As you fly across Europe you may notice something if it is a clear day. It begins as you leave the UK and observe the tens of hundreds of windmills lined up in giant farms on both sides of the North Sea. It continues as you cross the Netherlands into Germany: see on almost every piece of raised landmass more and more of these windmills. If you to travel by car through this same area, you would also marvel at the vast fields of solar panels that have sprung up in the last several years. Europe has changed, and it’s not just the scenery that has been affected.
In recent months, power prices in parts of Europe have generally turned deeply negative (as low as minus 200Eur/MWh). As renewable energy has reached a substantial proportion of generation capacity in countries like Germany, it has helped to drive wholesale power prices lower and for some periods, even turn those prices negative. In Europe, renewable power now occupies the bottom rung of the generation stack, having priority and rightly so, as it is, incrementally, no-cost energy after all. However, renewable energy is often subsidized, meaning that producers can actually bid negative prices and still make a profit. Unfortunately, unlike nuclear or coal-fired generated power, renewable energy as base-load is neither predictable nor stable. The impact of increasing amounts of cheap renewable power on other forms of generation has already been significant. At times of low demand and high renewable power availability, the burden of adjustment falls upon gas and coal-fired generation as nuclear plants are, by design, constrained to run only at full capacity.
However, there are a number of other factors at play that all come together to create the perfect storm for European utilities. Firstly, there is simply overcapacity of traditional generation in Europe as utilities over-built and as power consumption has fallen with economic recession (generation capacity went up 16% during the 2000s while consumption is forecast to decline by 2% between 2010 and 2015).
Secondly, the Fukushima nuclear disaster in Japan convinced the German government to shut down many nuclear reactors immediately and phase the remainder out of service before 2022; all the while, the shale gas phenomena in the U.S. has meant significantly cheaper European coal prices, which when combined with increasingly cheap carbon emission credit prices, has improved profitability of coal-fired generation at the expense of gas-fired generation.
The result has been that most of the major European utilities have been forced to mothball much of their gas-fired capacity. For example, GDF-Suez has mothballed three plants in France, E.On has shutdown 11,000MW of capacity, Statkraft has shut down 430MW in Germany, Centrica has shut 420MW in the UK and Eneco is decommissioning a plant it only brought on stream a year ago.
None of this has been positive for the major European utilities. At the sector’s height in 2008, the top 20 energy utilities were worth roughly €1 trillion. Now they are worth less than half that and utilities are one of the worst performing investment sectors as their market capitalization has fallen over €500 billion in the last five years. Credit ratings are also falling.
Meanwhile, the utilities have begun to fight back, arguing that the reliability of the grid is becoming more difficult to manage and, as the renewables share increases, it will only get worse. Some of the utilities have also started to migrate their business away from generation and more toward trading and energy services. Some have started belatedly to get into the renewable side of the business. Unfortunately, it may only get worse for the utility sector when the effect of hedging programs that have minimized the impact of lower prices wear off and as the renewable technologies get more sophisticated and increasingly more efficient.
From an environmentalist’s point of view, this may look like a winning strategy and be very welcomed. However, there are some fundamental issues facing the European power industry such as the need to modify the grid to cater for the new mix of generation. If the utilities are losing money, where will the investment capital come from? Further, if this is resulting in more coal-fired generation, how will Europe meet its CO2 targets? Furthermore, as the region battles high unemployment, the utilities sector will likely shed jobs as these companies lose money and shift their business emphasis away from labor intensive assets. Clearly, there are many challenges facing the power industry and the governments in Europe and it will be interesting to watch developments there.