Europe Divided on Supply Security as Green Power Gains: Energy

European Union governments and the bloc’s executive arm are splitting over how to guarantee electricity supply as the region builds more renewable power.

Germany, France and the U.K. are following nations from Spain to Greece in developing programs called capacity mechanisms to pay utilities to keep plants on standby from as early as 2016. The European Commission instead plans a single market by the end of the year. Supply and demand in 15 markets was for the first time linked today through a daily auction.

Europe’s power market relied on intermittent wind and solar output for a record 7.4 percent of generation in 2012, a share poised to reach 18 percent by 2020, according to Energy Brainpool GmbH & Co. KG., a Berlin-based consultant. The renewable energy boom cut profitable hours at coal and gas-fired plants and IHS Inc. estimates that as much as 60 percent of the region’s gas capacity isn’t covering costs and may be at risk of closure by 2016.

“Capacity mechanisms are popping up like mushrooms all over Europe,” David Viduna, head of long-term origination at Prague-based utility CEZ AS, said in an interview in Vienna on Jan. 29. “The point is that all those efforts need to be harmonized” because payments in one country affect the competitiveness of plants in neighboring countries, he said.

Preventing Blackouts

Nations are seeking to prevent blackouts as utilities plan the biggest-ever wave of shutdowns of unprofitable power plants. As much as 110 gigawatts of gas-fired capacity probably will shut in the next three years, according to IHS, a researcher based in Englewood, Colorado. One gigawatt is enough to power about 2 million European homes.

U.K. utilities from Centrica Plc (CNA) to SSE Plc (SSE) will be able to bid in an auction this year to offer backup power plants from 2018 at the lowest possible cost, according to the Department for Energy and Climate Change.

“We need more generation,” Michael Fallon, U.K.’s energy minister, said Jan. 21 in an interview. “We’re losing a fifth of our capacity over the next 10 years.”

Even with 58 nuclear reactors designed to operate 24 hours a day, France doesn’t have enough capacity to meet peak winter demand. Europe’s second-biggest power user may have to import almost 3,600 megawatts during cold snaps this winter, according to RTE, Electricite de France SA (EDF)’s grid unit. There’s a “moderate risk of supply shortages,” the network manager said in a Nov. 7 report.

Guaranteeing Supply

“France is convinced of the need” to take action to prevent blackouts, Robert Durdilly, president of the Union Francaise de l’Electricite, which represents power producers and distributors, said Jan. 29 in an interview.

From 2016, suppliers without enough capacity to meet the highest peak in demand from their customers must purchase certificates from generators guaranteeing backup supply, according to Commission de Regulation de l’Energie, the Paris-based regulator.

Germany, Europe’s biggest market, is paying plants deemed essential for power supply stability, including EON SE’s Irsching gas-fired plant in Bavaria, on an individual basis. Details have not yet been agreed to for a longer-term measure, according to a text adopted at a meeting of Chancellor Angela Merkel’s cabinet in Meseberg that ended Jan. 23.

Gas-fired plants such as Irsching can’t operate for enough hours to cover their costs, Georg Oppermann, an EON spokesman in Dusseldorf, Germany, said by e-mail.

“This is why we believe that plants which are needed for the security of the power system should be rewarded adequately,” he said.

Increase Trading

Nations should instead ensure security of supply by building more cross-border connections and increase trading with neighbors, according to the commission.

One of the pillars of the European Union is a single market where people, goods, services and capital move freely between its 28 nations. The region’s plan for a joint energy market by the end of 2014 will save as much as 70 billion euros ($94 billion) a year by 2030, according to the commission. Coupling, a step on the way to achieving a single market, may save consumers as much as 4 billion euros a year.

Europe began linking day-ahead markets in November 2006 as France, Belgium and the Netherlands integrated allocation of transmission capacity on cables and power trading. Germany and Luxembourg joined in November 2010.

The link-up of next-day electricity trading from the U.K. to Finland is intended to make power flow more easily across borders to where it is most needed.

First Auction

Prices in the first next-day power auction held today by network operators and energy exchanges across countries that account for 75 percent of Europe’s electricity supply ranged from 35.98 euros a megawatt-hour in Germany to the equivalent of 53.88 euros in the U.K.

“A strong, interconnected electricity transmission grid is critical” to creating a Europe-wide energy market and ensuring security of supply, Ethel Horan, spokeswoman for Brussels-based grid group Entso-e, said by e-mail.

“If we allow national ways of fixing markets with capacity mechanisms, it undermines the internal market,” said Klaus-Dieter Borchardt, a director for internal market in the energy department of the regulator in Brussels.

Capacity mechanisms could have “unfavorable effects” on competition, French regulator CRE said in a report last year. If a plant in one country receives payments, it may be able to sell power at cheaper rates than generators in neighboring countries, CEZ’s Viduna said.

Spanish Plant

A typical idle 500-megawatt gas plant in Spain, where generators have been able to earn capacity payments since 2007, receives about 7.3 million euros a year, according to Endesa SA, the Madrid-based utility. The number isn’t based on an actual plant.

Tennet Holding BV, one of four German high-voltage grid managers, will pay a “middle double-digit million-euro sum” a year to the Irsching 4 and 5 power plants to prevent them closing, EON said in May.

Capacity mechanisms are designed to pay the most flexible plants to act as backup when renewable output drops. A gas-fed plant with the latest technology can produce power within minutes, while coal-fed stations can take as much as six hours to reach full capacity.

Germany’s five-fold increase in renewable energy in the decade through 2012 intensified the need for gas-fired plants. Wind and solar accounted for as much as 49 percent of Germany’s power on Dec. 23, falling to 4 percent two days later, data from the European Energy Exchange compiled by Bloomberg show.

Further Declines

Profit at gas plants plunged as German power prices slumped. The benchmark year-ahead contract in Europe’s largest economy fell 29 percent since 2010 and traded at 36.55 euros a megawatt-hour today, broker data show. Prices may slide as much as 10 euros with a capacity mechanism because of the reduced risk of supply disruption, according to Tom Tindall, a director at IHS in London.

Gas-fed plants have been losing money since 2012 and will remain unprofitable through 2018, according to data compiled by Bloomberg. Power plants in Germany lose 20.73 euros for every megawatt-hour of power they generate, a gauge known as the clean-spark spread, a calculation based on year-ahead power price, fuel and emissions costs, according to data on Bloomberg.

Capacity mechanisms may cost consumers as much as 20 percent of the value of wholesale power markets, according to the commission. That’s 13.2 billion euros a year across Germany, France and the U.K., the bloc’s three largest markets, based on average prices and 2012 consumption.

Household Bills

That would add to the 28 percent price increase in the six years through 2013, according to Eurostat data. German residential bills are more than twice the amount that utilities pay to deliver the power, according to Berlin-based lobby group BDEW, even as demand last year fell to the lowest in a decade.

Economic output in the 18-nation euro region probably rose 0.4 percent in the three months through December after sliding for seven quarters, according to the median of 30 economists in a Bloomberg survey.

Spain’s 14 million households paid more than 858 million euros last year in capacity payments, said Cesar Martinez Villar, a regulatory affairs expert at Endesa in Madrid.

There is a risk new investments will be discouraged by capacity payments, according to Ben Caldecott, the program director at Oxford University’s Smith School of Enterprise and Environment.

“Capacity mechanisms are a band aid for a deeper, more structural market reform that’s required,” he said. “Poorly designed mechanisms paying out more than is needed will cost consumers more.”

To contact the reporter on this story: Rachel Morison in London at rmorison@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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