Need for flexibility dominates EPG Summit

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Europe’s leading utilities joined us at the annual European Power Generation Strategy Summit, which covered technological, regulatory and economic trends affecting the development of conventional and renewable power across the region. Duncan Coneybeare reports.

On 3–5 December, the EY-sponsored European Power Generation Strategy Summit was held in Prague.

One of the biggest events on the European energy sector’s calendar, the summit attracted more than 100 participants this year, including major utilities such as E.ON and Vattenfall.

A number of core themes emerged over the three days:

  • Renewable energy sources are already having a real impact on the reliable delivery of electricity in parts of Europe’s power networks.
  • Gas-fired capacity is well suited to provide flexible backup capacity, but current market price signals do not encourage new build.
  • There is a growing tension between the European Union’s (EU) vision of a common European energy market and the way that member states’ national energy policies are evolving.
  • The sector needs to attract external investors, with pension funds seen as the primary candidates.

Renewables growth seen as a real threat to supply security

A topic touched on repeatedly was the growing impact of renewable energy sources on European utilities’ maintenance of stability across their networks.

Multiple presentations highlighted the challenges of meeting future power needs given the intermittent nature of renewables output, particularly wind. Utilities raised concerns about supply security in parts of the European system that are becoming particularly stressed.

Looking forward to 2020, the following have key roles to play in coping with this system stress:

  • Storage
  • Increased interconnection
  • Demand-side response
  • Increased flexible backup generation capacity

There was also a general recognition that gas is best suited to providing flexible backup capacity, at least for the next decade.

Gas struggling, despite long-term need for flexible backup

However, gas-fired capacity is struggling to break even in the current economic climate. Speakers highlighted several factors that have undermined the profitability of gas-fired capacity in Europe:

  • The relative cheapness of coal: shale gas is displacing coal from the generation mix in North America, resulting in lower coal prices in Europe.
  • Changing wholesale pricing dynamics: the peak-load premium in the German electricity market has fallen. Analysis presented at the summit suggested that this is not all down to the impact of wind and solar output in Germany — increased interconnection and greater market transparency may also be playing a part.
  • Weak carbon prices: the EU Emissions Trading System is not producing a strong enough price signal to lead generators to change their operating strategies today nor definitively shift their investment plans for tomorrow.

Growing renewable output is increasing the volatility of spot power prices, and this does offer an opportunity for gas. But speakers felt the business case for new-build gas-fired capacity would remain hard to make.

National energy policies may jeopardize the EU’s energy vision

Speakers pointed out how European governments are beginning to appreciate the complex challenges posed by the rapid build-out of renewables capacity.

In particular, they pointed to the planned adoption of capacity market mechanisms in various European markets.

Capacity mechanisms at a national level could play a major role in providing a price signal for new gas-fired capacity to be built. Yet they are also likely to make it harder for new entrants to break into national generation markets and could frustrate the vision of a common energy market.

Europe is supposed to be heading for a common market, with a level playing field across the EU. In reality, national energy policy is typically conducted regardless of what Brussels hopes to achieve, with little thought to its impacts on neighboring energy markets. The sudden introduction of the Energiewende in Germany was cited as a prime example.

National capacity mechanisms will only add to growing tension within the EU’s vision of a single European energy market.

Financing future investments

At the summit’s Power Project Financing Forum, there was general agreement that power and utilities businesses do not have the balance sheet strength to fund the scale of investment needed by Europe’s energy networks over the coming years.

Many speakers made the familiar plea for long-term policy visibility and stability, citing the need for a stable regulatory framework to attract external investors.

However, there was also a growing appreciation that the sector must find ways to help pension funds invest directly in order to cope with the scale of capital expenditure required.

One speaker commented that the level of investment required over the next decade, compared to the size of his business today, means that it is no longer business as usual. He could have been talking about the European power sector as a whole.

No easy answers

The breadth and diversity of topics discussed at the summit make it clear that the region’s energy market is increasingly subject to pressures from far outside Europe.

The event’s key message was that utilities should not expect to find any one “silver bullet” to the challenges posed by the growth of renewables. A multifaceted, flexible approach will be required to successfully shape Europe’s power industry to 2020 and beyond.

For more information

The EPG Summit also saw the launch of issue 13 of Utilities Unbundled, our biannual publication that explores many issues addressed at the summit.

Read or download Utilities Unbundled here.

For more information on the summit, please email Theresa Hagemeister

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