Europe’s Power Supply Seen at Risk From Investment Dearth

Europe is in jeopardy of running short of power because wholesale electricity prices are too low to encourage spending on new thermal plants, according to the International Energy Agency.

The region needs more than $2 trillion in power-industry investment by 2035 and about 100 gigawatts of new thermal capacity in the decade to 2025, the Paris-based IEA said today in its World Energy Investment Outlook. Electricity prices are more than 20 percent below the level necessary to spur investment, according to the adviser to 29 nations. One gigawatt is enough to power about 2 million European homes.

“The investment required to maintain the reliability of Europe’s electricity system is unlikely to materialize with the current design of power markets,” said the IEA. “If this situation persists, the reliability of European electricity supply will be put at risk.”

German power for delivery next year, a European benchmark, rose 0.2 percent to 34.30 euros ($46.67) a megawatt-hour at 12:07 p.m. Berlin time, according to broker data compiled by Bloomberg. The contract dropped 5.8 percent in 2014, heading for a fourth straight annual decline.

Gas Capacity

Natural gas-fired power plants accounting for 14 percent of installed capacity in the European Union were idled, shut or at risk of closing at the end of 2013 as utilities burn coal instead, the International Center for Natural Gas Information, or Cedigaz, said yesterday. Europe is at risk of losing a third of its gas- and coal-fired capacity, the center said.

“Part of the solution involves higher revenues to thermal generators, but this potentially means higher prices to consumers,” the IEA said. That highlights “the difficulties facing European policymakers as they seek to make simultaneous progress toward ensuring energy security, environment sustainability and economic competitiveness.”

Europe must compete in the “near term” with Asian consumers for supplies of liquefied natural gas, according to the IEA. The organization also pointed to the expense of infrastructure for handling the super-chilled fuel.

“The expectation that a surge in new LNG supplies will totally transform gas markets needs to be tempered by recognition of the high capital cost of LNG infrastructure, with transportation typically accounting for at least half of the cost of gas delivered over long distances,” the IEA said.

Investment in LNG will exceed $700 billion over the period to 2035, according to the IEA.

Global energy investment is set to fall short of climate-stabilization goals, with $53 trillion in cumulative investment in energy supply and efficiency required by 2035 “to get the world onto a 2-degrees-Celsius emissions path,” the IEA said, referring to the generally agreed level to avoid irreversible climate change. Current policies and market signals are failing to drive investment in low-carbon sources and energy efficiency at the necessary scale and pace, the report showed.

Before it's here, it's on the Bloomberg Terminal.