG emissions and primary energy consumption g The Kyoto protocol was extended to 2020, but only the EU-27 and a few other countries, covering no more than 14% of the current global GHG emissions, agreed to comply. oor progress on global climate negotiations in 2012 – meanwhile the planet keeps increasingly warming 13 Sustainability and Climate Change Targets Energy Regulation and Policies Overview - Sustainability and Climate Change Targets Focusing on the EU ETS sector only, emissions reached 1,867 Mt CO2 in 2012, down 2% compared to 2011. This decrease is due more to the economic crisis than to the CO2 quota price on the ETS market, which collapsed. After reaching around €8/t in 2012, the price of the EUA quotas stayed in the €4/t range since the beginning of 2013. A diminution of 1.1% was observed for the EU-27 primary energy consumption year-on-year (see table 1.2), while the economic crisis drove down the GDP by 0.3%. Consequently the energy intensity dropped by only 0.5%, after an excellent -4.9% in 2011.
  • 26. Utilities the way we see it 13 Table 1.2 3x20 European Union climate change objectives (status as of 2011 with 2012 provisional data) 20 Historical evolution of GHG emissions Path to reach 2020 target 2020 target for EU-27 105 100 95 i 90 in EU-27 GHG emissions [base 1990=100] 110 85 -20% 80 1995 2000 2005 2010 2015 g 1,800 1,750 1,650 1,600 Historical evolution of primary energy consumption Path to reach 2020 target 2020 target for EU-27 Projection with current measures in place (as per the March 2011 EU Energy Efficiency Plan) New objective defined in the October 2012 EU Energy Efficiency Directive 1,550 1,500 1990 1995 © 1,450 -17% 2000 2010 2005 -20% 2015 22% 2020 20% ht 20% 18% 16% ig 14% 12% 10% yr 8% 6% 4% 2% 0% 1995 o 1990 p EU-27 share of renewables in final energy consumption [%] -9% ap 1,700 C EU-27 primary energy consumption [Mtoe] 1,850 2020 em 1990 2000 Historical evolution of renewables share Path to reach 2020 target 2020 target 2005 2010 2015 2020 C Source: BP statistical report 2013, European Environment Agency, Eur’Observer – Capgemini analysis, EEMO15 25
  • 27. M 20 i In June 2013, 22 out of 27 Member States submitted to the EC indicative targets of primary and final energy consumption for 2020. They will be evaluated in early 2014. States will then transmit their future NEEAP2, including the transposition measures voted in the Directive in 2012. Nevertheless, there is little public information on how States plan to implement the new Directive and especially the 1.5% energy savings objective for energy distributors and/ or retail energy sales companies. Although exemptions already exist for this 1.5% objective (enabling countries to reduce it by one quarter), the UK tried to further weaken this Directive by insisting on the inclusion of energy saving measures taken four years before or three years after the 20142020 period. This request was finally rejected by the Commission. However, several experts underlined that this Directive applies only until 2020 (a review is planned in 2016), while some energy efficiency measures such as building renovations provide results during up to 50 years. Without an extension of the Directive’s mandate, there is a concern that Member States might take only minimal measures to meet the requirements of this Directive. C o p yr ig ht © C ap g em in There is little public information on how States plan to implement the new Energy Efficiency Directive and especially the 1.5% energy savings objective for energy distributors and/or retail energy sales companies. 13 ore visibility is needed on energy efficiency 2 26 Energy Regulation and Policies Overview - Sustainability and Climate Change Targets National Energy Efficiency Action Plan
  • 28. Utilities the way we see it 13 20 i in ap g em This paper underlined the key issues to be dealt with. A new target on GHG emissions needs to be defined (the Roadmap 2050 suggested a 40% reduction by 2030). In addition, the question of whether having only a GHG emission target is raised, since the interactions between the 3x20 objectives have shown obvious synergies but also trade-offs. The question of whether having only a GHG emission target is raised, since the interactions between the 3x20 objectives have shown obvious synergies but also trade-offs. This paper also questioned the relevance of setting sector specific targets rather than targets for each Member State on energy efficiency, and the metric to use to measure it (keeping absolute energy consumption or switch to a relative target like the energy intensity). C o p yr ig ht In 2012, investments in renewables4 were down 29% year-on-year in Europe, reaching $79.9 billion. This drop was mainly driven by the economic downturn and the growing uncertainty about support policies and mechanisms, but also by the sharp fall in the price of solar PV panels. The European drop was in line with the worldwide decrease in investments: $244 billion in 2012, down 12% from the previous year‘s record. However, this downward trend is not evenly distributed. While investments in developed countries decreased by 29% to $132 billion, they continued to grow steadily in developing countries (+19%), reaching $112 billion5. On March 27, 2013, the Commission adopted a Green Paper entitled “A 2030 framework for climate and energy policies”. The aim is to build an intermediary step toward the 2050 Energy Roadmap, which has been drafted in line with the objective of reducing GHG emissions by 80 to 95% by 2050 compared to 1990 levels. C Partly thanks to low levels of energy consumption, renewables accounted for a 13% share in final energy consumption in 2011, and EU-27 looks on track to achieve the 2020 objective of 20% (see table 1.2). However, this objective is at risk3: if Member States do not implement new measures, the economic crisis, the remaining administrative barriers, the infrastructure and market design problems, and the disruption of the support mechanisms and politics may delay or cut future investments. 2 030, a new horizon in sight © R enewables presumably on track with the objective – but is there still a consensus on the target? On May 21, 2013 the European Parliament approved a non-binding resolution calling for a mandatory share for renewables in 2030 greater than the current working assumption of 30%. However, a proposal to set this target between 40 and 45% failed. Numerous Member States opposed the idea. The EU is therefore sending out conflicting messages, at a time when the international negotiations on climate change mitigation are stalling, pending the discussions on a possible new international agreement to be signed in 2015 at the COP 21 climate conference in Paris. 3 Renewable energy progress report, European Commission, March 2013 4 Excluding large hydro 5 Trends in renewable energy investment 2013, BNEF. Excludes large hydro projects >50 MW 27
  • 29. em in i 20 13 Electricity Markets g Electricity Generation I C ap n 2012, security of supply was guaranteed in a decreasing EU electricity consumption market C o p yr ig ht © Although exceptional weather events stressed the electricity system in 2012 leading to higher peak loads, security of supply was guaranteed After a 1.5% drop in 2011, European electricity consumption continued to fall by 0.2%6 in 2012. Corrected by the additional 0.3% increase that a leap year like 2012 adds to the annual electricity consumption, the fall reaches 0.5%. Temperatures were globally milder than average (+0.9°C) and the economic environment remained rather subdued with EU-27 GDP shrinking by 0.4% over the year. Experiencing low demand from energy-intensive sectors such as manufacturing and construction, most countries reported electricity consumption decreases, for example: Belgium (-1.9%), Bulgaria (-3.0%), Germany (-4.6%), Italy (-2.5%), the Netherlands (-1.6%), Portugal 6 28 Electricity Markets - Electricity Generation Non-weather corrected (-2.9%) and Romania (-0.9%). Due to the February 2012 cold wave as well as unusual cold temperatures in Northern Europe in December 2012, France (+2.4%), Norway (+4.2%) and Sweden (+1.7%) reported a noticeable electricity consumption surge. Large amounts of electricity in these countries are used for heating. These exceptional weather events put considerable stress on the EU system as most countries reached their peak load either in February 2012 or December 2012. Security of supply was ensured thanks to effective mobilization of reserve generation capacities and close cooperation between TSOs. Nevertheless, while total EU electricity consumption slightly fell over the year, significant peak load increases were reported compared to 2011 (see table 2.1), e.g. in Bulgaria (+6.8%), Czech Republic (+6.7%), France (+11.2%), Germany (+7.1%) or Poland (+3.6%). While France and Poland reached their historical consumption peak, Bulgaria reported its highest peak ever in twenty years.
  • 30. Utilities the way we see it Table 2.1 Peak load, generation capacity and electricity mix (2012) 6.6% 13 160,000 Total installed capacity in Europe 140,000 904,661 MW 11.2% 2011 934,574 MW 2012 i 100,000 7.1% in CO2 emitting generation capacity Non-CO2 emitting generation capacity Peak load 2012 2012/2011 change (notified if below or above +/-3%: +3.4%) 80,000 em 4.2% -4.2% 60,000 3.6% 5.9% 3.9% 20,000 -5.1% 0 FR IT ES UK SE PL NO NL AT BE 3.5% 4.8% 3.4% 7.5% 12.3% -3.1% 15.6% 6.7% -3.2% -6.9% -17.5% 6.8% CZ PT CH RO FI GR BG DK 5.4% 7.1% HU SK IE 6.3% 16.5% 7.2% 12.8% 8.1% 5.2% 3.1% -15.1% LT SI EE LV LU C DE g 40,000 ap Total generation capacity and peak load [MW] 120,000 20 +3.3% Despite increasing decommissioning of conventional plants, EU generation capacity grew again in 2012, stimulated by renewables Net EU generation capacity rose by 3.3% in 2012, boosted by the growth of renewable intermittent sources. Wind and solar PV new builds represented 64% of the additional 44.9 GW connected to the grid over the year (see table 2.2), with respectively 11.9 GW (26%) and 16.8 GW (37%). Gas-fired power stations accounted for 10.5 GW (23%) of capacity added. Even if gasfired generation remained unprofitable during most of 2012, some countries like Germany and the Netherlands completed and commissioned CCGT projects started a few years ago. ht 3.3% © Source: ENTSO-E – Capgemini analysis, EEMO15 p yr ig increase of net generation capacity in 2012 64% C o of newly installed capacity came from wind and solar PV in 2012 29
  • 31. 25,000 20 2011 2012 15,000 11,895 10,535 9,718 9,616 5,000 0 -207 -216 -934 2,147 1,338 833 472 615 50 69 22 331 5 32 234 424 -43 -60 -158 -22 -840 -1,205 7 700 6 5 em 3,065 in i 10,000 -1,147 -3,204 -5,441 C oa l -6,253 g ap G eo th er m al So la rC SP N uc le ar W as te H yd ro Bi om as s W in d So la rP V -10,000 O ce an -5,495 G as -5,000 Fu el oi l Decommissioned and new installed capacity [MW] 21,000 20,000 16,750 Meanwhile, decommissioned generation capacity rose significantly by 67%, from 9.5 GW in 2011 to 15.8 GW in 2012. Old gas-fired power stations were closed in Belgium, Hungary, the Netherlands and the UK. Driven by LCPD7 EU environmental legislation, the increasing loss of capacity is mainly due to coal and oil-fired power plants closures: 8.6 GW were taken out of the grid in 2012. In Belgium, France, Germany, Spain and the UK, additional closures were completed in H1 2013 or are planned before the December 2015 LCPD deadline. Overall, the net generation capacity keeps increasing but decommissioned dispatchable capacities are mostly replaced by non-dispatchable capacities, which endangers EU network ability to meet peak demand. 13 Table 2.2 Installed and decomissioned generation capacity per type of source (2012 versus 2011) © C Source: EWEA – Capgemini analysis, EEMO15 15.8 GW ht generation capacity decommissioned in 2012 C o p yr ig In a context of rather stagnant electricity consumption, the growing renewables capacity has led to a decreasing residual electricity market in Europe. In a decreasing residual EU market 8, dynamism of renewables capacity brought wholesale prices down and pushed Utilities to take short-term actions on their generation portfolio Reflecting the addition of renewables capacity, the share of renewables sources (excluding hydro) in the EU electricity mix reached 19.2% in 2012, up from 16.7% in 2011. Hydro power generation was abundant in Nordic markets and several solar and wind generation records were broken in Western Europe in 2012 and H1 2013. Wind power broke a record in Portugal in Q1 2013 producing 27% of total renewables generation (including hydro), and a world record for solar instantaneous power output was set up by Germany in July 2013, rising above 23.9 GW. 7 30 Electricity Markets - Electricity Generation Large Combustion Plant Directive 8 Residual market is set as the demand minus subsidized generation
  • 32. Utilities the way we see it 13 20 i in em g Coal-fired plants are currently better placed in the merit order than gasfired plants. C o p yr ig ht A direct consequence is that gas-fired generation remained unprofitable and under pressure during most of the year in 2012. Gas-to-power reduced in most European countries. In 2012, the six largest gas markets (the UK, Germany, Italy, France, the Netherlands and Spain) witnessed a 21.8% gasto-power consumption drop. Utilities are increasingly looking forward to adjusting their generation portfolios by mothballing or closing CCGT plants, which also contributes to reduce European dispatchable capacity. In 2012 and H1 2013, units have been mothballed in Austria, France, Germany, the Netherlands and the UK. To limit impact on grid balance, TSOs like TenneT reached first agreements with Utilities to keep CCGTs on the grid or on winter reserve. After a strong decrease in 2012, the funnel of capacity projects slightly increased in 2013, with a contrasted situation depending on the energy sources The funnel of projects increased by 2% and reached 245 GW (May 2013 compared to May 2012). It is the first year since 2010 to see such an increase. This enlargement of the funnel hides various situations depending on energy sources. Renewables (excluding hydro) account for 38% of the funnel, growing by 11% compared to last year, followed by gas which represents 33% of the funnel (+3% compared to May 2012). Nuclear represents 11% of all projects but experienced the strongest decrease of all power sources: nuclear projects dropped by 23% compared to last year. ap Besides, coal prices decreased and CO2 prices stayed at a low level, which led to the fact that coal-fired plants are currently better placed in the merit order than gas-fired plants. C Furthermore, as renewables sources are given priority in the dispatch merit order, EU power prices went down. I n the medium-term, even with decreasing subsidies, investors are reinforcing their position towards renewables, keeping momentum on nuclear in a few favorable countries, and postponing their interest in gasfired power plants to the end of the decade © But in a context of rather stagnant electricity consumption, the growing renewables capacity has led to a decreasing residual electricity market in Europe. In fact, utilization rates of CCGT were below 20% in most European countries in the first six months of 2013: as a case in point, the Spanish rate bottomed at 11%; between April and June, less than 10% of the capacity of some of RWE CCGT was used. 31
  • 33. 13 Table 2.3 Map of generation capacities projects in MW (as of May 2013) Coal UK/IRELAND 82,327 68,742 NORDICS Gas 18,502 Renewables Planned Applied Nuclear Under construction Approved Planned Hydro 4,806 15,672 Other thermal 37,058 Applied i 5,810 Approved 9,408 Planned Applied 8,070 Approved SE IE 3,117 DK NL DE BE LU FR 2,140 Planned Applied Approved Under construction CH PT IBERIA 10,314 Applied Approved 3,892 C Planned 21,054 Under construction Note: Data available for projects > 50 MW Source: Platts – Capgemini analysis, EEMO15 4,352 2,952 860 430 Planned Applied Approved Under construction 7,694 3,408 2,708 1,145 Planned Applied Approved Under construction GREECE SK HU RO BG ITALY 14,305 13,905 Planned Applied GR C o p yr ig ht The volume of projects under construction decreased by 15% compared to May 2012 (see table 2.3). Thermal capacities were the energy sources the most affected by this drop. Coal power plants projects decreased by 24% to 11.2 GW, but are still the largest part (31%) of projects under construction. Gas-fired power plants projects experienced the steepest drop of 27%, but rank second among all projects under construction, reaching 7.6 GW, ex-aequo with renewables (excluding hydro). 9 32 Under construction AUSTRIA CZ IT ES Approved 4,760 690 Approved Under construction © 23,154 10,721 PL ap 3,760 Applied LV g SWITZERLAND 4,540 GERMANY 30,678 20,568 EE LT UK Under construction 4,940 Planned Planned Planned NO Under construction FRANCE 12,985 Under construction FI in Planned 11,972 em 19,665 3,138 Approved App ro Appro Applied App lied Applied BENELUX 22,965 8,007 20 98,552 Electricity Markets - Electricity Generation Despite squeezed subsidies, renewables projects are the ones growing the most, with a particularly high share of offshore wind projects accounting for 79% of all renewables projects While renewables projects increased on the overall funnel compared to May 2012, renewables projects under construction remained quite stable (-1%). But the projects under the strictly planned9 status drastically jumped by 127%. This latter increase took place mainly in the Nordics, in Iberia and in Greece, where wind projects have been planned for the next 4 years. Strictly planned projects designate projects that are exactly at the step planned of the funnel, and not further. Referring to the chart, it is equal to planned capacity minus applied capacity
  • 34. 20 i in em g ap Finland still plans nuclear capacities with the Olkiluoto 1.75 GW project. In the UK, the Hinkley Point C 3.3 GW project led by EDF Energy was approved in March 2013; it will be the first nuclear project in the UK in almost 20 years. C o p yr ig ht Nuclear projects are on average on a downward slope, but investments and divestments from this energy source are driven by different national political orientations The situation on nuclear appears quite contrasted depending on the countries. Some, like Switzerland or Spain, do not plan any new reactors, and started – or are preparing – to phase out existing plants. Others, like Finland, Czech Republic, Poland or the UK, are confirming their plans to increase nuclear generation capacity. Somewhere in between, Belgium intends to close its 40-year-old reactors in the coming years, but security of supply remains at stake and could be a reason for lifetime extension. In July 2012 Belgium decided that Doel 1 and 2 reactors were to close in 2015 after 40 years of operation. Nevertheless, the 38-year-old Tihange 1 reactor should operate until 2025. Indeed, demand-side management measures implemented during the winter 2012/2013 and CCGT projects would not be sufficient to avoid the risk of blackouts. C Meanwhile, the subsidies on renewables decreased. In Spain for instance, the government announced no further feed-in tariff contracts would occur after 2012 for special regime suppliers, in particular renewables. In France, the feed-in tariff for solar PV decreases every 3 months. In Switzerland, the 6.4 GW planned last year have been cancelled due to the decision of the country to stop the construction of any new reactor. Also, the Swiss parliament decided to increase funds for decommissioning reactors, which would have to be available when a reactor reaches 40 years of operation (instead of 50 years). This milestone will occur beginning 2015 for two reactors. In Spain, where the government’s position on nuclear energy is still unclear, the 42-year-old Garoña power plant was closed in July 2013. © The countries that plan to invest the most in renewables (excluding hydro) are first the UK with 57 GW and second the Nordics with a notably lower projected capacity of 13 GW. The far leading position of the UK can be explained by the numerous offshore wind projects, which amount to 49 GW (86% of all UK renewables projected capacities). The commissioning of these capacities is expected to spread between 2013 and 2020. Two of these projects are already under construction: the 270 MW Lincs wind farm, developed by Centrica, Dong and Siemens, is expected to be commissioned in late 2013, while the construction of the 576 MW Gwynt y Môr project, developed by RWE Innogy, Stadtwerke Munich and Siemens, started in August 2012 and is expected to be completed by mid-2015. 13 Utilities the way we see it Gas-fired assets lack profitability in the current context but are expected to regain interest from investors in the mid-term Over the whole funnel of projects, gas-fired capacities slightly increased compared to 2012 (+3%). Nevertheless, regarding strictly planned projects, these capacities, which are expected to come on line after 2018, have boomed by 179%. In Germany for example, 7 GW have been added to the funnel. On the other hand, the mothballing of several CCGTs in Europe was decided last year: for example the 430 MW E.ON plant in Malženice (Slovakia), 33
  • 35. An unprecedent wave of investments requires Excellence in Capital Project Management 13 20 i in Our Approach Capgemini Consulting assists leading Energy and Utility players to secure the delivery of their Capital Project portfolio on time, quality, budget and within Health, Safety and Environmental standards: • Excellence in Capital Project Management: – – – – – © C ap The European Oil & Gas sector comprises ~900 projectsc, 80% in Exploration and Production of which 70% are offshore. Total, Eni, BP and Statoil are some of the major investors in Europe with more than 300 projects under construction. In Downstream, 49 projectsd are after Final Investment Decisions: 10 projects in LNG terminals and 14 in storage facilities. To secure an effective delivery on time, within budget, quality and safety, Energy and Utility players face both internal and external challenges. External challenges • Project Environment: Politics and social acceptance have a critical impact on Energy & Utility projects. The Hinkley Point C nuclear project for example has long been negotiating with the UK government the price per MW the UK would pay to EDF to go ahead with the project. Tax policies may affect project profitability: in Norway, for example, a tax increase rendered Statoil’s investment on the Johan Catsberg Oilfield less attractive and led to project postponement, • Project Economics: Project costs and investment decisions are impacted by the volatility of exchange rates and raw materials while the revenues are driven by commodity prices. The oil Brent price has been quite stable over the last 12 months (July 2012-2013) compared to the last 36 months (July 2010-2013), while there was more volatility on the Euro/Dollar exchange rate (+11%) and Iron Ore (+55%). em In EU-27, despite the slower growth in energy demand of only 1% over the same period, capital investments in infrastructures are estimated at around $4.5 trillion, twothirds of which will be in Power and one-third in Oil & Gas. Combined spending in the upstream energy value chain will account for ~70% of total investments. In 2013, according to the Datamonitor European Power Assets Database, around 800 new projects were registered in power generation in Europe, of which 64% are planned and 36% under constructionb. projects whose shareholder structure was altered several times with lately the sale of RWE’s share and the entry of GDF SUEZ. g Worldwide energy consumption is forecast to increase by 40% between 2011 and 2035 to reach approximately 17 billion toe. The dynamics of this growth are driven by emerging economies with 90% coming from non-OECD economies, especially China and India. To meet this growing demand, large-scale investments to expand or replace energy assets are required over that period. They are estimated at $38 trillion worldwidea. C o p yr ig ht Internal challenges • Project Execution: Today’s projects are facing an increasing scale and technological complexity leading to substantial delays. Nuclear power projects such as Flamanville 3 face multi-year delays and multi-million cost overruns. Same occurs for Oil & Gas projects that use ever more complex technologies to extract hydrocarbons in harsh environments, a situation that has led investors to put the Shtokman project on hold, • Project Resources & Capabilities: Increasing the labor pool and developing skills are key factors to a successful project. European Oil & Gas companies are threatened today by skill shortages and struggle to recruit project engineers. Another challenge impeding project success is the access to critical equipment. Currently at 92%, the Oil & Gas rig utilization rate has reached almost its full capacity. Poor planning of rig requirement can lead to considerable delays, • Project Governance: Large-scale projects always involve multiple stakeholders. Olkiluoto 3 for example, the Finnish nuclear project, involves diverse organizations with differing roles. It has faced conflicts due to unclear transfer of responsibilities impacting project quality, progress and costs. The Nabucco pipeline is one of many 34 Electricity Markets - Electricity Generation Project & Portfolio Management System, Large Scale Project toolkit, Look-back Management, Project Monitoring Tool, Knowledge Management Strategy, Community of Practice… • Excellence in Capital Project Sourcing & Contract Management, • Readiness to Operate (assessment and operating model design for operability), • Lean CAPEX (Customized capital project management improvement program, project implementation process improvements), • Digital Asset (leverage on digital innovation to develop an end-to-end view and seamless integration of the asset from conception, development, operations to abandonment), • “Acceleration Zone”®: ability to get multiple stakeholders to work efficiently together to secure the delivery of Capital Projects, • Executive Coaching for Capital Project delivery, • Project Recovery (Gap analysis & recovery plan). a b c d According to scenario developed by the International Energy Agency Planned: assets that have received various government approvals, but are not yet under construction; Under construction: assets currently in the process of being built and having received final investment decisions According to projects OGP ENTSO-G TYNDP 2013-2022 Main Report
  • 36. ig 20 i The carbon price has not succeeded in being a major driver towards long-term low-carbon investments. In addition, development and exploitation of unconventional hydrocarbons in the US are driving down manufacturing costs and C o p yr Moreover, the unclear perspective beyond 2020 does not encourage countries to formulate long-term policies: beyond the old debate about the specificity of the Euratom Treaty and a discussion about possible State aid, only a timid nuclear European policy may appear. A draft proposal for After 2018/2020, investors continue to prefer gas for new builds because of its low investment costs compared to coal and its flexibility, as well as lower regulatory risk as it is less sensitive to CO2 compared to coal. in em g ht The nuclear topic is a representative illustration of Europe uncoordination. As a matter of fact, the position of European countries regarding nuclear energy is extremely varied, with different road maps defined and unclear plans for those who decided to phase out nuclear energy. Future CO2 price signal and arbitrage between gas and coal reinforce uncertainties while investments lost attractiveness The carbon price has not succeeded in being a major driver towards longterm low-carbon investments. The current large surplus of allowances, caused in part by the economic crisis, that pushed CO2 prices to all-time low levels and the adoption of backloading by the European Parliament will not sustainably solve the problem. CDC (“Caisse des Dépôts”) Climat recommended the establishment of a binding, single and ambitious GHG emission reduction target of at least 40% by 2030, with the EU ETS as the central and non-residual instrument. ap I n the long-term, Europe’s orientations are still under discussions with no strong will to converge due to increased uncertainties This is leading countries to find alternatives and decide on temporary solutions with low investment profiles to delay replacement of nuclear capacities or to extend the operating lifetime, knowing that the necessary future investments to replace nuclear or to renew existing capacities will increase the consumer’s bill. This leads also to an estimation10 that current European policies will result in 40% reduction in GHG emissions by 2050 whereas 85% reduction is needed to limit global warming to 2°C by 2050. C This shows a two-steps strategy of investors. First, CCGT are seen as unprofitable until 2017/2018. This is due to a stagnant power demand, a decreasing residual market and a higher short-term marginal cost of gas versus coal, which benefits from low CO2 prices and coal exportations from the US. Then, after 2018/2020, investors continue to prefer gas for new builds because of its low investment costs compared to coal and its flexibility, as well as lower regulatory risk as it is less sensitive to CO2 compared to coal. a new nuclear safety directive has been adopted by the European Commission in June 2013, though excluding the debate on insurance and liability in relation to nuclear accidents. © expected from October 2013, or the 465 MW EDF Luminus plant in Seraing (Belgium), expected from July 2014. 13 Utilities the way we see it 10 European Commission report: “EU Energy Roadmap 2050” 35
  • 37. Finally, according to ENTSO-E11, renewable energies (excluding hydro) will develop the most rapidly: 22% of EU-27 electricity capacity mix in 2013, 33% in 2020 and 36% in 2030 (see table 2.4). And energy efficiency is another key area of all European energy policies but projections do not demonstrate the ability to achieve long-term goals. However the current drive towards more decentralized generation and more energy efficiency represent both a paradigm shift and a critical challenge for producers and grid operators. Pursuing the development of renewables is unwise without finding sustainable solutions to balance the grid – through other power generation means or massive investments in transmission and distribution grids, including cross-border infrastructures. Moreover, the regulatory instability regarding renewable subsidies scarcely encourages the Utilities to continue the installation of renewable capacities. 20 13 cost-efficiency of climate and energy measures, and the need to consider technological feasibility. In addition, they think that major national measures should not be taken without common agreement, such as the German nuclear shutdown. They urged politicians to define a stable, predictable and flexible climate regulation to limit carbon leakage and encourage innovation. They believe that a strong emphasis should be put on investments in infrastructures, in particular in networks that will deepen EU market integration and ensure sustainability, competitiveness and security of supply. i are leading to a major relocation of industries. Europe could develop its own unconventional oil & gas potential but there is a strong public resistance due to environmental concerns. In this situation, unconventional oils are becoming another major regulatory uncertainty in Europe. C o p yr ig © ht The regulatory instability regarding renewable subsidies scarcely encourages the Utilities to continue the installation of renewable capacities. Stable regulation is important for two main reasons: authorizing long investment cycles from public and private actors and defining a common position for the upcoming international agreement on climate mitigation expected by the end of 2015. C ap g em in Energy efficiency is another key area of all European energy policies but projections do not demonstrate the ability to achieve long-term goals. Generation markets need long-term and stable political frameworks While the EC has not yet formulated its proposals for the 2030 horizon (Green Paper “A 2030 framework for climate and energy policies”), the eight major European Utilities’ CEOs (including GDF SUEZ, E.ON, RWE, Enel and Iberdrola) made a common declaration that EU energy policy is “a failure”. They emphasized the lack of overall consistency between policies and have pointed out the need to improve the 11 36 Electricity Markets - Electricity Generation ENTSO-E Scenario outlook and adequacy forecast 2013-2030
  • 38. 13 Utilities the way we see it Table 2.4 Current (2013) and future (2020 and 2030) electricity capacity mix (as of June 2013) 100% 20 90% 80% 70% i Solar + Biomass Wind in 60% Other fossil Gas em 50% Hydro 40% Nuclear 2013 mix: lefthand side bar 2020 mix1: middle bar g 30% Lignite + Coal 2030 mix2: righthand side bar ap 20% 10% BG CH CZ DE ES FI FR UK HU IT LT NL PL RO SE SI SK EU-27 © BE C 0% C o p yr ig ht Notes: 1: 2020 projection based on a ‘best estimate’ scenario, 2: 2030 projection based on a ‘slow progress’ scenario towards 2050 decarbonisation goals Source: ENTSO-E – Capgemini analysis, EEMO15 37
  • 39. i C ap Investments mainly relate to new developments or renewal of ageing networks. However, despite these continuously growing investments and TSOs investments plans (see table 3.2) – in majority stable or even on the rise – it is hardly conceivable that electricity TSOs will be able to cope with the €140 billion investments €140 © ENTSO-E has analyzed the evolution of the investments, which shows that a majority of them, 53%, are Table 3.1 Investments from selected electricity TSOs in their national grid (2005 to 2012) Other TSOs 8,000 +11% DE - All 4 TSOs 7,000 +8% IT - Terna +14% Investments [million €] UK - National Grid 6,000 FR - RTE 5,000 4,000 +6% +7% ES - REE +21% +24% 3,000 2,000 o p yr ig ht It is hardly conceivable that electricity TSOs will be able to cope with the €140 billion investments 140 required by 2020. In fact, European TSOs will be exposed to uninterrupted and substantial capital expenditures over the next two decades. In Europe about 25% of the investment in transmission networks will be related to renewable connections. Among the €210 billion investments need (€140 billion in electricity ( transmission as already mentioned and €70 billion in gas transmission for projects of European interest), the European Commission estimates that approximately €100 billion of investment is at risk of not being realized due to delays in permitting procedures, access to finance and lack of adequate risk mitigation mechanisms. in The total investments reached €7,894 7,894 million in 2012, i.e. 2.3 times the investments in 2005 (see table 3.1). The countries that have invested the most are Sweden, France and Italy. g growth in investments from the top 14 European electricity TSOs in 2012 required by 2020, as defined by the European Commission. em 11% 20 D espite TSOs investments continuously increasing, transmission lines construction is not fast enough to cope with European needs 13 Electricity Infrastructures C 1,000 0 2005 2006 2007 2008 2009 2010 2011 2012 Note: 2012 data for German TSOs are based on planned investments and may vary. For TenneT who owns 100% shares in former E.ON’s Transpower TSO, the total company investments have been split between Germany and the Netherlands by using an approximation on the network length in each country. Source: TSOs Annual Reports, National Regulators – Capgemini analysis, EEMO15 38 Electricity Markets - Electricity Infrastructures
  • 40. Country Company Investments (€) Timeline Comments 200 million 2013 Main drivers: replacements (41%) and internal demand (33%) First Offshore investments in the North Sea 21 billion 2013-2023 3,800 km of new power lines to accommodate the boom in renewable energy and the nuclear phase-out 4,400 km of existing lines to be upgraded and modernized €425-450 million/year in the Spanish peninsula 425-450 €125-150 million/year in the islands €125-150 Elia DE All 4 TSOs ES REE 500-600 million/year 2013-2017 Fingrid 220 million ~1.2 billion 2013 2013-2022 Estlink project €110 million/year in average over 2014-2022 €110 1,440 million 2013 To accompany the energy transition, integrate more renewable energies, upgrade existing lines and reinforce interconnections i in FI 20 BE RTE NL TenneT 5 billion 2013-2023 Mainly renewables integration (notably offshore wind farms in the North Sea and solar PV) NO Statnett ~7-9 billion 2013-2023 Ambition to upgrading the existing 300 kV power lines and constructing new 420 kV power lines UK g 2013-2017 Focus on safety and modernization of the national grid (83% dedicated to development) ~1.8 billion 2013-2015 Main drivers: market integration (including the removal of structural bottlenecks), the development of renewable electricity generation and capacity increases in nuclear power plants ~23 billion 2013-2021 4.1 billion ap SE Terna Svenska C IT em FR National Grid Source: TSOs Annual Reports – Capgemini analysis, EEMO15 C o p yr ig ht ENTSO-E coordinates actions to facilitate the development of transmission networks in order to meet the requirements of European Energy Policy – sustainability, competitiveness and security of supply. Under the Electricity and Gas Regulation of July 13, 2009, the TSOs work jointly on Network Codes (allocation, balancing, tariffs, with the theoretical deadline of December 31, 2014) and Ten-Year Network Development Plans (TYNDP), through ENTSO-E and ENTSO-G, to ensure better security and reliability. These efforts have already allowed the coupling of the five national markets in the Central Western European zone, by the TSOs and the marketplace operators, a development that reduces the need for physical interconnection capacities. Table 3.2 Investments plans for selected electricity TSOs © on time regarding commissioning date, while 27% are delayed (most of them by 1 or 2 years). The delays are due to the difficulty on obtaining permits, authorizations and the public consensus necessary to build infrastructures. On April 17, 2013, the European Commission adopted the Regulation on “Guidelines for transEuropean energy infrastructure”. Consequently developers of priority cross-border infrastructure – such as pipelines or power grids – will no longer have to wait up to 12 years for permits, but should obtain a decision in about 4 years. This should help the EC in its goal of creating a true European market where energy systems are physically connected with each other. 13 Utilities the way we see it 39
  • 41. Table 3.3 Map of interconnections levels and interconnections projects (2012) Level of interconnections Countries Projects of cross-border interconnections < 5% Expected date ES - PT ≥10% & ≤15% ES - PT Beariz (ES)-Fontefria (ES) / Vila Conde (PT) - Recarei (PT) 2014 PT->ES: 1,700 MW Guillena (ES)-Puebla de Guzman (ES) / Tavira (PT)-Portimao (PT) > 15% ES->PT: 1,400 MW LT Woodland (IE) / Deeside (UK) 500 MW link NL DE 650 MW NO - DK Kristiansand (NO) / Tjele (DK) 2014 700 MW PL - LT Elk (PL) / PL-LT border (LT) 2015 Alytus (LT) / PL-LT border (PL) 2015 Klaipeda (LT) / Nybro (SE) 2015 1,000 MW 700 MW Works at Piossasco (IT) station 2016 > 1,000 MW Woodland (IE) / Turleenan (UK) 2017 600 MW DE - AT Isar (DE) / St Peter (AT) 2017 > 2,000 MW Endrup (DK) / Eemshaven (NL) 2018 700 MW NO - DE Tonstad (NO) / Wilster (DE) 2018 1,400 MW Richborough (UK) / Zeebrugge (BE) – subsea cable 2018 1,000 MW Grande-Ile (FR) / Piossasco (IT) 2019 1,200 MW i Vierraden (DE) / Krajnik (PL) IE - UK FR - IT ES > 1,000 MW UK - BE SI 2016 DK - NL CH n.c Niederrhein (DE) / Doetinchem (NL) DE - PL CZ AT 2016 DE - NL SK FR PT SI - HU/HR Cirkovce (SI) / Heviz (HU)-Zerjavenec (HR) PL BE LU in LV DK UK 1,200-1,400 MW 2014 LT - PL EE 2014 Püssi (EE) / Anttila (FI) - EstLink 2 em SE Baixas (FR) / Sta.Llogaia (ES) EE - FI 20 FR - ES FI NO IE 2015/16 LT - SE Cross-border interconnections commissioned in 2012 and H1 2013 Projects of cross-border interconnections 13 ≥5% & < 10% Capacity increase HU RO IT BG g GR ap Note: The European Council requires each country to have a minimum import capacity level equivalent to 10% of its installed capacity Source: ENTSO-E – Capgemini analysis, EEMO15 N Another major project is the EstLink 2 line between Finland and Estonia. Expected in early 2014, this 650 MW HVDC12 submarine link will bring the total transmission capacity between the two countries to 1,000 MW. This interconnection is a major project for the development of the Baltic electricity market. ht © C ew lines will come online from 2014 onwards while very few interconnections were commissioned in 2012 and H1 2013 C o p yr ig The long-awaited Spain-France interconnection is expected to come online in 2014 (see table 3.3). The tunneling works were completed in April 2013 (65 km underground section). Between Santa Llogaia, in Spain and Baixas, in France, the interconnection will double the electricity exchange capacity between both countries from 1,400 MW to 2,800 MW. It will result in improved security of electricity supply at both regional and national levels, enable a better integration of the Iberian market into the European electricity market and facilitate the exchange of renewable energy into the grid. 12 New HVDC lines are also being developed to connect large offshore wind farms. Offshore wind farms are indeed getting bigger and are moving farther from shore beyond the capabilities of AC submarine cables. One recent project is the 260 km HVDC subsea link that runs between Deeside in North Wales (UK) and Woodland in Ireland. This 500 MW HVDC interconnector was officially commissioned on September 20, 2012, doubling electricity capacity between Ireland and Great Britain and enabling exports of Irish wind power. High Voltage Direct Current 40 Electricity Markets - Electricity Infrastructures I n Europe, the changes in the pattern, profile and predictability of electricity supply are pushing for more regulation New regulations are emerging with the aim of improving the electricity system balance, especially in respect to the considerable development of intermittent renewable sources that come first in the dispatch priority. This has led to a significant lowering of electricity wholesale prices, particularly in Germany, Spain and Denmark. Conventional power plants have been pushed out of the merit order, leading to mothballing or closure of some of them. Governments are therefore working to establish capacity mechanisms in order to reward capacity availability. France has published its capacity market decree in December 2012, and in June 2013 the UK published a policy paper detailing capacity market design proposals. Once implemented, TSOs and DSOs will play a major role in operating these capacity mechanisms.
  • 42. Utilities the way we see it Booming activity in Smart Grid pilot projects across Europe Power system 9 Integration of EnR 8 g Demand Response & Customer involvement Storage Smart metering 14 Electric Vehicles Communications & Information Technologies C Source: JRC - Capgemini Consulting analysis ap Market & regulations 16 ht © Renewable energy integration, energy storage and customer involvement are the main areas targeted in latest smart grid project developments According to latest European Commission Joint Research Center reportb, smart grid research projects are more and more focusing on the global system rather than on individual components or applications. They are mostly designed to test the ability of an integrated system to coordinate inputs from different sources: fluctuating renewables generation, flexible demand and storage. • The massive increase of renewables capacities is forcing Transmission and Distribution operators to adjust the operations of the network. Thus, smart grid projects C o p yr ig 13 em Network control & VPP 6 20 in Breakdown of the 57 smart grid pilot projects launched in 2012 and H1 2013 per type of targeted applications 1 11 1 across Europe aim at improving load balancing and assets utilization. As an illustration, in July 2013, the Málaga Smartcity project driven by Endesa in Spain entered into a new phase, in which Endesa started testing optimal integration of renewable energy sources at a broader scale (installation of PV panels on public buildings, use of micro solar power generation in a number of hotels, installation of micro wind power systems in the area, etc), • Demand response and consumer involvement is another key theme found in numerous smart grid projects in 2012/2013. The projects aim at encouraging consumers to participate actively in grid operations and load balancing through market mechanisms (using demand response, dynamic tariffs and home energy management controllers). As an illustration, in June 2013, the RWE/Essent-led PowerMatching City project in the Netherlands entered its second phase in which consumers will test innovative smart energy services and equipment (energy storage, peak shaving, hybrid heat pumps, micro CHPs, smart charging stations for electric vehicles and smart household appliances), • Storage projects investigate the opportunity to enhance grid flexibility through the use of small to medium scale electric storage systems connected at low and medium voltage. As an illustration, the UK is the most active in H1 2013 with a total investment of at least €90 million including a €52.8 million grant from Ofgem’s Low Carbon Network Fund, €34 million grid energy storage research grants and the launch of a 2 MW lithium-ion battery grid pilot project in the Scottish Orkney Islandsc. In H1 2013 France launched three new large scale storage projects: eStorage (consortium led by Alstom alongside other stakeholders such as Elia or EDF working on the development of a 70 MW capacity variable speed Pumped Storage Plant) which was awarded a €13.3 million grant from the EC; Smart Sub-stations project led by French TSO RTE (€32 million); and the 5-year, €28 million Smart Grid Vendée project. i In 2012, Europe’s share in Smart Grid investments (including Smart Metering) reached 10% of the $13.9 billion worldwide spending In 2012, global smart grid developments (from innovation to large scale deployments and business-as-usual network upgrades) reached $13.9 billion worldwidea, a 7% increase over 2011. The investments were led by North America ($4.3 billion) and China ($3.2 billion) followed by Europe ($1.4 billion). a Tracking Clean Energy Progress 2013, IEA b JRC 2013: Smart Grid projects in Europe: Lessons learned and current developments, 2012 Update, European Commission c Technology provided by Mitsubishi, and operated by SSE generation 41
  • 43. 13 in The Electricity Directive (2009/72/EC) of the EU’s Third Energy Package requires that 80% of consumers should have smart electricity meters by 2020. The total investment is estimated to be €30 billion to 2020, for a total of at least 170180 million smart meters installed. 20 Three major countries decided mass rollout: the UK, France and Spain. responsibility. Progress was higher in the countries with a significant regulatory push. Three major countries decided mass rollout: the UK (56 million smart meters to be installed by the end of 2020 – a year later than planned), France (35 million smart meters by 2020) and Spain (28 million smart meters by 2018). Finland’s 5.1 million smart meters rollout is expected to be completed by the end of 2013, thus becoming the third European country, after Italy and Sweden, to finalize its mass rollout (see table 3.4). Centrica (UK) deployed 1 million smart meters by the first half of 2013. Endesa in Spain also installed i D SOs’ role in a smarter electricity system is getting bigger em DSOs are responsible for the installation and maintenance of the smart meters, except for a few countries such as the UK, where this is the suppliers’ Netherlands E Several pilots underway. + Legislation adopted in 2011. G Voluntary installations. Rollout from 2014 to 2020 (about 500,000 smart meters installed by end-2013) g Table 3.4 Smart meters deployment status in Europe (as of July 2013) Norway E E © C Strategy defined in 2012. 52% smart meters or alternative solutions deployed by several DSOs by end-2012 ig yr p 86% meters allowing hourly reading deployed by end-2012. To be finalized end-2013 Lithuania E B-case negative. Rollout rejected Poland LV E Pilots underway. Mass rollout + and planning not decided yet G Germany E Large scale pilots underway (~0.5 m meters by mid-2012). Government decision expected in 2013 following B-case publication Several thousands meters deployed. G Other pilots in 2013. Rollout scheduled in 2014 CZ SK CH AT HU RO SI Austria E Legislation adopted in April 2012: • : deployed • : deployed • : deployed Czech Republic C Italy E E G Rollout not decided yet Source: various industry sources – Capgemini analysis, EEMO15 Electricity Markets - Electricity Infrastructures Hungary E Pilots underway. Waiting for B-case conclusions in 2013 G Multi-fluids pilots underway (elec, gas, water) at RWE GR Spain Rollout underway, to be finalized by 2018. Regulation on data access and protection underway. Pilots end-2012 and 2013 to test demand response E CEZ’s pilot ended in 2011. Rollout rejected. BG IT o E No specific legislation nor B-case. Pilots underway. 42 E Deployment scheduled between and PL DE LU FR ES Estonia LT NL BE G Rollout of the 11 m smart meters scheduled during the same period as for electricity (2016-2022) Portugal E SE DK E Wallonia: Rollout over + 30 years preferred G Flanders: pilot underway, B-case re-evaluation by end-2013 PT Dual fuel deployment Finland EE Belgium E Rollout of the 35 m smart meters decided in July 2013 DSO not in the lead of deployment Sweden E 100% smart meters rolled out in 2009 NO IE France Mass rollout rejected FI ht Ireland E 2008-2011: Studies and pilots + 2012-2014: requirements G definition 2014-2015: Build & tests 2015-2019: National rollout Mass rollout by 2020 well-engaged Debate in progress ap Denmark UK E B-case re-examined end-2012. + Rollout to start in Autumn 2015 until end-2020. G 53 m electricity and gas smart meters to be installed. Extensive government intervention. Mass rollout finalized Law adopted in July 2011: mandatory rollout of automated reading. To be deployed by end-2016 100% smart meters rolled out in 2009 80% smart meters to be G installed in 2016. Renegotiation of concessions underway Greece E Rollout underway for 60,000 B2C large clients G Project to extend rollout to gas and water meters in Athens
  • 44. Utilities the way we see it Capgemini Consulting’s approach for selecting the right smart meter communication solution k€ 120 -18% -33% -58% -56% -48% Financially competitive alternatives 20 100 13 Result of total cost of ownership evaluation of different smart meter communication technologies and architectures (k€ per 1,000 meters) 80 60 40 i 20 0 2 3 in 1 Source: Capgemini Consulting 4 5 6 g em The results of a business case for a Nordic player are shown in the graph above. For this Nordic company the financial variation per technology was shown to be very significant and only three communication solutions were deemed to be competitive for further investigation. Risk evaluation Utility companies typically have little direct experience of installing or managing communication networks. Installation of smart meters and their associated communication solutions therefore represent significant investment and operational risk for such companies. Such analysis enables Utilities to identify the position they wish to take on the smart meter communications value chain. Indeed, exploiting directly or delegating the smart meter communications solution to an external provider is of high impact for the company operating model. Capgemini Consulting’s established framework addresses a number of risks, the most important ones are listed below: • Evaluation of suppliers per technology and degree of competition, • Risk of contractual lock-in, • Opportunity to realize income and operational synergies, • Evaluation of technological maturity and future developments, • Expected stability and technology lifetime (including risk of technological obsolescence), • Level and ability to realize synergies with future smart grid investments, • Degree of complexity in field service rollout. C ap With the upcoming rollout of millions of smart meters across Europe, selecting the right communication solution is a critical success factor for both a stable and secure service. It should also help in minimizing the cost of rollout and operations for both companies and clients. The three established communication technologies for smart meters have each a number of technological variations, architectures and differing value chain positions: • Mobile point-to-point: Smart meter communicates directly with the Utility company’s systems by buying an end-to-end solution from a commercial mobile operator. An alternative is to establish its own mobile operator through a PVNO or MVNOa, • Power line communications (PLC): Communication provided through existing power lines. There are a number of existing proprietary and open standards, as well as new standards under development, • Radio mesh: Communication through the establishment of a dedicated radio network. There are a number of different frequencies and radio mesh architectures. To evaluate and prioritize solutions, Capgemini Consulting has established a framework to secure the decision making process for CxO. This framework evaluates technical, economic and risk dimensions to reach a holistic recommendation. But most of all, it can be tailored to the Utility company’s priorities and local market conditions. p yr ig ht © Technical evaluation A detailed and transparent technical evaluation is important to identify the strengths and weaknesses of the different communication technologies. The technical evaluation focuses on the following aspects: • International security standards, • Solution capacity/bandwidth, • Level of stability, • Level of data security, including authentication and integrity, • Ability to prioritize between messages, alerts and readings, • Self-healing: ability for network to automatically identify alternative communication routes, • Network management: degree of automation and reporting functionalities, • Degree of future-proof. Failing on the mandatory ones will disqualify a technology from further evaluations. C o Economic evaluation Capgemini Consulting’s framework includes a thorough business case modeling of the total cost of ownership (TCO) across different technologies. This framework is based on a dedicated model per technology, each of which consists of more than thirty variables, and reflects local market conditions. The latter is important as experience across Europe has shown that the economics per technology are directly impacted by the level of competition between suppliers, and particularly among mobile operators. In summary Utilities are facing significant challenges in determining their communication technology. A wide range of technical alternatives with different strengths and weaknesses are available. However the decision remains mainly driven by company’s priorities and local market conditions. a PVNO is a Private Virtual Network Operator, MVNO is a Mobile Virtual Network Operator 43
  • 45. i 20 13 in the UK. It should save up to €7 million on upgrades, such as replacing transmission lines and transformers. The four-year-long project will use a massive Smart Network Storage battery from Samsung SDI. The goal is to ease capacity restraints and to improve ways of connecting intermittent sources such as wind and solar onto the grid. The local distribution operator, UK Power Networks, is leading the project. in em T g SOs and DSOs are facing issues around RES intermittency and grid balancing ap D Electricity storage has been a subject of intensive R&D and industry effort for many years, however the main barrier for its development is currently economic. The most promising technologies at the moment are batteries – which are developing rapidly even if today less than 1% of the grid storage is done by batteries – and pumped storage, the most widespread storage technology, representing almost 99% of current worldwide storage capacity. Regarding pumped storage, 170 plants are operating in Europe. Pumped storage projects with a capacity of 11,000 MW are in preparation or under construction. German, Austrian and Swiss Energy associations have agreed to work together. The total capacity would suffice to cover the need for storage and flexibility in the three countries up until 2020. Austria has also discovered a huge potential site, between Carinthia and Styria, which includes two basins connected by a 600 meters long pipeline. The capacity is 1,000 MW; permits and authorizations will require five years and commissioning is expected between 2019 and 2020. ht edicated information systems are needed to support the massive data exchange increase and standards must be implemented The current regulation of DSOs needs updating to allow distributed generation to be connected efficiently and promptly. DSOs need to be incentivized to foster the integration of viable new technologies into the market and benefit from the services that they can offer for system operations and planning. These new technologies offer indeed plenty of possibilities for new business models, whose performance and even viability may critically depend on the regulatory regime of DSOs. C 3.5 million smart meters by end-April 2013, and in Germany – where several pilots are ongoing (including six big pilot projects bundled under the statesponsored “E-Energy“ program13) – the recommendation in August 2013 by the Ministry of Economy not to deploy smart meters for residential customers consuming less than 6,000 kWh due to negative cost benefit analysis made the headline news. D SOs are looking for clear regulation © Electricity storage has been a subject of intensive R&D and industry effort for many years, however the main barrier for its development is currently economic. For batteries, Terna, the Italian TSO, and NGK, a Japanese power equipment manufacturer, are working on a 70 MW NaS14 system which will be the first large-scale installation of NaS batteries in a European grid system. Meanwhile the largest European energy storage experiment so far – involving a 6 MW Li-Ion15 battery – is under way C o p yr ig For example, the Schleswig-Holstein (northern Germany) 9,000 MW wind power project that should be connected by 2015, requires increased coordination between TSO and DSO (TenneT and E.ON). This is also the case for the Irish Gate process, where distributed generation is planned in ‘groups’ based on their network, location and capacity. Data are processed by the system operator (TSO or DSO) most suited to the group independently of which system operator they originally applied to. 13 E-Energy - Smart Grids made in Germany is a funding programme of the Federal Ministry of Economics and Technology (BMWi) in an interministerial partnership with the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) 14 Sodium-sulfur 15 Lithium-ion 44 Electricity Markets - Electricity Infrastructures
  • 46. Utilities the way we see it 20 em in i range during H2 2012 and H1 2013 Coal prices decreased by g ap 19% C from the end of 2011 to the end of 2012 Coal month ahead ($/t) Brent month ahead ($/bl) CO2 spot EUA 3rd period (€/t) Uranium 1st nearby ($/lb) UK NatGas month ahead (GBp/th) CO2 spot EUA 2nd period (€/t) 140 120 100 80 60 40 20 3 3 /1 07 / 01 3 /1 /1 01 06 / 05 / 01 3 3 /1 /1 01 04 / 03 / 01 3 3 /1 02 / 01 2 /1 /1 01 01 / 12 / 01 2 2 /1 /1 11 / 01 2 /1 10 / 01 2 /1 01 09 / 08 / 01 2 2 /1 /1 01 07 / 06 / 01 2 2 /1 05 / 01 2 /1 /1 01 04 / 03 / 01 2 /1 /1 01 02 / 01 / 01 2 0 Source: Exane BNP Paribas, EEX – Capgemini analysis, EEMO15 Fed: the central bank of the United States 17 US$100-120/bl Table 4.1 Commodity prices (2012 and H1 2013) Fuel and Carbon prices ig yr p o C 16 Oil prices moved in the The 2 period CO2 spot prices collapsed by 55% from €6.9/t on €6.9/t January 1, 2012 to €3.1/t on April 30, 3.1/t 2013 (end of the 2nd period). The 3rd period CO2 spot prices dropped by 49% from €8.1/t on October 29, 2012 8.1/t to €4.2/t on June 30, 2013 (see table 4.2/t 4.1). These drops reflected the excess of emission rights as a result of the nd ht Rangebound oil prices have not given a clear signal for other commodities prices which went through contradictory trends. European spot gas prices rose to long-term gas contract levels, while coal prices experienced a marked decrease in an oversupplied market and CO2 prices remained low In H1 2012, Brent prices (in $) showed an up-and-down trend (see table 4.1). Prices first increased (+13% in February 2012) due to US, OECD Europe and Japan crude oil stocks being rebuilt from 5-year lows. Prices then stabilized in March in a $121-126/bl range because of a drop of refinery runs due to planned maintenance. They finally showed a 29% decrease from the beginning of April 2012 to the $89.23/bl floor reached in June 6, 2012 as crude oil stocks met their 5-year highs. Prices then recovered in the early Q3 2012 with a growing actors’ risk appetite in anticipation of liquidity injections by the Fed16 and the ECB17. Then they moved in the $100-120/bl range until the end of H1 2013. The market hesitated between a gloomy economic perspective setting the ceiling and international instabilities setting the floor. Coal prices in Europe decreased by 19% from the end of 2011 to the end of 2012 (see table 4.1). On the production side, the market remained well supplied by exports from South Africa, Colombia, Australia and North America. Global demand also grew only slightly due to a difficult European economic context not taken over by Asian demand. The impact of the development of shale gas in the US is significant as gas remains there a more competitive fuel than coal, inducing significant US coal exports. © I n 2012 and H1 2013, European power prices followed a downward trend and spreads between European continental countries increased due to the different production mix 13 Electricity Wholesale Markets ECB: European Central Bank 45
  • 47. The 2nd period CO2 spot prices collapsed by European economic crisis, while there were no significant regulatory changes to revive the carbon market. CO2 prices remained too low to make gas-topower competitive with coal-to-power. 13 20 55% European power spot prices decreased by 8%18 from 2011 to 2012 and kept decreasing by 9% from H1 2012 to H1 2013, as the residual market decreased while coal and CO2 prices dropped Some power exchanges faced a significant year-on-year prices decrease (see table 4.2) from 2011 to 2012 (-15% in Poland, -16% in Czech Republic, -17% in Germany, -34% in Scandinavia) while others faced a slight increase (+1% in the UK, +4% in Italy). From H1 2012 to H1 2013, two former extreme markets converged: Italian prices have decreased by 22%, and Nordic prices have increased by 21%. g em in i Uranium prices went through a depressing trend during 2012, losing 17% from $52.3/lb at the beginning of 2012 to $43.5/lb reached at the end of 2012 (see table 4.1). From this point, prices decreased again by 9% to $39.7/lb at the end of June 2013. between January 1, 2012 and April 30, 2013 ap Table 4.2 Yearly (2011 and 2012) and winter (2011/2012 and 2012/2013) average electricity spot prices 70 50 51.8 49.4 47.0 51.8 43.2 40 30 56.2 50.6 49.7 51.2 49.9 42.6 42.4 55.8 48.9 46.9 47.2 45.7 36.8 60.6 53.4 45.3 44.6 45.9 43.8 37.4 35.4 63.2 61.7 67.5 51.5 C 60 Year 2011 Year 2012 H1 2013 72.2 75.5 © Average price [€/MWh] 90 80 37.3 20 57.2 48.0 47.0 50.5 49.6 53.7 42.1 52.1 50.2 48.1 31.2 37.5 40.4 36.9 PT OMEL 38.9 36.0 PL - Pol PX 55.7 55.1 53.1 60.5 10 AT EXAA BE BELPEX CH EPEX CZ OTE 62.2 60 50.6 48.3 42.5 40 30 20 o 10 0 52.6 46.9 47.6 yr 50 54.0 40.9 FR EPEX HU HUPX 60.7 59.7 53.3 51.3 41.8 LT Baltpool NL - APX NORDIC Power Nord Pool 80.0 RO SI UK - APX OPCOM Southpool Power Winter 2011/2012 Winter 2012/2013 64.8 50.2 64.0 49.9 44.6 43.7 43.6 41.8 53.2 36.2 BE BELPEX CH EPEX CZ OTE DE EPEX ES OMEL FR EPEX Source: Power Exchange websites, Exane BNP Paribas – Capgemini analysis, EEMO15 Arithmetic mean of European spot prices 46 IT IPEX 69.0 C AT EXAA 18 IE SEMO 45.8 39.7 39.6 61.7 54.1 52.5 40.9 44.1 p Average price [€/MWh] 70 ES OMEL DE EPEX ig 90 80 ht 0 Electricity Markets - Electricity Wholesale Markets HU HUPX IE SEMO IT IPEX LT Baltpool NL - APX NORDIC Power Nord Pool PL - Pol PX PT OMEL RO SI UK - APX OPCOM Southpool Power
  • 48. Utilities the way we see it 13 DE - EPEX ES - OMEL FR - EPEX NORDIC - Nord Pool C Nord Pool Nord Pool 140 20 Price [€/MWh] 120 100 80 60 i 40 in 20 0 em /0 1/ 12 08 /0 1/ 12 09 /0 1/ 12 10 /0 1/ 12 11 /0 1/ 12 12 /0 1/ 12 01 /0 1/ 13 02 /0 1/ 13 03 /0 1/ 13 04 /0 1/ 13 05 /0 1/ 13 06 /0 1/ 13 07 /0 1/ 13 2 12 07 1/ /0 06 12 1/ 1 /0 05 12 1/ /0 04 1/ /0 03 02 /0 1/ 2 12 -20 1/ 1 IT IPEX IT - I UK UK - APX N NL - APX Source: Power Exchange websites, Exane BNP Paribas – Capgemini analysis, EEMO15 ap g only European country where gas prices actually decreased (see the Gas Wholesale Markets chapter). © C Other prices showed a spectacular winter-on-winter decrease (-6% in France, -12% in Germany), in a market well supplied by renewables production and nuclear availability combined with favorable clean dark spreads. 8% decrease of European spot power prices in 2012 France was partly exposed to gas-topower consumption in winter during some periods of lower-than-expected nuclear availability. For example, gasfired power generation reached 3 GW at the end of March 2013, making prices rise to around €70/MWh. This explains a lower winter prices decrease than other decreasing markets such as the German one. High French hydro and nuclear availabilities throughout Q2 2013 made the power prices drop to a €20-40/MWh range, while unusually low and fickle temperatures made prices move up and down. yr ig ht Following NBP gas prices, UK power prices rose throughout Q4 2012 above €60/MWh and then went up and down until the end of February, following weather conditions, driven down by wind power generation and driven up by gas-fired plants. As the UK went through the coldest March in half a century, the maintenance of the UK/Belgium gas pipeline pushed NBP gas prices up and made power prices reach their 4-year highs despite high wind power availability. 160 /0 Despite the long and cold winter 2012/2013 in Europe, average European prices throughout this period were 9% below previous winter levels. Over this global trend, two different patterns have arisen: countries which rely on gasfired plants and other countries The first group faced important increases between winter 2011/2012 and winter 2012/2013 (+7% in the Netherlands and Belgium, +14% in the UK and Ireland) as gas prices remained around €28.6/MWh throughout winter 2012/2013 compared to around €23.4/MWh in winter 2011/2012. Table 4.3 Electricity spot prices on the main European markets (2012 and H1 2013) 01 On the demand side, consumption faced a slight 0.5%19 decrease despite a harsh and long winter 2012/2013 which was counterbalanced by a gloomy economic context. On the production side, the residual market size decreased as subsidized renewable capacities grew strongly. C o p The outage of two Belgian nuclear reactors increased Belgium imports from the Netherlands making both power markets reliant on Dutch gasfired plants. Following the gas curve, Belgian and Dutch power prices increased away from other CWE countries. As a counterexample, Italy saw its winter-on-winter prices decrease by 19%; indeed it was the 19 German power spot prices decreased, decoupling from French prices (22% average discount in Q1 2013), and reaching negative level at some points (see table 4.3). For example, weak 0.2% electricity consumption decrease corrected to take into account the leap year effect 47
  • 49. 100 DE - EPD IBERIA - OMIP NORDIC - Nord Pool IT - IPEX 20 FR - EPD NL - Endex UK - APX 80 Price [€/MWh] 13 Table 4.4 Electricity futures prices (year ahead) on the main European markets (2012 and H1 2013) in i 60 12 07 /0 1/ 12 08 /0 1/ 12 09 /0 1/ 12 10 /0 1/ 12 11 /0 1/ 12 12 /0 1/ 12 01 /0 1/ 13 02 /0 1/ 13 03 /0 1/ 13 04 /0 1/ 13 05 /0 1/ 13 06 /0 1/ 13 07 /0 1/ 13 12 1/ 1/ 06 /0 12 /0 05 12 1/ /0 04 12 1/ /0 03 1/ /0 02 01 /0 1/ 12 20 em 40 ap g Source: Exane BNP Paribas – Capgemini analysis, EEMO15 C o p yr ig ht © C demand over the Christmas break, due to milder than usual temperatures, combined with a high renewable production, made prices go down under €0/MWh. German prices €0/MWh. followed temperatures throughout H1 2013 in a market well supplied by wind and solar production. This German downward trend was also fueled by low CO2 and coal prices. The CWE20 year-ahead market showed the same decoupling trend as the one seen on spot markets: in H1 2013, German prices traded with a 20% discount to Dutch prices and with a 10% discount to French prices The spread between continental yearahead products (the Netherlands, France and Germany) appeared from H2 2012 (see table 4.4). The average gap between these three countries grew from a 0-5% range in 2011 20 48 and H1 2012 to a 15-20% range in Q2 2013. This evolution is based on anticipation that spot prices spread will be maintained because insufficient interconnection capacities will not level out the different country generation mix. These differences are due to individual political decisions taken in recent years. European future prices decreased, with an average 11% drop for Cal-14 (-6% in the UK, -9% in Northern countries, -13% in Italy). Italian futures prices decreased to reach the UK prices level due to decreasing Italian gas prices. The Central Western Europe market comprises Germany, France, Belgium, the Netherlands and Luxembourg Electricity Markets - Electricity Wholesale Markets
  • 50. Utilities the way we see it The Utilities marketplace continues to undergo profound change – disruptive technologies, digitally empowered consumers and cost-conscious stakeholders are rife. In order to succeed in this new arena, Utilities need to provide increased service delivery levels through gamechanging technology lest they fall behind. Capgemini helps Utilities overcome these challenges through two of our Utilities-specific Sector Growth Initiatives: Smart Energy Services and Digital Utilities Transformation. 13 Digital Revolution is forcing change for Utilities Typical Pain Points for a Utility SMART is logistics em “I am not sure if I am talking to the right person” in Low customer engagement Analysts see the value of our sector-specific portfolio and capabilities: IDC positioned us as a leader for IT services in the EMEA Utilities Market 2013 Vendor Assessment. Our best score in the current capabilities criteria is for our “Range of Capabilities” and “Range of Offering”. Within the Future Strategies criteria, we scored very well for our “Portfolio Strategy” and “Customer Service Strategies”. (Source: IDC: “IDC MarketScape: IT Service Providers in the EMEA Utilities Market 2013 Vendor Assessment,” Doc #EIOS02V, May 2013). i “We did not know this customer was likely to switch” Poor Data g “I can’t find a phone number to collect debt” High cost to Serve 20 We see 34% churn in the first year We don’t know who our customer is or when he has no power We only have 18% of our customers’ emails Limited customer insight “We don’t know what this customer wants” Low NPS “We did not get an accurate opening meter read” Source: Capgemini ht © C ap Digital Utilities Transformation Cloud, the Internet of Things, Mobility, Social Media, Big Data, and process digitization, including Digital Asset Management for Network Operators and Generation companies, are among the main ingredients of the Digital Utilities Transformation program, a framework created to prepare and assist Utilities in reinventing themselves via disruptive digital technologies. This new offering is designed to accelerate the adoption of digital by Utilities, transform the way they interact with and understand customers, and drive efficiencies across their organization internally. yr ig A study by Capgemini Consulting and the MIT Center for Digital Business showed that: • Digital Transformation gives a competitive advantage to Utilities, • Whilst 87% of Utilities believe digital is ‘a key driver of their business performance’, 62% do not believe they are investing enough in digital transformation. C o p Through Digital Utilities Transformation, Capgemini is focused on bridging this gap and ensuring Utilities providers are ready to adapt to the disruptive change digital has initiated within the industry. Our integrated Digital Utilities Transformation framework enables Utilities to rise to these challenges by assessing their digital maturity, mapping their customers’ cross-channel ‘digital journey’, unlocking and analyzing powerful, actionable data and incorporating digital technologies like mobile and cloud into their enterprise architecture. The service empowers companies to re-engineer their internal processes and external interactions rendering them more efficient, customer centric, flexible and future-proof. Smart Energy Services The adoption of smart devices into the Home and Grid Network presents tremendous opportunities and challenges to Utilities. There are three fundamental disruptive forces facing Utilities today: • Modernizing the grid to manage demand for energy better, • Power generation shifting from centralized to decentralized supply and delivery models, • The power industry adapting to become more efficient, customer-responsive and environmentally sustainable. To meet these challenges, Utilities need to rethink their business operation models and embrace new technologies. These will transform how Utilities do business and interact with their customers for the better. Capgemini offers practical, working Smart Energy Solutions to support Utilities and their customers by delivering sustainable energy efficiency and environmental solutions – transforming Utility operations and customer fulfillment. We have an unequaled track record of successful innovation and delivery in the Utilities industry: providing Smart Energy Services to over 75 Utility clients around the world, representing 113 million metered customers actively engaged in smart energy programs including directly managing mass deployment programs for over 23 million smart meters. 49
  • 51. in i 20 13 Gas Markets em Upstream Gas I C o p yr ig g ap ht in 2012 C 5.5% Indigenous production continued to lower its share of EU-27 gas consumption at 34%, down from 39% five years ago. Total production decreased by 5.5% to 149.6 bcm, following the 11.4% decline observed in 2011. This led the European share of global gas production to shrink from 4.7% in 2011 to 4.4% in 2012. © Total European gas production decreased by n 2012, EU-27 natural gas production dropped for the second year running 50 Gas Markets - Upstream Gas After the 2011 year-on-year decline of 9.0%, the Netherlands’ gas production remained stable in 2012 with only a 0.8% shrinkage at 63.9 bcm. It was 4.1% up in the first five months of 2013 compared with the same period last year, driven up by cold weather in Northwest Europe. The Netherlands, which remains the largest European gas producer among EU-27, increased its share of total European production by 1.3 points, accounting now for 42.7%. The UK follows with 27.4%, then Romania with 7.3%. As in 2011, the UK registered the most significant drop, with its home production in 2012 falling by 14% to 41.0 bcm (see table 5.1). The reduction was mainly the result of the temporary shutdown of several sites which accounted together for around 10% of the production: Elgin, Franklin and Shearwater. However, all sites reopened lately, and production in April and May 2013 exceeded 2012 levels for the same period. In Denmark and Germany, natural gas production slowed down in 2012, respectively by 9.4% and 9.8%. By contrast, after several years of decline, gas production in Italy increased for the second consecutive year, by 1.7% to 7.8 bcm, while it remained stable in Romania at 10.9 bcm. The continuous economic struggle in Europe affected total natural gas demand which was down 2.2% in 2012 following the 9.2% decline of 2011. The residential demand in the first five months of 2013 was slightly higher (+7.0 bcm) compared to 2012 levels due to an unusually long winter in Northwest Europe. The decreasing demand in 2012 was also largely due to a significant drop in the use of gas to generate electricity, attributed partly to increasing use of renewable energies and partly to very low coal prices and to an all-time-low CO2 price.
  • 52. Utilities the way we see it Table 5.1 Domestic gas production versus piped gas and LNG imports (2012) 90% BE 10% AT 16% 60% 84% 98 100% CZ 32% 68% -3.2% -6.2% -4.5% 88 -2.7% 65 PT 56% 44% +5.4% 146 105 -4.3% -2.6% +16.1% 51 -9.6% 48 Gas from domestic production Gas from pipeline imports Gas from LNG imports Total available supply (TWh) +5% Evolution 2012 vs. 2011 -2.9% 45 -7.6% 100% LT 100% 42 -2.3% +7.9% CH 100% 35 FI 100% 33 93% -6.7% 36 29 em DK in 100% 75% 25% IE -10.6% -6.8% SE 100% 12 -3.7% 3.7% 3.7% i 40% HU 339 +1.9% 179 19% 81% RO 183 74% 26% PL BG 62% 742 +4.0% -5.4% +1.0% +1.0% +1.0% 20 38% ES 459 394 100% NL GR 9% 23% 13 77% FR 845 813 79% 11% IT 18% 88% 12% DE SK 30% 52% UK -12.6% 0 200 400 600 800 1,000 g Total available supply [TWh] DK IT RO EU-27 © 5 C Table 5.2 Proven conventional gas reserves in Europe (1980-2012) 4 DE NL UK 3 ht Proven conventional gas reserves [tcm] entional entional gas reserves [tcm] reserves I n only ten years, European proven conventional natural gas reserves have halved, stabilizing at 1.7 tcm in 2012 (3.4 tcm in 2002) ap Note: Total available supply i.e. net of storage, internal consumption and losses variation Source: BP statistical review of world energy 2013, GIIGNL – Capgemini analysis, EEMO15 1 12 10 20 20 05 20 00 20 95 19 90 19 85 19 80 0 Source: BP statistical review of world energy 2013 – Capgemini analysis, EEMO15 C o p Continuous decline in proven reserves affected most European countries as revaluations and new discoveries failed to offset the lower production levels. In fact, although advances in technologies allowed an expansion of drilling activities and more intensive exploitation of old fields, production from mature fields in the North Sea has been falling rapidly, with the pace of new discoveries being insufficient. 2 19 yr ig While this decrease was limited to 1.3% in 2012 compared to a -4.8% yearly average over the last decade (see table 5.2), Europe still displays an opposite pattern to the rest of the world where global reserves grew annually by an average 2.5% over the past five years. 51
  • 53. W The tax break announced by the UK government in 2012 to support investments in older North Sea Oil & Gas fields gave positive results. In fact, Britain’s reserves showed a slighter decrease compared to other EU-27 producers thanks to several discoveries and revaluations. Drilling activity on the UK Continental Shelf was up by 33% in 2012, following broader tax allowances and a sustained high price of oil. By comparison, Norwegian drilling activity was down by 19% in 2012. in 2012, i.e. g ap ht 6.4% C 13.2 tcm The Netherlands holds the largest European reserves with 1.04 tcm, sufficient for the next 16 years. © European technically recoverable shale gas resources estimated at C o p yr ig of technically recoverable resources in the world Table 5.3 Technically recoverable shale gas resources (2012) Country Lithuania Spain 2012 estimation in bcm (vs. 2010 estimation) 11 (112) 224 (-) Sweden 274 (1,148) Bulgaria 476 (-) Germany 476 (224) Netherlands 725 (476) UK 728 (560) Denmark Romania 888 (644) 1,428 (-) France 3,836 (5,040) Poland 4,144 (5,236) Source: EIA – Capgemini analysis, EEMO15 52 Gas Markets - Upstream Gas 13 20 in In Denmark natural gas reserves continued to decline by a steep 11.6% low to 37.9 bcm, as well as in Germany and in Italy where they went down by 10.9% and 4.5% respectively. In Romania, reserves dropped by 6.4% to 102 bcm. em Continuous decline in proven reserves affected most European countries as revaluations and new discoveries failed to offset the lower production levels. hile conventional gas reserves are declining, shale gas could at best – according to an EC study – maintain import dependence at a level around 60%, but its exploitation is fiercely debated in Europe i As a result, the estimated lifetime of European reserves decreased by an additional 0.1 point to 11.7 years. Shale gas progress is being strongly slowed by regulatory delays and varies significantly across Europe. Some countries are moving forward into a shale gas rush while others consider it a source of risk and environmental concerns. In 2012, further exploratory drilling helped to qualify shale gas resources by size and quality, sometimes reducing them consistently (Poland, France, Sweden, Norway, and Lithuania) and sometimes increasing them (Romania, Denmark, the UK, the Netherlands, Spain and Germany). As a result, European technically recoverable shale gas resources were estimated at 13.2 tcm in 2012 compared to 2010 estimation of 15.7 tcm (see table 5.3) and represented 6.4% of total technically recoverable resources in the world. Even if revised down, the most important shale gas estimated reserves are found in Poland and France. Shale gas explorations are indeed underway in Romania, while Bulgaria currently imposed a moratorium on shale gas development. Romania, whose reserves were estimated at 1.4 bcm in 2012, lifted its moratorium in April 2013 in order to boost domestic energy resources and reduce its dependency on Russian gas (which in addition to its conventional gas reserves holds 8 tcm of technically recoverable shale gas resources; however, according to Gazprom, the country will not focus on developing
  • 54. 13 Utilities the way we see it Table 5.4 Shale gas development status in Europe (as of July 2013) • June 2012: 50 bcm of recoverable reserves estimated by the Lithuanian State Geological Service • Nov. 2011: moratorium on fracking in N. Rhine Westphalia • June 2013: New shale gas study from the British Geological Survey raises the potential volume of shale gas in the Bowland Basin and beyond to 40,000 bcm • July 2013: introduction of incentive fiscal measures (30% tax rate on shale gas production vs. 62% for conventional oil and gas production) Lublin Basin RO i PL • March 2012: Less than 1,000 bcm of recoverable reserves estimated by the Polish Geological Institute • June 2012: ExxonMobil abandons its Polish exploration program due Dnieper-Donets Dnieper-Donets Basin to weak flow rates from its first well Carpathian-Balkanian Basin BG France South-East Basin Thrace Thrace rac Thrace Basin • October 2011: 185 bcm of recoverable reserves in the Basque region estimated by a geological study • March 2013: 1,415 bcm of recoverable reserves estimated by the Spanish Council of Mining Engineers • April 2013: introduction of a moratorium on fracking in Cantabria g ES Southeast Anatolian Basin • June 2011: introduction of a moratorium on fracking • October 2011: all exploration permits removed • September 2012: government confirms its opposition to fracking and engages a revision of the mining code • June 2013: parliamentary report recommends to ease the fracking ban to assess reserves • July 2012: Five state-controlled companies launch a € 408 million exploration program • January 2013: Law to regulate the market under preparation (which may increase profit taxes on production) • June 2013: The EU Court of Justice ruled that Poland violated European law by allowing licences for the exploration and extraction of hydrocarbons, without fully open tenders • May 2012: government imposes a moratorium on fracking • April 2013: Lifting of the moratorium but public pressure to maintain it • January 2012: government revokes Chevron’s exploration permit and parliament introduces a moratorium on fracking • June 2012: parliament eases certain restrictions but fracking remains forbidden C Shale gas Coalbed methane Fracking ban Podlasie Basin ap • December 2012: introduction of a moratorium on fracking awaiting the outcomes from a detailed analysis • April 2013: Revision of the law to toughen environmental constraints LT SK HU Pannonian-Transylvanian Basin SI FR PT Lusitanian Basin • H2 2012: publication of the results of a study launched in July 2011 on the potential risks of shale gas exploration DK North SeaGerman Basin UK NL Southern Petroleum BE DE System Paris Basin Cantabrian Basin EE LV Baltic Basin in • December 2012: lifting of the moratorium on fracking SE Alum Shale em • February 2013: draft law to forbid fracking in areas with groundwater tables and to make impact assessments before permits issuance more systematic – under discussion until September 2013 legislative elections Northern Petroleum System 20 NO • June 2012: between 700 and 2,300 bcm of recoverable reserves estimated by the German General Institute for Geosciences and Natural Resources © Source: IEA, EIA, various industry-specific newsletters – Capgemini analysis, EEMO15 huge tax incentives to encourage early investment in the exploration and development of shale gas (see table 5.4). It has proposed cutting the tax on some of the income generated from producing shale gas from 62% to just 30%, below the taxes on conventional reserves. This – if validated by the parliament – would make the UK the “most generous” regime for shale gas in the world, the government said. ig ht it within the next decade because its vast conventional reserves are much cheaper to exploit). C o p yr Poland has the most important reserves among the EU-27 countries and has experienced a shale gas rush over the past few years. It is the most advanced Member State in terms of exploration work. To date, about 30 vertical exploration wells and a half-dozen vertical and two horizontal production test wells have been drilled. In addition, in January 2013, the government was preparing a law to regulate the market that may increase profit taxes on production. The UK government has recently announced the lifting of the moratorium on unconventional gas extraction and A recent shale gas study from the British Geological Survey estimated, in June 2013, that the total volume of gas ‘in place’ in the Bowland Basin, the only active shale drilling region in the UK, is approximately 40 tcm. This study is the first in the UK to provide investors, operators and regulators with an indication of where to target future exploratory drilling, which will be required to determine the extent of gas that can be technically and commercially recovered. The other European countries are showing less enthusiasm. The Netherlands decided in December 2012 to introduce a moratorium on fracking, awaiting the outcomes from a detailed analysis of the potential risks of shale gas exploration. Cantabria region in Spain also introduced a moratorium in April 2013 even though more than €100 million has already been invested just for exploration projects. Since February 2013, Germany has been working on a law to forbid fracking in areas with groundwater tables, and to make impact assessments before permits issuance more systematic. In 53
  • 55. G 27.7% 20 LNG imports declined by in i The conclusions of the European Summit on Energy of May 22, 2013 do not contain a single reference to shale gas, illustrating the political sensitivity of this topic and the misalignment across EU-27 countries. Nevertheless, further to reports commissioned by the Commission on the possible environmental effects of their exploitation, European standards for exploration and production of shale gas should be adopted in 2013, in order to “fill the serious legislative gaps” which exist today at EU level in environment regulation. while piped gas imports increased by 13 as imports in EU-27 declined by 5% down to 311.1 bcm in 2012 compared to 2011 due to a weaker gas demand in Europe, lower LNG imports and low coal prices France, the use of hydraulic fracturing has been forbidden by law since July 2011. However, in June 2013, a French parliamentary report recommended an easing of the fracking ban in order to assess reserves. em 3.2% © C ap g in 2012 LNG imports declined by 27.7% (see table 5.5) decreasing its share of EU imports down to 19.2%, while piped gas imports increased by 3.2%. On a worldwide basis, LNG supply experienced a general fall in 2012 due to a mix of project delays, planned shutdowns and outages. For the first time in the past thirty years, global LNG imports net of reloads decreased by 1.9% year-on-year. For example, during H1 2013, the French gas terminal of Montoir-de-Bretagne used only 12% of its capacities. The combination of these two trends resulted in LNG deliveries to Europe going down to 60.7 bcm, below ht Table 5.5 LNG imports to Europe (2012) In bcm - France - Algeria Egypt Nigeria Total imports % of total Europe % ch. 2012/11 - - - 4.54 - - - 4.5 7.5% -30.9% - 0.18 - 1.76 4.81 0.86 2.70 10.3 17.0% -29.3% 0.09 - 0.78 0.08 0.03 1.0 1.6% -24.9% - 0.09 0.11 5.78 0.98 0.17 - 7.1 11.7% -16.4% - 0.53 - - 0.04 - 0.06 0.7 1.2% 1.4% 0.08 - - 0.08 0.15 - 0.08 1.62 2.0 3.3% -33.8% 2.47 2.64 1.65 0.70 4.29 3.62 0.65 5.35 21.4 35.2% -10.9% - - 0.19 - 13.30 0.12 0.01 0.04 13.7 22.5% -46.0% 2.6 2.6 2.6 1.0 29.8 10.3 1.8 9.8 60.7 100% -27.7% 4.3% 4.4% 4.4% 1.6% 49.1% 17.1% 3.0% 16.1% -32.1% 36.3% 2.7% n.a. -30.3% -18.9% -53.6% -32.0% p - 0.08 Netherlands - - Italy o Portugal C United Kingdom Europe Qatar - Greece Spain Other Europe* yr Belgium Norway Peru ig Trinidad & Tobago To % of total Europe % change 2012 vs. 2011 Note: * includes re-exports Source: BP statistical review of world energy 2013, GIIGNL – Capgemini analysis, EEMO15 54 Gas Markets - Upstream Gas
  • 56. Utilities the way we see it 13 Table 5.6 Map of gas imports (2012) 20 Exporting country Importing country NORWAY Piped gas: 107 bcm LNG: 3 bcm LNG imports (net) FI 47 3 -2 29 BE DE 44 CH AT 3 HU 1 67 ES 4 33 4 SK 8 SI IT PT 11 10 CZ FR Peru LNG: 3 bcm PL 74 6 RO em 3 NL NIGERIA LNG: 10 bcm i LT -39 37 Piped gas flows LNG flows Re-expeditions Existing LNG terminal RUSSIA Piped gas: 106 bcm 2 g IE 1 BG ap TRINIDAD & TOB. LNG: 3 bcm LV DK UK in EE SE 5 Total net imports (in bcm) 1 NO Piped gas imports (net) 3 LIBYA Piped gas: 6 bcm EGYPT LNG: 2 bcm QATAR LNG: 30 bcm © ALGERIA Piped gas: 33 bcm LNG: 10 bcm C GR Source: BP statistical review of world energy 2013, GIIGNL – Capgemini analysis, EEMO15 Spain, which represented over a third of total EU-27 LNG imports, remains the first European LNG importer with total gas imports of 21.4 bcm in 2012. Spain also remains the largest LNG re-exporter accounting alone for more than a half of the cargoe re-exports, with a total of 29 cargoes reloaded in its harbors in 2012. Regarding LNG investments Spain postponed the start-up of its seventh LNG terminal, due to country’s dwindling gas demand and economic situation. yr ig ht 2009 levels. Besides, the phenomenon of cargoes redirections from Europe to the Asian market where prices were more attractive increased dramatically in 2012. The number of cargoes reloaded globally grew from 44 in 2011 to 75, of which 55 were loaded and dispatched from European ports. C o p In the UK, piped gas net imports doubled compared to 2011, largely thanks to a 24% increase of pipe imports from Norway which covers up 75% of its pipe imports. UK LNG net imports have halved to 13.7 bcm, mainly due to a 40% reduction of imports from Qatar. However, it remains the second largest LNG importer with a share of 22.5% of total EU-27 LNG imports. Only a few European countries plan to add LNG terminal capacity. Poland for instance hopes to open a 5 bcm per year LNG terminal by 2015. Polish energy policy to 2030 envisages an increased role for gas in the electricity mix, up from 2% to 10% by 2020. Lithuania will start the construction of an LNG terminal in December 2014. This terminal should improve diversity of supply and reduce dependence on Russia. Exports of natural gas from Norway to the EU have risen in 2012 to levels close to Russian exports. 55
  • 57. B i 20 13 eing a major gas importer and with declining domestic production of natural gas, Europe wants to diversify its sources of gas imports in order to avoid growing dependence on Russian gas ap g By contrast, Russian natural gas exports to Europe in 2012 were 9% lower than in 2011 (see table 5.6). Russia expects its gas exports to Europe to drop by 4.3% year-on-year, while its production is expected to be virtually flat. Even though Gazprom foresees its market share to grow to 30% by 2020 compared to 26% in 2012, it considers Japan as one of the most attractive markets due to its geographic proximity, high financial solvency and long-term guarantees. © C The falling demand and potential shale gas exploitation in Europe make the need for new diversification routes less crucial. em in Despite weaker demand, exports of natural gas from Norway to the EU have risen in 2012 to levels close to Russian exports (34% of total EU imports). Norway represented 35% of total EU-27 gas imports in 2012 compared to 29% in 2011. With 107 bcm of piped gas to EU-27 in 2012, Norway is approaching full utilization of its pipelines (transport capacity of the Norwegian pipeline system is 120 bcm per year). Further export growth in Norway may thus depend on transport capacity, including LNG terminals, and fields coming online. C o p yr ig ht Other gas imports came from Algeria (14%), Qatar (10%), Nigeria (3%) and Libya (2%). Libya’s natural gas industry is recovering from disruption related to the civil unrest and political upheaval that began in 2011, and Libyan exports to Europe increased during 2012 from 2.4 bcm to 6.5 bcm. The remaining supply part came from Trinidad & Tobago, Peru and Egypt. 56 Gas Markets - Upstream Gas Europe is supporting many pipeline projects aimed at connecting Europe directly to the gas fields of the Caspian Basin and the Middle East. However, Russia is protecting its European natural gas markets by proposing alternative pipeline projects and by offering European companies stakes in them. Russia decided to construct the South Stream pipeline to prevent Nabucco West from even being built. Despite the enormous costs and difficulties, Gazprom is committed to this project making Nabucco West and South Stream compete for similar routes. In June 2012, the Azerbaijani and Turkish presidents and oil firm heads signed agreements to build the TANAP (Trans-Anatolian natural gas Pipeline). The first stage, with a capacity of 16 bcm per year, is planned to be completed in 2018, making the Nabucco project (supposed to transport natural gas from Turkey to Austria) no longer viable (see table 5.7).
  • 58. 13 Utilities the way we see it Table 5.7 Map of pipelines and LNG terminals projects (as of May 2013) Pipeline projects RUSSIA Strea DK IE LV LT i LU BLACK SEA 8 0 CZ FR SK HU AT CH Na bu SI ES cc RO o W es t BG IT TAP ALGERIA GALSI Medgaz GR WEST. MED 111 eam EAST. MED n Str 45 Gree 13 >2015 >2 © Cost (€ billion) C Interconnector projects – AFRICA-EUROPE GALSI LIBYA Capacity (bcm) 8 To be commissioned in PL DE th Sou am Stre Interconnection projects financially supported by the European Energy Recovery Plan (EERP) LNG terminals Existing Under construction and/or included within Mandatory Planning Under study or proposed White Stream Nominal annual capacity by receiving zone (in bcm) g 67 GALSI em BBL NL BE ap UK 55 Built segments of pipelines under construction EE Nord 46 PT Projects of new pipelines (planned or under construction) 20 SE m BALTIC & NORTH SEA 98 ATLANTIC 113 FI NO Existing Forecast by 2022 Interconnector projects - SOUTH-EAST EUROPE Capacity (bcm) NabuccoWest 10 TANAP 16 2017 2018 8 7-7.5 To be commissioned Cost (€ billion) 63 White Stream 32 10+10 End 2015 2018 2019 >25 4.5 1.5 South Stream TAP ht Source: GIE gle, various industry sources – Capgemini analysis, EEMO15 Azerbaijani piped gas is supposed to flow through the TAP from 2019 onwards. Even if the Nabucco project seems compromised which is also the case for the development of alternative suppliers, the falling demand and potential shale gas exploitation in Europe make the need for new diversification routes less crucial. C o p yr ig In June 2013, the consortium that controls the Azerbaijani natural gas (SOCAR, BP, Statoil and Total) chose the TAP project (Trans Adriatic Pipeline from Azerbaijan to Italy) to connect to TANAP instead of the so-called Nabucco West. The decision moved natural gas flows to South Italy, and was bad news for Eastern and Southeastern Europe as Nabucco could have reduced considerably their dependence on Russian gas. This also leads to the abandon of the Interconnector TurkeyGreece-Italy project (ITGI). 57
  • 59. 13 Gas Infrastructures W in i 20 European TSOs investments decreased by 17% in 2011 and remained stable in 2012 at €4.3 billion €4.3 Gasunie (Netherlands) and Fluxys (Belgium) are the companies which have reduced their investments the most between 2010 and 2011, by respectively 42% and 35% (see table 6.1). g em According to the Ten Year Network Development Plan 2013-2022 (TYNDP), published in March 2013 by the European Network of Transmission System Operators for Gas (ENTSO-G), Europe has a well-developed gas infrastructure. It is well-connected to diverse supply sources and capable of dealing with high daily demand situations. Nevertheless, the reinforcement of gas infrastructures is necessary to meet EU energy policy objectives. After a peak of above €1 billion in its investment program in 2009-2010, Gasunie leveled off to €681 million in 2011 (especially due to regulator – Nma – tariffs change over the period). Fluxys has essentially reviewed the scope of its north/south project to avoid over-investment. In 2012, total investments remained steady compared to 2011. The biggest investments have been made by Snam in Italy (€936 million) and potentially German TSOs (€1,053 million – provisional figure). © C ap Europe has a welldeveloped gas infrastructure. It is wellconnected to diverse supply sources and capable of dealing with high daily demand situations. hile investments in gas infrastructures have declined over the past two years, perspectives for the future remain positive ht Table 6.1 Investments from selected gas TSOs in their national grid (2008 to 2012) C o Activities -17% +4% Pipelines LNG Storage +7% 5,000 DE - 19 TSOs UK - National Grid 0% Investments [million €] p yr ig 6,00 6,00 6,000 NL - Gasunie 4,000 IT - Eni Snam Rete Gas FR - GRTgaz 3,000 ES - Enagas BE - Fluxys 2,000 1,000 0 2008 2009 2010 2011 2012 Note: 2012 data for German TSOs are based on planned investments and may vary. Source: TSOs Annual Reports, National Regulators – Capgemini analysis, EEMO15 58 Gas Markets - Gas Infrastructures NA NA NA
  • 60. Utilities the way we see it Country Company BE Fluxys DE All 19 TSOs Investments (€) Timeline 1.2 billion 2013-2022 3,160 million 2012-2014 Comments • • New gas infrastructures are necessary to support the European Energy Policy pillars: sustainability, competitiveness and security of supply. 13 Table 6.2 Investments plans for selected gas TSOs • 20 I nvestments planned for the 10 years to come are estimated at a minimum of €72 billion million in maintenance million in rene al million in ne extensions constructions and million in maintenance million in rene al i 2015-2017 • • 2,535 million 700 million/year FR GRTgaz 820 million 2013 Snam Rete Gas 6.2 billion 2013-2016 National Grid ~7 billion 2013-2015 ig To increase exchange capacities and reinforce national infrastructures • . billion to be spent in • Develop the national grid increase supply diversification and exibility 2013-2021 Source: TSOs Annual Reports – Capgemini analysis, EEMO15 © C In April 2013, around 400 projects have already been submitted and an EU-wide PCI list is to be adopted before the end of 2013. Among gas projects, the highest priorities for energy corridors have been defined. They include the Baltic Energy Market Interconnection Plan (BEPIM)22 and the so-called Southern Gas Corridor (SGC)23. According to ENTSO-G partial estimates, project costs for the 10 years to come will amount to at least €72 billion (however, amongst those, 13.3% only are FID24 projects), split between: • Transmission: €60.51 billion, • LNG terminals: €8.66 billion, • Storage: €3.60 billion. New gas infrastructures are necessary to support the European Energy Policy pillars: sustainability, competitiveness and security of supply. C o p yr In consequence the EU regulatory framework has been modified, and financial support for trans-European Energy Network has been reinforced, to encourage cross-border infrastructures and diversification of gas routes and sources. The provision of EU funds is for PCI (Projects of Common Interest to Member States) and augments other enabling tools such as accelerated permitting procedures and crossborder cost allocation and appropriate incentives regimes. constructions and ap UK g IT million million in ne extension extensions in Enagas em ES ht TYNDP 2013-2022 of ENTSO-G presented a European Supply Adequacy Outlook, capturing a wide range of potential supply scenarios to cover European gas demand. The development of new gas infrastructures has to be pursued to cope with the following issues: • Higher demand21 while domestic production progressive falls, • Bottlenecks in regions such as the Baltic States, Finland and Central Europe suffering from ageing and insufficient infrastructures, • Connect the LNG re-gasification facilities of Spain and the UK to the European network, • Connect the Southern and Northern countries bi-directionally , • Distribution of gas from Libyan, Algerian and Mediterranean LNG re-gasification facilities towards Northern countries, • Reduction of dependency of some Eastern countries on Russian gas. • 21 ENTSO-G expects demand forecast to grow on average by 1% over the 10-year horizon 22 Agreed between Denmark, Estonia, Finland, Germany, Lithuania, Latvia, Sweden and Poland 23 24 Three pipelines have been designated to secure and safeguard gas imports from the Caspian and central Asia: Interconnector Turkey-Greece-Italy (ITGI) project; Nabucco-West pipeline linking Turkey and Austria; White Stream (Georgia-Ukraine-EU) FID = Final Investment Decision. A FID Project means that the promoter has taken the decision to go for it 59
  • 61. 13 In case of overproduction of electricity from renewable sources, the electricity can be transformed into gas (hydrogen) and injected and stored in the gas network. The power-to-gas (P2G) R&D market has encountered a concrete breakthrough during H1 2013. Roughly, 30 P2G demonstrators have been identified across Europe as of March 2013, with about a dozen (~40%) including grid injection testing (running or planned). Germany is still very far ahead of the game (~80% of demonstrators are German based) but most of European gas TSOs are involved in at least one of the R&D initiatives. In particular, National Grid and are active in the P2G area. Many other TSOs (Gasunie, Fluxys, OpenGrid Europe…) are now involved in the Kema-DNV P2G NorthSea initiative. ap g em in Reverse flows can be used to diversify supply sources or to improve solidarity between countries in case of a gas crisis. For example, to reduce its dependence over Russia, Ukraine has bought since autumn 2012 gas from European hubs (especially RWE) and shipped volumes eastwards. Portugal finalized in 2013 the construction of a 75 km two-way high pressure natural gas pipeline25 to reinforce the security of supply in the Iberian Peninsula. 20 In addition to grid expansion, reverse flow projects are multiplying since this service is framed by EU Regulation (EC) 1775/2005. TSOs must offer capacity in both directions on their pipeline systems. O ther innovations are being investigated, such as power-to-gas i P rogress has been made on reverse flows C o p yr ig ht © C However, reverse flow projects can meet some difficulties, in particular regarding tariff regulation. For example, Fluxys and Snam signed a Memorandum of Understanding in August 201226 to create reverse flow capacity from Italy through Switzerland to Germany and Belgium that will strengthen security of supply. This will also increase market liquidity by fully connecting the gas trading places in Italy, Germany, Belgium and the UK. However, while shippers have shown “significant interest” in the project, the binding bid phase was not completed due to strong concerns on the new regulator-approved exit tariff from Italy to Switzerland. 25 26 60 Gas Markets - Gas Infrastructures This pipeline links Portalagre-Guarda and Cantanhede-Mangualde in Portugal Fluxys is planning to provide bi-directional North-South flows from Italy through the Swiss Transitgas link into Germany and France and through the TENP link in Germany into Belgium. The project also requires investments by Snam (Italian gas grid operator)
  • 62. Utilities the way we see it The Smart Operations Centre: the key to smart meter rollout in the UK 13 20 i Our experience tells us that those challenges can best be tackled by putting in place a dedicated deployment management function In light of the unique set of challenges in the UK the critical success factors for managing an optimal field deployment will be: • Detailed planning, • Maintaining focus, • Enabling speed and agility, • Facilitating integration, and • Being able to transform the business. The scale of the deployment, coupled with the unique intricacies of the UK market, mean that whilst the financial and reputational risks of getting it wrong are huge, the competitive opportunity of getting it right is even bigger. C o p yr ig ht © C ap Field deployment is particularly challenging in the UK, with the retailer-led rollout, customer access, field resource constraints and the competitive market all combining to form a uniquely complex landscape • Competitive market: A special feature of the UK market is that it is highly competitive, and therefore companies need to ensure that smart meter deployment improves, rather than undermines, their competitive position. Keeping costs down will be critical, but so will providing a positive customer experience, • Retailer led rollout: Competition amongst the companies deploying meters will also introduce the added complexity of managing the meter and In-Home Display assets through the inevitable customer churn, • Resource constraints: Availability of skilled resources will be a constraint for the smart deployment programme. Furthermore, the age and condition of assets is frequently sub-optimal, and dual-fuel (gas and electricity) meters will be a requirement. Not only are the skills in limited supply, but the number of successful installations per engineer per day is expected to be low, • Access rates: As the key driver of number of failed/ re-visits and therefore jobs per day and cost per install, meter access rates represent the number one challenge for any Smart deployment programme. Unlike some other geographies, in the UK meters are typically housed internally, making accessing the meters more complex. UK energy companies must avoid badly managed incidents that could turn apathy into hostility, making customers less likely to provide access and driving up programme costs, • Labour costs: Labour costs have historically accounted for over 40% of the costs for build-run programmes g em The challenge is further complicated by uncertainty around the availability of compliant meter assets and the recently extended timescales for delivery of the government’s central data communication company (DCC), which will manage communication of data to and from smart meters. and this proportion may be significantly higher in the UK because of the anticipated low installation rates per engineer. UK energy companies need to plan how they will manage a remote workforce effectively to ensure the right level of efficiency, quality and customer experience, • Complex objectives: The deployment management team will face demanding volume, cost and customer satisfaction targets, which will sometimes conflict. The team will have to keep the field force utilised and efficient while ensuring a good level of service and keeping promises to customers. in The rollout of smart meters represents the biggest challenge of its kind that UK energy companies have ever faced By the end of 2020, the UK government wants energy companies to have installed a smart meter in the homes of 97% of their customers. This equates to over 53 million meters, which means that around 20,000 new meters must go live each day in this seven-year period. To achieve this, the successful programme should look to put in-place a dedicated, specialist deployment management function. This is the most effective way of eliminating the natural business silos that can derail a Smart programme, enabling integration in planning and execution, and delivering speed and agility in decision-making. Capgemini’s globally proven, UK-adapted Smart Operations Centre (SOC) solution is an independent business unit at the heart of the Smart programme that acts as the central ‘mission control’ for deployment. As an independent business unit within a smart metering programme, Capgemini’s Smart Operations Centre orchestrates deployment across business functions, taking overall responsibility for delivering an optimised deployment programme. This approach is as applicable in the UK as it is in other geographies facing the challenges of a Smart Meter rollout. Key capabilities of the SOC include: • Creating and owning a single, integrated deployment plan, • Reporting a ‘single version of the truth’ of deployment progress and performance, • Enabling rapid resolution of issues through stakeholder coordination, • Spotting optimisation opportunities and embedding continuous improvement. Through these capabilities – coupled with the experience of dedicated deployment specialists – the SOC is able to deliver joined-up, optimal deployment programmes. 61
  • 63. O n the distribution side, smart gas meters deployment is starting slowly em C ap Given the variability in gas market characteristics and drivers for smart gas meters at a national level, each country is adopting a different approach to fulfill EU requirements. C o p yr ig ht © As of 2013, smart gas meter rollouts are mandated in the UK, Ireland, the Netherlands, Italy and France (see table 6.3). If these mandatory rollouts go ahead as planned, this will involve deployment of over 60 million smart gas meters by 2020, which represents half of the European market. • In the UK – the largest gas market (~23 million customers) – the government mandated gas smart metering to be rolled out alongside electricity smart meters. By 2020, 80% of the smart gas meters should be deployed; • With the densest gas network in the world, the Netherlands has planned a massive rollout from 2015 onwards, • Italy (~22 million gas customers) has committed to extend its smart meter rollout from electricity meters to gas meters. By the end of 2017/mid-2018, 80% of the gas meters should be replaced by smart ones, • In France, the regulator (CRE) has recently given its approval to roll 62 Gas Markets - Gas Infrastructures 20 Country UK, Ireland, Netherlands, Italy, Malta, Luxembourg, France Austria Undecided Germany, Sweden, Finland, Latvia, Lithuania, Poland, Hungary, Slovenia, Romania, Bulgaria, Greece i Awaiting final decision following positive Cost/Benefit Analysis in In 2009, the European Gas Directive required Member States to carry out a ‘cost benefit analysis’ (CBA) for smart gas meters by September 2012. However, in contrast to the Electricity Directive which requires that 80% of consumers should have smart electricity meters by 2020, the Gas Directive does not give any standard nor rollout planning. This lack of enforceable EU regulations has contributed to a slower approach in gas and several EU Member States have not yet carried out their CBAs for gas. 27 13 Status Rollout going ahead g As of 2013, smart gas meter rollouts are mandated in the UK, Ireland, the Netherlands, Italy and France. Table 6.3 Smart gas meters rollouts status in Europe (2012) Rollout rejected Belgium, Portugal, Spain, Denmark, Czech Republic, Slovakia Source: European Commission – Capgemini analysis, EEMO15 out smart gas meters from 2015 to 2022. This “Gazpar” project – enabling remote transmission of data consumption, impacts 11 million customers. Smart gas meters should allow a 1.5% decrease in domestic consumption corresponding to gains of more than €1 billion, according to CRE. These gains should compensate the investment (€1.05 billion). Other countries have not yet decided to deploy smart gas meters: • In Central and Eastern Europe, discussions around gas smart metering have been relatively limited, • In Germany, even if large scale deployment is expected to start in 2014, after a pilot in 2013, there is no clear situation on new or additional functionalities. Nevertheless, the lack of data protection in remote meter reading networks has been identified as the major current risk 27. The remaining countries have decided not to roll out such smart metering initiatives. For example, Spain with over 7 million gas customers has only committed to electricity smart meters deployment so far. The German Ministry of Economic Affairs has nominated the Federal Office for Information Security (BSI) to develop standards accordingly
  • 64. Utilities the way we see it I n 2012, gas storage capacities remained stable in Europe 100% ig yr p o As of May 2013, total European storage projects represented around 65 bcm of additional working capacity corresponding to a 4% diminution compared to 2011 (see table 6.5). This 20 HU 6.3 60% SK SK 3.0 3.0 i 50% 30% DK 1.0 20% NL 5.3 10% RO 3.1 10% 20% 30% % 40% 40% 50% FR 12.9 IT 16.7 PL 1.8 UK 4.5 4.5 0% CZ 3.5 DE 21.8 in 40% em Storage capacities / Annual consumption [%] 70% BG 0.6 ES 4.1 PT 0.2 60% 70% 80% 90% BE 0.7 100% g Imports / Annual consumption [%] ap Source: BP statistical review of world energy 2013, GIE gse – Capgemini analysis, EEMO15 Table 6.5 Gas storage projects (as of May 2013) © 15 C 20 10 5 ht Nevertheless, the storage usage decrease put at risk winter 2013/2014 supply. The significant fall in temperatures in March 2013 altered stock levels and impacted gas injection plans. In case of extreme cold periods during winter 2013/2014, some European countries could suffer from insufficient gas supply. For example, in June and July 2013, GRTgaz warned shippers that the low gas storage stock level subscribed at that date would not ensure sufficient gas supply in France, in case of extreme temperatures. AT AT 7.5 7.5 80% 0% Expected capacity [bcm] A general decrease in gas storage levels across the EU has been driven by the 50% decrease of winter-summer price spread during the 2005-2012 period (reaching €2.8/MWh in June 2013). The tightening of winter-summer spread is mainly due to continuously declining EU natural gas consumption (-2.2% compared to 2011), but also to an increased competition from other sources of supply (LNG, pipelines) and to a willingness to increase flexibility. Consequently, companies found it more attractive to invest in other kinds of facilities (LNG, pipelines), viewing storage as a low-return asset. C Circle size stands for working capacity (bcm) 90% In 2012, the total storage capacity in Europe amounted to 93 bcm accounting for 22% of total European natural gas consumption (see table 6.4). Before winter 2012/2013, total European storage facilities were filled up to 88% compared to 93% before winter 2011/201228. 28 13 Table 6.4 Gas storage capacities (2012) 0 UK IT DE NL LV ES PL AT FR RO PT BE Source: GIE gse — Capgemini analysis, EEMO15 minor diminution corresponds to an adjustment between the increase of storage projects in the UK (+0.7 bcm), France (+1.1 bcm), Spain (+0.9 bcm) and Poland (+1 bcm) and the abandonment or postponement of storage projects in Germany (-0.5 bcm) and in Czech Republic (-1.9 bcm). The storage usage decrease put at risk winter 2013/2014 supply. Comparison between October 1, 2011 and October 1, 2012 63
  • 65. I n a context of decreasing gas consumption, European spot prices realigned on long-term contract prices except during exceptional climate events and production problems 20 in €7.6/MWh As a matter of fact, long-term contract prices decreased by 5% in H1 2013 compared to H1 2012, mainly due to an oil price decrease while over the same period spot prices increased by 14%. In a context of decreasing European gas demand (-2.2% in 2012 over 2011), spot prices and the spread with gas longterm contracts prices surged from time to time because of exceptional climate events or production issues: • Several cold snaps such as in February 2012 or in March 2013 pushed gas price to records: €41.3/MWh in the UK on February 7, 2012 and an average of €34/MWh during 3 weeks in March-April 2013. • Norwegian strikes in 2012 and operational troubles in 2013 led to a reduction of Norwegian exports to the UK and Continental Europe. In March 2013, an incident at the Scottish platform “Cormorant Alpha” i The spread between spot prices and longterm prices reduced from em €1.3/MWh In 2012, European spot prices stood 23/MWh at €25/MWh in average vs. €23/MWh in 2011. The spread between spot prices and long-term contract prices29 reduced from early 2012 to end of 2012: in January 2012, average spread was around €7.6/MWh and in December 7.6/MWh 2012 it amounted to €1.3/MWh and €1.3/MWh further decreased to reach €1.2/MWh in May 2013 (see table 7.1). © C ap g in December 2012 Table 7.1 Gas spot prices (2012 and H1 2013) BE - Zeebrugge IT - PSV (PB-Gas) Henry Hub (US) 120 DE - NCG NL - TTF LNG Japan 100 80 ig 40 60 yr 30 20 40 p Gas prices [€/MWh] DE - Import price FR - PEG Nord UK - NBP Brent month ahead ht 60 20 o 10 0 29 The proxy used for the price of gas long-term contracts is the BAFA price i.e. the price at the German border 64 Gas Markets - Gas Wholesale Markets 3 /1 01 07 / 1/ 13 /0 06 01 /1 3 05 / 01 /1 3 04 / 1/ 13 /0 13 Source: Gas Exchanges web sites, Exane BNP Paribas, World Bank, BAFA – Capgemini analysis, EEMO15 03 02 /0 1/ 13 12 01 /0 1/ 12 /0 1/ 12 11 /0 1/ 12 10 /0 1/ 12 12 09 /0 1/ 08 /0 1/ 12 07 /0 1/ 12 06 /0 1/ 12 05 /0 1/ 12 04 /0 1/ 12 12 03 /0 1/ 02 /0 1/ 01 /0 1/ 12 C 0 Brent price [€/bl] in January 2012 to 50 13 Gas Wholesale Markets
  • 66. Utilities the way we see it I 13 20 C © C C o p yr ig ht In 2012 and H1 2013, the spreads of gas spot prices between European countries were quite low (below €1/MWh) on average with the exception of high demand periods such as March-April 2013 where the geographical spreads reached values above €5/MWh. North European hubs (NBP, ZEE, TTF…) are well connected which led almost to a unique European price. Italian gas spot prices decreased to reach the level of the European prices from October 2012 onwards thanks to release of short-term capacity on the pipeline connecting Austria and Italy. It illustrates how contractual congestion on pipelines can lead to price differences between countries. Physical congestion remains an issue in Europe, as for example within France between the North and South PEG zones where spreads of more than €6/MWh have been €6/MWh observed during summer 2012. Asian gas prices are much higher than European prices, diverting to Asia some LNG cargoes initially planned to deliver gas in Europe. ap g em talian spot prices decreased to reach European prices, which stayed close to one another except during short periods of high demand The gap between prices in Europe and Asia is high, although decreasing from €22.0/MWh in January 2012 to €13.8/MWh in January 2013. As a matter of fact, gas demand in Asia increased (e.g. +13% in China from 2011 to 2012). Thus Asian gas prices are much higher than European prices, diverting to Asia some LNG cargoes initially planned to deliver gas in Europe. But during the cold snap of MarchApril 2013, the European prices soared up to the level of the Asian prices: the maximum spot price on NBP reached €42/MWh while LNG Japan price was at 42/MWh €42.9/MWh on the same day. It shows 42.9/MWh that European players can attract gas to Europe by increasing the price up to the Asian level. Meanwhile, gas prices in North America stayed well below the European prices, averaging €9.8/MWh. i With an average of €27.8/MWh in H1 2013 in the Netherlands, gas spot prices seem to have slightly increased in 2013 being back to their traditional dynamics i.e. aligned with gas long-term contracts. A sian spot prices currently represent the ceiling price for Europe while North American prices are much lower than European prices in led to a decrease in UK production representing up to 10% of the UK demand and as a consequence gas price rose to €34.4/MWh on the NBP. ontinuing the trend of 2012, spot indexation is more and more significant in gas long-term contracts The volume share of oil-indexed prices in gas long-term contracts was 57% (and thus 43% for gas spot price indexation) in 2012 and is expected to fall in 2013 to less than 50%. In less than 4 years, the weight of the gas spot price index has become significant in the long-term contracts price formula: GDF SUEZ reported 10% of spot index in its gas long-term contracts in 2010, 36% in 2012 and 46% on July 1, 2013. European Utilities and professional associations are promoting an even larger indexation to the spot 65
  • 67. C o p yr ig ht ap © In H1 2013, futures prices fluctuated €25-27/MWh within the €25-27/MWh range for Summer 2014 and €28-30/MWh range for Winter 2014/2015, in line with the oil price (see table 7.2). The summerwinter spread, an important indicator for the economics of storage operators, decreased from around €4/MWh at the beginning of 2012 to below €3/MWh at the end of H1 2013. Storage competes with LNG to offer flexibility to the European gas system and the recent development of LNG terminals within Europe has flattened the price curve, as LNG prices – mostly indexed on oil through long-term contracts – do not depict a seasonal pattern. 30 66 Gas Markets - Gas Wholesale Markets I 20 13 n 2012, the growth of traded volumes remained modest and market operators kept on developing new offers i The UK NBP hub continues to be the largest and most liquid hub in Europe, followed by the Dutch TTF. NBP represented 68% of all volumes of traded gas in Europe in 2012 while Dutch TTF stood “only” for 9%. In H1 2013, the UK share slightly decreased to 63% while Dutch share reached 12%. UK and Dutch churn30 ratios are above 100% indicating that these markets can be considered as reliable, offering open and easy access to the participants besides a good transparency and reporting. In other European countries the churn ratio is below 100%, but increasing. Belgian and German hubs are mainly transit locations for large quantities of gas traded mostly on short-term contracts. in em g F utures prices were quite flat as well as the seasons’ spread C The question now is whether and when the gas spot price will de-correlate sustainably from the oil indexation of gas long-term contracts. market. Under pressure from European countries, Gazprom made important, although sometimes temporary, changes in the price formula of the gas contracts. For instance, in 2012, Gazprom made retroactive payments of about $3.3 billion to its customers. The payment reflected price adjustments for gas supplies made in 2010 and 2011. Over the last years, Gazprom reviewed contract pricing conditions with 15 European Utilities. Although gas long-term contracts were renegotiated, gas spot prices are still closely linked to gas long-term contract prices. The question now is whether and when the gas spot price will de-correlate sustainably from the oil indexation of gas long-term contracts. Fluxys Belgium launched a virtual trading point, the Zeebrugge Trading Point (ZTP) on October 1, 2012 which will ease trading not only from the negotiation point of view but also the logistics point of view. On January 1, 2013, the Austrian market also switched to a virtual trading zone, as opposed to physical trading point. Optimization and re-organization of market places promoted gas exchanges with more efficient tools for traders. For example: • To attract more customers, the Powernext and EEX exchanges launched on May 29, 2013 PEGAS, a system to trade contracts on different locations: TTF (Netherlands), NCG & Gaspool (Germany) and the three PEGs in France, Ratio comparing the total traded volume on the markets (future, spot…) to the final consumption, illustrating the liquidity of the market
  • 68. Utilities the way we see it 13 Table 7.2 Gas futures prices (summer 2014 and winter 2014/2015) 40 20 Futures prices [€/MWh] 30 20 in W ig 13 06 /0 1/ 13 07 /0 1/ 13 13 1/ /0 05 13 1/ 1/ /0 C ht ork on the European IEM (Internal Energy Market) kept going TSOs is on track but there is room for improvement, in particular with respect to near-real time information. Such transparency is important for traders to help them understand price formation mechanisms. Within the framework of REMIT (Regulation on Energy Market Integrity and Transparency), ACER provided a first market monitoring report in November 2012 highlighting the need to improve congestion management and tariff transparency in particular for cross-border transportation. ACER is actively working on industrializing data collection. © • To re-organize, the APX-ENDEX exchange, operating on TTF (Netherlands), NBP (UK) and ZTP (Belgium), separated on March 1, 2013, into two companies: the power spot exchange APX and the gas spot and power and gas derivatives exchange ICE ENDEX. ap g Source: Exane BNP Paribas – Capgemini analysis, EEMO15 04 13 /0 03 13 1/ /0 02 12 01 /0 1/ 12 1/ /0 12 12 1/ 1/ /0 11 12 /0 10 12 1/ /0 09 12 1/ /0 08 12 07 /0 1/ 12 06 /0 1/ 1/ 12 /0 05 12 1/ /0 04 12 1/ /0 03 1/ /0 02 /0 1/ 12 0 em 10 01 i NBP Summer 2014 NBP Winter 2014/2015 C o p yr The European Commission envisioned an Internal Energy Market for 2014 (the Gas Target Model) in which market rules will be harmonized. Work is in progress, in particular with respect to the capacity allocation mechanism and balancing markets. ACER (Agency for the Cooperation of Energy Regulators) released a first gas transparency report in April 2013 where the main conclusions are that compliance of 67
  • 69. em in i 20 13 Customer Transformation W EU-27 gas consumption decreased by hile European electricity consumption remained stable in 2012, gas demand continued to decrease, mainly due to the decline of gas-topower consumption ap g 2.2% © C in 2012 Although gas consumption continued to fall across Europe, with a 2.2% drop in 2012 over 2011 (see table 8.1), this was a slight recovery after the significant fall in 2011 (9.2%). The decline from the previous year was partly offset by a rise in demand for heating in the residential and commercial sector, as a consequence of harsh winter 2011/2012 temperatures. This phenomenon was particularly visible in the UK and France with year-on-year increases in gas consumption on the residential and commercial sector of respectively +13.3% and +11.8%. 1,100 845 1% 1.0% 813 -3.7% 700 25% 12% 600 742 3% 44% 400 459 4% 52% 42% 200 100 -5% -5% -10% -10% -20% -20% 2012 2011 France 394 UK Spain Italy Industrial market R&C market Power plants market Other markets Total natural gas consumption (TWh) +3% Evolution 2012 vs. 2011 -2.6% 339 23% 66% 50% 16% 1.9% 5.4% 183 179 44% 22% 5,036 TWh -15% -15% -4.3% 15% C 300 -2.2% 5,151 TWh 4.0% p 500 5% 5% 0% -25% 34% o Total consumption [TWh] 800 Total gas consumption in Europe Q3-2012 vs. Q3-2011 Q4-2012 vs. Q4-2011 Q1-2013 vs. Q1-2012 Q2-2013 vs. Q2-2012 10% ig -5.4% 15% yr 900 Gas consumption change [%] consumption consumption change 1,000 ht Table 8.1 Total gas consumption and size of I&C and residential markets (2012) -3.2% 146 -6.2% 105 22% 60% 30% NL 98 -2.7% 88 33% FR -4.5% 16.1% 65 -9.6% -2.9% -6.7% 48 42 51 IE NO -0.8% -10.6% -7.6% 45 7.9% -2.3% -6.8% 33 35 36 29 DK LT CH FI BG 47 0 UK DE IT ES BE & LU PL RO HU AT CZ SK Source: BP statistical review of world energy 2013, Eurogas, Exane BNP Paribas – Capgemini analysis, EEMO15 68 Customer Transformation PT GR -12.6% 12 SE
  • 70. 13 Utilities the way we see it Table 8.2 Total electricity consumption and size of I&C and residential markets (2012) 500 Total consumption [TWh] 27% 400 7.1% 46% 333 300 200 -2.5% 0% -15% FR 67% NL UK DE ES IT 250 142 4.2% 128 -1.6% 116 2012 Nordics I&C market Residential market Total consumption (TWh) -5.6% Evolution 2012 vs. 2011 0.8% -1.9% -0.1% 0.9% 0.0% -0.9% -1.8% -2.9% -0.8% -0.5% -3.0% 69 0.2% -1.6% 65 63 54 -0.1% 1.4% 2.3% 7.4% -4.6% 65% 52 49 27% 24% 40 34 32 29% 31% 25% 26 27 77% 71% 27% 34% 28% 66% 78% 13 11 8 8 6 33% 32% 73% 76% 71% 69% 75% 73% 66% 72% 67% 68% 38% 62% 23% 29% 34% 22% 85 85 NO FI BE g 100 77% BE -0.2% 3,195 TWh 2011 -1.9% 145 54% Q3-2012 vs. Q3-2011 Q4-2012 vs. Q4-2011 Q1-2013 vs. Q1-2012 Q2-2013 vs. Q2-2012 -10% 35% -0.7% 1.7% 73% 3,201 TWh -5% 324 33% 23% 20 490 5% i 2.4% em 540 Total electricity consumption in Europe 10% in -4.6% 0 DE FR UK IT ES PL SE NL CZ RO GR PT © HU DK BG SK IE SI LT EE LV LU In 2012, the gas-topower consumption dropped by 21.8% in average in the six largest European gas markets C o p yr ig CH Electricity consumption in 2012 (see table 8.2) remained stable compared to 2011 (-0.5% corrected for the leap year effect): a small rise in the residential sector offset a small decrease in the industrial and commercial sector. The unusually cold month of March 2013 was not sufficient to push up significantly the electricity consumption during Q1 2013, which remained flat year-on-year. ht But the main reason for the decrease in gas demand in 2012 was the spectacular fall of the gas-to-power sector: in the six largest gas markets31, the related consumption saw an average drop of 21.8%. This was the consequence not only of the unattractive prices of gas in Europe compared to coal, but also the result of the growth of renewable capacities installed and the subsequent closure or mothballing of gas plants across Europe. In Spain as a case in point, the utilization rate of CCGT plants was only 19% in 2012. In addition, gas consumption in the industrial segment also decreased in most European countries, driven by the economic crisis. AT C Source: ENTSO-E, Eurostat, Exane BNP Paribas – Capgemini analysis, EEMO15 ap 600 Electricity consumption change [%] 700 31 The UK, Germany, Italy, France, the Netherlands and Spain 69
  • 71. The competitiveness dilemma for Europe’s energyintensive industries 13 20 i The framework adopted by the European Commission in May 2012 (under which Member States may compensate certain EIIs for part of the higher electricity costs resulting from stricter rules as from 2013 in the Emissions Trading Scheme) has also triggered further governmental initiatives across Europe. © C ap Shock waves in the world economy EIIs, which have their yearly electricity consumption beyond 150 GWh and are characterized by 24/24 all year long base load, benefit generally from lower electricity prices reflecting long-term direct contracts with suppliers. Many of these industries historically located their plants close to cheap electricity production means (e.g. fertilizers industry close to Norway hydro plants, aluminium producers in the French Alps hydro basins…) and were 30 or so years ago sometimes financially involved in building power plants. in In many EU countries, EIIs are the core of the real economy, representing approximately 100,000 jobs and 523 companies in France, and 125,000 to 150,000 direct jobs in the UK. In the UK, EIIs receive a 65% discount on government CCL (Climate Change Levy) tax, leading to a discount of €3.45/ MWhb. They also benefit from a few other tax exemptions. em It is particularly acute for industries which by their very nature use large amounts of energy (electricity and gas) in their manufacturing processes or as raw materials: the energyintensive industriesa (EII). For those industries energy can represent from 8% of the revenues for glass manufacturing, 13% for base chemicals, up to 20% for industrial gas. In the UK, EII consume 50% of UK industrial energy; In France, top 40 EII firms represent 70% of the industrial electricity consumption of the country. In Germany, industry experts calculated that the industrial sector benefited in 2012 from financial relief worth approximately €10 billion, half of this amount stemming from 10 reduced energy and electricity taxes (Ecotax/Ökosteuer), and a third stemming from renewable energy contributions exemptions (EEG). However, the EU Commission has signaled that it would only allow an extension of such a scheme if strict conditions were attached (such as obligation to further invest in energy efficiency), otherwise the move could be seen as illegal state aid. g With ongoing economic turmoil in many EU Member States, the competitiveness of the industrial sector has become a highly sensitive issue over the past couple of years. ig ht Endorsement of an integrated approach to climate and energy policy by the European Union since 2007, combined with the financial and economic crisis since 2008, have undermined this economic sector in its foundations. The arrival of shale gas in the US market, which has given the US a major boost in competitiveness through low energy prices, has undermined even further the competitiveness of many of the European EIIs. C o p yr Level playing field? Given the important sensitivity of EIIs to local economies, many governments have developed compensation schemes or financial relief schemes to preserve the competitiveness of their domestic EIIs. Unsurprisingly, most of these measures are tax related, tax being the only component (with T&D regulated costs to some extend) a government can have control over. a b 70 In November 2012, the UK government announced that EIIs are to be exempted from upcoming fuel charges designed to fund investments in low-carbon power generation. In addition, a separate £250 million scheme to compensate certain EIIs for additional costs associated with the Carbon Price Floor and EU Emissions Trading Scheme is under discussion. Similar to the UK, Norway is also expected to introduce a CO2 scheme that aims at compensating its energyintensive manufacturing industry for higher electricity prices. The scheme covers 15 sectors, including producers of aluminium, iron alloys, chemicals and paper, and will take effect from July 1, 2013 until 2021. Way forward? In today’s globalised economy, with such a diversity of labor and energy cost structures among world regions, tax measures may be the only realistic way forward to sustain EIIs competitiveness. However, these tax measures may look somewhat patchy and remain, at least in the short run, local. Another way forward may also lie in joint-venture agreements between EIIs and Utilities, such as the one set up between German aluminium producer Trimet and EDF for taking over Rio Tinto-Alcan’s St Jean de Maurienne and Castelsarrazin facilities; in this agreement EDF took a 35% stake in the assets. Energy Intensive Industries (EII) are usually defined as industries in which energy costs represent more than 10% of the gross added value (UK), or industries which requires electricity consumption above 2.5 kWh per gross added value (France), EII sector encompass 20 or so manufacturing segments, most critical ones being aluminium, iron & steel, fertilizers, paper, industrial gases, chemicals, plastics, cement, ceramics, petroleum refining, or glass manufacturing UK EII firms with Climate Change Agreements (CCAs) receive a 65% discount on the CCL (i.e. they pay 0.2p/kWh, instead of 0.5p/kWh) Customer Transformation
  • 72. Utilities the way we see it 20 i 20% 71.5 5 50 15% 10% 10.3% 10.3% 10.3% g 5% BG U PT ES H IT PL LT LV SI C Z SE N L DK EE SK 0% A EU T -2 7 IE DE BE FR LU U K RO ap 0 Price change H2 2012 vs. H2 2011 [%] 25% em 100 -5% -10% © C Note: Annual gas consumption between 20 GJ (i.e. 5,557 kWh) and 200 GJ (i.e. 55,566 kWh) Source: Eurostat – Capgemini analysis, EEMO15 Table 8.4 Residential electricity prices – all tax included and with PPP (H2 2012 and % change with H2 2011) 36% 30% 250 196.6 200 24% 150 18% 100 12% 50 6% 6.6% 0 PL DE ES H U PT DK IT SK IE C Z BG LV LT EU SI -2 7 BE SE G R EE U K N L AT O FI FR LU 0% Price change H2 2012 vs. H2 2011 [%] 300 N ig C o p yr EU electricity prices also rose across all I&C customer segments in H2 2012 over H2 2011, in the continuation of the 2011 trend, with increases ranging from 4.7% to 5.8%, depending on consumption band. Despite this overall trend, it should be noted that in a similar way as in 2011, the Nordic countries experienced price decreases (up to 10% for Norwegian households) across most if not all consumption bands, as a consequence of abundant rainfall at the beginning of winter 2011/2012 which provided strong hydrological balance. Spain, Portugal and Poland have joined Germany, Hungary and Slovakia in the group of countries experiencing highest residential prices (~€250/MWh all taxes and PPP included) (see table 8.4). 30% in 150 ht Residential gas prices rose particularly – and are still rising – in several Central and Eastern European countries and the Baltic States. Steep increases were observed in Portugal and the Netherlands (respectively 18.4% and 16% H2 2012 vs. H2 2011) in the continuation of the trend observed the year before. Customers in Germany, Austria, Czech Republic on the other hand, experienced below-average price increase, whilst Belgian gas customers benefited from flat bills year-on-year. Price [€/MWh, Purchasing Power Parity, all taxes included] In the continuation of the 2011 trend, EU-27 gas prices across all segments increased between H2 2011 and H2 2012, from 6.7% to 10.9% for Industries and 10.3% on average for the Residential segment (see table 8.3). Table 8.3 Residential gas prices – all tax included and with PPP (H2 2012 and % change with H2 2011) Price [€/MWh, Purchasing Power Parity, all taxes included] /MWh, End-user energy prices have continued to rise steadily in 2012 and H1 2013, despite lower electricity wholesale prices and flat wholesale gas prices in several major markets. 13 End-user energy prices have continued to rise steadily in 2012 and H1 2013. RO D espite downward demand again in 2012, both gas and electricity prices have risen significantly across the EU -6% -12% Note: Annual electricity consumption between 2,500 kWh and 5,000 kWh Source: Eurostat – Capgemini analysis, EEMO15 Spain, Portugal and Poland have joined Germany, Hungary and Slovakia in the group of countries experiencing highest residential prices. 71
  • 73. T © ht ig yr p o C In France the CSPE tax, of which half goes to renewable energies, has increased from €10.5/MWh in H2 2012 to €13.5/MWh in 2013. However the French government decided not to pass on the full level of tax required for offsetting incurred costs to the customers, but rather leaving some of it to be supported by EDF (approximately €5 billion deficit to be offset by 2018 through future tax increases). 33 Customer Transformation 20 i The persistence of regulated tariffs in 15 EU countries regarding electricity and 17 countries regarding gas as of mid-2013 does not help in further developing sound competition. However, during 2012, retail market de-concentration occurred in a few European countries. The most noticeable example is Belgium, where market shares of the incumbent player Electrabel dropped below the 50% mark for electricity in the Flanders regions at the end of 2012. In France, market shares of alternative suppliers increased mainly in gas supply, where new entrants such as Eni (formerly Altergaz) decided to develop an aggressive growth strategy. In the UK market, where six companies supply 98% of all consumers, small suppliers have been struggling year 32 72 As in previous years, annual market shares (in number of clients) and market concentration analysis show little evolution in market de-concentration, whether for electricity or gas. Trends remain identical year-on-year, with slow overall erosion of market shares of major incumbents in their home markets – especially in the B2C segment – few new entrants being able to stay on the market on their own in the long run, and a fair proportion of the switching occurring between electricity and gas incumbents or oligopoly actors. in em g ap In Spain on the contrary, renewable energy developments were passed to ratepayers to a limited extent only, leading – for part of it – to the “tariff deficit” currently reported at €28 billion which the electricity reform (passed in July 2013) aims at eliminating. Despite this, support to renewable energies increased by 22.6% in 2012 over 2011, according to the January 2013 CNE report. Nearly €8 billion out of the €28 billion deficit relates to renewable energy support schemes, with €2.5 billion for PV only33. C The persistence of regulated tariffs in 15 EU countries regarding electricity and 17 countries regarding gas as of mid-2013 does not help in further developing sound competition. In Germany, the portion of the EEG tax funding the renewable energy capacity development increased from €36/MWh in 2012 to €52.7/MWh in 2013, representing 18% of the total electricity price paid by households32. This move is triggering growing debate among German citizens about disproportionate share of the energy turnaround burden supported by households, whilst discounts are given to the industrials to protect their competitiveness. he competitive landscape is evolving slowly, due to lasting incumbent influence and persistence of regulated tariffs in many EU countries 13 F inancing renewable feed-in-tariffs is complex, leading to various political arbitrage across EU countries According to Federal Association of the Energy and Water Industry (BDEW) all taxes and duties are expected to exceed a 50% share of the German household bill for the first time in 2013 Wind accounts for €1.8 billion of the €28 billion deficit and CHP for €1.7 billion
  • 74. Utilities the way we see it Hot and warm active markets 12% 10% Active markets i 8% in Cool active markets LU U RO LT H LV SI AT PL G R ES Dormant markets IT DK FI C Z DE IE Br SE n us B se E ls B N L N O N or th IE er G la nd B e E (W rs) al B lo E ni a) 0% g Source: VaasaETT Global Energy Think Tank – Capgemini analysis, EEMO15 ap C © Table 8.6 Aggregated European gas switching rates (2012) 20% 18% E IR nte FA tte A a en Hot and warm active markets ht Aggregated switching rate [%] - I&C and residentials I&C and residentials residentials 16% 14% 12% 10% Active markets 8% 6% Cool active markets 4% Dormant markets 2% LU SI SE U AT H FR IT DK B G DE BE ls se us Br Z C L N n ES IE er th or N a) ni IE BE lo (W al la nd e rs ) BE 0% (F ig yr p o em 2% FR 4% PT 6% T C 20 14% he switching panorama continues to evolve as well The overall changes between 2011 and 2012 amount to a 19% increase, which includes reductions of switching rates in the Republic of Ireland and Great Britain (for the fifth year in a row) in contrast to increases in Belgium, Northern Ireland, Denmark, Greece, Norway and the Netherlands (see tables 8.5 and 8.6). The biggest rise was in Belgium, where in Flanders and Brussels the switching rate doubled between 2011 and 2012, making Brussels a hot market and Flanders the most active market in Europe. Belgian customers deserted market leader Electrabel and switched to contracts offered by green energy retailer Lampiris, which in turn doubled its market share from 3.5% to 8.5% at the end of 2012. What is the rationale behind such a high churn? Lampiris’s co-founder and chairman Bruno Vanderschueren explains this fact saying that “People come to us because we are one of the cheapest suppliers and our power is green”. Indeed, the ethical stance of the energy company should not 13 16% Aggregated switching rate [%] - I&C and residentials In Spain, the competition watchdog CNC (National Competition Commission) kept on pushing for more competition in the market, but strong vertical integration between the supply and distribution business is preventing any competition from developing in some specific regions of Spain. Table 8.5 Aggregated European electricity switching rates (2012) (F after year to compete against offers from the “big six”. Ofgem stresses however in its final market review report published in March 2013, that some growth in the market share of independent suppliers was witnessed in 2012; although small (leading independent retailer First:utility claims 100,000 electricity supply points by Q3 2012). Source: VaasaETT Global Energy Think Tank – Capgemini analysis, EEMO15 73
  • 75. ap g em In particular, European switching levels continue to be heavily influenced by issues of affordability in the face of increasing prices and sustained economic challenges, and by switching heuristics (physical and mental shortcuts, such as price comparison websites, which customers employ to simplify the switching decisionmaking process). British energy market regulator Ofgem reported that the key facilitator of switching is internet access and that the majority of customers who reported having switched tariff or payment method, found out about their options mainly through online price comparison websites. C o p yr ig ht © C European switching levels continue to be heavily influenced by issues of affordability in the face of increasing prices and sustained economic challenges, and by switching heuristics. 74 Customer Transformation W i 20 13 ith rising energy prices affecting many households, governments are exploring ways to help low income households keep their energy bills as low as possible in be underestimated. Besides creating a positive image, “green” reputation is helping customers to save time on taking ethically sound decisions. The high switching rate in Flanders is also supported by the simplicity of changing supplier and by competitive market conditions; the Belgian market is dominated by foreign new entrant companies that boost choice and customer awareness. The definition of progressive tariffs increasing block tariffs structure – also known as inverted block rates – has been identified as an enabler for implementing an energy system that helps households, particularly lowincome citizens, in managing their energy bills and eventually reducing a country’s energy consumption. Based on a pricing model that charges a higher rate per kWh at higher levels of energy usage, and a lower rate at lower usage levels, the system had been successfully implemented in Italy, Greece and other areas outside Europe (e.g. South Africa, Japan, many US states). Since 2010, Belgium, Spain and France have indicated their willingness to implement this pricing model, while Germany renounced it on the basis that it was not the proper tool to eradicate fuel poverty in that country. In Belgium, progressive energy pricing was voted into law in the Wallonia area in May 2013. According to the Belgian government, more than 78% of households will benefit from reduced energy bills in 2014. Nevertheless, both French and Spanish governments have encountered significant difficulties in designing the pricing model. The French constitutional council censored the proposed law. The government expects to re-examine it by the end of 2013, following the national debate on the energy transition.
  • 76. 20 i in em g Green electricity offers have spread further in 2012. C o p yr ig ht In the UK, according to the law, energy companies will offer no more than four core tariffs for each type of fuel by the winter 2013/2014, and will have to inform customers about the cheapest deal available to them. One of the tariffs has to be a standard-variable rate, the other three depending on a range of options such as fixed, green or online. The cheapest energy deals tend to be online, in return for clients managing their energy account with little or no support over the phone. British Gas, Ecocentric and EDF Energy have already started to simplify tariffs by replacing their current range of various standing charges with just one. While consumers values turn more around social and environmental responsibility in some countries (Germany, Switzerland, the Netherlands, Belgium), green electricity offers have spread further in 2012, addressing both residential and BtoB segments, indicating where the electricity comes from; most independent or mid-size suppliers have even made it their main strategy. In Germany, all Stadtwerke – German public energy companies, controlled by local authorities – have developed green strategy, promising that their electricity is generated from environmentally friendly and renewable energy sources. ap The rising costs of energy have made tariffs a main issue for customers. As a consequence, customers expect more transparency from energy suppliers in their bill, making supplier comparison and benchmarking easier. In most European countries (Belgium, Germany, France), energy providers have already engaged in this direction over the past couple of years. C T he main trend for consumers still remains the basic search for cheap energy, whilst calling for increased clarity of retail tariff structures In the current economic context, many Utilities have launched communication campaigns around fixed-term tariffs that are becoming an increasingly attractive option for consumers. While terms of contracts used to last 12 or 24 months, many Utilities (e.g. Essent and Eni in Belgium, npower in the UK) have launched a three-year fixed rate energy tariff, renewing competition amongst providers to offer longer periods of price security. This plan could be a saving grace for consumers looking to shield themselves from increasing energy prices. Nevertheless most fixed energy tariffs carry penalty exit fees and none of the fixed deals is currently as cheap as the best variable deal. © Meanwhile in Spain, the National Energy Commission strongly criticized the Spanish pricing model because of its complexity. It caused the withdrawal of the proposed law and the Spanish government has announced its determination to review and simplify the pricing model methodology. 13 Utilities the way we see it 75
  • 77. Utilities: the customer experience goes digital Today’s utilities are beset by a demanding set of stakeholders. Regulators exert constant pressure to lower operational costs. Shareholders demand returns. Customers are coming to expect the same level of convenience and interaction that they get from Amazon or Netflix. Thankfully, new digital tools are helping address each of these demands, and transform how utilities think about their business. In particular, technologies such as mobile, social media, and smart devices are redefining how utilities interact with their customers. 20 13 Telecoms Travel and hospitality High Technology Retail Consumer Packaged Goods em in Pharmaceuticals i Banking Manufacturing Transformation Management Intensity Insurance Utilities Interpreting the Digital Maturity Matrix g • The vertical axis measures “Digital Intensity,” i.e. firms’ digital practices • The horizontal axis measures “Transformation Management Intensity Intensity,” i.e. the management practices implemented by the firms around digital transformation d Source: Capgemini Consulting and MIT's Center for Digital Business Busin C ap A focus on operations In 2012, Capgemini Consulting and MIT’s Center for Digital Business conducted a study of over 400 companies in 11 industry sectors around the world to understand how companies are managing and benefiting from Digital Transformation. This research showed that although the Utilities industry overall has been Conservative (see Figure) in adopting digital technologies, many companies are realizing the value of digitizing their operational processes. For example, a majority of respondents from Utilities companies reported that digital tools are helping their colleagues collaborate, share knowledge, and communicate with executives more effectively. In fact, utilities are on par with companies in other sectors. 83% of respondents also reported that digital technologies were helping to improve internal efficiency of operations. Digital maturity matrix Digital Intensity yr ig ht © What about the customer experience? Responses were not nearly as strong for customer-facing applications of digital. Many utilities are awash in customer data, but less than half of respondents reported using analytics in any of the capacities that we measured. Only 32% reported using social media in providing customer service. Does that mean that utilities do not see value in a more digital customer experience? Quite the contrary. A few leading utilities are beginning to embrace the concept of a more “customer-centric” utility and are leveraging new digital channels to inform, empower and interact with customers. Efficient operations will remain a top priority for utilities for the foreseeable future, and technology will no doubt continue to play a leading role in that transformation. However, our research shows that the “digital advantage” enabled by new technology is not limited to operational excellence alone. Likewise, companies should not confine their use of new technologies within the walls of the organization. As social media, mobile and smart devices are playing an increasingly central role in customers’ daily lives, utilities can use these channels to develop more engaging relationships with customers and create their own “digital advantage.” For more information on Digital Transformation in the Utilities industry, please see our websitea and The Digital Advantageb, a joint research report with MIT’s Center for Digital Business. C o p Take, for example, Con Edison – New York City’s provider of electric, gas and steam services. Last year, the company introduced its “CoolNYC” program to control energy consumption of air conditioners, and offered customers a smart outlet (dubbed a “modlet”). The modlet, which sits between the unit and a traditional outlet, allows user to control their air conditioners directly from a smartphone. Con Edison can also connect to the devices remotely during a demand management event to control consumption. San Diego Gas & Electric has also taken steps to empower its customers – though with data. The company’s PowerTools application gives customers access to their own energy usage data, and provides tools to help manage energy expenses. Customers can set goals, track usage over time and even understand how weather trends affect their energy consumption. a 76 Customer Transformation b
  • 78. Utilities the way we see it g em 13 20 i in Energy retailers are enthusiastic about energy efficiency offerings, searching for new sources of income and profit, and as a way to increase customer loyalty. ap On the BtoB market, energy providers have developed well structured and targeted offers, covering the entire portfolio of clients – from small business to large industry. A wide range of energy audits and diagnostics addressing full or part industrial site (with targeted offers on heating, lighting, computers, office equipment, motors and pumps) helps BtoB clients adopt adequate energy efficiency measures. Several Utilities (Endesa, Electrabel, Stadtwerke Leipzig) also offer engineering services, including replacement of electric systems or gas systems, and support for heat pumps and boilers. A fuel switching offer (replacement of oil facilities by gas facilities) has even been developed by Endesa in Spain for large industry and British Gas in the UK for BtoB markets. ig ht Many Utilities in Europe have developed services based on consumption data visualization and energy monitoring, allowing household consumers to have near real-time insights into energy consumption, and remote control of electric appliances – in particular heating appliances. But as the massive deployment of smart meters is not yet a reality, these offers mainly rely on the purchase of a specific device or meter and concern almost exclusively already engaged consumers. In Italy and Sweden, 100% smart meters have been implemented since 2009. New innovative services are being explored. In Italy, Enel has launched an Energy@home project, in partnership with home appliances and telecom companies, to develop a communication infrastructure inside the home, allowing value added services based upon information exchange related to energy usage among home appliances. This includes a wide range of services, from monitoring of electric vehicle charging, rational and efficient use of smart appliances to demand modulation requests. C Energy retailers are enthusiastic about energy efficiency offerings, searching for new sources of income and profit, and as a way to increase customer loyalty. Having a wide range of products and services, from energy efficiency awareness – including energy audits and energy saving tips – to maintenance of building’s energy equipment, will help meet the consumers’ needs, in the current environment of rising energy costs. helps balance demand on the power grid by shaving weekday peaks. © A lthough basic energy efficiency offerings have been generalized among many energy providers, innovative offers are slow to start C o p yr In a period of progressive rollout of smart meters in Europe, marked by some uncertainties, ensuring that smart meters meet consumers’ expectations and needs requires energy retailer’s active involvement in the process. In the UK, retailers are leading the rollout, while the European trend gives responsibility to distributors. British Gas has already deployed by mid2013 one million smart meters among its customers and has outlined early stage plans to offer these customers innovative deals like free electricity on Saturdays. This initiative could be launched by mid-2014, and potentially Since part of the revolution of the next decade is related to smarter grid, smart meters and digital technology will provide over the coming years a foundation for a new suite of retail energy products and services. However, profitability of those new offers is still to be demonstrated. 77
  • 79. em in i 20 13 Renewable Energy Sources & Local Energy Transitions © C ap g In uncoordinated ways, European countries have debated, planned or implemented policies to start the so-called “energy transition” that will lead to more competitive and sustainable economies. Two main common points – detailed in this new chapter – can be observed: (i) an expected growing share of renewable energy sources (RES) in the energy mix and (ii) an increased mobilization of local territories enabling the multiplication of small-scale energy projects. R ht 16.8 GW ig solar PV capacities added in 2012 compared to over yr 20 GW C o p added in 2011 78 egarding renewables, the EU as a whole seems to be on its 2020 trajectory with a renewable energies share of 13% in 2011 In the electricity sector, additions of renewable generation capacities remained important in 2012 despite a sharp fall in solar PV installation year-on-year As in 2011, RES in 2012 accounted in Europe for about 70% of the 44.9 GW newly installed capacities. For the third year in a row, solar PV (54% of the renewable capacities installed) outpaced wind (38%): 16.8 GW of solar Renewable Energy Sources & Local Energy Transitions PV capacities were added in 2012 compared to over 20 GW added in 2011 (see table 9.1). This first market decline in more than a decade is the consequence of reduced incentives and general policy uncertainty across Europe. In Italy, lower payments under feed-intariffs (FIT) and the strict limits put on the amount of new solar power capacity eligible for this support, led to an impressive 61.5% drop compared to last year, with an addition of only 3.6 GW. Meanwhile, Germany added 7.6 GW, as in 2011, and regained its position of leadership in terms of newly installed capacities, while following the same trend of FIT reduction. Regarding wind power, the EU passed the 100 GW milestone, adding a record 11.6 GW (net) of wind capacity for a total of 105.6 GW. The connection to the grid of onshore (+10.4 GW) and offshore (+1.2 GW, 73% in the UK) wind farms, together with the dynamism of Eastern European countries (+68% growth year-on-year), explained this trend. However, this upward trend does not reflect the current economic and policy uncertainty: most capacities installed this year were permitted, financed and ordered before the economic crisis destabilized the legislative framework for wind energy.
  • 80. Table 9.1 Growth rate of renewable energy sources for electricity production (2005 to 2011 or 2012) 120% 2008 Top 3 countries ranked by: Cumulated installed capacity1 DE UK 100% 90% IT 2010 2005 Geothermal NL BE DE Small hydro IT FR ES 20% IT RO BG GR 2012 2005 2006 2011 10% 0% 2011 0 10 2011 30 40 50 2011 60 70 DE FI SE 80 Wind Capacity DE ES UK 2007 Biomass 2011 20 i FR g DE 30% FR IT Growth (%) DK BG ES DE IT CZ Growth (abs.) DE IT em DE UK IT 2006 40% Urban waste IT PT FR DE IT 2009 Biogas 50% Solar PV PL UK DE ap Growth rate [%] 60% Capacity in 2011 FR 1 In MW for wind, solar PV, small hydro and geothermal and in TWh for biogas, urban waste and biomass 2 Relative growth additionally displayed for solar PV and wind 80% 70% Growth2 (absolute) DE IT 20 110% 2007 13 Utilities the way we see it 90 90 100 100 110 11 2008 120 2009 130 Growth (abs.) DE UK IT Growth (%) RO PL EE 2010 140 150 2012 2011 160 170 180 190 200 210 Electricity production [TWhel] tion [TWh tion [TWh © The solar thermal market has slipped for the fourth year in a row, suffering from the economic crisis, the construction sector crisis and competition with ground heat pumps, but also with solar PV for financial incentives. p yr ig ht In the heating and cooling sector, after years of slow continuous growth, renewables suffered from the economic context and a mild winter 2011/2012 Overall in Europe, heat consumption dropped off by 3.1% in 2011, mainly because of an exceptionally mild winter. As a result, the demand for solid biomass fuel was low: albeit solid biomass electricity production ongoing growth, the overall demand contracted by 2.9% compared to 2010 (see table 9.2). C Source: Eur’Observer barometers – Capgemini analysis, EEMO15 C o Regarding district heating, RES accounted for 27.2% of total heat produced in 2012 (95% wood and wood waste, 1% straw and 0.4% biogas). In June 2013, the Lithuanian EU Presidency pointed out that this share should increase up to 75% in district heating by 2020. Last but not least, biomethane production is still in its infancy compared to the other valorization pathways for biogas, but is expanding rapidly across Europe. Biomethane is either injected into the gas grid or used as a vehicle fuel (in Sweden, more than 60% of the compressed natural gas vehicle fuel is biomethane). Injection of biomethane into the grids was effective in about 90 plants in Germany, 15 in Switzerland and 2 in France by the end of 2012. 100 GW wind capacities milestone passed in 2012 79
  • 81. 13 Table 9.2 Growth rate of renewable energy sources for heat production (2008 to 2011 or 2012) 40% Top 3 countries ranked by: 30% UK FI DE in FR i SE DE 2009 2010 10% AT IT GR PL 2010 2011 2011 2012 2009 2011 2010 0% 0 10 20 NL SE 2011 DK DE IT 30 ap DE FR SE GR ES 2009 2010 g Urban waste -10% 2011 Biomass DE PL em Growth rate [%] SE 2008 FR 1 In MW for solar thermal and heat pump and in TWh for urban waste and biomass Ground heat pumps 20% IT IT 2009 Solar thermal DE DE Growth (absolute) DE 20 Cumulated installed capacity1 DE 40 40 2012 50 600 700 800 Heat production [TWhth] production production C Source: Eur’Observer barometers – Capgemini analysis, EEMO15 G © iven the growth of renewables and decentralized energy systems, local territories have shown an increased interest in energyrelated decisions C o p yr ig ht Local authorities showed a growing interest in the design and implementation of energy transition policies for three main reasons: economic, territorial and electoral. 80 Local territories appeared as a major lever to make the energy transition happen as they have the critical scale to conduct innovative programs and pilots and reach results rapidly. In 2012 and H1 2013, local authorities showed a growing interest in the design and implementation of energy transition policies for three main reasons: • Economic: they see a way to better control and eventually reduce their energy spending, • Territorial: they can adapt decisions to their specific situations, • Electoral: they can create jobs and meet citizens’ expectations. Renewable Energy Sources & Local Energy Transitions Towards decentralization and local governance in the energy sector? The involvement of cities and local territories in energy transition issues is no new trend in Europe: Scandinavian and German cities have traditionally played a key role in the supply of gas, electricity and district heating to end-consumers. However, in these countries and elsewhere, local authorities play or wish to play an increasing role in energy decisions. In Sweden, the city of Malmö was honored by the City to City FAD Award in Barcelona for its radical transformation of the Augustenborg quarter, undertaken since 1998. Together with Stockholm and Umeå, Malmö is considered a showcase of “future sustainable cities”. British cities are also distinguishing themselves. The city of Bristol for example was awarded the title of European Green
  • 82. ig yr C o p Rural territories are not exempted. Thanks to their easy access to renewable sources and their small scale, they can reach energy independence easily. Rural investments are coming mostly from energy cooperatives, or communities with a focus on decentralized energy generation. In Germany, membership in such cooperatives increased from 80,000 members in 2011 to 130,000 in i 20 The involvement of cities and local territories in energy transition issues is no new trend in Europe. However, local authorities play or wish to play an increasing role in energy decisions. C ap g em in Although mostly self-initiated, local actions are now encouraged by international or national governance. The key role of cities and regions in sustainable development was reaffirmed at the Rio+20 Summit in June 2012, and movements to coordinate best practices are encouraged, such as The Covenant of Mayors, sponsored by the European Union (the number of signatories grew by 50% in 2012/2013, to reach more than 4,700 members). Other initiatives are being assisted by national governments, as in Sweden, where a Delegation for sustainable cities was appointed from 2008-2010. Sustainable/smart initiatives in cities are concrete illustrations of the ongoing local energy transition Energy transition efforts in urban projects focus on three main areas: energy efficient buildings, sustainable urban mobility and local sustainable energy mix. ht In partnership with cities, municipallyowned Utilities have extended their scope of intervention. In Germany, the once outdated model based on municipally-owned Utilities (the so-called Stadtwerke, which account for more than 50% of German energy retail and own 40% of the distribution networks) is now considered key for the country’s Energiewende. Between 2008 and 2012, German Stadtwerke took part in the re-municipalization of 150 electricity and gas distribution grids. In France too, between June 2012 and June 2013, the number of public local companies specializing in environment and network or town planning grew by respectively 8% (142 companies in total) and 5% (308 companies). Some have been created with a 100%-public status exclusively for buildings refurbishment programs (“OSER” in Rhône Alpes, created in December 2012) or renewables development (“POSIT’IF” in Ile-de-France, created in January 2013). 2012 with an estimated 90% of private individuals. Following the success of German community energy schemes, many countries such as the UK in July 2013 launched a study on community energy best practices. The UK also started in 2013 a £15 million Rural Community Energy Fund, to encourage investments in small-scale renewable energy projects. © Capital 2015: indeed, Bristol has committed a budget of €500 million for transport improvements by 2015 and up to €300 million for energy efficiency and renewable energy by 2020. In France, some cities and regions took benefit of the DNTE (National Debate on Energy Transition) to ask for further responsibilities. Discussions led to a consensus on the need to transfer more responsibilities to regions. At the same time, a decentralization law, published in July 2013, settled regions in charge of steering the energy transition at local level. 13 Utilities the way we see it Energy transition efforts in urban projects focus on three main areas: energy efficient buildings, sustainable urban mobility and local sustainable energy mix. Improving the energy efficiency of buildings is a priority reinforced by the Energy Efficiency Directive adopted in 2012. While the market remained relatively static, some big refurbishment projects, encouraged by national and local governments, were launched. Cities such as London started in 2012 a large program to retrofit 400 public buildings. Financial aid was also made available to promote private energy-efficient renovation projects for individuals or small businesses (as cashback money through the 81
  • 83. 13 Making Demand Response Management a real business model – discussion on the challenges through the German example they have a solid understanding of the industry’s electricity requirements (e.g. which type of product they prefer). Demand Response Management (DRM) is considered to be an important part of the future European energy market and is supported by the third Energy Efficiency Directive (2012/27/EU). The primary driver of DRM is the increasing share of renewables generation, requiring more flexibility on the demand side to balance the more volatile supply. C o p yr ig ht © C ap g em in i 20 In most European countries the second challenge for DRM can be seen in the regulatory framework which is characterized by a strong focus on generation. In Germany, load as well as peak load increases by consumption units are penalized with rising power grid charges while According to the European Smart Energy Demand Coalition, pumped-storage hydropower plants are exempt from DRM can be defined as “Changes in electrical usage by this. Furthermore, for conducting a fully developed DRM end-consumers from their current consumption patterns solution, up to five contracts are needed, not all of which in response to changes in the price of electricity over time, are regulated – which makes them sometimes difficult or to financial incentives designed to adjust electricity to close (e.g. with balance responsible parties). Finally, usage in response to wholesale market prices or when some operating procedures such as the prequalification system reliability is jeopardized”. This definition reflects process and the operating point for balancing and billing the broad application of DRM: From Time-of-Use tariffs still need to be defined. However, most for households with smart meters of the regulatory obstacles are currently to balancing services for TSOs Demand Response under discussion and manageable based on the control of industrial Management represents in the meantime. It will be essential consumption units. that the further development of the a new business model, European regulatory framework (e.g. In any case DRM represents a new offering Utilities and ENTSO-E codes) takes into account the business model, offering Utilities and third-party players the requirements of DRM and enhances the third-party players the opportunity to Europe-wide application of ‘industrialized’ develop new customer services and opportunity to develop flexibility solutions. non-subsidy-driven revenue streams. new customer services However, providers are facing and non-subsidy-driven The third challenge for DRM is the several challenges in realizing new choice of value creation through pooled DRM business models. This holds revenue streams. loads. In Germany loads generally could especially true for balancing services be used for procurement optimization for TSOs based on industrial loads. (e.g. by real time pricing), load curtailment or for balancing services. However, marketing loads as balancing service The first challenge for feasible DRM business models is to for TSOs is the main option. On the background of the combine the operating logic of two so far separate worlds. technical requirements, especially tertiary control is a On the one hand, DRM depends on the integration of loads feasible option for industrial loads due to the required into current electricity trading, controlling and balancing reaction time (15 minutes) and the allowance to pool loads. schemes requiring classical Utility capabilities. On the Since the utilization rate is around 4% and since the owners other hand, DRM requires a thorough understanding of of the consumption units can step back in case of difficulties industrial production processes in order to identify flexible from delivering balancing energy, tertiary control couples loads that can be marketed with only a minor impact on the revenue generation with a very low impact on the production production process. Usually, this knowledge has to cover process. multiple processes since the loads need to be aggregated in a portfolio to optimize the DRM capacities. Accordingly, To sum up, DRM is an attractive new business model the DRM provider pooling loads is the so called ‘aggregator’. opening up new revenue streams for Utilities and enabling Typically, the aggregator hosts the necessary equipment new approaches to customer services and retention. which primarily consists of control units, bidirectional The challenges are manageable, prospectively, within a communication and IT application(s) for forecasting, pooling, European framework. monitoring and controlling. Utilities do not possess the capabilities required for an aggregator. In the best case 82 Renewable Energy Sources & Local Energy Transitions
  • 84. Local authorities tend to enhance and promote their public network to increase ridership. In 2012/2013, Prague simplified and optimized its public transport network, while Tallinn became the largest city in the world to provide zero-fare public transport. 20 yr ig ht © C ap g Initiatives were also launched on alternative mobility such as EVs. The 4-year Green eMotion European project, launched in 2011, prepares the mass deployment of electromobility by testing EVs and smart charging stations in seven European regions. Sustainable projects in cities often include a greener energy mix based on local resources. The Houthaven project in Amsterdam launched in 2013 is one of the many examples. It aims to be neutral by generating electricity from solar and compact windmills, heat from the city’s waste-burning plant and cooling by water from the river. Moreover the energy demand of the 2,200 homes will be cut through insulation and eco-design. i in Mobility transition from car-based personal mobility to sustainable mobility (public transport, electric vehicles (EVs) and soft transportation) is a strategic challenge for cities. To support these projects, Europe has strengthened its 2012/2013 investments through dedicated funds and initiatives. In 2012, Europe launched the Smart Cities and Communities European Innovation Partnership to boost the development of smart technologies in cities in the field of energy, transport and information and communication technologies (€85 million subsidies in 2012 and €350 million in 2013). Additional European funding was dedicated to smart cities projects and research (€40 million in 2012 and €209 209 million in 2013). em “Green Deal” in the UK or KfW bank loans in Germany). By mid-2013, 400 UK households only engaged in the Green Deal. 13 Utilities the way we see it C o p District heating systems also tend to be greener such as the Sonderborg district heating in Norway based on a geothermal facility, combined with absorption heat pumps and biomass burners, which has been supplying more than 10,000 customers since mid-2012. In the UK, London Mayor Boris Johnson has set a target to deliver a quarter of London’s energy through decentralized energy by 2025. 83
  • 85. 13 em in i 20 Companies’ Overview Finance and Valuation* ig C ht increase of top 41 European Utilities debt in 2012 These companies cover a broad range of business areas: • Electricity companies such as Iberdrola, Fortum, • Gas companies such as Centrica, Gas Terra, • Companies operating in both gas and electricity, such as GDF SUEZ, E.ON, EDF, Gas Natural, • Companies operating only in electricity or gas networks, such as National Grid or Enagas. © 4% ap g In this 15th edition of the Observatory, a sample of 41 companies has been reviewed, i.e. the same companies as in the last edition. C o p yr Electricity and gas companies suffered from a further decline in power generation margins. * This chapter has been written in collaboration with Exane BNP Paribas 84 T otal sales generated by the companies sampled in 2012 amounted to €808 billion, up 12% on 2011, and prolonging the growth observed in 2010/2011 The sampled electricity-only companies had a 2012/2011 revenue increase of 4%. This growth hides two trends: • An increase in sales due to specific acquisitions (EDF acquisition of Companies’ Overview - Finance and Valuation Edison in Italy) or commissioning of new renewable assets (Iberdrola), • A decrease in sales due to pressure on hedged prices (electricity forward contracts). On this point, the surge in shale gas in the US already started to have an indirect impact on the level of European wholesale power prices, through the import of cheap US hard coal. While not reflected yet in the Utilities’ 2012 results due to forward hedging, a persistence of this trend would lead to a deterioration of the companies’ revenues prospects. Meanwhile, gas companies saw a 12% revenues increase as they benefitted from a further increase in tariffs to their clients (Centrica), and an increase in E&P volumes. Companies active in both gas and electricity saw revenues increase by 24%. However 11% of this increase is due to a change in scope of ENI Distrigas which merged with Nuon Belgium. The rest appears attributable to the consolidation of newly acquired companies (notably GDF SUEZ). Network operators saw a 7% jump in revenues, in euro terms. They benefitted from higher access tariffs reflecting past investments (National
  • 86. Utilities the way we see it Table 10.1 Utilities sector EBITDA margin evolution (2000 to 2013e) 13 Grid notably), and a higher allowed remuneration set by regulators (Terna). The weakening EUR vs. GBP also supported National Grid revenues. 30% I n contrast to sales, the average EBITDA margins declined from 19.4% to 18.7% 20 25% 20% e 13 20 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 g 20 03 20 02 20 01 Source: Exane BNP Paribas, company data – Capgemini analysis, EEMO15 ap In the meantime, electricity and gas companies suffered from a further decline in power generation margins (ENEL, Verbund notably). This effect more than offset the improvement in gas midstream margins (E.ON) and the increasing focus on cost control programs. 20 20 00 0% 04 5% Network operators managed to stabilize their operating performance, with an EBITDA margin kept at 73%. em 10% 20 This follows the trend that started to materialize in 2009. in i 15% Table 10.2 Utilities sector total debt evolution (2005 to 2013e) © 350 0 300 300 300 250 250 250 ig ht Debts [in billion €] €] We expect a further decline in EBITDA margins in 2013 (see table 10.1). Utilities should be negatively impacted by the CO2 cost increase, and by lower power prices, as their hedging rolls off. These factors should offset the positive contribution of the very cold weather seen in H1 2013. C 400 A yr ddressing debt concerns p In absolute terms, the sector debt slightly increased by 4% in 2012 versus 2011 (see table 10.2). 150 100 50 0 2005 2006 2007 2008 2009 2010 2011 2012 2013e Source: Exane BNP Paribas, company data – Capgemini analysis, EEMO15 C o This is essentially (75%) attributed to an €8 billion increase in debt at 8 EDF, boosted notably by the growing renewables related liability (CSPE, a contribution to the electricity public service). The debt is expected to stand at €15 billion lower by the end of 2013, as the underlying trend in divestments is continuing and investment programs are being reduced. 200 85
  • 87. S em g Most Utilities are enhancing their focus on operational excellence, in order to address the rising debt burden. These measures usually do not reach initial objectives and are not enough to restore fully the financial health of the companies. ap Credit agencies have kept tightening the screw on the sector, with a tendency to cut ratings progressively. elf help – enhanced focus on costs ig ht © C For instance: • E.ON is implementing its August 2011 “E.ON 2.0” program targeting over €2 billion cost savings, €2 • Fortum announced at the end of 2012 a new efficiency program aiming at improving the group’s cash flow by €1 billion over 2013/2014, € through asset divestments, investment cuts, and reduced fixed costs, yr Table 10.3 Utilities sector CAPE X to revenues ratio (2000 to 2013e) CAPEX 16% p 14% o 12% Source: Exane BNP Paribas, company data – Capgemini analysis, EEMO15 86 Companies’ Overview - Finance and Valuation e 13 20 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20 03 20 01 02 20 20 00 6% 20 8% C 10% i 20 13 • EDF announced a €1 billion ‘Spark’ €1 program in 2013, • GDF SUEZ announced a “Perform 2015” program, focusing both on investments and operating cost savings, • Spanish Utilities (Iberdrola, Gas Natural) are considering implementing cost control programs, to address the government’s intention to implement a wide reaching market reform, • Vattenfall announced a deep reorganization of the group into two regional entities in order to cut costs, effective as of January 1, 2014. in Credit agencies have kept tightening the screw on the sector, with a tendency to cut ratings progressively. Power generation overcapacity and visible impacts on future power prices led to some ratings adjustments – notably on E.ON, RWE, Fortum. The announcement by the Spanish government of a market reform in early July also led rating agencies to adopt a more prudent stance on Iberian Utilities. O n a comparative basis, a continuous decline of investments In 2012, Utilities spent €73 billion on investments, 1% above the 2011 level, which itself was 6% below 2010. The growth is essentially supported by the change in consolidation of Edison by EDF, and by the accelerated expansion of Centrica into E&P. Without these two impacts, investments are down 4%. The high debt level of most companies is leading them to save on investments as soon as projects are completed. They still remain committed to completing the construction of new European thermal power plants (RWE, E.ON for instance). Some also are further reorienting their investment program to emerging markets (E.ON, GDF SUEZ, Endesa), E&P (Centrica, GDF SUEZ), or renewables (SSE, Drax). Investments in renewables by Utilities collapsed by 24%, as several governments (Spain, the UK, the US, etc) unwound or did not prolong their support schemes.
  • 88. 20 i in em g Quite often, Utilities are being forced to sell the jewels of their activities, as these are the only activities that offer an attractive price. C o p yr ig ht Some infrastructure activities have been divested. In this category are also placed regulated wind assets, which benefit from a visible remuneration framework attractive for infrastructure type of investors: • RWE’s disposal of Net4Gas (€1.2 billion) in August 2013, of its stake in Kevag (€20 million), and of its 24.5% stake in Berlinwasser (€610 million) in June 2012, • E.ON’s disposal of stakes in German regional Utilities (Westfalen Weser for €360 million, Thüringer Energie 360 for €900 million), and of Open Grid 900 Europe (€3.2 billion) in May 2012, 3.2 • E.ON and GDF SUEZ’s disposal of Slovakia’s SPP (€2.6 billion), 2.6 • GDF SUEZ’s disposal of a 20% stake in Brazilian hydro dam project Jirau, and of wind assets in Canada, and Italy (€0.8 billion), 0.8 • Vattenfall sold its Finnish network and CHP activities in January 2012 (€1.5 billion). 1.5 Only a handful of companies have been active in specific acquisitions: • Infrastructure companies are financially healthier, and thus could afford to expand their footprint. Snam acquired TIGF in Southern France (gas transport and storage) for €2.4 billion and stakes in UK-Belgian interconnector. Enagas acquired a 90% stake in Naturgas, and 40% stake in the Chilean Quintero LNG terminal, • Some portfolio rationalization occurred for electric/gas Utilities. EDF bought the minorities of Edison in Q3 2012. GDF SUEZ bought the 30% stake in International Power that it did not own for €8.3 billion in April 2012. It also gained exposure to US LNG export potential, through the acquisition of a stake in Sempra’s Cameron LNG terminal. Separately, Centrica purchased E&P assets from Statoil for £770 million in April 2012 and expanded in North American retail services. ap Quite often, Utilities are being forced to sell the jewels of their activities, as these are the only activities that offer an attractive price. While many observers were anticipating a further step in of sovereign funds into the sector, notably after the entry of Qatar Investment Authority in Iberdrola in March 2011, or China Three Gorges in EDP in December 2011, these have however remained essentially sidelines over 2012/H1 2013. C 2012 and H1 2013 have been intense in terms of divestments for three reasons: • First, some are attempting to crystallize value that buyers could offer (Fortum’s stated attempt to divest its distribution grid in the Nordics), • Second, portfolio rationalization is ongoing, with companies refocusing on core activities or countries (EDF’s disposal in Slovakia or the US), • Third, and more importantly, most Utilities cannot address their high indebtedness through efficiency efforts only. • GDF SUEZ sold wind and thermal generation assets in Portugal to Marubeni in July 2013 (undisclosed financial terms), • E.ON disposed of hydro assets in Europe, through a swap with Verbund on Turkish assets, • E.ON and RWE sold their stake in UK nuclear JV Horizon (€860 million). © M &A – continued divestments 13 Utilities the way we see it Interestingly, some Utilities have also managed to sell some more traditional European generation assets: 87
  • 89. M g em Many Utilities are likely to implement further disposals in order to improve their balance sheet in the near future, or crystallize attractive valuation. • GDF SUEZ has committed to complete a €11 billion 2013-14 11 divestment program, and this stood at €4 billion in early August 2013, 4 • Fortum is attempting to sell its Nordics electricity distribution network (€5-6 billion), 5-6 • E.ON and RWE are attempting to dispose of their 33.4% stake in uranium enrichment company Urenco (€2-2.5 billion), (€ (€2-2.5 • RWE remains committed to dispose of its E&P activities (€5-6 billion), ( • Spanish Utilities are likely to opt for some divestments in order to C © ht ig Table 10.4 13-year Utilities sector performance versus the MSCI Europe index (base 1 on 1 January 2001) 2.6 2.4 yr 2.2 2.0 1.8 Ja n 0 Ju 1 l0 1 Ja n 02 Ju l0 2 Ja n 03 Ju l0 3 Ja n 04 Ju l0 4 Ja n 05 Ju l0 5 Ja n 06 Ju l0 6 Ja n 07 Ju l0 7 Ja n 08 Ju l0 8 Ja n 09 Ju l0 9 Ja n 10 Ju l1 0 Ja n 1 Ju 1 l1 1 Ja n 1 Ju 2 l1 2 Ja n 1 Ju 3 l1 3 1.0 0.8 o 1.2 C 1.4 p 1.6 Source: Exane BNP Paribas, company data – Capgemini analysis, EEMO15 88 20 i U in Some governments appear willing to pursue privatization opportunities, notably in Ireland, the Netherlands, and Greece. These will be successful provided governments put in place a transparent and trustworthy regulatory framework. ap Many Utilities are likely to implement further disposals in order to improve their balance sheet in the near future, or crystallize attractive valuation. restore the balance sheet after the implementation of the Spanish market reform, • Enagas is willing to spend €800 million over 2013-2015 800 on acquisitions, notably in Latin America, • Snam intends to participate in the consolidation of the European gas infrastructure. 13 &A looking ahead – focusing on further divestments Companies’ Overview - Finance and Valuation tilities stocks kept underperforming the broader market From January 2012 to July 2013, the sector has underperformed the broader equity market by 25%. Specifically over H1 2013, the relative decrease versus the broader equity market amounted to 7% (see table 10.4). The Utilities sector continued to underperform in the stock markets. A slight recovery materialized in mid2012, on the anticipation that the sector’s relatively high dividend offering could increase the attractiveness of the sector, and on E.ON’s success in renegotiating its gas procurement contract with Gazprom. However, such enthusiasm was short lived, as power prices kept declining on growing overcapacity, supported by renewables expansion, and declining CO2 price. In the second quarter of 2013, a new pick up in sector relative performance materialized. This was driven essentially by cold weather and high snow/ rainfall, which boosted the financial performance of most Utilities, due to respectively enhanced electricity and gas consumption and higher availability of cheaper power generation means. Investors have been quick to realize though that such trends cannot be extrapolated.
  • 90. Utilities the way we see it S ector valuation – a balancing act 13 Table 10.5 Utilities sector dividend yield (dividend/stock price) since 1 January 2000 8% 7% 20 The Utilities sector has remained valued at about the same P/E (price to earnings) multiple of about 10x over the past four years (see table 10.6). 6% 5% i 4% in 3% n 0 Au 0 g 0 M 0 ar 0 O 1 ct 01 M ay 0 D 2 ec 02 Ju l0 3 Fe b 04 Se p 0 Ap 4 r0 N 5 ov 0 Ju 5 n 0 Ja 6 n 0 Au 7 g 0 M 7 ar 08 O ct 0 M 8 ay 0 D 9 ec 09 Ju l1 0 Fe b 11 Se p 1 Ap 1 r1 N 2 ov 1 Ju 2 n 13 2% em Ja Source: Exane BNP Paribas, company data – Capgemini analysis, EEMO15 Table 10.6 Utilities sector P/E, Europe and US g The European Utilities sector is now trading at a wider discount to US Utilities (6pt difference in July 2013). This trading gap remains attributable to the more regulated, and thus, visible, nature of the US Utilities sector, whereas European Utilities remain more exposed to weaker wholesale power prices. Also, US wholesale power prices are much less impacted by renewables growth, and rather, supported by a recent increase in US gas prices. 16x 14x 12x C 10x 8x © 6x 4x 0 Ju 1 n 02 D ec 0 Ju 2 n 03 D ec 0 Ju 3 n 04 D ec 0 Ju 4 n 05 D ec 0 Ju 5 n 06 D ec 0 Ju 6 n 07 D ec 0 Ju 7 n 08 D ec 0 Ju 8 n 09 D ec 0 Ju 9 n 10 D ec 1 Ju 0 n 11 D ec 1 Ju 1 n 12 D ec 1 Ju 2 n 13 01 European Utilities US Utilities ec D Ju D n 00 2x 2x 0x 0x ht Investors are often accused of being too short-termist in their assessment of the business models and prospects of Utilities. The ball is in the policymakers’ court to prove them wrong by providing medium-term regulatory visibility. 18x ec The dividend remuneration level suggested by current stock prices appears attractive, at close to all-time high versus the broader market. The question is whether Utilities will be able to sustain such high levels as they remain highly indebted. ap 20x yr ig Source: Exane BNP Paribas, company data – Capgemini analysis, EEMO15 C o p Investors are often accused of being too short-termist in their assessment of the business models and prospects of Utilities. The ball is in the policymakers’ court to prove them wrong by providing medium-term regulatory visibility. 89
  • 91. 13 Strategy and Organizational Challenges T 20 i g ap © C In addition to this context, regulatory pressure on Utilities leaves them with lower room for manoeuvre: • European governments are planning or have already implemented energy reforms and additional taxes: carbon levy in the UK, setting up a carbon price floor at £16/t of CO2 for electricity generation as of April 1, 2013; the planned 6% tax rate on power generation revenues in Spain; Finnish plans to levy a windfall tax on nuclear and hydro plants from 2014; the reform of the Flemish C o p yr ig ht Political risks at national level is contributing to the current market uncertainty. 90 support scheme for green power and cogeneration that drastically reduces support levels as of 2013; the planned increase of the coal tax in the Netherlands to €25/t in 2015 (which might be scrapped if Utilities agree to close low-efficient coal-fired units), • Besides, Utilities must comply with the Large Combustion Plants Directive (LCPD) that requires them to close the power combustion plants that do not comply with the emission limits by 2015. The Directive allows plants to be exempted on condition that they are not in use for more than 20,000 hours between January 1, 2008 and December 31, 2015 – some of the plants, mostly in the UK, are already disconnected from the grid, having exceeded these 20,000 hours. in As it was mentioned in other chapters, the power and gas economic environment for European Utilities is still gloomy, with a continuous decrease in gas demand and a stable electricity demand. The energy mix is evolving as the development of RES power generation capacity and the low coal prices induce a decrease in CCGT utilization rate and thus lead to closing of some capacities. Still the current generation overcapacity situation in Europe continues to be structural. em Regulatory pressure on Utilities leaves them with lower room for manoeuvre. he European Utilities market context continues to be challenging Companies’ Overview - Strategy and Organizational Challenges Political risks at national level is contributing to this market uncertainty, particularly the ongoing German elections, the Italian political paralysis, the French internal political issues between the socialist majority and their partners from the Green party, etc… As an example of this situation, German Utilities face the need to comply with the LCPD Directive while plant closure restrictions regulations are voted upon.
  • 92. 20 i in ap g em In Europe, Utilities are seeking to benefit from the ongoing energy transition and are trying to diversify their service offerings through the development of: • Energy efficiency: e.g. GDF SUEZ targets to increase efficiency revenues by 40% in 2011-2017, • Distributed energy: e.g. E.ON is investing in Germany to seize opportunities from the energy system transformation and also in Sweden, the UK and the Netherlands. It is focusing on district heating and industrial CHP activities and is CAPEX planning to increase its CAPE by 50% per year in 2013-2015, starting at €0.3 billion, €0.3 • Anticipating technological evolutions: e.g. demand side management, services to new energy consumption points (data centers) or smart technologies. Regarding smart technologies, Enel and Endesa are the global leader in SmartCity projects, having a total of seven projects underway (Malaga, Barcelona, Turin, etc) and are starting to export the model to Latin America (Santiago de Chile and Armação dos Búzios in Brazil). ig ht The first lever for growth is to increase revenues outside of Europe: • E.ON is targeting environments favorable for players with strong capabilities in generation. The group entered Brazilian generation in April 2012 with the acquisition of 10% stake in MPX, increased to 36% in 2013, as well as the Turkish market, where its entry has been approved by the local anti-trust authority in January 2013, • Endesa increased its generation capacity in Latin America by 2% to 16 GW and plans to become a major player in the region’s gas market within the five next years (the first target is to start a new business, LNG distribution in Chile and Colombia), • GDF SUEZ’s CAPEX priority is clearly outside Europe. The group is targeting new markets: South Africa, Kuwait, Morocco or Mongolia. European Utilities are looking to reduce exposure to their depressed core businesses by investing in areas of potential growth. C European Utilities are looking to reduce exposure to their depressed core businesses by investing in areas of potential growth. As a second growth lever, Utilities continue to develop renewable capacities both in and outside of Europe as this market remains relatively preserved. For instance, Enel targets to increase its capacity by 55% in 20122017, GDF SUEZ wishes to commission additional renewable capacities of 2 GW by 2017 in Europe and E.ON is pursuing its growth in renewables in Russia and the US. © I n this context, Utilities continue to implement the efforts initiated in recent years 13 Utilities the way we see it Furthermore, Utilities are also restructuring and refocusing their European activities (for more details see the Finance and Valuation chapter). C o p yr Still, growth strategy in emerging countries is not risk-free, as E.ON learned when its Brazilian partner, a Brazilian multibillionaire of German origin, got into major financial problems that could have an impact on the MPX-E.ON JV. 91
  • 93. C o p yr ig The full impact of shale gas on the European energy market is yet to be assessed. 92 13 20 in em ht © C ap g The already ongoing energy transition is bringing in new market players. European shale gas development is still hindered by regulation and public opinion. For the moment, the main side-effect of shale gas activities in the US is the European Utilities’ success in renegotiating their long-term take-orpay contracts. This has an effect on the European gas market as the upstream players take advantage of this situation and try to enter into downstream activities: • In March 2012, E.ON renegotiated its contracts with Statoil but had to open the German hub so that the latter can sell gas directly to German customers, at the spot gas price, • In November 2012, BASF agreed on an asset swap with Gazprom: the latter is to take over 100% of the currently jointly run natural gas trading and storage business as well as 50% of Wintershall Noordzee. BASF aims at further expanding its production of oil and gas through the swap. Most electric Utilities are involved in discussions with their local governments about the possibility of implementing a capacity mechanism. The idea is that the rise in renewable capacity combined with the weak demand is progressively denting the utilization rate and the profitability of traditional thermal generation. Capacity payments could restore traditional power generation profitability. The outcome of these discussions remains extremely uncertain, both in terms of calendar of implementation, and level of generosity of such schemes. All countries appear to be going their own route. i M ain challenges ahead for European Utilities: shale gas, capacity payments and energy transition Companies’ Overview - Strategy and Organizational Challenges The already ongoing energy transition is bringing in new market players. Industrial players, such as Schneider Electric or General Electric are trying to address Utilities’ customers’ needs by offering them solutions for energy efficiency using new technologies. Smaller companies and even start-ups also operate in this field, offering for instance smart plugs. Moreover, the European Energy Efficiency Directive will force the European players to prove that they are helping their customers to save energy. This will obviously lead to further pressure on Utilities’ revenues (the Directive requires a 1.5% drop in volume per year) and possibly to a reassessment of their business model.
  • 94. Utilities the way we see it Appendix Tables FI Sweden Estonia 21 Denmark 170 37 4 76 164 36 76 29.7 68 5.3 0.7 3.1 UK IE DK 8 2.0 3 125 Germany 8.0 NL BE Belgium FR 26 148 13 143 10 117 35.8 5.9 Slovenia PT ES Romania SK AT 33 0 5.5 Italy 336 BG Greece IT 151 28.8 RO 6 0 342 8.8 Hungary 0.9 Spain Number of connected  customers (million)  41 HU SI 1 6.2 1.7 5.8 CZ 128 CH 5 305 Austria 5.6 France Portugal LU 12 6 308 45.3 Number of DNOs  with < 100,000 customers Lithuania PL Czech Rep. 780 DE LT 16.4 883 Total number of DNOs LV 131 em Netherlands Poland g 1 EE SE i 3.2 Ireland 95 20 NO Finland in UK 0 13 Table A.1 Map of electricity distribution (2012) GR 1 0 ap 124 35.6 © C Source: CEER, regulators – Capgemini analysis, EEMO15 7.5 Table A.2 Map of gas distribution (2012) UK Ireland ht 23.2 Netherlands 1 UK 8 yr BE Belgium p 25 C ES 2 SE Poland 14 Slovenia 7.3 Romania SK AT SI 41 39 HU 3.1 Hungary 16 11 5 0.5 2.9 CZ 20 1.4 6 80 Austria CH Number of connected  customers (million)  Lithuania 86 19.6 8 26 LT Total number of DNOs Number of DNOs  with < 100,000 customers PL Czech Rep. DE LU 24 LV 35 640 Finland EE 720 6 0.2 RO 11 16 3.5 Spain PT 0.04 29 3.0 11.4 o 7 1.2 18 22 11 0.05 6.7 NL Portugal 24 0.04 4 Germany 7.3 France 26 DK 1 FR 26 5 0.4 ig IE 0.6 Estonia 5 NO Denmark 3 0 FI Sweden 31 Italy 229 195 22.4 BG Greece IT GR 3 2 0.3 Source: CEER, regulators – Capgemini analysis, EEMO15 93
  • 95. Table A.4 Status of electricity price regimes (as of July 2013) Table A.3 I&C electricity prices – VAT excluded (H2 2012 and % change with H2 2011) Existence of regulated prices regulated (year of price control removal) BG 13 Country CZ No (2006) No DK Yes Yes EE Yes Yes FI No No FR Yes Yes DE No (2007) No GR Yes Yes HU Yes Yes IE No (2011) No IT Yes No LV Yes No LT LT Yes Yes LU No (2007) No NL Yes No Very Small Industries: annual consumption < 20 MWh 186.7 150 100 15% 5.6% 50 0 D E IT IE D K ES EU PT -2 7 C Z SK LU B E G R SE SI AT U K PL LV FR FI R O N L H U LT EE N O B G 0% Small to Medium Industries: 500 MWh < annual consumption < 2,000 MWh g 250 200 30% ap 150 118.2 100 15% 5.8% IT E IE D ES U K G R SK C 30% 95.0 15% 4.7% LT IT C Z G EU R -2 7 LV U K H U D E IE SK PT K AT ES D E Yes No Yes Yes RO Yes Yes SK Yes Yes SI No (2007) No ES Yes No SE No No UK No No Source: ERGEG, National regulators – Capgemini analysis, EEMO15 Number of electricity customers (in thousands) 5,880 5,601 5,889 CH 4,000 CZ 5,757 DE 45,330 DK 3,200 EE 701 ES 28,800 FI 3,100 FR 35,818 GR 7,500 HU 5,500 IE 2,400 IT 35,583 LT 0% B N L SI PL Source: Eurostat – Capgemini analysis, EEMO15 PL PT BG Price change H2 2012 vs. H2 2011 [%] ht ig o p FI B G LU O N SE 0 yr 50 FR R O EE Price [€/MWh, VAT excluded] 100 Yes AT 45% 150 Yes BE 300 200 No Country -15% Medium to Large Industries: 20,000 MWh < annual consumption < 70,000 MWh 250 No Table A.5 Electricity retail market size (2012) 0% © LV LT Z U B E AT C H SI PL N L D K LU EE R O N O FI SE B G FR 0 C 50 Price change H2 2012 vs. H2 2011 [%] [%] 45% EU PT -2 7 Price [€/MWh, VAT excluded] em -15% 300 No BE 20 30% No (2001) i 200 Non-households AT in Price [€/MWh, VAT excluded] 250 Price change H2 2012 vs. H2 2011 [%] Households 45% 300 1,700 LU -15% 269 LV 1,101 NL 8,000 NO 2,746 PL 16,393 PT 6,199 RO 8,838 SE 5,300 SI 914 SK 2,369 UK 29,687 Source: ERGEG, National regulators – Capgemini analysis, EEMO15 94 Appendix Tables
  • 96. 13 Utilities the way we see it Table A.6 Residential electricity price breakdown (as of June 2013) 90% 20% 15% 80% 6% 18% 16% 17% 20% 17% 17% 17% 19% 7% 19% 11% 22% 70% 3% 36% Energy Taxes Distribution / Transmission 8% 43% Energy 33% 26% 27% 18% 37% 43% 44% 32% 31% 27% 26% 50% 26% 34% i 60% 4% 12% VAT 12% 12% 15% 13% 12% 19% 29% 5% 4% 6% 5% 9% 23% 30% 28% 53% 57% 59% 63% 41% em 39% 40% 42% 42% 45% 20% 33% 33% 34% 34% 29% 16% 0% DK FR PT DE BE SE AT NL ES FI LU in 40% 10% 20 100% IT UK IE GR EU-15 Average C ap g Source: HEPI, Energie Control Austria and VaasaETT – EEMO15 © Table A.7 Potential annual savings from switching electricity retailer (H1 2013) 180 160 or 40% (+/- xx%) indicates the % change of savings compared to H1 2012 ht (-12%) 120 24% (+18%) 100 80 60 ig 20% (+53%) 17% (+32%) 13% (-27%) yr 10% (+15%) 40 0 DE UK DK 25% 20% 16% (-17%) 14% 14% (+9%) (-15%) 15% 10% (-33%) 10% 5% (+5%) 3% 5% (-13%) 2% (+10%) 0% AT BE IE NL FI IT FR PT ES o SE p 20 30% Potential savings [%] 35% 140 31% Potential savings [€] 45% C Note: The table shows the average savings in € and in percent of the current energy bill available to typical households who ea switched away from their local by-default contract to the cheapest offer available in H1 2013. The simulations were repeated each month and potential savings were averaged out over the first 6 months of 2013. Temporary discounts or rebates were taken into account for this analysis. Prices in capital cities are used as a proxy to assess prices at the national level. Source: Accredited price comparison websites, Suppliers’ website, Savings Tracker – analysis VaasaETT, EEMO15 95
  • 97. Table A.9 Status of gas price regimes (as of July 2013) Country Very Small Industries: annual consumption < 1,000 GJ (i.e. 0.2778 GWh) Households 40% 60 30% 54.0 40 20% No Yes BG No Yes BE Yes CZ No (2007) No DK Yes Yes EE Yes No FI No No FR Yes Yes K D IT PT SE SI FR LT N L LU AT SK EU -2 7 BE IE H U LV PL U K C Z D E ES RO EE BG 0% HU Yes Yes Yes No IT Yes No Yes Yes Yes No LU No (2007) No NL Yes No em -10% Small to Medium Industries: 10,000 GJ (i.e. 2.778 GWh) < annual consumption < 100,000 GJ (i.e. 27.78 GWh) g 30% ap 60 IE LT 10% 20% 10% C Source: Eurostat – Capgemini analysis, EEMO15 SE H U FI LV BG D E PT IT AT EE SK -2 7 0% Yes SK Yes No SI No (2007) No ES Yes No SE No (2007) No UK No No Source: ERGEG, National regulators – Capgemini analysis, EEMO15 Number of gas customers (in thousands) 1,349 3,095 Not developed market CH 445 CZ 2,869 DE 19,477 DK 391 EE Not developed market ES 7,297 FI Not developed market FR 11,381 GR 272 HU 3,529 IE 647 IT 22,391 LT 554 LU Not developed market LV EU PL C Z p FR K BE U o N L RO ES 9 9.0% 0 Yes BG Price change H2 2012 vs. H2 2011 [%] ht ig 30% yr Price [€/MWh, VAT excluded] 40% 31.9 31.9 31.9 20 Yes RO BE 50% 40 Yes Yes AT -10% 100 60 Yes Country Medium to Large Industries: 1,000,000 GJ (i.e. 277.8 GWh) < annual consumption < 4,000,000 GJ (i.e. 1,111.3 GWh) 80 PL PT Table A.10 Gas retail market size (2012) 0% © PT SK F EU R -2 7 IT LV BG AT ES L PL N EE K C Z BE U RO 20% SI D K 6.7% 0 C 20 U SE 40 H 40.4 FI D E LU Price [€/MWh, VAT excluded] 40% 80 Price change H2 2012 vs. H2 2011 [%] [%] 50% 100 i Yes L LT 0 No Yes LV 10% 10.9% No (2007) IE 20 DE GR in 80 Non-households Non-households No (2002) AT 20 50% Price change H2 2012 vs. H2 2011 [%] Price [€/MWh, VAT excluded] 100 Existence of regulated prices regulated (year of price control removal) 13 Table A.8 I&C gas prices – VAT excluded (H2 2012 and % change with H2 2011) -10% 443 NL 7,275 NO Not developed market PL 6,666 PT 1,251 RO 3,122 SE Not developed market SI 150 SK 1,494 UK 23,211 EU-27 117,138 Source: Eurogas – Capgemini analysis, EEMO15 96 Appendix Tables
  • 98. Utilities the way we see it 15% 17% 0% 80% 3% 19% 12% 35% 38% 12% 5% 17% 24% 24% 12% 5% 6% 4% 30% 6% 2% 14% 14% 8% 13% 35% 34% 10% 23% VAT Energy Taxes Distribution / Transmission Energy 20% 24% 24% 23% 11% 50% 79% 16% 61% 30% 42% 20% 45% 48% ES PT 48% NL 48% 50% AT 44% DE 52% FR 66% 54% 51% em 29% 10% 0% DK IT IE BE in 40% 16% 24% 70% 60% 17% 17% 14% 1% 19% i 90% 20% 20 100% 13 Table A.11 Residential gas price breakdown (as of June 2013) GR UK LU EU-15 Average C ap g Source: HEPI, Energie Control Austria and VaasaETT – EEMO15 © Table A.12 Potential annual savings from switching gas retailer (H1 2013) 180 31% or (-3%) 45% 40% (+/- xx%) indicates the % change of savings compared to H1 2012 ht 35% 120 100 24% (+22%) 80 20% (-6%) ig Potential savings [€] 140 10% (-11%) 40 0 AT UK 20% (+1%) 13% 10% (-13%) (+24%) 15% 16% (-57%) 14% 14% (n.a.) (-52%) 10% 5% (-36%) 5% 0% NL IE IT FR BE DK PT ES o DE p 20 25% 17% yr 60 30% Potential savings [%] 160 C Note: The table shows the average savings in € and in percent of the current energy bill available to typical households who switched away from their local by-default contract to the cheapest offer available in H1 2013. The simulations were repeated each ea month and potential savings were averaged out over the first 6 months of 2013. Temporary discounts or rebates were taken into account for this analysis. Prices in capital cities are used as a proxy to assess prices at the national level. Source: Accredited price comparison websites, Suppliers’ website, Savings Tracker – analysis VaasaETT, EEMO15 97
  • 99. EBITDA 2011 (€ million) Y-o-y change (%) 17% 10,769 9,353 15% 90,673 7% 17,026 16,525 3% 65,307 11% 16,810 84,889 79,514 7% 16,738 Elec 50,771 49,153 3% 8,727 Elec 33,933 32,686 4% 7,005 UK Gas 29,523 26,314 12% ES Elec 34,201 31,648 8% Scottish & Southern Energy UK Elec 35,047 36,791 (5%) Vattenfall SE Elec 19,230 20,251 (5%) GasTerra NL Gas 23,381 21,095 National Grid UK Network 17,614 16,041 EnBW DE Elec 19,246 18,790 Gas Natural Fenosa ES Elec/gas 24,904 21,076 EDP PT Elec 16,340 15,121 Alpiq CH Elec 10,546 11,342 ENI Distrigas BE Elec/gas 36,200 7,025 Dong DK Elec/gas 9,033 Fortum FI Elec 6,159 Eneco BE Elec/gas 5,256 CEZ CZ Elec 8,555 RTE FR Network 4,529 3,174 DE Elec/gas 132,093 11,2954 GDF SUEZ FR Elec/gas 97,038 EDF FR Elec 72,729 Enel IT Elec RWE DE Endesa ES Centrica Iberdrola AT Elec DE Elec Statkraft NO Elec EVN AT Elec/gas Snam IT Gasunie NL Drax GRT Gaz Bord Gais IE Terna IT 8% 17,416 (4%) 7,860 11% 7,860 (11%) 3,937 12% 7,727 7,651 1% 2,507 2,267 11% 6,262 6,100 3% 11% (39) 52 (176%) 10% 6,157 5,540 11% 27% 4,427 2% 2,293 1,809 18% 4,845 4,429 9% 8% 3,628 3,815 (5%) (7%) 817 917 (11%) 1,314 245 436% 18% 1,160 1,848 (37%) 6,161 (0%) 2,403 2,408 (0%) 5,007 5% 776 711 9% 8,527 0% 3,342 3,405 (2%) 4,229 7% 1,610 1,355 19% ap 415% (18%) 1,234 1,062 16% 3,590 8% 399 394 1% 4,106 2,869 43% 1,325 1,252 6% 2,847 2,729 4% 458 471 (3%) Network 3,946 3,605 9% 2,817 2,612 8% Network 1,506 1,726 (13%) 941 1,108 (15%) Elec 2,195 2,117 4% 368 385 (4%) FR Network 1,652 1,564 6% 854 816 5% Elec 1,625 1,608 1% 380 343 11% Network 1,806 1,636 10% 1,390 1,230 13% Elec ht ig NO © 3,865 3,895 UK Hafslund 1,757 (13%) 283 287 (1%) Elec 1,317 989 33% 212 217 (2%) ES Network 1,755 1,637 7% 1,299 1,215 7% ES Network 1,157 1,113 4% 934 886 6% BE Network 1,310 1,278 2% 456 448 2% BE Network 626 710 (12%) 307 402 (24%) NL Network 1,647 1,541 7% 458 573 (20%) FI Network 526 441 19% 170 124 37% NO Network 713 705 1% 302 311 (3%) 808,555 722,815 12% 140,891 135,234 4% yr 1,534 DK Red Electrica p Enagas Elia TenneT C Fingrid o Fluxys Statnett Total Source: Exane BNP Paribas, company data – Capgemini analysis, EEMO15 98 15,592 7,630 C Verbund Y-o-y change (%) i E.ON MVV Sales 2011 (€ million) in Sales 2012 (€ million) em Type g Country 20 EBITDA 2012 (€ million) 13 Table A.13 Main financial characteristics of European Utilities (2012) Appendix Tables
  • 100. Utilities the way we see it 13 Table A.14 5-year Utilities sector performance versus the MSCI Europe index (base 1 on January 1, 2008) 1.2 20 1.1 1.0 0.9 i 0.8 in 0.7 em Ja n 08 Ap r0 8 Ju l0 8 O ct 08 Ja n 09 Ap r0 9 Ju l0 9 O ct 09 Ja n 10 Ap r1 0 Ju l1 0 O ct 10 Ja n 11 Ap r1 1 Ju l1 1 O ct 11 Ja n 12 Ap r1 2 Ju l1 2 O ct 12 Ja n 13 Ap r1 3 Ju l1 3 0.6 g Source: Exane BNP Paribas, company data – Capgemini analysis, EEMO15 ap Table A.15 H1 2013 Utilities sector performance versus the MSCI Europe index (base 1 on January 1, 2013) C 1.00 © 0.98 0.95 13 g Au 3 3 l1 l1 Ju Ju 3 l1 Ju 13 n Ju 13 13 n Ju 13 ay ay M M r1 Ap Ap r1 3 13 ig 13 ar M 13 M ar b 13 Fe b 13 13 n n Fe Ja Ja Ja n 13 0.90 3 ht 0.93 C o p yr Source: Exane BNP Paribas, company data – Capgemini analysis, EEMO15 99
  • 101. Glossary Base load The minimum amount of electricity delivered or required over a given period, at a constant rate Bilateral contracts/OTC A contractual system between a buyer and a seller agreed directly without using a third party (exchanges, etc.). Also named as OTC for Over The Counter CHP/Cogeneration Combined Heat and Power. System of simultaneous generation of electricity and heat. The output from cogeneration plants is substantially better than it would be if they produced only electricity Clean Coal New technologies and processes allowing electricity generation from coal while lowering CO2 emissions Clean Dark Spread/Clean Spark Spread CAPEX CCGT/Combined cycle power plant Capital Expenditure, funds used by a company to acquire or upgrade physical assets Combined Cycle Gas Turbine. Thermal power plant, usually running on gas-fired turbines, where electricity is generated at two consecutive levels: firstly by gas combustion in the turbines, and secondly by using energy from the product of the gas combustion process in boilers, which supply heat to steam turbo-generators. This process provides high levels of thermal output (55 to 60%, compared with only 33 to 35% for conventional thermal power plants) CDM CEER/ERGEG p yr ig Clean Development Mechanisms, a mechanism under the Kyoto Protocol through which developed countries may finance greenhouse-gas emission reduction or removal projects in developing countries, and receive credits for doing so which they may apply towards meeting mandatory limits on their own emissions C o Council of the European Energy Regulators and European Regulators Group for Electricity and Gas. ERGEG was dissolved with the creation of ACER, all ERGEG works are found in CEER website CER Certified Emission Reduction. Quotas issued for emission reductions from Clean 100 ap C ht Carbon Capture and Storage. Technologies used for isolating carbon dioxide from flue gas (at combustion plants) and storing it. This means that a significantly lower amount of CO2 is emitted into the atmosphere © CCS g Exchangeable or tradable CO2 allowances or quotas within the European Trading Scheme and Kyoto protocol (see EUA) The Clean Dark Spread is the difference between electricity’s spot market price and the cost of electricity produced with coal plus the price of related carbon dioxide allowances while the Clean Spark Spread is the same indicator but with electricity produced with natural gas Black Certificates Glossary 13 Free (by choice) movement of a customer from one supplier to another Distributed generation Any technology that provides electricity closer to an end-user’s site. It may involve a small on-site generating plant or fuel cell technology 20 “Contango” means that long-term prices are more expensive than short-term prices, depicting a relaxed short-term market, whereas “backwardation” reveals more tension in the short-term reflected in higher short-term prices than in the long-term Churn/Switch European Union’s Directorate General for Energy that develops EU policies in the energy sectors EBIT Earnings Before Interest and Taxes. EBIT may also be called operating income; i.e. the product of the company’s industrial and commercial activities before its financing operations are taken into account. EBIT is a key ratio for gauging the financial performance of companies i Backwardation/Contango DG Energy Development Mechanism (CDM) project activities in Agency for the Cooperation of Energy Regulators, created under the EU Third Legislative Package, adopted in April 2009 em ACER Decentralised generation Production of electricity near the point of use, irrespective of size and technology, capacity and energy sources Demand response Any program which communicates with the end-users regarding price changes in the energy market and encourages them to reduce or shift their consumption DG Competition European Union’s Directorate General for Competition which role is to enforce the competition rules of the Community Treaties EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is a key ratio for gauging the cash flow of companies Eligible customer Electricity or gas consumer authorised to turn to one or more electricity or gas suppliers of his choice ENTSO-E European Network of Transmission System Operators for Electricity. ENTSO-E, the unique association of all European TSOs, was created at the end of 2008 and is operational since July 1, 2009. All former TSOs associations such as UCTE or ETSO are now part of ENTSO-E ENTSO-G European Network of Transmission System Operators for Gas. ENTSO-G was created at the end of 2009 and comprises 32 gas TSOs from 22 European countries EPIA European Photovoltaic Industry Association. The association that represents the photovoltaic (PV) industry towards political institutions at European and international level. EPR European Pressurized Reactor. Third generation of nuclear plant technology using advanced Pressurized Water Reactor (PWR) ERU European Reduction Unit. A unit referring to the reduction of greenhouse gases,
  • 102. Utilities the way we see it The installed capacity represents the maximum potential net generating capacity of electric utility companies and autoproducers in the countries concerned 13 Emissions Trading Scheme. An administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. The European Union Emissions Trading Scheme has been in operation since January 1, 2005 Installed capacity Gas Exporting Countries Forum. GECF is a gathering of the world’s leading gas producers GIE Gas Infrastructure Europe. GIE is the association representing gas transmission companies (GTE), storage system operators (GSE) and LNG terminal operators (GLE) in Europe Green Certificates European Union Allowances. Quotas allocated by the National Allocation Plans in compliance with the European Trading Scheme A Guarantee of Origin certificate associated with renewable targets fixed by national governments. Green Certificates are often tradable Eurelectric Greenhouse effect Professional association which represents the common interests of the Electricity industry at pan-European level The warming of the atmosphere caused by the build up of ‘greenhouse’ gases, which allow sunlight to heat the earth while absorbing the infrared radiation returning to space, preventing the heat from escaping. Excessive human emissions including carbon dioxide, methane and other gases contribute to climate change A body formed when the heads of state or government of European Union member states meet. Held at least twice a year, these meetings determine the major guidelines for the EU’s future development EWEA yr Forwards ig European Wind Energy Association p A standard contract agreement for delivery of a given quantity at a given price, for a given maturity (OTC markets) Futures o A standard contract agreement for delivery of a given quantity at a given price, for a given maturity (organized exchanges). The maturities may differ across power exchanges (weekly, half-yearly, quarterly, monthly, annually). Maturity Y+1 corresponds to the calendar year after the current year C em g Herfindahl-Hirschman Index, a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI number can range from close to zero to 10,000 ht The assembly of the representatives of the Union citizens Final Investment Decision A certificate stating a volume of electricity that was generated from renewable sources. In this way the quality of the electricity is decoupled from the actual physical volume. It can be used within feed in tariffs or Green Certificate systems HHI European Parliament (EP) FID ap European Council Guarantee of Origin C A governing body of the European Union that oversees the organization’s treaties, recommends actions under the treaties, and issues independent decisions on EU matters © European Commission (EC) Intergovernmental Panel on Climate Change, the leading body for the assessment of climate change, established by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) to provide a clear scientific view on the current state of climate change and its potential environmental and socioeconomic consequences in EUA IPCC 20 ETS GECF i particularly under the Joint Implementation where it represents one ton of CO2 reduced Hub (gas) Physical or virtual entry/exit points for natural Gas Hub (retail) Inter Company Data Exchange platform primarily enabling Suppliers and Distribution companies to exchange client related data and making supplier’s switching more reliable IED Industrial Emissions Directive, a European Union Directive that sets strict limits on the pollutants that industrial installations are allowed to spew into the air, water and soil. Installations have until 2016 to comply with the limits JI Joint Implementation, a mechanism under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment to invest in emission reducing projects in another industrialised country as an alternative to emission reductions in their own countries Kyoto Protocol The United Nations regulatory frame for greenhouse gases management, adopted in December 1997. It entered into force in February 2005 and ends in 2012. It encompasses 6 greenhouse gases: CO2, CH4, N2O, HFC, PFC, SF6 LCPD Large Combustion Plant Directive, a European Union Directive that aims to reduce acidification, ground level ozone and particulates by controlling the emissions of sulphur dioxide, oxides of nitrogen and dust from large combustion plant. All combustion plant built after 1987 must comply with the emission limits in LCPD. Those power stations in operation before 1987 are defined as ‘existing plant’. Existing plant can either comply with the LCPD through installing emission abatement (Flue Gas Desulphurisation) equipment or ‘opt-out’ of the directive. An existing plant that chooses to ‘opt-out’ is restricted in its operation after 2007 and must close by the end of 2015 LNG Liquefied Natural Gas. Natural gas that has been subjected to high pressure and very low temperatures and stored in a liquid state. It is returned to a gaseous state by 101
  • 103. Maintaining system integrity through measures which equalize pipeline (shipper) receipt volumes with delivery volumes during periods of high system usage. Withdrawal and injection operations into underground storage facilities are often used to balance load on a short-term basis A request for a physical quantity of gas under a specific purchase or transportation agreement NTC Net Transfer Capacity. NTC is the expected maximal electrical generation power that can be transported through the tie lines of two systems without any bottlenecks appearing in any system Off-peak energy is the electric energy supplied during periods of relatively low system demands as specified by the supplier On-peak energy is electric energy supplied during periods of relatively high system demand as specified by the supplier OPEC Organization of the Petroleum Exporting Countries Open season ht Metering A period (often 1 month) when a pipeline operator accepts offering bids from shippers and others for potential new transportation capacity. Bidders may or may not have to provide “earnest” money, depending upon the type of open season. If enough interest is shown in the announced new capacity, the pipeline operator will refine the proposal and prepare an application for construction before the appropriate regulatory body for approval C The merit order is a way of ranking available sources of energy, especially electrical generation, in ascending order of their short-run marginal costs of production, so that those with the lowest marginal costs are the first ones to be brought online to meet demand, and the plants with the highest marginal costs are the last to be brought on line © Merit order ig Measurement of the various characteristics of electricity or gas in order to determine the amount of energy produced or consumed NAP yr National Allocation Plan. List of selected industrial and power installations with their specific emissions allowance (under the ETS system) p NEEAPs C o National Energy Efficient Action Plans, plans providing detailed roadmaps of how each Member State expects to reach its energy efficiency target by 2020 NREAPs National Renewable Energy Action Plans, plans providing detailed roadmaps of how each Member State expects to reach its legally binding 2020 target for the share of renewable energy in their final energy consumption 102 On-peak g Market coupling links together separate markets in a region, whereas market splitting divides a regional market into prices zones. Market coupling minimises prices differences and makes them converging wherever transmission capacity is sufficient. Cross-border market coupling also drives better use of interconnection capacity ap Market coupling/Market splitting Glossary Renewable Energy Sources. Energy (electricity or heat) produced using wind, sun, wood, biomass, hydro and geothermal. Their exploitation generates little or no waste or pollutant emissions Shippers The party who contracts with a pipeline operator for transportation service. A shipper has the obligation to confirm that the volume of gas delivered to the transporter is consistent with nominations. The shipper is obligated to confirm that differences between the volume delivered in the pipeline and the volume delivered by the pipeline back to the shipper is brought into balance as quickly as possible in Ratio of average daily deliveries to peakday deliveries over a given time period RES i Off-peak em Load factor the peak load. Yearly values are an average of monthly real margin at peak load 13 Load balancing Nomination 20 the reverse process and is mainly used as a peaking fuel OPEX OPEX Operational Expenditure, expenditures that a business incurs as a result of performing its normal business operations P/E Price / Earning ratio. The ratio of the share price to the Earning per share (EPS). P/E ratio is one of the tools most commonly used for valuing a company share Peak load The highest electrical level of demand within a particular period of time Peak shaving Spot contract Short-term contract, generally a day ahead Take-or-pay contract Contract whereby the agreed consumption has to be paid for, irrespective of whether the consumption has actually taken place Theoretical capacity margin This value is obtained by deducting the peak load from the installed capacity Third Energy Package Third Energy Package. A legislative package proposed on September 19, 2007 by the EC in order to pursue the liberalisation of the electricity and gas markets TPA Third Party Access. Recognised right of each user (eligible customer, distributor, and producer) to access in a nondiscriminatory and efficient manner transmission or distribution systems in exchange for payment of access rights Unbundling Separation of roles according to the value chain segment (generation, transmission, distribution, retail) required by European Directives for enabling fair competition rules Reduction of peak demand for natural gas or electricity UNEP Real margin at peak load White Certificate This value is obtained by deducting the system services reserve, outages, overhauls and non usable capacity from the installed capacity and is compared with A certificate stating a volume of engaged energy savings (electricity, gas, fuel, …) at end-users’ site, like a home or a business. They are tradable or not United Nations Environment Program
  • 104. Utilities the way we see it 13 Country Abbreviations and Energy Authorities Regulators Ministries or authorities for energy-related topics AT E-Control Ministry of Economic Affairs: Environment Agency: Competition Authority: Belgium BE CREG (national) BRUGEL (Brussels) CWAPE (Walloon) VREG (Flanders) Ministry of Economic Affairs: Bulgaria BG DKER Ministry of Economy and Energy: Czech Republic CZ ERU Ministry of Industry and Trade: Competition Office: Denmark DK DERA Energy Agency: Ministry of Economic and Business Affairs: Ministry of Environment: Estonia EE ETI Ministry of Economic Affairs: Competition Authority: Finland FI EMV NordREG Ministry of Employment and the Economy: Ministry of Environment: Competition Authority: 20 Abbreviation Austria in i Countries em NordREG FR CRE Ministry of Ecology, Sustainable Development and Energy: Germany DE BNetzA Federal Environment Ministry: Energy Agency: Competition Authority: Greece GR RAE Ministry of Development: Ministry of Environment, Energy and Climate Change: Competition Commission: Hungary HU MEH Energy Office: Ireland IE CER (Republic of Ireland) NIAUR (Northern Ireland) Department of Communications, Energy & Natural Resources: Italy IT AEEG Ministry of Environment: Ministry of Economic Development: Competition Authority: Latvia LV VEI Lithuania LT REGULA Luxemburg LU ILR Netherlands NL DTe Norway NO NVE Poland PL Portugal PT Romania RO Slovakia SK Slovenia SI Spain ES Sweden SE C ap g France © Ministry of Economy: Competition Council: Ministry of Economy: ht Ministry of Economic Affairs: State’s energy service: Ministry of Economic Affairs: Energy Council: Competition Authority: Oil and Energy Ministry: Competition Authority: NordREG Ministry of Energy and Resources: yr ig Ministry of Economy: Directorate General for Energy and Geology: ANRE p o United Kingdom Ministry of Economy: ERSE URSO Ministry of Economy: Ministry of Environment: AGEN Ministry of Environment and Energy: CNE Ministry of Industry, Energy and Tourism: Ministry of Environment: Competition Authority: EMI Ministry of Energy: Competition Authority: NordREG CH BFE Federal Department of Environment, Transport, Energy and Communications: Competition Authority: UK OFGEM Department of Energy and Climate Change: Competition Authority: C Switzerland URE 103
  • 105. Team and Authors Gas Markets Topic Boxes Philippe David Upstream Gas Florent Andrillon Spanish energy reform Antonio Alonso Rubio Ludovica Marangoni Oscar Somarriba Guemes Safae El Fadili Capital project management Roshan Gya Sopha Ang +33 1 49 00 22 30 Our partners European Energy Policy insights CMS Bureau Francis Lefebvre Gas Infrastructures François Verrecchia Mathilde Brignatz Dr Philip Lewis +358 40 529 5852 Customer Transformation g ig Electricity Generation Grégoire Lejetté yr p o Jean Zanello C Electricity Infrastructures Andrea Serafini Riccardo Severini Electricity Wholesale Markets Wandrille Vallet Team and Authors Renewable Energy Sources and Local Energy Transitions Smart grid projects Marie Molinier Communication technology for smart meters Martin Pfründer Erik Barstad Hovdkinn Johannes Aasheim Digital revolution for Utilities Peter Harris Katia Ronzeau Smart meters deployment in the UK Jonathan Nelmes © Philippe Vié Alexandre Autheman ht Sustainability and Climate Change Targets Alain Chardon Paul Faraggi Léa Nassif Alain Chardon Energy Regulation and Policies Overview Nicolas Prévitali Alexandre Autheman C Benjamin Leyre +33 1 42 99 24 72 ap Stéphane Sun Finance and Valuation insights Exane BNP Paribas Electricity Markets i Philippe Coquet Christophe Dromacque +358 44 906 6822 104 Gas Wholesale Markets Chloé Rathour em Switching and customers behaviors insights VaasaETT Global Energy Think Tank Moïse Tignon in Mr Christophe Barthélémy +33 1 47 38 55 00 Alexandre Autheman 20 Project Director 13 Report Sponsor Agathe Dubrulle Emilie Seng Bérénice Germain Yann de Saint Germain Adam Wilkinson Energy-intensive industries competitiveness Philippe Coquet Customer experience goes digital Michael Welch Companies’ Overview Demand Response Management Moritz Fruehbauer Strategy and organizational challenges Philippe David Bastian Wurm François-Xavier Chambre Lucie Stembirkova Acknowledgements to Bettina Grötschel, Camilla Carlsson and Stéphane Tchirieff.
  • 106. Utilities the way we see it C Implantation in 30 countries: • European countries: Albania, Austria, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, France, Germany, Hungary, Italy, Luxembourg, The Netherlands, Poland, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, Spain, Switzerland, Turkey, Ukraine and United Kingdom • Outside Europe: Algeria, Brazil, China, Morocco and United Arab Emirates More information at and ig 13 20 i Our world-leading expertise includes: customer behavior and psychology, customer lifetime value, smart energy issues and market efficiency issues. VaasaETT is among other things the world’s leading source of benchmark information on customer switching trends and dynamics; retail energy prices; smart grid, smart energy demand and demand response programs. VaasaETT is also a founding member and manager of the European Smart Energy Demand Coalition (SEDC); the World’s only organization that has tracked customer behavior data in every competitive electricity market globally since market opening; and a source of market tracking data on over 60 jurisdictions in six continents. VaasaETT delivers assistance to clients and its network through consulting, collaboration and its new service. More information on C o p yr Exane BNP Paribas’s sound and balanced model is based on: • Quality research reputed for rigorous financial analysis and sector expertise. • A sales force close to our institutional clients and recognized for its stockpicking expertise. • A comprehensive range of execution services (high-touch sales trading, facilitation, electronic trading, program trading and ETF). About VaasaETT Global Energy Think-Tank VaasaETT is a unique and world leading collaborative think-tank and consultancy that delivers best practice, data, analysis and highly specialist expertise from around the world to the global energy and utilities industry. We help turn the World’s best knowledge into local strategies and solutions. At the heart of our offering are a global knowledge sharing network of thousands of contacts in over 60 countries in six continents and a vast up-to-date and ever increasing store of global best practice, data and analysis. in ap g em CMS Bureau Francis Lefebvre is a member of CMS, the organisation of 10 major independent European law firms providing businesses with legal and tax services across Europe and beyond. Operating in 49 business centres around the world, CMS has over 750 partners, more than 2,800 legal and tax advisers and a total complement of over 5,000 staff. ht With a current market share of 4% of institutional business, Exane BNP Paribas is the fasted growing broker in Pan-European equities and was ranked No 4 in the most recent Extel PanEuropean survey. Exane BNP Paribas counts 115 analysts covering about 630 European stocks and work closely with an 90-strong sales and salestrading team. Exane BNP Paribas serves more than 1,200 institutional investors worldwide from a base of 9 offices (Paris, London, Frankfurt, Geneva, Madrid, Milan, Stockholm, New York and Singapore). About CMS Bureau Francis Lefebvre CMS Bureau Francis Lefebvre is one of the leading business law firms in France (Paris, Lyon, Strasbourg) and North Africa (Algiers, Casablanca). Its organisation based on the active assistance by specialist lawyers and its recognised know-how for over 85 years ensure that companies are provided with reliable and sound advice relating to their strategic and tactical decisions at national and international level. © About Exane BNP Paribas Founded in 1990, Exane is an investment company specializing in 3 businesses: • Cash Equities: Under the brand name Exane BNP Paribas, Exane provides institutional investors with research, sale and execution on European equities. • Equity Derivatives: Exane Derivatives has built a robust structured products franchise, based on its longstanding leadership in European convertible bonds and options. • Asset Management: Exane AM is the leading long/short equity fund manager in France and recently added a team-managed long-only fund. More information can be found on 105
  • 107. 13 About the European Energy Markets Observatory 20 Initiated in 2002, Capgemini’s European Energy Markets Observatory (EEMO) is an annual report that tracks progress in establishing an open and competitive electricity and gas market in EU-27 (plus Norway and Switzerland) and the progress in reaching the EU’s 3x20 climate change objectives. The report looks at all segments of the value chain and analyzes leading-edge energy themes to identify key trends in the electricity and gas industries. i The analysis is made by a team of consultants and regional experts of Capgemini Consulting, the global strategy and , transformation consulting organization of the Capgemini Group. Their in-depth knowledge combined with sector news crunching provide an insightful analysis which is enriched by the expertise from our selected partners: Exane BNP Paribas, VaasaETT and CMS Bureau Francis Lefebvre. in About Capgemini Consulting em Capgemini Consulting is the global strategy and transformation consulting organization of the Capgemini Group, specializing in advising and supporting enterprises in significant transformation, from innovative strategy to execution and with an unstinting focus on results. With the new digital economy creating significant disruptions and opportunities, our global team of over 3,600 talented individuals work with leading companies and governments to master Digital Transformation, drawing on our understanding of the digital economy and our leadership in business transformation and organizational change. Our Expertise and Unique Approach in the Utilities and Energy Sector ap g Capgemini Consulting helps clients formulate operational strategies, implement wide business transformations and optimize organizations and processes through dedicated operational management initiatives. © C Our areas of expertise in the Utilities and energy sector include: • Digital Utilities Transformation • Smart Energy (including implementation of smart infrastructures) • Power generation • Power & gas infrastructures and regulated activities • Energy retail including energy services • Clean technologies • Water distribution, collection and treatment • Upstream and downstream Oil & Gas • Operational excellence ht Our 800+ professionals operating in 12 major geographies include consulting professionals and experts in specific value chain segments and industry issues. We deliver consulting services to 60% of the leading Utilities companies, and to 50% of the leading Oil and Gas companies worldwide. ig We are recognized for our professional commitment and leadership, our intellectual curiosity, and our ability to innovate. Find out more at: C o p yr 106 European Energy Markets Observatory
  • 108. C o p yr ig ht © C ap g em in i 20 13 Utilities the way we see it 107
  • 109. 13 20 About Capgemini em in i With more than 125,000 people in 44 countries, Capgemini is one of the world’s foremost providers of consulting, technology and outsourcing services. The Group reported 2012 global revenues of EUR 10.3 billion. Together with its clients, Capgemini creates and delivers business and technology solutions that fit their needs and drive the results they want. A deeply multicultural organization, Capgemini has developed its own way of working, the Collaborative Business ExperienceTM, and draws on Rightshore®, its worldwide delivery model. ap g Capgemini Consulting is the global strategy and transformation consulting organization of the Capgemini Group, specializing in advising and supporting enterprises in significant transformation, from innovative strategy to execution and with an unstinting focus on results. With the new digital economy creating significant disruptions and opportunities, our global team of over 3,600 talented individuals work with leading companies and governments to master Digital Transformation, drawing on our understanding of the digital economy and our leadership in business transformation and organizational change. C Learn more about us at © ra2studio (Cover & page 4), Hans-Joerg Nisch (page 18), hramovnick (page 28), photo stock (page 50), 06photo (page 68), gui jun peng (page 78), leungchopan (page 84). Rightshore® is a registered trademark belonging to Capgemini. The information contained in this document is proprietary. Copyright © 2013 Capgemini. All rights reserved. ST-9/13 C o p yr ig ht ©