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Capgemini 2013

Capgemini has used its best efforts in collecting
the information published in the 15th European Energy...
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2012 AND WINTER 2012/2013 DATA SET - FIFTEENTH EDITION

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EUROPEAN ENERGY MARKETS OBSERVATORY ...
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Gas Markets
Upstream Gas
Gas Infrastructures
Gas Wholesale Markets

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Electricity Markets
Electricity Generati...
Utilities the way we see it

Tables

Table 2.3 Map of generation capacities
projects in MW (as of May 2013) .................
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A Strategic Overview of
the European Energy
Markets

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Editorial by Colette Lewiner

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While energy efficiency is generally
satisfactory in the industrial sector, the
problems lie i...
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isolated in Europe. Other countries,
such as Germany and the Netherlands,
having performed prelim...
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When US exportations will be effective
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Triggered by the Energy-Climate
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Moreover, the massive importations
of solar panels, mainly from China,
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In the present market conditions,
very high consumption on cold, dry
and dark days with no wind could
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In August 2013, the French government
approved the 11 million gas smart
meters47 deployment t...
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Japanese nuclear status
According to recent reports56, it is
unlikely that there will be any serious
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There are 65 nuclear reactors under
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The energy transition debate that took
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Even if electricity and gas demand/
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Paris, September 6, 2013.

Colette Lewiner
Energy and Utilities Advisor to Capgemini Chairman

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Energy Regulation
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Policies Overview

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Fourthly, the gas market design has
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85% of the gas is...
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of its generation capacity abroad), and
the most enterprising are developing
their business in emerging countri...
Utilities the way we see it

Spanish energy reform: a high risk mission

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Although consumers cannot support all c...
Jan 1 - June 30: Denmark leads the EU Council Presidency
March 11, 2011 - May 5, 2012
All 54 Japanese nuclear reactors pro...
October 5
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Meanwhile the 2012 global land and
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Table 1.2 3x20 European Union climate change objectives (status as of 2011 with 2012
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In June 2013, 22 out of 27 Member
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This paper underlined the key issues
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Electricity Markets

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n 2012, security of supply
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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 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.

Published in: Business, Technology

European Energy Markets Observatory 2013

  1. 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. 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. 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. 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. 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. 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. 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 http://ec.europa.eu/clima/policies/eccp/studies_en.htm, European Commission, September 2012 18 LNG: Liquefied Natural Gas 6 A Strategic Overview of the European Energy Markets
  8. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

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