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European energy markets in crisis
Fabien Roques, FTI Compass Lexecon & University Paris Dauphine
ESADE – The Global Annual Energy Meeting
Madrid – 24 November 2014
FTI Consulting overview
2
Established in 1982
>US$ 1.5 billion revenues, NYSE listed
>4,000 staff across 24 countries on six
continents
Five divisions:
1. Economic Consulting
2. Corporate Finance / Restructuring
3. Forensic & Litigation Consulting
4. Technology
5. Strategic Communications
History & scale
Global reach Services
Overview
Global business advisory firm
Dedicated to helping organisations protect
and enhance enterprise value
Content
Context for the current crisis of the European energy industry
Policy issues: the lack of consistency of Europe’s energy policy framework
Market issues: electricity markets do not send appropriate price signals
Conclusion and way forward: the need for a new model
3
Context for the current crisis of the European
energy industry
4
Electricity demand: a lost decade
5
Index of historical consumption (base 100 in 2006)
Several countries have not recovered
yet the pre-crisis consumption level:
■Double dip recessions in Italy and
Spain
■Stabilisation in France and
Germany
■Eastern Europe continues to grow
6
Solar and wind capacity additions reduced “residual
demand” for thermal plants
0
1
2
3
4
5
6
7
8
9
10
2006 2007 2008 2009 2010 2011 2012 2013
Solar capacity additions
Germany Spain France UK Italy
0
1
1
2
2
3
3
2006 2007 2008 2009 2010 2011 2012 2013
Onshore wind capacity additions
Germany Spain France UK Italy
GW/year GW/year
Source : Eurobserv'er
7
Utilization rates of gas plants have fallen
dramatically
Theoretical utilization rate of a 56% efficiency CCGT
Monthly percentage of hours for which the spot price is superior to the CCGT SRMC
Yearly percentage of hours for which the spot price is superior to the CCGT SRMC
Source: ICE CO2 EU ETS future, For germany NCG gas price, for Spain, PEG Sud + transit costs estimated from
CNE, starting Jan 2013, gas tax included.
UK Spain
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
01
/01
/20
10
01
/04
/20
10
01
/07
/20
10
01
/10
/20
10
01
/01
/20
11
01
/04
/20
11
01
/07
/20
11
01
/10
/20
11
01
/01
/20
12
01
/04
/20
12
01
/07
/20
12
01
/10
/20
12
01
/01
/20
13
01
/04
/20
13
01
/07
/20
13
01
/10
/20
13
01
/01
/20
14
01
/04
/20
14
01
/07
/20
14
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
01/0
1/2
010
01/0
4/2
010
01/0
7/2
010
01/1
0/2
010
01/0
1/2
011
01/0
4/2
011
01/0
7/2
011
01/1
0/2
011
01/0
1/2
012
01/0
4/2
012
01/0
7/2
012
01/1
0/2
012
01/0
1/2
013
01/0
4/2
013
01/0
7/2
013
01/1
0/2
013
01/0
1/2
014
01/0
4/2
014
01/0
7/2
014
European utilities fight for survival as their
profitability has fallen and debt has increased
European utilities are in a weak financial situation as they enter into a massive investment
cycle
8
12.3
10.3 10.5
8.9
7.6 7.78.3 7.8
7.3 7.26.7 6.4
0%
2%
4%
6%
8%
10%
12%
14%
2007 2008 2009 2010 2011 2012
ROCE WACCSource: IHS CERA, Industry.
EPD_SR_0213
0
50
100
150
200
250
300
2000 2002 2004 2006 2008 2010 2012E
UR
Billio
n (n
om
ina
l)
Source: IHS CERA.
EPD_SR_0213
Net debt evolution of 10 largest
European utilities (billion Euros)
Return on capital employed (ROCE) and
weighted average cost of capital (WACC) for 10
largest European utilities (2007-2012)
Policy issues: the lack of consistency of Europe’s
energy policy framework
9
• 1996 & 2003: 1st and 2nd Directives
concentrate on creating integrated
competitive power & gas markets
• 2008: Green legislative package sets
2020 targets
• 2012-2013: Debate on 2030 targets
highlights change in priorities:
• European Commission Green Paper
(COM(2013) 169 final) - “A 2030 framework
for climate and energy policies”
• “One of the fundamental objectives of EU
energy policy is to ensure …. competitive
domestic and international energy markets
and prices which are internationally
competitive and represent affordable energy
for final consumers“
Environmental
sustainability
Competitiveness
and affordability
European energy policy: the need for a consistent
framework that addresses trade offs
10
Competitiveness
Green agendaSecurity of
supply
Infrastructure development is lagging behind
ENSTO-E 10 2012 Investment Plan calls
for two- to threefold increase in the rate
of infrastructure investment:
■58 GW of new interconnection in Europe
by 2022.
■104bn of investments over 2012-22.
However, slow progress to date as
critical infrastructures face repeated
delays:
■Progress slowed down by a range of
factors: local opposition, political and
regulatory barriers.
■One third of the ENTSO-E “Projects of
Pan-European Significance” have
experienced delays.
11
Evolution in the timing of interconnection completions, and
causes of delay or cancellations (ENTSO-E TYNDP of 2010
vs. 2012)
Source: ENTSO-E ten year network development plans, 2012 and 2010.
Renewables represent a rising share of
consumers’ electricity bills
12
Evolution of the share of renewables support schemes share in
domestic consumer retail prices (2009-2012)
Source: European Commission “Energy prices and costs report”, Accompanying the Commincation from
the EC Energy prices and costs in Europe
The European carbon market: need for a structural
reform to address overlap with RES policies
The ETS has become a “residual market”
■RES and energy efficiency policies are the
prime drivers of investments.
■ETS prices well below the implied
switching price btw. coal & gas generation
(about 40€/tCO2).
The decisive step for the future
credibility of the ETS is the structural
reform that the EC has started
discussing:
■Need for a supply adjustment mechanism
that is transparent and based on
predetermined simple rules
13
ETS carbon price and coal-gas switching
implied carbon price
Source: FTI analysis
€/ton CO2
-20
-10
0
10
20
30
40
50
60
Ju
n-0
5
Ja
n-0
6
Au
g-0
6
Mar-
07
Oct-
07
May
-08
Dec-0
8
Ju
l-09
Feb
-10
Sep
-10
Ap
r-11
No
v-1
1
Ju
n-1
2
Ja
n-1
3
Au
g-1
3
CO2 price CO2 break-even price
Market issues: electricity markets do not send
appropriate price signals
14
Current European electricity markets remain
incomplete
Adequate price signals are lacking to provide the right operational and investment
incentives to market participants:
■both on a very short time frame – within day or within the last hour
■and on a long time frame to trigger investments
Forwardmarket
Spot Market
IntradayTrade
Capacity
Energy
Balancing
services
Years
ahead
Months
ahead
Day ahead
(h-24) IntradayReal
time
Product
type
Time
Forwardmarket
h-1
Primary, secondary, tertiary reserves
Forward contracting
Spot market
Historical
focus
Need for reform & integrationReform &
integration
15
Renewables need to be integrated into electricity markets
Lack of coordination between national
approaches leads to suboptimal deployment
of renewables, increasing costs for
consumers.
Support policies need to evolve to integrate
RES into power markets
In the long term, the depressive effect of
RES on power prices represents a structural
issue
16
R. Haas, Ch. Panzer, G. Resch, M. Ragwitz, G. Reece, A. Held. A Historical
Review of Promotion Strategies for Electricity from Renewable Energy
Sources in EU Countries, Renewable and Sustainable Energy Reviews,
volume 15, issue 2, pp. 1003 – 1034 (2011).
Type of renewables support policy by country
Capacity mechanisms need to be coordinated
17
Spain
Discussions for
reform of capacity
payment
Italy
2014: Implementation
of market
for Reliability Options
France
2014: implementation of
capacity obligation on
suppliers and backstop
auction
Germany
Implementation of transitory
“redispatch / winter
reserve”, discussions on
capacity market
United Kingdom
2014: implementation of
capacity market with
centralized auction
Capacity market Strategic reserveCapacity payment
Ongoing reforms / discussions
mark a shift toward market
based capacity mechanisms
France, Italian, and United
Kindom reforms share
common structural (and
permanent) approach
Significant differences remain
in the design of the different
capacity markets
This could introduce further
distortions in energy markets
…
And calls for some European
guidelines on harmonization
and coordination of these
mechanisms
Belgium
Strategic reserve
/ tender for new
plant
Conclusion and way forward: the need for a new
model
18
Conclusions
A set of objectives does not make a consistent energy policy
■The lack of consistency in the different policy objectives is the root cause of many the
regulatory and policy uncertainty that hampers investment.
■The debate on the 2030 targets has not addressed the key trade offs between competitiveness
an costs, environmental objectives, and security of supply.
European power markets need a deep reform to adapt to change in policy priorities and
international context
■It is critical to complete the sequence of electricity markets with the missing elements in both
the short term and in the long term
■Experience on other continents (Latin America, Ontario, etc.) demonstrates how the functioning
of competitive and well developed electricity markets can be enhanced through the judicious
use of long term contracts.
Governance issues need to be addressed and regional approaches are a promising way
forward
■National and European levels of governance are obsolete
■Coordination mechanisms need to be strengthened to reduce risk and support investment
19
Merci pour votre attention
20
Fabien Roques
Senior Vice President
FTI - COMPASS LEXECON
froques@compasslexecon.
com
Fabien Roques
Professeur Associé
Université Paris Dauphine
fabien.roques@dauphine.fr
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