Sometimes you wonder whether liberalization is a help or hindrance when faced with the task of meeting increasing electricity demand. I guess the short answer is both.
While most Europeans believe that liberalization is the way forward, there are still concerns over how it is being implemented and the impact of the uncertainty that it has created.
This was highlighted in a recent letter from Europe’s Union of the Electricity Industry (Eurelectric) to the European Council. The letter stated that “… the electricity industry welcomed the advent of open competitive energy markets and supports the Commission in accelerating the liberalization of EU energy markets”. However, while applauding the basic objectives behind these policies, Eurelectric argues that “these policies need more consistency and should have a market-based approach. Some of them like emissions trading take a market-oriented approach but many do not. One of the challenges of the coming years is to streamline these efforts to take a consistent least-cost, market approach to policies that interface energy and the environment.”
According to Eurelectric, Europe will need to install between 500 GW and 600 GW of generating capacity through 2030. This will cover both modest demand growth of about 1.5 per cent per annum and the replacement of old plant. In monetary terms, the International Energy Agency forecasts that during the same period, the electricity sector will require an investment of about €1330 billion. This will be roughly split equally between generation and transmission and distribution.
This is a huge amount, which will have to come from investors who are currently not entirely confident in the market conditions. For this investment to come, there are two key areas that have to be addressed: regulatory stability and generation options.
Surveys show regulatory uncertainty comes out as the main factor hindering investment. Paul Bulteel, secretary general of Eurelectric commented: “Going through the liberalization process has caused tremendous turmoil. Now we would like to see some stability through a more stable regulatory framework.”
With regards to generation options, there are various obstacles facing each of the technologies, which also hinders investment. For example, nuclear energy certainly does not represent an attractive investment option; coal is often considered dirty; gas is attractive but then there is the danger of over-reliance on Russian supplies; hydro resources in Europe are almost exhausted.
How to overcome these obstacles and promote an investment friendly climate is not easy. Clearly, subsidies are not the answer. “We would not call for any artificial subsidies for any technology with the exception of renewables where we realise that some kind of support is necessary. Market forces should be sufficient to identify those projects which are viable,” said Eurelectric.
Although there are pros and cons facing every technology, the investment will come – even for nuclear. There is a new project being built in Finland and France has also shown interest to continue nuclear build. Meanwhile, clean coal developments are likely to put coal back on the agenda.
However, the market has to be allowed to develop in such a way that it provides investors with the necessary price signals. “If markets are subjected to periods of volatility as a result, any caps on electricity enforced by regulators would be disastrous,” noted Bulteel.
To the credit of the European Commission, it has provided a coordinated framework for the liberalization of the electricity industry. The fact that some member countries have been slow in transposing EU directives is not the fault of the European Commission.
The EC could, however, take further steps in streamlining all legislation in the area of sustainable development, renewables and climate change. Today there is a patchwork of policies to support renewables, combined heat and power, energy efficiency, CO2 emissions trading.
Nevertheless, a tremendous amount has been achieved over the last five years or so. Due to the nature of the commodity, the concept of freely transporting unlimited amounts of energy between countries is perhaps unrealistic. Therefore the pan-European market will likely always maintain a strong “local or regional accent” as Bulteel put it.
The main aim must therefore be to bring coherence between the different markets and to provide a scenario where the transfer of capital can play its role. This will allow traditional national players to transform themselves into international and European players that can be active in the different regional markets that we will have in Europe.
From this point of view the European Commission’s efforts have been successful, but there is still a long way to go and there will certainly be hiccups along the way.
Junior Isles, Managing Editor & Associate Publisher