Despite increased investment in the power sector across Europe, a recent report shows decreasing capacity margins with security of supply becoming an increasing problem.

Nigel Blackaby

For the last eight years the consulting firm Capgemini has published its European Markets Observatory. The latest report, covering 2005 and the start of 2006, gives an update on the main indicators within the electricity and gas markets, in order to monitor the supply and demand balance and towards the establishment of an open and competitive market in Europe.

This year, the report’s findings in respect of the electricity industry do not make good reading. It predicts that recent utility merger and acquisition activity is set to continue and that this will run counter to Europe’s desire to see more unbundled markets and free competition. Capgemini says that the trend towards increased energy prices has continued, levels of infrastructure investment have been insufficient, and progress towards improving interconnections has been slow. Despite the issue of security of supply becoming a higher political priority across Europe, the report notes a worrying overall decrease of peak power generation margins.

The report says that, across the UTCE region, the average reserve margin between electricity supply and demand fell to its lowest ever figure of 4.8 per cent in 2005 and early 2006, a full percentage point lower than the 5.8 per cent margin in 2004. The report describes current capacity margins as ‘worrying’, considering short-term demand. The fall in margin was caused by an upswing in demand for electricity that was not matched by sufficient new operating plants, as well as more extreme weather conditions. These included the record-breaking high temperatures in the summer of 2005 pushing up usage of air conditioning units across Europe and severe cold spells and low rainfall in Spain and France. The report suggests that parts of Europe are moving in line with some North American states where two major peaks are seen per year, one in the winter and one in the summer.

European country’s real margin vs. theoretical margin at peak load (2005)
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Some improvements in theoretical capacity margin across Europe were noted. Ireland’s margin increased 21 per cent, the UK improved by 1 per cent, Portugal by 4 per cent. Greece, Italy and Holland added 6 per cent new capacity and Germany added 4 per cent. Nevertheless, demand as well as growth or shifting peak loads (Spain +15 per cent in peak load from 2004 to 2005, UK +11 per cent, Holland +8 per cent and France +5.6 per cent) are leading to an overall decrease in real margins. This is best illustrated in the case of Spain where a shift in peak load from winter to summer caused a real capacity decreased by 4 per cent despite 5500 MW of new capacity.

Overall, Belgium, France, Greece and Hungary are still in a tight balance with France especially impacted by last year’s cold winter spells.

Less predicable weather patterns are also presenting problems to Europe’s power producers. Power generators usually plan maintenance to allow for the maximum generating capacity to be available for the months of December and January. They do however expect milder conditions to have arrived by March and April, thus reducing demand and permitting planned outages. The Capgemini report gives the example of Germany in 2005, when unexpected freezing cold weather arrived against a background of some nuclear capacity being offline for maintenance combined with very low hydropower. In France the system was also stretched at that time and the country was forced to import power from the Netherlands for the first time.

Capgemini calls their report a wake-up call to the energy industry, governments and regulators that security of supply in Europe is now under severe pressure, despite the steps that they have taken to address the problem, such as investing in peak and baseload generation and transmission infrastructure and attempting to introduce a common EU energy policy.

In its 2004 report Capgemini forecast a requirement for investment in electricity generation plants at €700bn over the following 25 years. This year’s report shows that investments in generation grew again but the 2005 levels are still insufficient to restore a secure supply situation.

As regards trends in new power plant construction, there remains a sustained emphasis on developing gas fired plants albeit not as intense as Capgemini reported the previous year. In contrast, there has been a massive return of coal fired projects around Europe, especially in Germany. The report notes the slow shift of opinion in favour of nuclear power across Europe but points out, “No real decisions have been reached regarding security of supply and energy mix during this period and the long term situation has still to be clarified – if possible in the very near future.”

Security of supply can also be improved through reinforcing interconnections between neighbouring countries, especially those with a differing generation patterns or fuel mix. The Netherlands, for example, is planning a new sub-sea link to Norway that will be completed by 2008. It will then achieve a good balance between its own mainly fossil fuel thermal generating capacities and the hydro intensive Norway.

Collette Lewiner, energy utilities and chemicals global sector leader at Capgemini concluded, “We have stressed the importance of the security of supply issue for the past five years and it is now becoming critical. Looking forward, the regulators and the industry must redouble their efforts to revisit their energy mix, invest in infrastructure, encourage energy saving initiatives and reduce CO2 emissions. We predict interesting times ahead.”