Speakers at POWER-GEN Europe Conference Bemoan State of Europe's Electricity Market

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Efforts to decarbonize Europe's electric supply have produced poorly thought-out market reforms that have wiped out tens of billions of dollars of shareholder value, speakers told POWER-GEN Europe's plenary panel earlier this month. These reforms have managed to swell the percentage of electricity generated from renewables while stimulating greater reliance on fossil fuels, including wider use of carbon-intensive lignite, said one speaker at the conference in Vienna, Austria. The plenary panel topic was, "Liberalization & Decarbonization--Roadmap or Roadblock?"

"We have paid a lot of money to try to achieve a renewable energy target, but we won't achieve it," predicted Wolfgang Anzengruber, chief executive at Verbund AG (Vienna, Austria). "Any reduction in Europe's carbon emissions will be based not on renewable, but rather on the (continent's) stagnant economic situation. We are at a crossroads: wholesale prices are low, end-use prices are high and no one will invest in generation technologies aside from subsidized renewables."

"We must immediately exit this subsidized system," he continued. Europe's Emissions Trading System (ETS) "is not working anymore. Europe has the world's lowest prices for carbon, and lignite generation is very profitable today. Electric reforms have destroyed over $50 billion in shareholder value over the last three years in Germany alone."

The ETS was enacted in 2005 to facilitate continent-wide reductions of greenhouse gas emissions through a cap and trade system, but the system has not worked as planned. For more on this issue, see April 29, 2013, article - European Parliament Rejects CO2 Rescue Plan.

Anzengruber's complaint was echoed by Michael Fübi, chief executive at RWE Technology GmbH (Essen, Germany). The stock of RWE AG (OTC:RWEOY) (Essen, Germany), parent company to RWE Technology, has plunged about 75% over the last three years. He blamed this plunge on Europe's rush to decarbonize. "Over the last five to six years, we have invested about $12 billion in power stations, most of which will not be profitable. If we knew how this market would turn out, we would not have built most of those plants."

Fübi said generators in Europe receive about $40 per megawatt-hour (MWh) for their electricity, but owners of renewable generation receive that price plus an additional subsidy of $65 per MWh, soon to reach $75 per MWh. "This is not necessarily bad news, but it is expensive news. Prices for end users are rising, but the amount going to generators is decreasing. The political will (to decarbonize) is clear, but there has been little discussion of the price tag."

Europe has about 330 gigawatts (GW) of fossil-fueled electric generation capacity, and about 200 GW of this, or 60%, is either unprofitable or only barely recovering its operating costs, estimated Fabien Roques, senior director of the European Power & Carbon practice for IHS Incorporated (NYSE:IHS) (Englewood, Colorado). "The situation is bad, but it could get worse," he told the conference. "Not all of these (unprofitable) plants are old. In Spain and Italy, for example, some new combined-cycle combustion turbines are hardly running."

"This crisis is not solely a consequence of the business cycle," Roques continued. "About two-thirds of the drop in the thermal plant utilization rate is a consequence of renewable energy being forced into the system. If you think this is just part of the (business) cycle and that growth will come back in a few years and (plant) utilization rates will increase, I'm sorry but I have bad news: We have a deeper problem, a structural problem. Renewables have changed the generation mix, but we don't have policies to adjust for that."

One of the problems identified by the POWER-GEN Europe speakers is that Europe's electric market values only energy, not capacity. In that regard, it shares some similarities with the restructured electric market in Texas, where low electricity prices have prevented construction of new power plants because asset owners will not receive payments for electric capacity--basically, the ability to generate electricity if needed. Another market flaw in Europe is that renewable electricity is first in the dispatch order. That means renewable electricity is always put onto the grid, even if it is more expensive than electricity generated by other types of power plants.

Europe's jumbled electricity market is "a consequence of not having a clear playground with rules governing how we all play," commented Andrea Apara, senior advisor for research & development to the chief executive of Ansaldo Energia SpA (Genoa, Italy). "We have politicians who play at being economists, economists who play at being politicians, and industrialists who think they're politicians. No one's doing what they're supposed to do--which is to be an expert in their respective fields and create a dialogue based on that."

Several speakers rued the short timeline that Europe has adopted to decarbonize its electricity market: By 2030, member countries in the European Union (EU) have committed to have 30% of their electricity come from renewable resources. Some in the EU are angling for a carbon-free electricity market by 2050.

"We need policies that are sustainable and can last," Roques said. "The policies in place drive up the cost of decarbonization. You need to recognize the time component of decarbonization: This is an industry with a long lead time, and you can quickly destroy value if you force change too quickly onto the system."

The IHS official added, "I don't think we are questioning the end target (of decarbonizing the electric supply), but rather the speed and trajectory of how we get there."

All of the panel speakers agreed that Europe's electric market needs to be fixed, but no speaker proposed solutions. But one audience member who questioned the panelists had a modest proposal: "We need to go back to the old utility system, where wise people making modest salaries sat in a room and made decisions." His suggestion drew scattered applause from the POWER-GEN Europe audience.

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