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How to Get Rich Investing in Stocks by Riding the Electron Wave

Electricity Post Post-Carbon Future

Commodities / Energy Resources Sep 07, 2011 - 02:02 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleVANITY TECH OR ECONOMIC IMPERATIVE ?
Back as February 2009, Lord John Mogg of the UK, president of the European Regulators Group for Electricity and Gas (ERGEG) charged by the European Commission (EC) with outlining further electric power system integration in Europe and the regulatory environment for this, said the winds are turning for European energy regulators. Since that time the facing winds are blowing very hard for European debt, deficits, economic growth and monetary stability, and a lot slower for high cost windfarm projects. This however remains the main hope for Low Carbon energy, with world windpower capacity attaining about 200 GW in early 2011. However, while wind itself is endless, natural and free, producing electricity with it is not: especially with offshore windfarms, capital costs can reach the fantastic level of around 7 500 euro per kiloWatt ($ 10 000/ kW), making windpower even more expensive, if less dangerous than nuclear power for electricity supply.

Solar electric power plants remain costly. Along with other Low Carbon renewables, the overall electric power system integration challenges and costs for adding power capacity, with what are often intermittent supply and smaller scale alternative and renewable sources, are rising. This often wipes out the benefits from lower operating costs due to improving technology - facing highly mature competing fossil fuel power plants which, for natural gas, with carbon capture can cost less than 750 euro/kW.

Over and beyond the technology and resource issues, electric power demand shows clear signs of saturation in many countries. Demand growth is often slow, zero or negative due to electric power's close correlation with economic growth, but the daunting perspective, or threat of all-electric car fleet growth would transform the outlook for electric power demand and demand growth.

Upstream energy, climate and environment policy, extremely so in Europe, remains resolutely committed to Low Carbon. The European Union, since late 2008, has a target of getting at least 20 percent of all European energy from renewable and low carbon sources (with nuclear power supplying the "fudge margin") by 2020. Due to these official commitments, windpower, solar PV (photovoltaic), landfill biogas, small scale hydropower, wavepower and other new, renewable, alternative and unconventional energy sources and systems remain major parts of the picture. This drives very major changes for the frameworks governing  European electricity supply. Adding both complexity and confusion to the high level targets for Low Carbon, the same "climate-energy package" decided in December 2008 which sets a 20 percent goal for renewables in European energy also sets targets for reducing the energy intensity of economic activity in Europe by 20 percent through the same timeframe.

Cutting electricity consumption, and substituting electrical energy are inevitable key measures for doing this, but this inevitable, feasible and economically rational read-out is often sidelined.

The EU's upcoming or mooted Agency for the Cooperation of Energy Regulators (ACER), whatever the form it takes (for example consultative only, or able to set tariffs) would be in Lord Mogg's words "physically independent" with a board of regulators responsible for decision making across the hoped-for interconnected European electric power space. The ACER would possibly set tariffs, taxes, transport charges and premiums for either "bad" suppliers or "good" suppliers of electric power, linked with the already complex and opaque ETS or European CO2 emissions trading system, which started in 2005 but remains the world's only mandatory anti-CO2 trading system.

For the ERGEG, most large European electric power companies, energy policy setters at the European Commission and in the most climate conscious European countries the keywords are "hoped-for interconnection". While Europe's gas grids are fully interconnected and able to transport huge amounts of gas, this is not at all the case for electric power, and the reasons for this include basic electrical engineering fundamentals, as well as past policy and investment for power grids interconnection which was conceived as, and designed for low-power system balancing and marginal supply.

As Lord Mogg was quick to add, more than 2 years ago, the needed high-power capacity grid interconnection linkages across Europe are currently either in project or simply missing. Building them will not only be expensive but take a long time - in fact decades. Where relatively large capacity power transport already exists, notably in Germany, its own post-nuclear national energy strategy completely phasing out nuclear power by 2022 will create massive additional needs for in-country north-south power transmission, making it unlikely that transborder east-west transmission capacity raising will be prioritized by German deciders, whatever the calls for "European solidarity".

National economic issues immediately surface. Transit countries, in particular, do not see the benefits of joining up to the coming ACER - if it comes - because the front end cost for beefing up their power grids, to transport electricity from one border to another, are high. Conversely the hoped-for benefits - especially larger utilization of, and dependance on electricity produced from Low Carbon energy sources - are easy to define, but face a large set of challenges. These especially include alternate national energy investment strategies favouring local and decentralized electric power systems, and targeting the soft and easy potential for cutting massive wastes of electricity in most EU countries.

Lord Mogg argued that Europe's power transit countries presently do not see "the benefits of joining up", and speaking in 2009 went on to mention Europe's periodic and Russian-origin gas crises. In his opinion, and for most policy makers these crises demonstrate gas supply uncertainty and high gas costs, and will push EU member states into making sure they have "better arrangements" for European electricity. This is coded language for big spending on Low Carbon and alternate energy sources for electric power supply, and power transport system integration. Since 2009 however, both the European and world picture for gas has changed - due to unconventional, shale gas and coalseam gas resources - and this heavily undermines the Russian bogeyman as a key reason why huge spending has to be made in Europe on beefing up electric power transport capacity, and rushing the development of higher cost alternative power generating systems based on Low Carbon energy sources.

Mogg also argued that his ACER, if it comes, will not operate with "some artificial idea that an agency can impose rules which will force the integration of the market," because, as he said, electric power markets are already integrated in Europe: for European electricity consumers the result is very clear. Trading in electricity, like anything else, incites speculative zeal by exchange operators and players, with guaranteed high volatility of spot and overnight tariffs, and generally rising electricity prices. The trend to higher prices, due to artificial or real scarcity, feeds on itself as is also shown by European gas trading. Only when supply is abundant will trading deliver generally low prices: US natural gas trading operates in a national context where around 20 percent of supply now comes from unconventional sources, leading to prices below $ 4 per million BTU in early September. European prices are generally more than twice this level, and - being oil linked and supply constrained - reached more than $ 10 per million BTU at the start of the Libyan crisis in February-March.

European gas, like oil, and in some national cases electricity was always conceived and thought of as scarce and therefore high priced, but cheaper gas is surely coming to Europe. Several countries including Poland, Holland, France and Germany are already known to have very large unconventional resources, to be sure setting environmental challenges for their production, but also surely not setting the extreme high costs, risks and dangers set by nuclear power. With cheaper gas supply, and already existing large capacity gas transport, localized and decentralized heat-and-electricity (CHP) production becomes the winning solution. Unrelated to this reality, showing the disconnect of scarcity-based and trading-oriented concepts for national and European energy, 24 European electricity transmission system operators (the TSOs), who would benefit from the existence of ACER have established ENTSO-E, a new Europe-wide electric power network organisation, built from the previously existing UIE or Eurelectric, a mainly consultative organization.

Their goal at ENTSO is simple: European electricity prices have to be raised enough to cover the very high cost of extending and fully integrating Europe's power grids - rather than attack the tempting target of wasteful and easily replaced or substituted uses of electrical energy, notably through micro-CHP and leapfrogging the technological and industrial blind alley of all-electric car fleets, with gas-powered road transport. Instead of further raising Europe's now generally high but very variable electricity prices and spending national cash on grid development to transport other peoples' electric power, national energy spending could go to solving national energy problems, at home.

With Europe's now critical sovereign debt, deficit and economic crises, the time is certainly not ripe for big spending on easily substituted electric power generation and transmission systems, which under any scenario would need decades to succeed.

Europe's periodic gas crises are an upstream supplier and transport country issue, especially concerning Russia's Gazprom and Ukrainian, as well as other East European transit country gas transportation entities. With little surprise, Norwegian and Algerian gas suppliers to Europe provide no free gifts whenever Gazprom enters into conflict with its near-neighbour countries, notably on tariff and supplier credit issues.  The energy security bogeyman lurks, usually hidden as calls for European "solidarity", and heavily used to advance the case for alternate and renewable Low Carbon energy.

While the oil constraint remains almost certain and any potential for unconventional shale-based oil supply is a long way down the tunnel, and geopolitical stress for world oil is now at very high levels due to "Arab Spring" and its aftermath, the supply security outlook for gas and coal is far less constrained. Neither gas nor coal need to be price-linked and indexed to oil. Certainly at the global level, apart from a few remaining high-priced LNG supply contracts and LNG capital projects needing prices as high as $ 9 - $ 11 per million BTU for profitability, gas prices are retreating. Global coal supply contracts, even at current prices sometimes above $ 140 per ton, still price coal energy at around $ 5 per million BTU, thermal basis.

The alternate and renewable energy resources and systems are certainly but variably scalable, but the question of how their part of national, regional, or world energy mixes is raised is a very complex issue. Of one thing we can be sure, economic recession as in 2008-2009, and as threatened now in 2011 will always cut energy demand, changing sellers markets to buyers markets. The rising likelihood of longer term low economic growth - the "Japanese model" for OECD countries - removes much of the supply security rationale's credibility, and again focuses the need for credible and economic, technologically feasible energy development and supply strategies.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


07 Sep 11, 19:07
Small error

It's Lord Mogg, not Lord John Mogg - he's not a hereditary peer.

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