Power panel: Karel Beckman kicks off the Plenary Panel discussion
Power panel: Karel Beckman kicks off the Plenary Panel discussion
Credit: PGE

Three years of Energiewende, three days in Cologne: the debates during POWER-GEN Europe this month gave a fascinating insight into the future of Europe’s energy market, write Kelvin Ross and Tildy Bayar

Three years of the Energiewende and its consequences – unintended or otherwise – on the European power sector were starkly analyzed and debated over three days in Cologne at POWER-GEN Europe earlier this month.

With many of the major European operators counting the cost of mothballing state-of-the-art plants, you would have expected them to be downbeat about the state of the power market – and they were. But there was anger, too, at the situation they found themselves in.

A blistering attack on the rise in renewables’ subsidies and the phase-out of nuclear power was delivered by Martin Giesen, chairman of Advanced Power. Delivering one of the speeches at the Joint Opening Keynote Session, he said the combination of the two – coming on the back of the economic crisis – had been a “truly deadly mixture”.

And he added that this deadly mixture had resulted in combined losses of €200bn for major utilities EDF, E.ON and RWE. “These are horrendously large numbers,” he said, adding the cost could also be counted by saying that “every citizen of the EU has lost €1000”.

“This is all bad enough,” he added, “but perhaps worse is that confidence in markets, future price signals and asset valuations has collapsed. Government-mandated subsidies for renewables – whose impact was enormously underestimated – have completely changed the industry.And government-mandated shutdowns of nuclear stations have taken away trust and ownership rights and the rights to enjoy the benefits of that ownership.”

Also speaking at the Joint Opening Keynote Session were Matthias Hartung, chief executive of RWE Generation and RWE Power, and Vesa Riihimaki, president of power plants and executive vice-president for Wartsila.

Mr Hartung warned that “what we are doing in this business is not sustainable”.

He said his company was already shutting down or mothballing power plants, and highlighted the case of a 48 per cent efficiency CCGT plant in the Netherlands which had been shut down.

“In Germany we have a complete transformation of a country’s energy sector”, yet he said that this in fact involved two transitions: a “small energy transformation until 2022” when the phase-out of nuclear will be complete, and then “a large-scale transition to 2050”.

While he stressed his backing for the Energiewende – “the transition is necessary: we are supporting it and changing our business model” – he added: “To fulfil this we also need support from the political environment and the regulatory framework.”

He said for a successful energy transtition, policy reforms are necessary at both European and national levels, and these reforms are vital, he stressed, because “this will destroy the European energy system if we continue like this”.

Mr Riihimaki said that what Germany – and the rest of Europe – needs in order to rebalance the intermittency of renewables in the system is a “flexibility toolkit”. But in order to embrace and utilize flexible generation, he said “there is a need for a flexibility market.

“Not a capacity market – a flexibility market. Flexibility means resources that we can keep in standstill, switch on and then switch off again. This requires a new business model.”

On day two of the show at the Joint Plenary Panel Discussion, the flexibility message continued, combined with a pragmatic view that there is no going back from the energy transition in Europe and it will fundamentally change the way we think about the role of electricity providers.

“The genie is out of the bottle and the genie in this case is the energy transition,” said moderator Karel Beckman, Editor-in-Chief of Energy Post.

However, he added that “the good news… is that there are lots of opportunities”.

Helmut Moshammer of Doosan Lentjes said that while it was hard to give a clear strategy for the next 10 years, the key business areas to be focused on are flexibility, technology and resources.

On the first he said: “You have to be flexible on market conditions, you have to be flexible on regional demands and we have to adapt our products,” while on resources he stressed: “These are our employees. There is only one way to go forward and survive and that is to have good motivated employees.”

Emmanouil Karakas, president of EPPSA, a trade body of 20 thermal power plant component manufacturers, said bluntly: “We are not the bad guys.”

He said that in the new world of greater renewables integration, thermal power has a vital role to play in providing flexible backup, cost-competitive supply and security of supply.

Jim Lightfoot, chief operating officer for Gas-CCGT at E.ON Generation, also stressed that the turbulent changes of recent years were only “accelerating” and were “here to stay”.

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And he added: “This transition isn’t cheap – so we have to make it investable. We will need a much clearer and stable framework to gain investor confidence.”

In terms of financing, he said the power sector is seeing entrants such as pension funds, who are “taking a punt on the market” in the expectation that it had hit rock bottom and the only way was up from now on.

Jonas Rooze, lead analyst for European power at Bloomberg New Energy Finance, said that the rate of change in the energy sector is so fast that “it is leaving people behind”.

“All this change: companies can’t keep up; governments can’t keep up. If companies can’t keep up they lose money. When governments don’t keep up, lots of companies lose money because governments do things like retroactive policy. But the reality is that governments need to catch up. They need to make some changes. The system can’t look the same over a 10-20 year period as it does now. Too much change has been going on. You can’t keep trying to fit everything in the system you have now.”

And he added: “We expect to see the impact of solar to get more extreme. By the late 2020s to 2035, off-peak will be the new peak and peak will be the new off-peak.

“The one thing we know for sure is that there is a huge demand for flexibility. The system will need to change – and how is the big question. The pie is getting bigger – it’s how it is distributed that is changing.”

Meanwhile, John Easton, vice president of international programmes at Edison Electric Institute, said the US was seeing many of the same issues as Europe.

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“We see flat demand and flat sales. We see environmental policy driving energy policy.”

And in answer to his own question, ‘what is our business going to look like in the future’, he said: “The customer is going to be king.” He added that for utilities to move forward they were going to have to become “market enablers and solutions enablers”.

Renewables and climate change

While the exhibition floor played host to a raft of product launches and business deals being clinched, the conference rooms picked apart the nuts and bolts of the latest power technology and also the money driving them.

“Why is our firm interested in investing in renewable energy and energy efficiency?” asked Patrick Avato, climate business lead at IFC, in a panel discussion called Investing in existing and new assets: strategic options. “Because climate change is affecting our clients.”

He pointed to rising energy prices in a number of countries, the growing cost and increasing scarcity of water for power projects, and the growing risk areas of weather and policy. “As a private-sector arm of the World Bank,” he said, “we’re faced with the expectation that 80 per cent of our project financing should come from the private sector.” But why would the private sector invest so much, he asked? Is this actually an opportunity that can generate significant returns?

To answer this question, IFC conducted what Avato said is the first comprehensive study on “climate-smart” business in Europe, the Middle East and North Africa. The study found that the opportunity is “huge”: between now and 2020 it found $640bn in commercially viable investment opportunities, almost half of which are in the energy sector.

  • ooking at specific countries, Russia is “not that interested in renewables” and “not an ideal investment climate”, yet IFC found that the size and structure of its economy and the age of its assets make it a big opportunity market. In its far east and Siberia there are off-grid locations with high power prices, and across the country there are aging power plants and infrastructure. Russia’s losses of power and heat due to an aging grid are equal to France’s total annual energy production, Avato said.

  • arge swathes of central Asia such as Kazakhstan also feature aging infrastructure networks, parts of which are not recoverable, but there are still significant opportunities in refurbishments and upgrades of district heating systems.

    Other big-opportunity countries include the newest EU Member States and Poland, Romania and Turkey, the country with the fastest-growing energy market in the region. Opportunities for investment in renewable energy projects are strongest in eastern Europe, IFC found, while there are also big opportunities in upgrading existing power plant and transmission/distribution assets.

    “We only invest in projects where we expect to make returns,” Avato concluded; “We think this region at this time, with these technologies, is a significant opportunity.”

    ‘The market for large plants is over’

    In a bid to take the pulse of the power sector, a new feature was introduced at this year’s POWER-GEN Europe – audience voting. During a panel discussion on the final day, members of the audience were invited to contribute their opinions via handheld voting devices.

    Nine questions were asked and here is a roundup of the – often surprising – answers.

    1. What regulatory structure would be best for Europe’s electricity sector: fully regulated, fully open, or a compromise between the two?

    Almost 83 per cent of the audience opted for the compromise option, with regulated markets coming a distant second at 10.3 per cent and a fully open single market proving a dismal third choice at 6.9 per cent.

    2. Given the current economic, technical and regulatory constraints, is Europe right to be pressing ahead so fast with its decarbonization agenda?

    While the audience agreed that decarbonization is a priority, attendees were divided on how it should be pursued, with 43.3 per cent choosing “Yes, as quickly as possible” and 50 per cent answering “Yes, but at a slower pace”. “No, we should not make this a priority” was chosen by just 6.7 per cent.

    3. What is the best available way to address intermittent generation in Europe’s grid system?

    Perhaps unsurprisingly, the top answer from this crowd of power producers was “Use of flexible fossil-fired generation” at 30 per cent. The next most popular answer, at 23.3 per cent, was “Deploy available storage technologies”, followed by “Deploy demand response, e.g. smart meters/appliances/grid solutions” at 20 per cent. “Better integrate electricity and heat markets” garnered 13.3 per cent of the vote, while “Strengthen and increase interconnections” and “Use nuclear power to back up solar in the winter” tied at 6.7 per cent.

    4. What would you like policymakers to do with the European Emissions Trading System (EU-ETS)?

    Interestingly, this question produced a three-way tie between very different responses. “Scrap it”, “Increase the floor price to discourage coal and lignite generation”, and “Use the mechanism but with more restricted allowances” each received 28.6 per cent of the vote. In last place at 14.3 per cent was “Allow the CO2 price to find its own level”.

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    5. What would have the greatest positive effect on kick-starting large-scale power project development in Europe?

    “An upturn in economic conditions” received a modest 6.7 per cent of the audience vote, while “Removal of subsidies for renewables” received only 3.3 per cent. After numerous discussions on the need for a capacity market during the three-day conference, it was surprising that “Guaranteed value for capacity” received only 20 per cent of the vote. At 23 per cent was “A reliable long-term policy framework from Brussels” – but the big winner, and again perhaps a surprising answer, was “None – the market for large power plants will never return”, at 46.7 per cent.

    6. What do you think is most likely to have the greatest impact on Europe’s electricity sector in the next five years?

    “Lower cost of renewable generation” proved the most popular answer to this question, at 37.9 per cent of the vote. Next was “development of shale gas in Europe” at 24.1 per cent, followed by electricity storage at 17.2 per cent. Smart technologies drew 13.8 per cent, while deployment of CCS and electric vehicles tied at 3.4 per cent.

    7. How do you feel about recent consolidation among equipment and service suppliers?

    “Concerned that innovation and R&D will suffer” was the view expressed by 33.3 per cent of the audience, while 30 per cent believed consolidation to be a “Natural and healthy consequence of tough market/economic conditions”. Twenty per cent were “Concerned that Europe’s global influence in power engineering will suffer” while 16.7 per cent termed the consolidation a “Regrettable reduction in competition among suppliers”.

    8. Do you expect the growth of electric vehicles to noticeably increase electricity use in Europe in the coming decade?

    The impact of EVs is still an open question, if the votes are any indication. While 38.7 per cent of the audience voted “Yes”, the same percentage – 38.7 per cent – voted “No”, with 22.6 choosing the “I don’t know” option.

    9. Who do you expect will be responsible for the majority of power generation in Europe in 10 years’ time?

    Decentralized energy is on the rise, according to the audience: 46.7 per cent chose “Small municipal/local producers”. But the status quo had its supporters: another 36.7 per cent opted for “Large centralized utilities”.

    Prosumers were chosen by only 6.7 per cent, while “Other entities e.g. Google or Amazon!” was selected by 10 per cent.

    If we take the opinions of these industry professionals as read, Europe’s future power sector will be decentralized, with big utilities going the way of the dinosaur.

    The future EU electricity market will combine regulated and open elements. Fossil fuel-fired power plants will continue to back up intermittent renewable generation as Europe moves, at a slower and steadier pace, toward a low-carbon future; costs for renewables will continue to fall, and energy storage will increasingly come into play.

    The ETS will be reformed in a manner yet to be determined, or done away with altogether. A capacity market may be implemented, but will not rescue big utilities from their ‘death spiral’ in the end. Europe’s global competitiveness may suffer due to industry consolidation, but when economic conditions improve this trend may reverse. And EVs may or may not contribute to growing electricity demand.

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