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Europe's Miracle Electric Economy, We Don't Need Gas

Economics / European Union Mar 12, 2013 - 05:42 PM GMT

By: Andrew_McKillop

Economics

Germany's diplomatic and trade Missions in the US, on their Web site state that the official Energy Concept or Energiewende of 28 September 2010, and subsequent policy decisions through 2011 set a number of binding goals for the nation. As of 2011, but able to be raised afterwards, these goals include at least 35% of gross electricity supply to come from renewables by 2020, a 50% share by 2030, followed by 65% in 2040 and 80% by 2050. Final electricity demand in 2020, relative to 2008, must fall by at least 10%, with national primary energy demand cut by 80% relative to 2008, by 2050.


This is Low Energy !

On the ground this has set the cat among the pigeons in the power sector, and beyond. Three years ago, Germany’s largest utility EOn spent 400 million euros ($520 million) as its 50.2% share of building costs for an 846 MegaWatt state of the art natural gas-fired power station. This Irsching-5 plant joined 4 others at the same site in Bavaria, but later this month, March 2013, EOn may close the plant because it is losing so much money. In January, an EOn spokeswoman said the plant had only operated about 1900 hours in year 2012, but the breakeven minimum for the plant is 4000 hours-per-year.

Being majority stakeholder, EOn's decision to pull out will be bad news for its main partners in the project, including the power distributor company Mainova and the power producer N-energie of Nuremburg. Slumping power prices make burning natural gas at European gas prices unprofitable, and by record margins. As Europe’s weak economy holds back electricity demand and cheap coal is readily available, Germany's requirement to buy renewable-source power, and the collapsing cost of carbon permits which penalize coal more than gas, are all heavily undercutting gas-fired plants.

As for nuclear plants, already given a death sentence in Germany with almost no possibility of a Japanese-type reprieve, a power production system where even gas-fired plants have to be stopped, three days out of four, makes for further and deeper uncompetitiveness. As Gerard Mestrallet, CEO of GDF Suez, France’s former gas supply monopoly, said at a February 28 press briefing: “The thermal industry is in crisis. There is overcapacity.”

AN ENTIRELY NEW BALLGAME
The pattern is repeating throughout Europe. As recently as 2010-2011, the decision to build modern, highly efficient, low emission gas-fired power plants was an almost shoehorn, nod-through winner for spending decisions by power utilities. The decision hardly needed discussing, due to gas plants being so much cheaper to build per kiloWatt of capacity than coal-fired plants, and so much lower in CO2 emissions. Today, utilities including France’s GDF Suez and UK-based Centrica, and utilities in the Netherlands, Italy, Spain and the Czech Republic are also mothballing gas plants, including very recent units sometimes costing a quarter-billion euros each, and more.

Measured by "the spark spread" or the difference between the cost of fuel and the price paid by power distributors for the electricity generated, these can and do attain spectacular negative values, as high as minus $40 or 30 euros lost on every 1000 kWh (MegaWatt-hour) produced and distributed. As of early March typical daily spark spreads in German power trading were minus 18 euros per MegaWatt-hour. Only under exceptional conditions, as produced a few days in February, with low winds in Germany but high power demand, can the spark spread soar to extreme high positive values.

Conversely, ironic to some given the anti-coal advocacy of global warming alarmists, only coal-fired power can beat the cards stacked against fossil-fuelled power production in Europe. Defenders of the faith such as Oxford University-based professor Dieter Helm expound: "The switch from gas to coal in Europe is a very serious retrograde step from a climate change perspective and in Germany it is worse -- building new coal power stations which will be locked in for decades".

This was exclusively due to coal energy's extreme low cost - but coal's advantage is now reinforced by collapsing CO2 emission permit costs as the eccentric, creaky and corrupt European ETS "carbon scam" loses a little bit more of its shrinking credibility each day. Across Europe today, spark spreads for coal plants are profitable in every European power market. Gas-fired plants are losers.

The idling of Europe's high tech gas-fired power plants built to last a generation or longer is holding back Europe’s consumption of gas, as I noted in a recent article on what this means for Gazprom, and the the other main state-controlled or state-owned gas supplier monopolies of Norway and Algeria. European gas demand is set to drop at least 3.5%-4.5% in the 3-year period 2012-2015 (3.5% according to the IEA) with an almost inevitable impact on Gazprom revenues.

CHEAP GAS CAN SAVE THE DAY
Lower gas prices are one of the few things that can save the profitability of an increasing number of EU27 power producer and distributor companies. Again ironic, those power companies that were slow to join the rush for gas, a stampede which has now stopped dead in its tracks, such as Germany's No 2 power producer RWE, are gaining from not having joined the rush.

RWE's recent former CEO Juergen Grossmann earned the nickname 'Nuclear Rambo' for his almost hysterical attacks on Angela Merkel's 2011 decision to quit nuclear power, but his company's large portfolio of coal-fired plants is now an asset. In 2012, RWE was Europe’s single largest carbon dioxide emitter, and it churned out 11% more greenhouse gases in one year, as its coal-fired plants increased their annual generation. This notch up in German coal-fired power production was closely matched by the drop in German natural gas-based power production in 2012.

Showing how radical and total the turnaround in fortunes has been, two of Europe's previously most gas-oriented power producers - EOn in Germany and GDF Suez operating in France, Germany and other EU countries - have bluntly said, at CEO level, they cannot and will not run loss-making gas power plants where they see no possibility of even breaking even. For GDF Suez, only in France, it was forced to cut gas-fired generating operations by 24% since early 2012. In the last 6 months, profit forecast downgrade has followed downgrade, mainly because of the gas power production crisis.

Major financial firms covering utilities in Europe are unanimous that around 30%-35% of all fossil-fuel power plants must be shut in the next 7 years. Unlike previous forecasts, however this will start with gas-fired plants on present trends and outlooks - despite their age, despite their building cost. On a very approximate base, using industry forecasts, up to 12 000 MW of gas-fired plants may have to be shut in Europe by 2020, representing a financial loss to utilities of around 9 - 10 billion euros.

Unfortunately and as the utility companies and power distributors know, at least in winter-time there is almost no solar PV supply on-line: windpower is the only enemy. In summer however, this second horseman of the financial apocalypse switches on, and can turn spark spreads even deeper negative.

Remedy may be coming, and can include so-called "capacity guarantee mechanisms", where power generators are paid to keep stand-by fossil plants on line even when they are not used. This will be attractive to the power industry, to be sure, but for consumers the bill is going to be higher than previous. Progress towards "capacity guarantee", and who pays for it will sonn become a political issue - but in the meantime, power plants will be shut down, until brownouts become all too usual and consumers get the message that not using electricity at all is most surely the cheapest option!

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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