BMI View: In the second part of this two-part analysis, we will focus on the renewable energy industry across Europe and how concerns over the region's competitiveness and the problems with integrating the various technologies into the conventional power network is throwing renewable energy policies into question. This was recently evidenced by the announcement of the proposed EU 2030 climate and energy targets in late-January 2014, and in particular the renewable energy component of the framework, which we believe has been watered down and, yet again, highlights the ongoing 'policy slippage' we have been witnessing in the EU over the last six months. The announcement will no doubt continue to leave renewable energy developers questioning the region's commitment to renewable technology and reinforces our viewpoint that renewable energy is unlikely to be a panacea for the European power sector, which is struggling to secure investment into new electricity generating capacity.
In our previous analysis of the European energy market we summarised that a capacity crunch in the EU over the coming decade is not entirely out of the question given the current dynamics that are playing out within the market ( see 'EU Energy Policy Continues To Leave Utilities In The Dark', November 1 2013). With the future of coal-fired generation looking uncertain (s ee 'EPS Amendment To Accelerate Coal Closures', November 19 2013), gas-fired facilities suffering from questionable economics and the cost of nuclear proving prohibitive, there is seemingly a gap to fill. EU policy, in the form of the 20'20'20 energy and climate package, and the region's long-standing green energy credentials, would once have suggested that renewable energy could partially fill the gap.
Renewable Energy Policy Up In The Air
However, we have previously commented in our analysis that there appears to be slight policy slippage with regards to renewable energy in Europe as concerns about the EU's competitiveness in the global arena grow. Furthermore, the problems associated with incorporating the huge influx of renewable energy sources into the European power system are complex, with the intermittency of renewable generation meaning conventional capacity has to run at stand-by, causing utilities and some governments to push for policy reform. This viewpoint played out in January 2014, when the European Commission (EC) announced the proposed EU 2030 energy and climate package, which in our opinion featured a watered-down renewable energy target, which appears not to be binding at the member-state level.
In the lead up to the announcement on January 22 2014 there was a great deal of speculation with regards to what the EC would propose, with debate raging amongst EU member states as different countries pushed for a different number of goals to be adopted. For example, the UK is in favour of an ambitious emissions target but believes a renewable energy target is 'inflexible'. Germany on the other hand is backing a high renewable energy target, on account of its own renewables-focused energy policy.
The targets that have been proposed are as follows:
40% reduction in greenhouse gas (GHG) emissions below the 1990 level. This is actually slightly above what some industry players were estimating (35%) but overall mostly agreeable, which leads us to believe it will be adopted. That said, environmental groups have voiced concerns that this is goal is not ambitious enough, particularly considering that the EU already met its 20% emissions reduction target in 2012 - eight years ahead of schedule.
EU-wide binding target for renewable energy of at least 27% as a share of consumption by 2030. However, crucially, it seems that there will be no binding targets at the individual member states.
As previously mentioned, we believe that the EC's apparent lack of individual renewable energy mandates for member states aligns with our long-held view about environmental policy slippage in Europe. We believe there are two primary reasons underpinning such slippage:
Europe has witnessed an incredible boom in renewable energy over the last decade, spurred on by EU regulation (the 20'20'20 energy and climate package), government subsidy schemes and the gradual reduction in renewable technology costs, particularly wind turbine and solar panel prices.
|EU-27 Renewables Capacity and Generation, 2000-2010|
In order to support the green energy expansion and encourage renewable developers into the market, financial incentives were, and in some cases still are, currently offered to ensure that electricity generated from renewable technologies is cost competitive with conventional sources, such as coal and gas-fired electricity generation. Furthermore, in a bid to boost energy efficiency and reduce emissions - other requirements of EU policy - additional incentives have been introduced. For example, in the case of UK, the 'Green Deal', 'ECO' and smart meter programmes.
Environmental taxes, including renewable energy subsidies, coupled with an uptick in feedstock prices, primarily gas, has led to European retail electricity prices rising significantly over the last few years. In fact, on a global level EU electricity prices are among the highest in the world. According to data from the UK's Department for Energy & Climate Change (DECC), the average price of domestic electricity for EU15 economies was double that of the US in 2012, with prices in Germany almost three times higher. Whilst our Country Risk team believe Europe's economic trajectory is on a stronger footing heading into 2014, the region will struggle to remain competitive with energy prices at such high levels.
|Natural Gas Price In Selected Markets, 2007-2012 (US$/mnBTU) and Domestic Electricity Prices (Including Taxes) for Selected Countries in 2005 and 2012 (GBp/kWh)|
Although gas prices in Europe have remained high after spiking in 2011, causing the wholesale gas component on energy bills to increase accordingly, much of the focus with regards to rising electricity prices has been on the impact of renewable energy subsidies and environmental policy. Taking the UK as a case in point, recent announcements that four out of the 'big six' utilities in the country are to hike consumer energy bills has led Prime Minister David Cameron to suggest that the government will roll-back environmental levies, in order to reduce the green tax element of electricity bills ( see 'Renewables: Battlelines Being Drawn', November 11 2013). Similarly in Germany, how to tackle the issue of rising electricity prices, whilst at the same time continuing to follow the country's ambitious energy agenda (the phasing out of nuclear energy and incorporation of high levels of renewable energy), has proven a key political and economic issue.
Incorporating Renewables Into The Mix...A Bumpy Ride
Aside from the issue of decreasing regional competitiveness, the mammoth uptake of renewable technology into the EU power grid and the consequential influx of renewable-sourced electricity generation has had some wide-ranging effects on the EU energy market, particularly on thermal back-up capacity and the region's transmission and distribution (T&D) network.
European utilities were quick to capitalise on the favourable rewards on offer within the EU renewables market, including attractive subsidy schemes, preferential access to grids and a solid regulatory environment governed by the EU. Additionally, the renewable energy sector provided an avenue for growth for companies in an otherwise subdued market - owing to suppressed electricity demand and the clouded economic environment during the financial crisis and eurozone sovereign debt crisis. As such, utilities began to diversify their generating portfolio towards renewable energy and renewable energy investment into Europe surged.
However, considering that the two renewable technologies of choice for the EU market are solar and wind (with both highly dependent on climatic conditions), the output from these sources is notably intermittent. Thus thermal back-up, typically flexible gas-fired generation, is required in order to stabilise the grid and ensure constant supply during peak load periods; the problem is that when considering the economics of gas-fired power generation at present, running gas power plants as back-up is proving unprofitable for utilities. The International Energy Agency (IEA) has stated that gas plants require an utilisation rate of 57% to be profitable. This situation has led some utilities to push for a European capacity mechanism which will enable them to run capacity on standby whilst maintaining profitability.
Another problem resulting from the EU's push towards renewable energy has been the ability of the region's T&D network to handle the renewable-sourced generation. Renewable energy is notably difficult to integrate into power infrastructure and susceptible to large line losses. Improving T&D networks and adopting more efficient metering technology, such as smart meter programmes, is both a costly and lengthy solution to the issue. For example, Germany has had well-documented history of delays when connecting offshore wind projects to the national grid, owing to technology and financial challenges ( see 'Offshore Wind Caught In A Storm', October 22 2013). Similarly, a surge in solar in the Czech Republic over 2009 and 2010, due to a government-introduced lucrative solar feed-in-tariff, placed such stress on the country's T&D grid that CEPS, the Czech Republic's grid operator halted new approvals for further generating capacity in February 2010.
Despite ambitious renewable energy, energy efficiency and carbon targets, European emissions have not registered a significant decline over the last few years, in fact Germany's spiked in 2012. Although, we argue that this is partly due to shifting cost-dynamics playing out within the thermal segment of the power sector, which have resulted in an increase in coal-fired power generation - this paradoxical situation provides ammunition for those political parties pushing for a reduction in environmental policy and the associated costs.
|Total GHG Emissions, By Region and Country (Mt CO2-eq)|
The Future Of EU Renewables
The announced targets and the general watering down of environmental policy will no doubt continue to leave renewable energy developers questioning the region's commitment to renewable technology, and could potentially ward-off investment. Furthermore, we question how the 27% target will be met at all if member states are not required to follow individually binding targets. As such, it reinforces our viewpoint that renewable energy is unlikely to be a panacea for the European power sector, which is struggling to secure investment into new electricity generating capacity.
Striking the balance between ensuring environmental sustainability and maintaining economic growth was always going to be one of the key challenges for the EU as it implements an energy policy to take it beyond 2020. However, we believe that the EC's proposed targets are not particularly controversial and are indicative of the realisation that rising energy costs are becoming an increasingly contentious issue within the EU. The proposals will now be reviewed and are not expected to be formally implemented before 2015.