EU Energy Policy Continues To Leave Utilities In The Dark
BMI View: The operating environment within the EU energy market remains extremely challenging for utilities, as the region's energy policy and future trajectory of it remains confused as policy aspirations and economic realities vie for prominence. In the first part of this two-part analysis, we will examine the uncertain future of gas-coal price dynamics, the EU regulations governing coal-power plants and the potential power-capacity crunch in Europe as utilities stall on building new capacity in light of the confused policy environment. If these issues are not addressed through policy implementation, there is a real risk of jeopardising the region's future energy security and capacity expansion plans.
Shifting economic and policy dynamics within the European energy market have resulted in coal becoming the most competitive source to generate power - a trend that we have been following closely in our analysis (see 'Coal Comeback Continues', June 19). Coal prices remain relatively low following their collapse in 2011, and gas prices remain high - following the steep increase in wholesale gas prices in 2011. Furthermore, and exacerbating the growing divergence between the cost of coal and gas-fired power generation (dark-spark spread), has been the continued policy stalemate of the EU emissions trading scheme (ETS), which is providing no mechanism to discourage the burning of coal (see 'Successful Vote Throws ETS A Lifeline', July 5). Initially, we believed that it was unlikely that this dynamic would change until at least 2016, however, a continued failure on a policy level to create a sustainable long term policy environment and ongoing uncertainty over coal/gas price dynamics lead us to believe this will remain an issue through to the end of the decade.
Quite clearly, the renewed focus on coal as a fuel source for the power sector, which led to carbon emissions rising in both Germany and the UK in 2012 - reversing a long downward trend - comes as a stark contradiction to the global image of the EU as a 'green champion'. In fact, we believe we are witnessing a softening stance towards stringent environmental regulation in Europe, as the region's decreasing competitiveness and rising energy costs take centre stage - something will we be looking at in more detail in part two of this analysis. This viewpoint was encapsulated in the summer of 2013, when an EU official stated that energy talks should be undertaken 'through the lens of prices rather than climate concerns'.
|Economic And Policy Case For Coal|
|Dark-Spark Margin EUR/MWh (LHS) and European Energy Exchange (EEX) Spot price (EUR/tCO2) EU Allowance Period 3 - Last Price (RHS)|