Europe faces €1 trillion cash crunch that could derail green agenda

The European power sector is facing a double whammy of a capacity and investment crunch which could jeopardise its security supply and derail its low carbon agenda.

That is the stark warning in a report published today which puts a €1 trillion price tag on the new infrastructure needed to maintain Europe’s energy supplies.

Analysts at US-based consultancy HIS (NYSE:IHS) say the investment climate deteriorated over the last year as several countries faced a double-dip recession, while the financial strength of utilities weakened due to higher debt levels and weaker credit ratings.

“Europe’s energy sector faces a large and pressing investment challenge,” says Michael Stoppard, co-author of the report ‘The Energy Investment Imperative: Toward a Competitive and Consistent Policy Framework’.

“Today the required investment is lacking. However, because of the long lead time to develop energy assets, it is imperative that the right investment framework be put in place as soon as possible to ensure long-term stability of Europe’s energy system,” he added.

IHS has calculated that investment of around €750bn ($997bn) is needed over the next ten years for power generation, €90bn for transmission lines and about €150bn for new gas supply and transmission capacity.

The report notes that Europe is due to close around a quarter of its fossil fuel power generation capacity by 2023 to meet tighter environmental rules, while the rapidly expanding renewables sector needs back-up supply and better grid interconnections.

This means that “new approaches to corporate and project finance will be needed to attract institutional investors, and regulators will need to take major steps to reduce uncertainty for these investors” notes IHS.

“The current market structure is unlikely to attract the necessary risk-bearing investment,” says Fabien Roques, head of European Power Research the report’s co-author.

“Premiums to cover significant regulatory and market risks threaten to drive up the costs of capital in an already capital-intensive industry.

“National reforms to implement capacity mechanisms risk undermining progress so far with market integration at the European level. Unless the investment framework is fixed urgently, Europe will fail to deliver on its low carbon agenda.”

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