With de-carbonisation targets, policy harmonisation and market design fuelling debate in the European power industry, members of POWER-GEN’s Advisory Board consider the strategic challenges topping the agenda at this year’s event, being held 4–6 June 2013 in Vienna.
Roundtable participants are:
- Thomas Dalsgaard, Executive Vice President, Dong Energy
- Dr. Jacob Klimstra, Energy and Engine Consultant
- Nicolas Kraus, Policy Officer, EPPSA – The European Power Plant Suppliers Association
- Peter Ramm, Chief Operating Officer, Europe, Advanced Power (UK) Ltd
1. ENEL president Fulvio Conti recently described the power sector as being ‘uninvestable’: do you agree and how do regulation and market design need to evolve to encourage investment and innovation?
Nicolas Kraus: Current regulatory signals given by European and national policymakers make it difficult for investors to see a long-term return on investment, causing the market to stagnate. Green technologies must be pushed to reach 20-20-20 targets, but long-term planning is not possible because the agreed political framework keeps changing. The recent back loading of allowances by the European Commission to increase carbon prices is a prime example.
Jacob Klimstra: The growth forecasts for Europe’s power industry are disappointing. On average, investment is set to grow by 0-2% per annum according to latest available figures from Eurelectric (the Union of the Electricity Industry), and most of this will be focused on renewables, which are intermittent sources of power generation that require back-up. Yet there is little incentive to invest in back-up equipment. So I fully agree with Fulvio Conti’s assessment.
Thomas Dalsgaard: It’s a complex investment situation because on the one hand there is a patchwork of national initiatives and subsidies promoting mainly renewables, and on the other, market-based power production – such as combined cycle plant, coal-fired plant, and traditional thermal capacity – is not being incentivised and is therefore uninvestable. Meanwhile, the CO2 scheme has all but collapsed, with prices now at a level where they are not driving investment at all.
Peter Ramm: If you are going to put a long-term asset into construction and operation, you need to have a reasonable level of regulatory and market certainty such that making an investment is going to have a rate of return over that 30+ year lifetime. The other thing that we need is to return to demand growth. Current investments in renewables are largely a result of the regulatory framework and are either intermittent or un-dispatched in nature. Therefore, these plants are displacing existing thermal plant. With increasing demand there would be the need to invest in additional thermal or dispatchable power plants that produce power whenever this is required to meet demand.
2. What progress has been made over the last 12 months towards the creation of an open, interconnected, and integrated European electricity market? Can this objective be achieved with existing mechanisms and led by the market or is more intervention necessary?
Peter Ramm: I don’t believe there has been a great deal of progress because each EU country tends to approach the electricity market in a different way and they remain fairly disparate. Clearly there is effort being made towards harmonising, but it will take time. Meanwhile, there has been some progress in respect of transmission and interconnection, but these types of project are always complex and slow. Look at how long it has taken for the Spanish/French interconnector to enter construction, for example.
Thomas Dalsgaard: It’s fair to say that currently, we don’t have an internal market for power in the EU. The biggest issue today is the lack of transmission infrastructure for physical interconnectivity, which I believe is also one of the biggest impediments to realising a more efficient market and better investment signals. Without the necessary interconnects, the faster build out of intermittent sources in some countries will not be sustainable in the long run.
Nicolas Kraus: Ensuring generation adequacy implies building new generation facilities and delivering flexible resources to complement variable wind and solar generation. This is necessary to ensure sufficient capacity is available to meet demand with the contribution of energy efficiency and demand side participation. It was agreed between Member States that by 2014, the internal energy market must be completed as a key instrument to economic growth. This communication sets out ways to ensure the market fulfils its potential as soon as possible, with interventions that are well designed and effective throughout Europe. However, national structures that have evolved over the past few decades are not easy to change. A well functioning internal market would be vital to encourage investment where it is most cost effective, and we support this view.
Jacob Klimstra: Electricity and energy are the engines of the economy and they have to be as cheap as possible. But I have yet to see any evidence that an open market leads to a real drop in prices. So I don’t believe that an open market is the right mechanism. Rather, it would be better to follow the traditional model where national energy companies are controlled by the state and are supported by long-term investment ensuring citizens have access to reliable and cheap electricity.
3. How does the 2050 low carbon energy objective impact on development of the physical interconnections required to make the market work?
Thomas Dalsgaard: It’s not enough to set objectives – you need a much more proactive and decision oriented approach to trigger the necessary investments in interconnectors and related infrastructure. The problem is that the political focus has been on renewables build out and meeting targets for each country, whereas the infrastructure necessary to sustain it is lagging behind. This is manifest in the pressures on internal balances within individual countries, and the situation is becoming critical as more intermittent power comes on stream.
Peter Ramm: The current transmission system is basically set for large power stations in certain locations and the transmission of power from those power stations to the demand centres of the large cities and industrial areas. With the low carbon objective, the new power stations will effectively be offshore wind, distributed solar or distributed thermal plants. Therefore there’s a need to rebalance the transmission system to deal with that change. The power industry is aware of this challenge, but has yet to make the necessary changes to accommodate a low carbon transmission system.
Jacob Klimstra: As with renewables, low carbon energy means more volatility in terms of supply, so you will need back-up power generation. There is not enough hydroelectricity resource. Technology such as hydrogen storage is too dangerous, too expensive and too inefficient. Nuclear is a viable option but is being phased out by some countries, and winter in Europe is too dark for us to rely on solar PV. So for me, we should be saving natural gas for the dark days, and aiming for a more realistic low carbon target of say 80% carbon-free electricity by 2050.
Nicolas Kraus: The feed-in of intermittent energy sources in areas where there is no consumption means conventional power plants are no longer operating at their design load for most of the time. Given that part load operation takes place at much less efficiency than plant design efficiency, interconnecting the EU grid to make it a ‘European copperplate’ would, among other solutions, reduce CO2 emissions through renewable energy sources and at the same time mitigate the increase in CO2 emissions from the back-up power plants vital for grid stability.
4. What critical steps are necessary for a more cohesive approach to decision-making at national and EU level?
Jacob Klimstra: Today the industry is dominated by stakeholders that believe everything is a matter of opinion, not scientific fact. We need more scientists and engineers involved directly with the decision-making process. In the US for example, it is common practice to set up committees that include representatives from users, suppliers, manufacturers, and academics. By finding the right type of experts, they find the right solution – and this is what was achieved with gas quality in the US. The current wrangling over deteriorating gas quality in Europe is an example of how EU decision-making is stymied by bureaucracy and lobbying.
Nicolas Kraus: Historically, the EU has had no specific competence in energy matters. The only way to encourage a cohesive approach in decision making was indirectly through the environment competences of the European Commission. However, article 194 of the Lisbon Treaty gave the EU some shared competences with Members States on energy matters, but this is not enough! Member States still have the final say on the type of technology they use (i.e. renewable energy sources, nuclear, conventional), which makes it difficult for the EC to ‘Europeanise’ the internal energy policies of Member States.
Thomas Dalsgaard: There needs to be a decision taken at EU level to increase the CO2 price. I also believe TSOs and regulators should work more closely to develop the critical physical interconnects between countries, and should be taking a more proactive role. A bigger physical interconnection system could possibly trigger, or at least put more political focus on aligning the fragmented subsidy schemes and systems within Europe.
Peter Ramm: Ultimately, there is a need to harmonise across all member states such that there is one set of rules for power systems. Looking at renewables subsidies for example, power stations are being built in some countries but not in others, so we need to remove the dislocations happening at national boundaries. I believe that current mechanisms are inappropriate and that subsidies should be the same irrespective of which country you are in. Investors would then be looking at constructing plants at locations where they make most economic sense.
5. What challenges have yet to be addressed, and in particular, in respect of factors external to Europe (e.g. the ‘US energy gap’)
Nicolas Kraus: It’s no secret that the EU is not immune to global activities. But the major challenge today is to agree on how far the EU can carry the global climate change burden on its own without a binding global agreement on CO2 reduction. The issue is whether Europe can remain competitive as energy prices rise while other regions reduce them, especially if the ‘green economy’ does not materialise as hoped.
Peter Ramm: To reduce carbon at the rate suggested by the EU’s 2050 target will mean a significant increase in cost. This will be passed on to the consumer and will also make Europe less competitive. Therefore there is the risk of the off-shoring of industry to locations such as the US, where they currently have low-cost natural gas.
Jacob Klimstra: Industry suffers when electricity prices are too high. Globalisation dictates that multi-national firms will locate their sites where the workforce is best educated, and where labour and power costs are most competitive. We have to focus more on fuelling the engine that generates wealth for Europe – i.e. the power industry – and this means ensuring we furnish the next-generation workforce with the skills and technical expertise necessary for Europe to compete on a global basis.
Thomas Dalsgaard: Europe aims to transform its power market through a more climate-friendly energy policy and more renewables, but it has not taken the steps necessary to make this happen in a cost-efficient way. To do this, we need an appropriate price on CO2, and a single market by interconnectivity, by design, and by incentive scheme harmonisation.
