A recent survey has indicated that security of supply is now the top concern for utilities. And confidence is not high that sufficient investment will be made to overcome reliability issues. Siân Green reports.

Security of supply is now seen as the leading strategic aspect of the power market and industry and utility leaders around the globe are firmly focused on the issue, according to PriceWaterhouse Coopers’ (PWC) latest global utility survey report. Blackouts in North America, Europe and other parts of the world over the past 12 months have raised serious questions about the adequacy of transmission facilities, and whether the right signals are being given to the market in relation to ensuring sufficient investment in required infrastructure.

According to the report – Supply Essentials: Utilities Global Survey 2004 – underinvestment in infrastructure is causing demand to outstrip supply and there is an urgent call to action from both utility companies and regulators to prevent further collapses. The PWC survey represents the views of 148 leading electricity companies in 47 countries throughout Europe, the Americas, Asia-Pacific, Africa and the Middle East.

“Security of supply is a global concern. If blackouts are not to become a regular feature of the future, major investment in the sector is required,” says Manfred Wiegand, global utilities leader of PWC. “Across the world we see ageing infrastructure coupled with increasing demands on generation and transmission capacity. A consistent and stable regulatory environment is required to make the sector more attractive to investors. Capital will only come from good rates of return.”

PWC notes in its report that utilities are facing the same issues and anticipate similar challenges no matter where they operate and under what regulatory ownership and structure. Security of supply is of particular concern in Europe, the USA and Canada as well as parts of Africa and Asia. Coupled with these concerns is the increasing reliance on natural gas in the electricity sector.

Survey highlights include the fact that 91 per cent of European respondents believe that blackouts are likely to continue to occur, and that a lack of investment in transmission networks is the primary cause of the blackouts. There is grave concern in Europe that further blackouts will occur as the markets become increasingly competitive. While competition has provided benefits for the consumer in terms of price, there is a need for swift action from regulators and utilities to prevent further grid supply collapses.

In the USA, over half of respondents believe that the federal government should provide state and local governments with sufficient incentives to facilitate transmission permitting. However, few felt that the solution to the problem is to deregulate transmission. A key fear in the industry is whether or not the reliability issue has been remedied, and there is concern that more blackouts will occur.

Respondents in the USA felt that the proportion of coal in the generation mix will decrease and be replaced by natural gas and renewables. Europe is also likely to experience a shift from coal to gas – driven mainly by the European Union emissions trading scheme (ETS) – and an over reliance on a single fuel source is of real concern. The survey found that respondents are concerned about political instability in supplier nations and that such fears are not likely to abate significantly over the next ten years. As natural gas supplies in Western Europe diminish, reserves in Russia and the former Soviet Union will become key. Although Europe is moving away from nuclear generation, security of supply fears may force the region to re-address the role of nuclear in the future.

Security of supply is also an issue in Canada. While Alberta believes that its policies have successfully promoted investment in new generation, Ontario is suffering significant supply constraints, and many areas of the country believe that major investment in transmission capacity is required. The Alberta Electrical System Operator has recognised that investment in transmission capacity has not kept pace with economic growth and is already planning to increase investment. Ontario is also reviewing its transmission capabilities.

Interestingly, in the USA, 41 per cent of respondents believe that an inflow of significant investment funds in the transmission grid over the next three years is unlikely, indicating that confidence is low in terms of being able to overcome reliability issues. According to PWC, the cautious approach to investment in the global utility industry in 2003 looks set to continue throughout 2004. For many companies, political and market stability is a key consideration for investment. Concerns over investment transparency also run deep, and political unrest and financial failures remain fresh in peoples’ minds.

In the US, investment inflows will be partly dependent on the development of regional transmission organizations (RTOs) and the future of FERC’s Standard Market Design Notice of Proposed Rulemaking (NOPR). There is also debate about what other measures can be taken to encourage investment. Incentives are clearly needed but the question is whether market forces or government intervention are the answer.

In Europe, countries vary according to the investment attractiveness. Countries such as Spain and Italy rate quite high as attractive markets to invest in, while those Central and East European markets that have just joined the EU are seen to offer the greatest potential for growth. Barriers to investment include regional differences in liberalization, and in the new EU member states, work is still required on the regulatory front for investors to have full confidence in the market.

Responses to the question: ‘With an increasingly competitive market in Europe, do you think that blackouts are more likely to occur?’
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