European Utilities

8/13/2019 European Utilities

1/5

European utilities

How to lose half a trillion euros

Europes electricity providers face an existential threat

Oct 12th 2013

ON JUNE 16th something very peculiar happened in Germanys

electricity maret! "he #holesale price o$ electricity $ell to minus

%100 per mega#att hour &'(h)! "hat is* generating companies #ere

having to pay the managers o$ the grid to tae their electricity! +t #as a

,right* ,ree-y .unday! /emand #as lo#! et#een 2pm and 3pm*

solar and #ind generators produced 2! giga#atts &G() o$ po#er*

more than hal$ the total! "he grid at that time could not cope #ith more than 4G( #ithout ,ecoming unsta,le! 5t the

pea* total generation #as over 41G( so prices #ent negative to encourage cut,acs and protect the grid $rom

overloading!

"he trou,le is that po#er plants using nuclear $uel or ,ro#n coal are designed to run $ull ,last and cannot easily reduce

production* #hereas the e7tra energy $rom solar and #ind po#er is $ree! .o the ,urden o$ ad8ustment $ell on gas9$ired

and hard9coal po#er plants* #hose output plummeted to only a,out 10: o$ capacity!

"hese events #ere a microcosm o$ the changes a$$ecting all places #here rene#a,le sources o$ energy are ,ecoming

more important;Europe as a #hole and Germany in particular! "o environmentalists these changes are a story o$

triumph! 1!3 trillion)! No# they are #orth less than hal$ that &see chart 1)! .ince .eptem,er 200*

utilities have ,een the #orst9per$orming sector in the 'organ .tanley

inde7 o$ glo,al share prices! +n 200 the top ten European utilities all

had credit ratings o$ 5 or ,etter! No# only $ive do!

"he rot has gone $urthest in Germany* #here electricity $rom

rene#a,le sources has gro#n $astest! "he countrys ,iggest utility*

E!ON* has seen its share price $all ,y three9?uarters $rom the pea and

its income $rom conventional po#er generation &$ossil $uels and

nuclear) $all ,y more than a third since 2010! 5t the second9largest

utility*


2/5

2010! 5s the companys chie$ $inancial o$$icer laments* @Aonventional po#er generation* ?uite $ranly* as a ,usiness

unit* is $ighting $or its economic survival!B

"he companies #ould have ,een in trou,le any#ay* #hatever happened to rene#a,les! /uring the 2000s* European

utilities overinvested in generating capacity $rom $ossil $uels* ,oosting it ,y 16: in Europe as a #hole and ,y more in

some countries &up 1: in .pain* $or e7ample)! "he maret $or electricity did not gro# ,y nearly that amount* even in

good times then the $inancial crisis hit demand! 5ccording to the +nternational Energy 5gency* total energy demand in

Europe #ill decline ,y 2: ,et#een 2010 and 2014!

"#o in$luences $rom outside Europe added to the pro,lems! "he $irst #as the =uushima nuclear disaster in Japan! "his

paniced the government o$ 5ngela 'erel into ordering the immediate closure o$ eight o$ Germanys nuclear9po#er

plants and a phase9out o$ the other nine ,y 2022! "he a,ruptness o$ the change added to the utilities #oes* though

many o$ the plants #ere scheduled $or closure any#ay!

"he other in$luence #as the shale9gas ,onan-a in 5merica! "his displaced to Europe coal that had previously ,een

,urned in 5merica* pushing European coal prices do#n relative to gas prices! 5t the same time* car,on prices crashed

,ecause there #ere too many permits to emit car,on in Europes emissions9trading system and the recession cut demand

$or them! "his has reduced the penalties $or ,urning coal* ept pro$it margins at coal9$ired po#er plants healthy and

slashed them $or gas9$ired plants! GCrard 'estrallet* chie$ e7ecutive o$ G/= .ue-* the #orlds largest electricity

producer* says 30G( o$ gas9$ired capacity has ,een moth,alled in Europe since the pea* including ,rand9ne# plants!

"he increase in coal9,urning pushed German car,on emissions up in 2012913* the opposite o$ #hat #as supposed to

happen!

.o the gas and nuclear ,its o$ the utilities ,usiness #ere heading $or trou,le even ,e$ore the rene#a,les ,onan-a*maing the gro#th o$ solar and #ind all the more disruptive!


3/5

had it)! Fou ran these $ull ,last around the cloc;$or technical reasons* coal and nuclear plants cannot easily ,e shut

do#n any#ay! 5nd that provided @,aseload po#erB &the amount al#ays needed)! "hen* to supply e7tra electricity at

pea times &lie lunchtime or early evening) you had plants that could more easily ,e po#ered up and do#n* such as

gas9$ired ones! +$ you imagine a chart o$ po#er provision during the day* it loos lie a layer cae the ,ottom layers are

$lat &nuclear* coal and so $orth) the layer at the top &gas) is #avy!

/eregulation s#ept a#ay this tidy* ordered system* letting po#er plants produce according to the marginal cost o$

electricity! "he advent o$ rene#a,le energy then speeded up the changes!


4/5

.ome utilities have got into the rene#a,les ,usiness themselves! /ra7* #hich used to ,e ritains largest coal9$ired

po#er station* is ,eing converted to run on #ood pellets! Other utilities are ,ig investors in o$$shore #ind po#er!

ut ,y and large utilities have ,een slo# to invest* especially in solar! Utilities o#n only I: o$ rene#a,les capacity in

Germany* $or e7ample! "he pro,lem is that solar energy is so di$$erent $rom #hat they are used to! "he old9$ashioned

utility has a ,ig e7pensive po#er plant #ith* say* 191!4G( o$ capacity! "he plant sits in the middle o$ a radiating #e,

o$ #ires do#n #hich the $irm distri,utes po#er! .olar po#er is di$$erent! hotovoltaic panels are cheap* tiny &a

medium9si-ed array may have a capacity o$ 8ust 10'() and arranged in a net* not as a hu, #ith spoes!

Utilities may eventually get more serious a,out rene#a,le energy* ,ut at the moment change is slo#! +nstead* utilities

are responding to their #oes ,y shi$ting out o$ po#er generation and into @do#nstreamB activities* such as trading and

o$$ering customers advice on energy use! +n the past $e# months Katten$all* .#edens ,iggest utility* has #ritten o$$ 6:

o$ its assets and three German $irms* E!ON*


5/5

+n such a #orld* the old9$ashioned utilities play t#o vital roles! "hey #ill ,e the electricity generators o$ last resort*

ensuring the lights stay on #hen #ind and solar generators run out o$ pu$$! 5nd they #ill ,e providers o$ investment to

help ,uild the grand ne# grid! +t is not clear that utilities are in good enough shape to do either o$ these things!

.o $ar* it is true* they have managed to provide ,acup capacity and the grid has not $ailed* even in solar9 and #ind9mad

Germany! +n $act* the German grid is more relia,le than most &countries run relia,ility indices Germany has one o$ the

highest scores in Europe)! Greens there$ore dismiss #orries that rene#a,les #ill undermine grid relia,ility* pointing out

that* as #ind and solar plants spread over the continent* there #ill ,e enough #ind or sun some#here to run some o$

them* at least during the day!

'ay,e! ut as the price s#ings in Germany sho#* it is getting harder to maintain grid sta,ility! Utilities are not

re#arded $or o$$setting the varia,le nature o$ #ind and solar po#er! +nstead* they are shi$ting out o$ electricity

generation! 5nd this is happening at a time #hen rene#a,le energy supplies* on average* 22: o$ Germanys electricity

demand! No one really no#s #hat #ill happen #hen rene#a,les reach 34: o$ the maret* as government policy

re?uires in 2020* let alone i$ they reach the national target o$ 0: in 2040! 5lmost everyone acno#ledges that as the

share o$ rene#a,le energy rises* regulation o$ the grid #ill have to change!

"he role o$ utilities as investors is also ,eing threatened! "he sums re?uired to upgrade the grid are huge* as much as %1

trillion in Europe ,y 2020! Aompanies #orth %400 ,illion cannot $inance anything lie that amount! +nstead* they are

cutting capital spending! "hat o$

European Utilities

Documents

Transcript of European Utilities