MorganEnergy

The so-called 3rd Energy Package that the European Commission is rolling out this year looks at creating Europe-wide markets in both electricity and gas. How these markets should work is still very much open to debate, especially in gas because actual sources of the fuel are by no means evenly distributed around the continent.

Frontier Economics has been commissioned by GDF SUEZ to consider how such a market might work. Their report, describing a “target model” for the European gas market, is available online (PDF). The scope of the problem is made clear in the executive summary:

It is unrealistic to assume that all gas sources will be able to compete to serve all customers in Europe, as this would require a gas transport network with huge capacity. For example, while gas supplies to GB might be able to compete with gas supplies to Ireland, it would cost much more to ensure that supplies from North Africa could compete throughout the continent with supplies from Norway.

The report highlights several other areas where creating a fully competitive market is unlikely to be feasible, and a pragmatic approach that uses competition as a means to an end, not an end in itself, is recommended.

In the wake of the Fukushima disaster in Japan, most people have been predicting the demise of the nuclear power industry. Recent events appear to have proved that true, with German Chancellor Angela Merkel choosing to shut 7 of her country’s older plants, and promising an exit from nuclear generation by 2022. Switzerland’s cabinet has voted to follow suit. This article by John Daly on oilprice.com, titled “Nuclear Twilight in Europe”, is typical of the sort of media reaction we have seen.

Not every European leader agrees with the German line. In Italy Silvio Berlusconi was keen to press ahead with new nuclear build. Given his ability to win elections despite being mired in all sorts of scandals, you might have thought that the Italian Prime Minister would be unconcerned at being forced to fight a referendum on the subject, but Berlusconi was so afraid of the result that he put all his energy (and considerable media clout) into trying to keep the turnout below the 50% needed for the result to be legally binding. It didn’t work and, as The Guardian reported, well over 90% of the people who did vote were against nuclear power.

Some countries in Europe have always been more well-disposed towards nuclear. Sweden has 10 operating nuclear plants that supply over 40% of the country’s electricity. Following the Three Mile Island disaster a referendum voted to close all of the existing plants by 2010, but most of them are still operating and the Swedish parliament has voted to allow new nuclear build. That, of course, was before Fukushima. Also Vattenfall has had a particularly difficult time of late with the nuclear plants it operates in Germany, particularly Krümmel and Brunsbüttel. A recent International Atomic Energy Agency report listed Vattenfall as the worst nuclear operator in Europe.

Finland is one of the few countries in the world currently building a new nuclear power station. The Finnish people, however, are not happy, and haven’t been since well before Fukushima. The Olkiluoto 3 reactor is currently scheduled to come online 4 years late, and massively over budget.

The existence of nuclear power in an interconnected market means that even countries that are firmly opposed to nuclear make use of it. At today’s Economist UK Energy Summit, Director-General Philip Lowe noted that Austria gets 6% of its electricity from nuclear, despite public opinion being very much against it.

The one country in Europe that has always been a flag bearer for nuclear, however, is France. That support has continued, despite the problems in Japan. In the wake of the Fukushima disaster the European Union decided to undertake a program of stress tests on all nuclear power stations within its borders. No country was likely to vote against that, but pro-nuclear countries have been working behind the scenes to make sure that the tests were not as stringent as they might be. This lobbying has been led by France, the Czech Republic, and particularly by the UK.

Today the UK government released a list of 8 sites at which new nuclear build is planned to be authorized. In order to forestall public objections, all 8 plants will be built on brownfield sites adjacent to existing nuclear reactors. The plans still have to be voted on by parliament, but given that they were put in motion by the preceding Labour government, it will take a fairly substantial u-turn for the vote to fail. And if the UK government manages to get nuclear plants built despite the inevitable public opposition, other European governments might once again reconsider their options.

The latest post on EU Energy Policy is by none other than Andris Piebalgs, Europe’s Commissioner for Energy. In it he makes a confident plea for a revolution in energy technology:

It is clear that we are at the beginning of what has correctly been called the “third industrial revolution” – the rapid development of an entirely new energy system. We can expect a massive shift towards a carbon-free electricity system, huge pressure to reduce energy consumption and transport on the basis of renewable electricity. To make this shift in a manner that maintains, and in fact increases the EU’s competitiveness, means that stimulating rapid technological development in these areas has to be a central part of the EU’s energy policy. Indeed, this is at the heart of the question: how can the EU turn the challenges of climate change and energy security into an opportunity?

Read the whole article here.

Consolidation of energy trading markets continues with Germany’s EEX announcing that they will take over the operation of France’s Powernext. Platts has the full details.

It seems like it is open season on emissions trading schemes at the moment. Over at the Wall Street Journal they are reporting on the hail of fire descending on the U.S. Climate Action Partnership over their blueprint for government action. Meanwhile Sandbag is having at go at the EU’s scheme in the light of the current rapid collapse of carbon prices in that market.

Much of the USCAP criticism appears to be politics as usual. Business interests will carp over anything that costs them money, consumer advocates will rail against anything that puts up prices, and environmentalists will complain that anything that doesn’t hurt businesses and consumers is an outrage. The fact that it is being shot at by all sides suggests that USCAP might actually have hit the middle ground. But that doesn’t mean that their scheme will work.

Europe’s problem is altogether different. Whatever scheme a government comes up with will be unpopular with someone. However, if a carbon trading scheme ends up with a very low price for carbon then it is very clearly not doing its job, no matter how happy some people might be about that. The objective of a carbon trading scheme is to reduce emissions by making them expensive, and if it doesn’t do that then it is pretty much just creating jobs for consultants and IT people.

Here are a couple of follow-ups to stories that we have run here.

– E.On is apparently now free of anti-trust worries in electricity as the European Commission has accepted its promise to divest itself of 5,000 MW of generating capacity. EurActive has details.

– While doom and gloom is all too common in business these days, some people still have confidence: Westinghouse has set up a UK company in expectation of a bonanza from new nuclear plant build in that country. The move may also be connected with concerns about the vulnerability of US-based companies to law suits arising from nuclear accidents, as explained by this Guardian article.

Yesterday the European Union took a major decision on the future of its Emissions Trading System (ETS). The big issue has been the question of whether companies would have to pay for their permit allocations in future, or whether they would continue to have them handed out for free. Karsten Neuhoff made a strong case for auctions, and it seems that the EU agreed with him, because broadly speaking that is what they opted for.

Reactions have been mixed. The Times thinks this is a disaster for the UK energy industry and suggests that electricity costs will rise steeply. Sandbag is broadly optimistic. And Deutsche Welle is furious that we have to wait until 2013 for the auctions to take place.

Of course it could all be moot, as the decision has to be ratified by both the European Parliament and member states. Doubtless much lobby will take place between now and then.

As expected, regulatory authorities in both the UK and EC will be taking an interest in the purchase of British Energy by EdF. Interestingly EdF has announced that any deal with Centrica, who are supposed to be taking a 25% stake in the deal, will have to be put off until after regulatory approval is granted. Presumably EdF is much more worried about Centrica’s potential dominance of the UK retail market than about its own potential dominance of the UK generation market.

Now wait for British MPs to tell Gordon Brown that the deal can’t go to Brussels unless some UK ownership is involved.

EU Energy Policy has a long post summarizing the results of the CESSA research program looking into security of supply. Most of it can be boiled down to “markets are good, and bigger markets are better than small ones.” How that will go down in the wake of the financial market meltdown is unclear. In particular the report warns governments against removing price signals by capping prices so as to avoid upsetting consumers by exposing them to short term price spikes. There are, of course, other ways to protect consumers from price spikes, but that would involve *gasp* derivatives!

EurActive reports on a major European Union initiative to invest in the African energy sector. The €600 million will go to a variety of projects including renewable generation, power pools and infrastructure projects. A further major announcement is expected soon on the subject of the proposed Trans-Saharan Gas Pipeline. This is intended to bring up to 30 billion cubic metres of Nigerian natural gas across more than 4,300km of desert to EU markets via Algeria. It would also, of course, significantly reduce Europe’s dependence on Russia for gas supplies.

The primary source of all these handouts is something called the European Development Fund, which is of course abbreviated to EDF. Any resemblance to a French energy company is entirely coincidental, if somewhat amusing.