The document discusses Europe's growing energy security concerns amid increasing dependence on Russian gas, heightened by geopolitical tensions following the Ukraine crisis. It highlights the EU's efforts to diversify energy sources and develop infrastructure to reduce reliance on Russian imports, despite the remaining dependence projected through 2030. Additionally, the document touches on the controversial energy transition in France, aiming to decrease nuclear reliance, and Poland's resistance to phasing out coal amid economic implications.

1. Focus on regulation
as losses mount
Government pressure to
reshape the industry
sees a
sector
in a
state
of flux
Page 5
FT SPECIAL REPORT
European Energy
www.ft.com/reports | @ftreportsThursday October 23 2014
Inside
Continent aims to wean
itself off Russian gas
Ukraine crisis forces EU
leaders to face up to the
extent of its dependence
Page 2
District heating to play
starring role
Scandinavia offers
model for using excess
power station heat
Page 3
Comment
Philip Stephens
Barriers to exploitation
of Greenland’s resources
are not just physical
Page 4W
hen Guenther Oet-
tinger, the EU’s com-
missioner for energy,
warned last month that
Russia might cut
natural gas supplies to the continent in
retaliation to western sanctions, he
firmly placed energy security front and
centre of the debate surrounding esca-
latingtensionswithMoscow.
“That [Russia’s President Vladimir]
Putin would use false information, lies
and weapons was beyond my imagina-
tion,”MrOettingerwaswidelyreported
to have said at a Brussels event. “That’s
why I am not ruling out worst-case sce-
nariosanymore.”
The clash between the west and the
Kremlinoverthelatter’smilitaryaction
inUkrainehasledtotheworststand-off
between both sides since the cold war,
and the threat to energy supplies has
accelerated calls for a move away from
Russianenergysources.
The EU imports more than half the
energy it consumes, and Russia is its
biggest supplier of oil, coal and natural
gas.InEurope’scapitalsthereisapalpa-
ble sense of déjà vu, in view of the 2006
and 2009 stand-offs between Moscow
andKiev,thatheldEuropetoransom.
As Mr Oettinger mediates talks
betweenRussiaandUkrainetoresolvea
gas pricing row in an attempt to avert a
damaging supply cut in the winter, the
latest dispute has not only revealed
what little room for manoeuvre Europe
has, but also the diverging interests of
EUmembercountries.
The conflict has also underlined –
again–thecompetingclaimsoftheEU’s
three energy policy objectives: security
of supply, environmental concerns and
competitiveness.
JonathanStern,seniorresearchfellow
at the Oxford Institute for Energy Stud-
ies, says: “If you want to use less gas, in
many countries that will mean more
coal [usage] and you kiss your carbon
dioxide emissions targets goodbye.”
Renewables would need subsidies,
whilealternativegasimportswouldcost
more,headds.
Inrecognisingthecontinent’svulner-
ability to external energy shocks, the
European Commission has spent the
pastfewmonthsconductingstresstests
toassesshowthecontinent’senergynet-
workswouldcopeintheeventofdisrup-
tions, particularly during the winter
whengasusageisatitshighest.
The aim of the tests is to develop
short-term back-up mechanisms for
emergency situations. The results will
be released this month, before the
commission meets to discuss its 2030
policy framework for climate and
energy. This includes moves to increase
EU seeks alternative suppliers
As Europe’s biggest
supplier of oil, coal and
natural gas, Moscow has
flexed its political and
economic muscle.
Anjli Raval and
Henry Foy look at a
continent learning
to fight back
Line of attack: Russia’s Gazprom, supplier of a quarter of Europe’s natural gas, has expanded production and storage capacity – Alexander Zemlianichenko/Bloomberg
gasstocks,developinfrastructure–such
as reverse flow pipelines – reduce
energy demand and switch to alterna-
tivefuelsintheshortterm.
Longer-term aims include improving
energy efficiency, boosting production
within the EU, diversifying supplier
countries and access routes, construct-
ing infrastructure and creating a more
unified energy policy – a demand
former Soviet states, such as Poland,
havemadestrongly.
continuedonpage5
Simple solutions offer
a greener future
Saving energy could cut
costs for industry and
solve climate change
Page 5

2. 2 FINANCIAL TIMES Thursday 23 October 2014
European Energy
A
n interim gas deal between
Ukraine and Russia has
been in the works. If a new
price and a timetable for
paying off $5.3bn in gas
debtscanbeagreed–atthetimeofpub-
lishing, although progress had been
made,afinaldealhadnotbeenreached
–thereishopethatlargeareasofEurope
will not be shivering in the cold this
winter.
Efforts to end the row have collapsed
several times and take place in the
shadow of a wider political crisis. The
annexation of Crimea this year and the
subsequent sanctions on Moscow have
forcedEuropetofaceuptotheextentof
its dependence on Russian energy
exports.
Patryk Figiel, a Poland-based lawyer
for Linklaters, says: “Despite geopoliti-
caltensionswithRussia,fromanindus-
try perspective, it was thought that
[Russian President Vladimir] Putin
would not put at risk the country’s gas
contracts.Butsentimenthaschanged.”
RussiastoppedgasflowstoUkrainein
June – awakening memories of the gas
crises of 2006 and 2009. The continent
received about a third of its needs from
Russiain2013– morethan160bncubic
metres(bcm)–andcloseto40percent
of this amount is pumped via Ukraine.
However,state-controlledGazpromhas
in recent weeks cut supplies to Poland,
Slovakia,AustriaandHungary.
Gas storage reservoirs throughout
Europe are close to full and govern-
ments have already talked about ways
to ration resources through the winter.
Buttheprospectofsustainedstoppages
if the matter is not resolved has raised
concerns. The Institute of Energy Eco-
nomicsattheUniversityofCologneesti-
mates that in the case of a Russian
export embargo starting in November
the most dependent countries, Estonia,
Finland,LatviaandBulgaria,wouldsuf-
fer in the first three months. Germany
would be affected after six months and
France and Italy during a nine-month
stoppage. About 46bcm would not be
delivered.
“Thiswinteriscrucialtodetermining
the relationship Europe has with Rus-
sia,” says Thierry Bros, analyst at
Société Générale. “Europe has to scrap
50yearsofthewayitdoesbusinesswith
Russia.”
The Russian Ministry could not be
reachedimmediatelyforcomment.
Dmitry Medvedev, Russia’s prime
minister,hassaidinrecentmonthsthat
thecountry“shouldn’tclosethewindow
for dialogue”, while officials have
stressed that supplies to Europe would
continue.
Efforts have been made to improve
Europe’s gas infrastructure resilience.
Pipelines that allow supplies to move
betweenRomaniaandHungaryorSlov-
enia and Austria, among others, have
beenbuilt.
Reverseflowmechanismsthatensure
two-way movement of gas have been
implemented and liquefied natural gas
(LNG) import terminals and storage
facilitieshavebeenconstructed.
Marlene Holzner, an EU energy
spokeswoman, says: “We have con-
ducted stress tests, ensured that each
country has one month’s reserve gas
supply,[made]infrastructureimprove-
ments,andwehavefast-trackedpermit
approvals for key projects across the
continent.”
Even so, the Oxford Institute for
Energy Studies estimates that in 2030
Europewillstillneedatleast100bcmof
Russia’s natural gas – approximately
60percentof2013imports.
“Many of the ‘highly dependent’
countries can reduce or even eliminate
dependenceonRussiangasbytheearly
2020s, by means of LNG imports and
more pipeline connections,” says
Jonathan Stern, senior research fellow
at the institute. “[But] which countries
are going to be willing to pay these
costs?”
Althoughinfrastructureisanintegral
part of any emergency response, it can-
notberegardedastheprimarysourceof
supply security, says Trevor Sikorski of
EnergyAspects,aconsultancy.“Europe
needs[diversified]supplies.”
Europe’sgasreserves,fromNorwayto
the UK, are drying up, while domestic
shale gas industries are in doubt
because of perceived environmental
risks. Supplies from north Africa, the
eastern Mediterranean, central Asia,
Iran and Iraq are a possibility, but will
taketimetoberealised.ExpensiveLNG
imports are the most viable option, but
volumesarequestionable.
Generating electricity from coal
insteadofgasmaybefavouredbysome
nations,butwouldcomeattheexpense
of goals to reduce greenhouse gas emis-
sions. On nuclear policy, Europe does
notspeakwithonevoice,whilerenewa-
blesarecostlytoscaleup.
As yet it is not understood how com-
mercially viable many flagship infra-
structureprojectsare.
Countries keen to make the shift
wouldalsoneedtoterminatelong-term
contracts with Gazprom, even as prices
remainatattractiveratesforatleastthe
next decade. Regional variations also
persist.
Continent strives
to wean itself off
dependence on
Russian gas
Ukraine crisis Infrastructure improvements are no
substitute for diversified supplies, says Anjli Raval
Inthe1970s,Francestartedarevolution
in its national energy policy, installing
nuclearpowerplantsataspeedandona
scale unprecedented anywhere in the
worldoutsidetheUS.
Some40yearslater,itcouldbeonthe
brinkofanother:abillpassedlastweek
in the lower house of parliament envis-
ages Europe’s second-largest economy
halvingitsenergyconsumptionby2050
compared with 2012 levels and putting
renewableenergysourcescentrestage.
France’s energy transition bill, one of
the most ambitious legislative changes
proposed for the three remaining years
of Socialist President François Hol-
lande’sterminoffice,contemplatesa30
per cent reduction in fossil-fuel con-
sumption by 2030, thanks in large part
toincentivestoswitchtoelectriccars.
As Ségolène Royal, energy minister,
said recently, the bill aims “to give
France the most advanced energy tran-
sitionlegislationinEurope”.
Butthemostcontroversialpartofthe
billisitsaimtoreduceFrance’sreliance
onnuclearenergyasasourceofelectric-
ity, from 73.7 per cent of the total last
yearto50percentby2025.
Several factors explain the speed and
ambition of the plans. One is the 2011
accident at Fukushima in Japan, which
served as a wake-up call to all govern-
ments of the potential environmental
implications of nuclear energy and of
theimmenseclean-upcostsinvolved.
Germany, Europe’s largest economy
andFrance’smostinfluentialneighbour
hadalreadydecidedtoabandonnuclear
power; Fukushima made it accelerate
theplan.
A second factor, argues Jean-Marie
Chevalier,economicsprofessoratParis-
Dauphine University and an energy
expert, was more domestic in nature:
adopting a far-reaching programme on
energy transition won Mr Hollande the
support of the Green party, helping to
securehiselectionvictoryin2012.
“There was a clear, political dimen-
siontothegovernment’splans,”hesays.
Yet the proposals have drawn
criticism from several quarters.
Unsurprisingly, one of them is the pro-
nuclear lobby. For a start, they insist,
thepolicyonnuclearfuelhasresultedin
reliableandabundantelectricity.
The programme, developed against
thebackdropofthe1970soilshocks,has
fordecadeshelpedFranceovercomeits
relatively limited access to traditional
fossilfuels.Proponentssaytheresulting
energy security is no less important
today, given the west’s desire to lessen
itsdependenceonRussia’shugenatural
gasreserves.
Advocates of nuclear fuel also argue
that the programme has long provided
French consumers – both residential
andindustrial–withmuchlowerenergy
coststhantheirEuropeanneighbours.
During the 1970s and 1980s, France
spent billions constructing nuclear
power plants, and today has 58. But the
bulk of those costs were front-loaded,
leaving the French state today with
relatively cheap running costs that
many experts say would be impossible
toreplicateusingothersources.
The Union Française de l’Électricité,
the French professional association for
theelectricityindustry,saysanyprema-
ture closure of French nuclear reactors
would lead to a substantial rise in elec-
tricitycosts.
With shale gas pushing down energy
prices in the US, the International
EnergyAgencylastyearwarnedthatthe
wideninggapbetweenUSandEuropean
energypriceswouldtranslateintoaloss
of market share for Europe’s energy-
intensiveexports.
MsRoyalhasunderlinedthatthepro-
posed legislation does not mean France
is turning its back on nuclear. “That is
notthechoicewearemaking,”shesaid.
Areva,themajoritystate-ownedcom-
pany that builds nuclear power plants,
saysitisoptimisticaboutthelatestpro-
posals.Callingthebill“verybalanced”,a
representative told the FT: “It actually
confirmstheimportantrolefornuclear
inthefutureFrenchenergymix”.
Yetsomequestionwhethernuclearis
a suitable partner to renewable fuels,
pointing out that renewables such as
solar and wind power are volatile in
terms of output, while nuclear power
plants are not best suited to the sort of
short-term surges and falls in output
requiredtocompensate.
ProfChevalierisconcernedaboutthe
proposed timetable, saying it would
involveshuttingdownplants–atahuge
cost – that still have a viable life of 20
yearsormore.Estimatessuggestthebill
would lead to the closure of between 23
and25nuclearplantsby2025.
“Youshouldnotcloseaunitforpoliti-
calreasons,”hesays.“Youhavetoassess
the costs involved and make your deci-
sionbasedoneconomicarguments.”
Politics helps drive France’s newfound commitment to renewables
Nuclear
Critics say shutting down
nuclear plants would not
make economic sense,
writes Adam Thomson
73.7%
France’s reliance
on nuclear energy
as a source of
electricity from
total generated
50%
Targeted reliance
by 2025, which
would involve
shutting down up
to 25 plants
Under slate-grey skies one chilly Octo-
ber morning in Warsaw, Ewa Kopacz,
Poland’s new prime minister, saw first-
hand the front line in Europe’s high-
stakesbattleoverthefutureofcoal.
Outsideparliament,whereshewasto
make her maiden speech as the coun-
try’sleader,hundredsofhelmetedmin-
ers sounded foghorns, chanted slogans
and waved banners in a protest calling
foractiontosavetheirindustry.
Coal is at a crossroads in Europe. For
some, the fuel is too polluting to keep
burning in such high quantities. But for
others,itistoocheap,tooabundantand
toopoliticallystrategictoabandon.
The midterm future of Europe’s
energy mix, and that of coal, may well
be decided in Poland, the EU’s second-
largest producer and consumer of the
blackstuff.
Coal is the dirtiest of all fossil fuels.
Historically, its use in environmentally
awareEuropehasbeenfalling.Butcon-
sumption has ticked up since the US
shale gas boom sent coal prices tum-
bling, and countries such as Poland are
resisting calls to switch to lower-emis-
sionalternatives.
“It will be extremely difficult politi-
callyandeconomicallyforusjusttoend
ourdependenceoncoal,”saysOktawian
Zajac,headofthecoalpracticeatBoston
Consulting Group in Warsaw. “In the
medium term, the top priority is not to
switch away from coal, but to produce
coalthatiseconomicallyjustifiable.”
ThatisnottheviewinBrussels,where
diplomats are trying to hammer out an
EU deal to curb the bloc’s carbon emis-
sions by 2030. That deal is likely to
revolve around whether countries are
willing to pay for the environmental
benefits of reducing their fossil fuel
usagegiventhecostlieralternatives.
The biggest impediment to agree-
ment is coal-hungry Poland, and the
angry miners who won support in Ms
Kopacz’s speech. “I realise how impor-
tant environmental concerns are . . .
but my government will not accept
increases in the costs of energy in
Polandandtheimpactontheeconomy,”
theprimeministersaid,addingthatthe
fuel was of strategic national impor-
tance.
HeavycoalconsumersintheEU,such
as Poland, the Czech Republic and Bul-
garia, say the proposed reduction tar-
gets would cripple their economies by
raising energy prices. Poland says its
wouldrocket120percent.
Coal accounts for 27 per cent of the
EU’s gross power generation, according
toEurostat,justbehindnaturalgas,and
below the US and global average of
about 40 per cent. Consumption in the
EU fell 40 per cent between 1990 and
2009, and with large users, such as the
UK and Germany committed to further
reductions,useofcoal–whichproduces
more carbon dioxide than the equiva-
lent amount of gas or nuclear power –
shoulddeclineoverthecomingdecades.
But a series of unrelated events have
conspired to make coal very attractive
to European power producers, muddy-
ingthedebateandcausingfrustrationto
environmentalcampaigners.
The surge in US shale gas production
over the past half decade has pushed
downgaspricesandmadeimportsofUS
coal cheaper. That effect may increase
as environmental laws passed in the US
to curb emissions could lead to
increaseddumpingofAmericancoalon
the European market. Add to that the
uncertainty over Russian gas supplies
andthefearinEuropeancapitalsofrely-
ing on Moscow to supply their power
needs, and a still-sluggish EU economy
where countries face tight budgets, and
it is easy to see why coal is a tempting
proposition.
Since2009,consumptionhascreptup
10percent,accordingtoEurostat.Even
in Germany, which has been at pains to
stress its commitment to cutting emis-
sions, coal use has risen since 2010,
partly as a result of its decision to shut
allitsnuclearpowerplantsby2022.
Thatincreaseincoaluse,analystssay,
isinevitable,asEuropeseekstokeepits
industrialbasegloballycompetitive.
“Thetruthisthatitwillbeimpossible
forEuropetostaycost-competitivewith
the US without using coal,” says BCG’s
MrZajac.“Coalisstillverymuchpartof
thefutureenergymix.”
The UK, the EU’s third-largest con-
sumerofcoal,isanotheroutspokensup-
porterofemissionsreductions.
But with many of its nuclear power
stations heading for decommissioning
andthepotentialofitsshalegasdeposits
still not fully known, coal will probably
continue to be an important element
ofitsenergymix.
Several factors conspire to increase fossil fuel use
Coal
The black rock is cheap but
its use is hard to reconcile
with plans to cut carbon
emissions, writes Henry Foy
Polandsays
theEU’s
fossilfuel
reduction
targets
wouldmean
itsenergy
priceswould
rise120
per cent
As the US shale revolution
continues to transform the
country’s energy supply,
progress towards
establishing whether
Europe can follow in North
America’s footsteps is at a
snail’s pace.
Fracking bans across
many EU countries
continue, with little sign
that heightened concerns
about energy security
prompted by Russia’s
behaviour over gas
supplies will prompt a
significant reversal in
policy.
Meanwhile, in Poland
and the UK – the two
countries with plenty of
shale resources and clear
government support for
exploration – there is still
no clear evidence that
shale gas and liquids can
be extracted on
commercial terms.
But, despite setbacks
and opposition from
environmental groups,
early stage explorers
remain confident they are
poised to go some way
towards replicating the
success of US pioneers in
establishing shale gas as a
significant energy source
in Europe.
Andrew Austin, of IGas
Energy, a UK explorer, says
his company is to flow-test
two wells aimed at
demonstrating the
commercial potential of the
Bowland Basin, which
stretches across northern
England.
Further work is expected
from Cuadrilla Resources,
whose appraisal work in
east Lancashire was
blamed for minor earth
tremors and prompted a
temporary ban on fracking
in 2011.
Mr Austin says: “We
know there’s lots of gas
there, but we need to know
what it takes to make it
flow in a commercial
operation.”
He believes the
investment market could
be transformed by
successful outcomes from
a wave of flow-testing at
fracked wells planned
across UK sites.
Amid all the hype
surrounding the UK’s shale
potential, exploration work
remains extremely limited.
But Mr Austin says that
stake building in acreage
positions by Centrica of
the UK and Total and GDF
Suez of France over the
past two years has
demonstrated the interest
of energy companies in
taking early stage
positions.
“A lot of areas of interest
that are potentially
available for licensing are
already operated. I think
we will see some new
entrants and surprising
faces,” he adds.
But, in Poland, where
fracking tests have been
more extensive than in
Britain, disappointment in
drilling has cast a shadow
over the shale exploration
sector, which has seen a
number of groups abandon
the field.
Last month, 3Legs
Resources, a London-listed
early player in Poland,
became the latest to throw
in the towel by announcing
it would be relinquishing
its interests in a concession
where it has been
partnering US major
ConocoPhillips. Although
some gas and oil had been
produced at its latest
fracking well in Poland’s
Baltic Basin, the company
concluded that flow rates
were not commercially
viable and did not justify
further investment.
In Poland, more than
most countries in Europe,
the ambition of loosening
dependence on gas
supplied from Russia has
been a big factor in
ensuring government
support for fracking.
Oisin Fanning, executive
chairman of San Leon
Energy, insists his
exploration commitment in
the country remains
unaffected by 3Legs’
decision to fold its position.
Operators in Poland are
continuing to co-operate in
the sharing of data from a
growing number of wells
that have demonstrated
the potential for gas and
oil to be economically
extracted, he insists.
Mr Fanning suggests a
willing Poland remains well
positioned to beat the UK
to the line in establishing
itself as a commercially
viable shale producer of
note.
“Eighty per cent of the
population is in favour,” he
notes. “The UK won’t be as
easy as Poland.”
Melissa Stark, an analyst
at Accenture, a
consultancy, says both
countries are well
positioned in terms of
access to workers, oil
services equipment and
infrastructure to bring any
shale gas and liquids to
market, should they be
discovered in commercial
quantities. However, she
concedes, there has been
little change in generally
hostile attitudes across the
EU this year.
Such a shift would be
required to challenge the
widespread bans that
prevent shale exploration
across much of western
and central Europe.
“Not much has changed
in recent months and not
much will change until
we see success,” she
says. “What’s needed
are commercial
geologies in the UK and
Poland.”
Michael Kavanagh
Fracking Hostility limits growth
Oisin Fanning,
executive
chairman of San
Leon Energy
Breaking point:
Ukraine has
had to import
gas from its
neighbours
since Russia cut
off its supply
– Yuriy Dyachyshyn/AFP

3. Thursday 23 October 2014 FINANCIAL TIMES 3
European Energy
I
n 1978, Bulgarians flocked to see a
film called Toplo (“Heat”). Now
hailedasacomicclassicinBulgaria,
the movie catches the giddy mood
of an era when “district heating”
networks were being rapidly expanded
acrosstheeasternblocandrepresented
theapogeeofsocialistengineering.
Little known in much of western
Europe, district heating takes heat that
would otherwise be wasted from power
stations and uses it to warm water,
whichisthenpumpedroundcityneigh-
bourhoods. Toplo focuses on the shiver-
ing residents of an apartment block in
Sofiaandtheirslapstickadventurestry-
ing to connect themselves (illegally) to
thehotwaterpipes.
Almost 40 years later, people in the
former communist bloc are keener to
takethelawintotheirownhandstodis-
connect themselves. Residents in big
blocks often have no control over when
theheatingcomesonoroff.Thereislit-
tle accurate metering of individual flats
and, therefore, no incentive to take
responsibilityforconsumption.
ForEuropeanpolicymakers,increas-
ingly worried about greenhouse gas
emissions and the EU’s dependence on
fuel imports from Russia, these net-
worksfromPolandtoBulgariawould,at
first glance, seem to be wasteful black
holes. In the central European cities
where they predominate, renovation
work is urgently required, with poorly
insulatedpipesrunningaboveground.
These technical problems have been
compounded by poor regulation and
corruption scandals, notably in Bul-
garia,RomaniaandUkraine.
But it would be a mistake to write off
districtheating.EUandUNpolicymak-
ers are coming to a rather unexpected
conclusion about how to cut energy
wastage, one in which district heating
may play a starring role. Done effi-
ciently, as in Copenhagen and Helsinki,
districtheatingcouldbeaglobalmodel.
Until recently, heating lingered at the
bottom of the political agenda, but its
importanceisincreasinglyevident.
According to the UN, cities account
for 70 per cent of all energy use, and 50
percentofurbanenergyconsumptionis
for heating and cooling. If the EU wants
to rein in consumption, it has to
undergoarevolutioninthewayitheats
buildings.Thatrevolutionappearstobe
coming.
Copenhagen is widely hailed as the
modelforarethinkingofEurope’sheat-
ing system. The city started a district
heatingnetworkinthe1890s,buttheoil
shocks of the 1970s sparked a massive
expansion. Some 98 per cent of heat is
now provided by the district heating
network,theworld’sbiggest.
According to the OECD and Interna-
tionalEnergyAgency,aregularthermal
power station only makes efficient use
of 36 per cent of the fuel fed into it,
whereas so-called cogeneration plants
(producing electricity and heat
together) convert 58 per cent of energy
inputs.Capturingtheheatreduceselec-
tricity produced, but the trade-off adds
up. The latest Scandinavian projects, a
world apart from those in eastern
Europe,canbe85-90percentefficient.
Jørgen Abildgaard, executive climate
project director for Copenhagen, says
theDanishparadigmisattractinginter-
national attention, particularly from
Britain. London has set a target of
expanding district heating networks to
25 per cent of supply by 2025. Rotter-
dam last year completed the Warmte-
bedrijf project, using 26km of pipeline
to transmit waste heat from industry to
householdsandbusinesses.
Theshifttorenewablefuelsisthesec-
ondphaseofthedistrictheatingrevolu-
tion, with power stations moving from
coalandgastobiomassandgeothermal
power.
There is also a trend towards
using smaller power stations to serve
individual districts more efficiently.
Copenhagen is planning to run entirely
onrenewablesby2025.
The biggest challenge is to find a
financing model for such huge struc-
tural changes across the EU. Mr
Abildgaard notes that the Danish capi-
tal’snetworkrunsonanon-profitbasis,
which is not necessarily a model other
citieswouldseektofollow.
Leading companies that would bene-
fit from any overhaul of heating net-
worksincludeDenmark’sDanfoss,Swe-
den’sVattenfallandFrance’sDalkia.
PaulVoss,managingdirectorofEuro-
heat & Power, which represents the
heatingindustryinBrussels,sayshehas
struggledinrecentyearstopersuadeEU
policy makers to focus on cutting con-
sumption, saying their priorities lie in
finding new gas supplies. However, the
conflictinUkraineandfearsaboutRus-
sian deliveries have steered the debate
towardsenergyefficiency,hesays.
EU warms to
the potential
efficiencies of
district heating
Consumption Scandinavia offers a model for using
excess power station heat, writes Christian Oliver
Some Germans see the latest phase in the
country’s renewable energy push as
adding insult to injury.
The population has come to accept
that subsidies to support a transition to
sustainable power account for significant
portions of their energy bills. And
businesses are accustomed to paying up
to twice what their overseas rivals do for
power, particularly in the wake of the US’s
shale gas revolution.
But, as Germany embarks on its
biggest infrastructure project since
building the autobahn system, the burden
can seem at times too much. The country
is constructing a new power grid to
transport renewable energy from where it
is produced to where it is needed.
When a reporter from Die Zeit, a
German newspaper, followed the
proposed route of one 80m-wide, 720km-
long line of pylons, she met an abundance
of residents fighting the plans.
Individuals’ complaints are being
reflected in policy across Europe.
Investment in renewable energy
production fell significantly in developed
countries in 2012 and 2013 – from 2011
highs – as governments reassessed
incentive programmes that had powered
much of the investment of the past
decade. But if Europe appears to be
backpedalling, that is in part because the
EU believes it is on track to hit its 2020
goal of 20 per cent of demand being
covered by renewables. Member states
are now discussing 2030 goals.
The consultancy KPMG also notes
signs that renewables investment is
growing again in Europe. That is in part
thanks to institutional investors, who
believe they can make a profit buying
“green” bonds in, for example, France and
the UK.
While years of subsidies have helped
make Germany a leader in the renewables
field, the challenge is now infrastructure,
since the best places to harness the
energy are rarely where it is used.
And, if one concern has to do with
creating one kind of energy
infrastructure, another centres on
dismantling a different type. After the
2011 decision by Angela Merkel’s
government to scrap nuclear power,
Germany’s utilities are facing bills of €1bn
and more to dismantle their power plants.
The three biggest companies have
proposed that the government take on
responsibility – financial and logistical –
and Eon has filed a suit over the matter.
“Several questions need resolving,”
says Michael Salcher, KPMG’s head of
energy and natural resources.
“First, should these companies be
getting cash, and how much; and second,
what does the utility look like after
removing such activities? Is it still
economically viable?”
This comes at a time, moreover, when
utilities across Europe are struggling with
record low margins as wholesale energy
prices fall – thanks to renewables.
“Many energy utilities have been badly
affected by the continuing slump in
profits in the area of conventional power-
generation,” says Norbert Schwieters,
global energy leader at PwC. He adds:
“Many power plants cannot be operated
profitably, and these plants’ planned
closures in turn threaten the sustainable
security of supply in the electricity sector.
“The aim must be to create incentives to
keep back-up capacity available without
creating a new subsidy regime.”
Yet there is general political agreement
that incentives must be offered to utilities
running coal plants, for example, since
these need to remain in operation as
fallback, or baseline, sources of power
when renewables cannot meet demand.
Mr Salcher points out that it makes
little sense to look at any one European
country in isolation. Nuclear, for example,
may continue to play a role in the German
energy landscape, because the country
will probably continue to buy power from
France, Austria and the Czech Republic,
all of which have nuclear power plants.
In the end, argues Mr Salcher, the key
to achieving renewable goals may
depend as much on smart meters, flexible
operations and other innovations in
homes, offices and factories, as it does on
big infrastructure projects.
Rose Jacobs
Norbert Schwieters
‘Many energy
utilities have been
badly affected by
the continuing
slump in profits’
Shift to renewables
Old infrastructure
needs dismantling,
while distribution
grids must be built
Combined forces: an ExxonMobil cogeneration facility in Antwerp — Bloomberg

4. 4 FINANCIAL TIMES Thursday 23 October 2014
European Energy
Arrive in the Greenland capital of
Nuuk and there is a palpable optimism
in the air. The country is on the cusp of
a resource boom that will transform its
economic fortunes and underwrite full
independence from the old colonial
power, Denmark.
But spend time talking through the
inconvenient details with politicians,
business leaders and seismologists, and
harsher truths begin to collide with the
vaulting ambitions.
The resource potential is real. The
melting polar ice has set off a scramble
for the resources locked beneath. The
US government estimates the Arctic
may hold some 13 per cent of the
world’s undiscovered oil and 30 per
cent of its gas. By Washington’s
estimation, the thawing ice will also
begin to make accessible “vast
quantities of mineral resources,
including rare earths, emeralds, iron
ore and nickel”.
Greenland, a territory four times the
size of France and home to a
population of only 56,000, expects a
sizeable share of the bounty. “Climate
change,” the country’s former economy
minister, Vitus Qujaukitsoq, has been
heard to remark, “is the new
opportunity for Greenland . . . I guess
we are in the business of nation-
building.”
The discovery of iron ore, zinc, gold
and rare earth deposits has attracted
prospectors and mining companies
from around the world. China, the
biggest consumer of such resources, is
taking a close political and economic
interest, offering to provide the labour
for an iron ore development proposed
by London Mining.
Oil majors – ConocoPhillips,
Chevron, Exxon Mobil, Royal Dutch
Shell, Statoil and Cairn Energy among
them – have been mapping the icy
waters beyond Greenland’s western
coast for decades. Last year, the
government in Nuuk awarded the first
licences for exploration and
exploitation in the eastern coastal
waters of the Greenland Sea. BP was
among the winning bidders. A few
years ago, the US Geological Survey put
the Greenland Sea in the top five for
potential of 25 designated oil and gas
provinces in the Arctic region.
Look forward 20, 30 or 40 years and
it is hard to imagine that such
resources will not be exploited. Global
warming is reshaping the world’s
physical contours; and relentless
demand for raw materials and energy
from the emerging middle classes in
the rising economies of Asia, Africa and
Latin America is making the case for
frontier developments.
Arctic temperatures have been rising
twice as fast as those further south and
the polar region has lost up to three-
quarters of its sea ice. According to the
Arctic strategy published last year by
the US, the warming is “unlike
anything previously recorded. The
reduction in sea ice has been
dramatic, abrupt and unrelenting.”
If the long-term outlook looks more
than promising, however, Greenland’s
journey from eager anticipation to
realisation of such resources may be
anything but smooth. The obstacles are
physical, political and environmental.
The ice may be melting fast, but
Greenland’s Arctic waters remain some
of the most hostile and inaccessible
anywhere.
The country is geographically
isolated and lacks both the physical
and human infrastructure to support
rapid development. Some 80 per cent
of the landmass is covered in thick ice.
Nuuk is home to only 16,000 people,
and the two next largest towns,
Sisimiut and Ilulssat, to 5,000 each.
There are no roads connecting the
scattered communities, and a single
ship serves the settlements on the
western side of the island. People and
freight mostly travel by air, often in
brutal conditions.
The recent collapse of the governing
coalition led by Aleqa Hammond spoke
of Greenland’s political immaturity.
The proximate cause was an alleged
scandal over expenses but, in spite of
her boisterous Inuit nationalism and
feisty political style, Ms Hammond
lacked a sure touch in steering the
coalition.
Nuuk secured full home rule,
including control of natural resources,
in 2009, leaving Copenhagen in charge
of security and foreign affairs. Ms
Hammond, elected in 2013 on a pro-
independence platform, saw this as a
springboard, both for accelerated
exploitation of mineral deposits and
for further decisive steps towards full
independence.
Unable to make a living from fishing,
hunting and tourism, however,
Greenland continues to depend on
Copenhagen to fund a large slice of the
national budget. Levels of educational
attainment are low and much of the
public administration is in the hands of
Danish-trained civil servants.
Ms Hammond, who faces defeat in
the forthcoming general election,
struggled to come up with a framework
for mineral and energy exploitation
that at once promised sufficient tax
revenues, provided the incentives
demanded by international companies
and met the demands from the native
Inuit population for environmental
protection.
Smart politicians in Nuuk see the
potentially dangerous paradox. The
past few years have witnessed a
flowering of native identity across the
Arctic, not least among Greenland’s
native Inuit. The hope is that they
will now be empowered by the
prosperity that flows from resource
riches.
The risk, though, is that very process
of oil, gas and minerals exploitation
will sweep away the lifestyles and
traditions of indigenous populations in
what has been called the great cold
rush.
Doubtless there is a balance to be
found. But, for all their ambitions,
Greenlanders are not there yet.
Thegreat‘coldrush’maybring
prosperity–butatwhatprice?
Supply and demand
Gas consumption
Petajoules*, 2012
Per cent of
gas supplied
by Russia
R U S S I A
TURKEY
FINLAND
LATVIA
ESTONIA
LITHUANIA
Nord
Stream
South Stream
Trans-
Anatolian
Pipeline
(TAP)
Nabucco-West
pipeline
TAP
South Stream
South
Stream
European gas pipelines
Major gas pipeline
(selected)
Pipelines under
construction
or planned
(selected)
Countries
totally dependant
on Russian gas
0 500 1000 1500 2000 2500 3000
Germany
UK
Italy
France
Turkey
Netherlands
Spain
Belgium
Poland
Romania
Hungary
Austria
Czech Republic
Norway
Slovakia
Ireland
Portugal
Greece
Denmark
Finland
Lithuania
Bulgaria
Croatia
Serbia
Latvia
Luxembourg
Sweden
Slovenia
Estonia
39
0
24
15
59
6
0
0
0
18
80
98
89
0
91
0
0
55
0
100
100
83
0
46
100
24
0
42
100
Supplied by Russia
Sources: ENTSOG; GIE; Eurogas; BP; Eurostat * 1015 joules
From the windswept polders of
Schleswig-Holstein, where fields are
dotted with wind turbines and farmers’
barns covered with solar panels, to the
energy-hungry businesses of the
Ruhrgebiet, Germany’s ambitious plan
to transform its power supply is chang-
ingthelookofthecountry.
Europe’s biggest economy is switch-
ing from nuclear power and fossil fuels
to renewables, with the goal of deriving
80 per cent of electricity from clean
sourcesbythemiddleofthiscentury.
It is a revolution that is being subsi-
disedbyelectricityusers,whopaysome
of the highest prices in Europe because
of renewables surcharges on their bills.
Those subsidies have driven a boom in
cleanenergy,whichreached24percent
of Germany’s gross electricity produc-
tionlastyear.
For some, it has brought opportuni-
ties. Jobs and investment in the manu-
facture of wind turbines have grown in
recent years, while German villages
have derived extra income by feeding
power from their solar and wind power
generationintotheelectricitygrid.
For others it has brought pain. Com-
paniesthatoncemadevastprofitsfrom
generating electricity have seen those
earningssqueezed,asenergyfromwind
andsolarisgrantedfavourableaccessto
thepowergrid.
German manufacturers complain
about the cost of subsidies. The chemi-
cals group BASF plans to shift the bulk
ofitsinvestmentoutsideEurope,partly
becauseofhigherenergycosts.
“It isn’t in question that man-made
CO2 is responsible for climate change,”
says Heribert Hauck, general manager
forenergyatTrimetAluminium,oneof
Germany’s biggest electricity consum-
ers. “But we observe at the same time
that it makes no sense if we lose an arm
andalegasaone-manshowhereinGer-
many and the rest of the world doesn’t
followus.”
TheoriginalgoalofGermany’senergy
transition–protectingtheenvironment
–isincreasinglyatrisk.Untilthenuclear
switch-off, Germany was steadily
cutting carbon dioxide emissions. Since
Fukushima, when Angela Merkel
announced an accelerated exit from
nuclearpower,theuseofcoaltoprovide
baseload electricity has edged up. Coal
and lignite accounted for 45.5 per cent
of gross electricity production in 2013,
upfromabout43percentin2011.
CO2 emissionshavenowbeenslashed
by about 24 per cent on 1990 levels,
according to government estimates
publishedinMarch.ButGermany’soffi-
cial goal is a 40 per cent cut on 1990, to
beachievedbytheendofthisdecade.
Meanwhile, the solar panel industry
has largely collapsed in the face of Chi-
nesecompetition.
Employment in the photovoltaic sec-
tor in Germany fell from more than
100,000jobsin2012to56,000lastyear,
as a string of businesses filed for bank-
ruptcy. Germans sometimes joke that
theirEnergiewende–asthetransitionto
renewables is called – is a subsidy from
GermanbillpayerstoChinesemanufac-
turers.
Insteadofbeingatemplatefortherest
of the world, Germany is now increas-
inglysingledoutasanemblemoffolly.
Inrecentmonths,thegovernmenthas
mapped out a course correction for the
Energiewende. A return to nuclear
energyappearstobeofftheagenda,but
ministers want to curb costs by scaling
back subsidies for renewables. Legisla-
tion agreed this year puts upper limits
onnewinstallationsofcleanenergy.
Feed-in tariffs paid to renewable
power generators will be cut to an aver-
age across all technologies of €0.12/
kWhby2015,downfromacurrentaver-
ageof€0.17/kWh.
Inaspeechtrailingthereformsatthe
start of this year, the economy minister
Sigmar Gabriel declared: “We have
reached the limit of what we can ask of
oureconomy.”
Clean sources prove
a costly exercise
Germany
Businesses and consumers
are paying a high price,
reports Jeevan Vasagar
F
or President Vladimir Putin,
Russia’soilandgassectorsare
paramount politically as well
aseconomically,asguarantors
of the security and stability of
thecountry.
While much has been said about
Europe’sdependenceonRussianenergy
resources, Russia depends on the reve-
nuesitreceivesfromthecontinent.
“We need Russian gas; they need the
euros,” says Thierry Bros, a Paris-based
gas analyst for Société Générale. “It has
alwaysbeenaboutinterdependence.”
Oilandgasmakeupmorethan50per
cent of the Russian government’s total
revenue, with most of it coming from
Europe, making it unrealistic that Rus-
siawilltotallycutoffgassuppliestothe
continent.
Any decision by the world’s biggest
gas exporter to halt supplies would not
only cause problems for customers, but
also leave a massive hole in Russia’s
budget.
Butthelatestdevelopmentsechosim-
ilardisputesin2006and2009whengas
flows to Europe were reduced during
freezing weather. Russia cut off deliver-
iespassingthroughUkrainianpipelines
over claims the country was siphoning
off gas, a charge it denied. Energy mar-
ketwatchersfeararepeat,withsupplies
toUkrainealreadyshutoff.
Ilya Zaslavsky, a Russia and Eurasia
programme fellow at think-tank
Chatham House, says Mr Putin is again
usingenergyresourcesasapoliticaltool
thatcouldworktothedetrimentofRus-
sia’saims.State-ownedGazprom,which
largely supplies the continent, would
take the biggest hit. “In the short term,
Russia might be winning; but, in the
long term it is losing from decisions
takenbytheKremlin,”hesays.
On the technical side, analysts say,
pulling back the extraction volumes at
Gazprom’s mega-fields in Siberia on a
bigscalewouldbedifficult,whileflaring
offsuchlargeamountsofgas–forwhich
Russiahasalreadybeenmuchcriticised
–isimpossibletodosafely.
Financially, for each month of a
shutdown, Gazprom – which controls
theUnifiedGasSupplySystem(UGSS)–
would lose up to €4.5bn of revenues,
accordingtotheInstituteofEnergyEco-
nomicsattheUniversityofCologne.
This is equal to an almost 4 percent-
age point decrease in the company’s
annual revenues a month. “This would
significantly affect Gazprom’s profita-
bility, and reduce the company’s ability
to contribute to the Russian state
budget,”saytheauthorsofthereport.
This is problematic as the company,
which is heavily indebted, would have
troubleservicingitsliabilitiesifexports
driedup.
Gazpromdeclinedtocomment.
Othergascompanies,suchasRussia’s
Novatek, and oil companies that pro-
duce associated petroleum gas (APG),
wouldalsobeaffected.“Therewouldbe
a gas glut, [as] the competition to sell
inside the country would become
fierce,”saysMrZaslavsky.
Oil companies may also see harsher
oiltaxationifrevenuesfromgasfallsub-
stantially, as the Russian government
tries to compensate for the budget
shortfall. This may lead to slower oil
productionthanexpected.
All of this comes as Russian energy
market watchers say competition for
Gazpromisonlygoingtogetstifferover
time, as Europe seeks to fast-track
domestic energy initiatives such as
renewables and shale in a shift away
fromfossilfuelsinitsenergymix.
“Gazprom has to fight for market
share, as oil and gas exports to Europe
makeupsuchahugepartofitsbudget,”
says Emily Stromquist, analyst at
Eurasia Group. “There is a bit of buffer
space where they can come down on
price and remain competitive, but it’s
still unclear as to how much they can
doso.”
Gazprom requires tens of billions of
dollarsofinvestmentannuallytomain-
tain output levels, while developing
fieldsintheArctic,buildingpipelinesin
thePacificandtheBaltic,aswellascon-
structingapipelinenetworktoChina.
“The much higher production and
transport costs from these remote
regions need to be priced into the long-
term gas contracts with Europe,” says
FrankUmbach,oftheEuropeanCentre
for Energy and Resource Security at
King’s College, London. He believes
Gazprom’s preferred pricing method,
based on long-term, oil-indexed con-
tracts,isalreadyinserioustroublefrom
cheaperpricesfromothergassources.
The US shale gas revolution and
attempts to replicate this model across
Europe, China and other parts of the
worldcouldaddfurtherpressure.
From 2017-18, Australia, which is
replacing Qatar as the world’s biggest
LNGexporter,willonlyincreasecompe-
titionwithRussia.
Russia also has interests in the con-
struction of the $40bn South Stream
underseagaslinkwithEurope.
Inthelongrun,PresidentPutinhopes
toweanGazpromoffitsrelianceonsales
to Europe by cultivating China as a new
customer for natural gas. In May, at the
height of the Ukraine crisis, a deal was
agreedwithBeijingtosupply$400bnof
gasovercomingdecades.
Itwilltakeatleastfiveyearstobuilda
new pipeline for the shipments. And
whileRussia’sattentionhasshiftedeast,
gas infrastructure to date has all been
built to cater to European needs, a leg-
acyoftheSovietera.
Analystssayitwilltakeatleastadec-
ade to see a real shift towards China.
Even so, with more than 85 per cent of
Russian gas in western Siberia, geo-
graphically it does not make sense to
severtieswithEuropeinfavourofAsia.
Pipeline politics flow both ways
AnalysisPresident
Putin faces a dilemma:
his country would be
badly hurt by turning
off supplies to Europe,
writes Anjli Raval
Power play: President Vladimir Putin signs the first segment of pipeline that will take Russian gas to China – Ria Novosti/Reuters
Corrective action
Sigmar Gabriel,
economy minister,
says: ‘We have
reached the limit of
what we can ask of
our economy’
The story in full
The push to develop cleaner
sources is proving costly, with
consumers paying a high price
ft.com/reports
OPINION
Philip
Stephens
Hostile waters
Barriers to
exploitation of
the country’s
resources are not
just physical but
political

5. Thursday 23 October 2014 FINANCIAL TIMES 5
Contributors
Anjli Raval
Oil and gas correspondent
Henry Foy
Central Europe correspondent
Michael Kavanagh
Energy correspondent
Adam Thomson
Paris correspondent
Philip Stephens
Chief political commentator
Christian Oliver
EU correspondent
Jeevan Vasagar
Berlin correspondent
Rose Jacobs
David Crouch
Freelance journalists
Aban Contractor
Commissioning editor
Steven Bird
Designer
Andy Mears
Picture editor
For advertising contact Liam Sweeney,
on +44 (0)20 7873 4148 or
liam.sweeney@ft.com address,
or your usual FT representative.
Laszlo Varro, head of the Interna-
tional Energy Agency’s gas, coal and
powerdivision,says:“Overthepastfive
yearstherehasbeenrealprogressonthe
infrastructureandregulatorysides,par-
ticularlyintermsofincreasinggasstor-
age capacity and the construction of
pipeline interconnectors to redirect gas
flowsacrossthecontinent.
“But the European energy network
does not have physical resilience to a
sustaineddisruptiontoRussiangassup-
plies.Thereisnowaytocopeifthereisa
completeshutdown.”
MrVarrosaysthattomakearealdent
in the continent’s reliance on Russian
energysourceswouldtakethebestpart
of a decade, hundreds of billions of dol-
larsandalotofpoliticalwill.
Improving domestic supplies of gas,
suchasfromNorwayortheUK,isonthe
cards, but reserves are depleting while
Europe’sfledglingshalegasindustryhas
facedpopularprotests.
Gasfromfurtherafield,suchasnorth
Africa, the eastern Mediterranean, the
Caspian and central Asia, Iran and Iraq
have been considered, but each has its
problemsandwillbealonger-termstra-
tegicfocus.Bringingnon-Russiangasto
Europe will need infrastructure
improvements and favourable regula-
tions,andwillonlybearfruitfrom2025,
analystssay.
Although Europe could boost lique-
fied natural gas (LNG) imports, infra-
structure improvements are necessary
first. Prices are far higher than pipeline
gas, as the continent competes with
Asian consumers, such as Japan, whose
needs have increased following the fall-
out from the Fukushima nuclear power
plantdisaster.
Following in the footsteps of Lithua-
nia, Poland – one of the most hawkish
European states towards Russia’s
actions in Ukraine – is racing to com-
plete construction of an LNG terminal
continuedfrompage1
on the Baltic coast, which should begin
importswithin12months.
Atfullcapacityitcouldhalve Poland’s
reliance on Russian gas, from 66 per
cent of today’s needs. But, even as the
rushtothefinishgatherspace,thecoun-
tryisimportingcoalfromRussiatofeed
its power plants – an example of how
deep energy relationships with Russia
acrossEuroperun.
The option of generating electricity
fromcoal,insteadofgas,hasbecomean
attractive economic proposition in
Europe thanks to a falling global coal
price, but it clashes with the EU’s long-
held goals to cut greenhouse gas emis-
sions. And coal-fired power stations are
runningatcapacity.
Further,Europeisdividedonnuclear
policy. While the UK is pushing for new
plants, countries such as Germany and
Belgium are moving away from nuclear
intheirenergymix.
Implementing policies to reduce
energy demand could be effective in
the long term, as could accelerating
the deployment of renewable energy
technologies, which has stumbled in
recent years due to the financial crisis,
the impacts of the US shale boom and
lowcarbontradingprices.
Therenewableenergylobbyhasbeen
a vocal supporter of the EU’s 2030
climate change targets, arguing for
them to be even more stringent. But
experts wonder if governments have
thestomachtocommittheconsiderable
sums of time and money necessary
to bring alternatives to market,
and question whether that would
be sufficient to offset existing gas
supplies.
Renewablesaccountedfor11percent
oftheEU’sgrossenergyconsumptionin
2012, with a 20 per cent target set for
2020. Biomass and renewable wastes,
derived from plants or animals,
accounted for the bulk of that, contrib-
uting7.3percent.
Bioenergy’s cost per kilowatt-hour
could be almost halved over the next
decade, the consultancy McKinsey
wroteinarecentreport,makingthecost
of electricity generation from the fuel
closetothatofcoal.
Although steps have been taken to
improve the resilience of the EU’s
energy regime, they have had varying
degreesofsuccess.Someenergymarket
watchers question if the most recent
pushistoolittletoolate.
“Europe has sleepwalked into a deep
dependency on Vladimir Putin’s gas,”
saysGalLuft,co-directoroftheInstitute
for the Analysis of Global Security, a
Washington-based think-tank focused
onenergysecurity.
“Europe needs to be much more
introspectiveaboutitsenergyresponsi-
bilities for the future. For years, it has
turned its back on all other forms of
energy in pursuit of its environmental
policies: coal, nuclear, shale, and now
we hear it has problems with Russia.
When you throw energy security under
thebus,thisiswhathappens.”
EU seeks alternative suppliers
European Energy
Old and new generators in Germany
Moreenergy,cheaperenergy.Fromreli-
able sources. And cleaner, too, if possi-
ble. Questions about how to achieve
these ambitions dominate Europe’s
energydebate.
But in a month when the Nobel phys-
icsprizewasawardedfordevelopingan
energy-savinglightsource,morepeople
are asking whether less energy could
alsobeasolution.
The business of Jean-Pascal Tricoire,
chairmanandchiefexecutiveofSchnei-
der Electric, is based on providing
answers. The French specialist in
energy management for industry has
grownrapidlyinrecentyears,becoming
one of Europe’s largest engineering
groupsbymarketvalue.
“What strikes me is that, when you
speak about energy, everyone talks
about generation. There are scientific
and ideological debates about energy
sources,”saysMrTricoire.
“Sosavingenergyisnotoftenthought
of.It’snotpolitical,notbigprojects,not
glamorous, but it reduces costs for
industryandcontributesgreatlytosolv-
ingtheclimateequation.”
It could be as simple as throwing a
switch,hesays.Aschool,forexample,is
typically occupied only 50 per cent of
the time, so technology that turns off
lights and heating can save half its
energyuse.
“Our experience shows the return on
investment is less than three years,
while the IEA [International Energy
Agency] says two years,” Mr Tricoire
says.“Thisisactiveenergyefficiency.”
MrTricoireisatpainstostressthathe
is not talking about insulation, or “pas-
siveefficiency”,butusingtheinternetof
thingstomakebuildingsmoreefficient,
the capacity to connect every energy
consumingelementinthebuildingtoits
usersusingsimpleprinciples.
“Themindsetofregulatorsandpoliti-
cians is geared towards refurbishing an
old building, insulating it. But it has
very long paybacks, and forces the
building to close for months. With new
technologies, however, you can do it
quickly,andthepaybackcomessoon.”
OnceyoucanimagineaEuropemade
more efficient in this way, it becomes
possible to connect it to the generators
andavoidthehugepeaksandtroughsof
consumption that make the electrical
gridinefficient.
In many countries, the grid is used at
less than 50 per cent of capacity for
more than 50 per cent of the time. “It’s
designed for peaks, but rarely used for
them,”saysMrTricoire.
“So instead of building a new power
station you redo the process. It’s a dou-
ble win – you don’t invest billions in a
newpowerplant,andyoumakesavings
[onenergyuse].”
Schneider is experimenting with this
approach in Japan in the wake of the
Fukushimanucleardisaster.Whenpeo-
plecomehomeinthewinterandgener-
atepeakdemand,theyarepaidbyutili-
ties to lower their energy use. “It
changes the business model. The utility
becomes an arranger of savings, rather
thanagenerator.”
Mr Tricoire brings a global approach
to the energy business, having lived in
Germany,Italy,China,SouthAfricaand
the US. In 2011, he relocated to Hong
Kong, starting a trend of French corpo-
rate leaders responding to their busi-
nessesbecomingmoreinternational.
Chief executive since 2006, he has
continued a transformation at Schnei-
derawayfromelectricalequipmentand
towardsenergymanagement.
Europe is poor in natural energy
resources, making it strategically vul-
nerable. But at the same time it has a
“tremendous advantage” over the US,
argues Mr Tricoire, because it already
consumeslessenergyperunitofGDP.
“European industry is not bad in
energy. With companies such as Sie-
mensandABB,wehaveflagshipsinthe
worldofenergy,”hesays.
“Because Europe has suffered from a
shortage of energy, we have developed
thetechnologytomakebetteruseofit.”
Simple solutions lead
to a greener future
Schneider Electric
Saving energy cuts costs for
industry and helps solve the
climate change equation,
says David Crouch
V
attenfall, Sweden’s state-
owned energy giant, is
caught between a rock and
severalhardplaces.
Energy is plentiful and
demandsluggish,sopricesareatrecord
lows. But the company’s 16 large and
profitable coal-fired power stations in
Germany are under attack over carbon
dioxideemissions.
Its nuclear programme is also in
doubt.Onlyaweekintohisjob,Magnus
Hall, Vattenfall’s new chief executive,
faced calls to resign after he criticised
Sweden’s incoming leftwing govern-
mentforsayingexpansionplansforcoal
andnuclearshouldbeputonhold.
Meanwhile, a political row continues
over losses following Vattenfall’s pur-
chaseofNuon,aDutchutility,fiveyears
ago.
“Lookingatthecomingfiveyears,we
willcontinuetoseeaverytoughmarket,
for us and other [utilities], meaning of
course a strong focus on efficiency is
going to continue,” says Tomas Björns-
son,Vattenfall’sheadofstrategy.
Thecompanyisslashingcosts,aiming
bytheendoftheyeartoachievea25per
cent reduction compared with the cost
base of 2010. Its current five-year capi-
tal expenditure plan is down by nearly
half.
Ithasshrunkitsbalancesheetbyexit-
ing “non-core” markets in Poland, Fin-
landandBelgium.MrBjörnssonisclear
about the company’s attitude to this
drastic programme of consolidation,
saying:“Noregrets.”
Vattenfall’svaluehashalvedinrecent
years, according to estimates by
Swedbank, from at most SEK400bn
(€43.92bn) to about SEK200bn
currently.
Each unhappy utility company in
Europe is unhappy in its own way, but
they are also all alike. “The traditional
concept and business model of the
larger utilities is in danger right now,”
says Thomas Kaestner, head of power
and utilities at consultancy EY. There-
fore their main focus “is to shrink,
divest, cut costs, stabilise the company,
notputalltheireggsinonebasket”.
A feature of the energy sector is its
politicisation and the high degree of
stateintervention.
Under Germany’s Energiewende, or
energytransition,forexample,Europe’s
largest economy is planning to phase
out nuclear power altogether by 2022
and generate 60 per cent of its electric-
ityfromrenewables by2035.MrKaest-
ner compares the effort required to
effect this change to that of reunifying
EastandWestGermanyafter1989.
Frequentchangestoenergylawmake
itenormously difficult forutilitiestobe
certain about the framework they have
to work with, despite the long invest-
ment cycles associated with energy. In
consequence, from being a sector seen
assomewhatstatic,itisnowinastateof
flux.
“That’saparadigmshift.Historically,
energyassetsdidn’tchangemuch,”says
Matthias Lang, energy and utilities
expert at international law firm Bird &
Bird. “Now it’s a constantly moving tar-
get . . . Iamnotawareofanotherindus-
try that is under such state pressure to
moveandbereshaped.”
At times, Mr Lang says, political
demands are in danger of clashing with
thelawsofphysics.“Wehaveanalmost
magicbeliefinengineers,butitcanturn
into a minefield when there is a discon-
nectwithpolitics.”
Apart from retrenchment, are there
any other ways forward from this diffi-
cultsituationforutilities?
Johannes Teyssen, chief executive of
Eon, Germany’s biggest utility by mar-
ketvalue,hasurgedBerlintofollowthe
example of the UK and introduce a
“capacitymarket”thatofferselectricity
generators predictable revenue in
exchange for ensuring security of sup-
ply.Utilitieshavealsobeensuccessfulin
lobbying to reduce subsidies for renew-
able energy. But both approaches
amount to moving the goalposts rather
thangenuineinnovation.
As profits have slumped in its home
market, Eon has also looked for growth
abroad, moving into Brazil and Turkey
andconsideringIndia.Butfirst-halffig-
ures for 2014 revealed that the com-
pany’s earnings outside the EU had
fallenbymorethanaquarter.MrKaest-
ner points to Eon’s more successful
acquisition of generating capacity in
Russia eight years ago, where it had
alreadybuiltupcloseco-operationwith
topfiguresinRussia’senergymarket.
Possible new business models in the
sectorincludeflexibleenergyconsump-
tion, when utilities become experts in
energyconservationandstorage,rather
than generation. But the experience of
disruption and change itself could also
pointtonewdirections.
One of the core competencies of
energy companies is how to deal with
regulatory changes, Mr Lang argues. “It
is quite amazing how many of the big
energy companies have been able to
adjust when you look at the enormous
regulatory change and state interven-
tionintotheirbusiness.”
Search for new
business models
as losses mount
UtilitiesPolitical uncertainty creates problems for
companies such as Vattenfall, writes David Crouch
Under pressure: Vattenfall’s heat and power station in Berlin– Fabrizio Bensch/Reuters

6. 6 FINANCIAL TIMES Thursday 23 October 2014