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A Fair Price For Energy In Europe ?

Politics / Energy Resources May 26, 2012 - 10:53 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleFROM ZERO TO INFINITY
One thing electricity consumers in Europe can expect, at latest by about 2017 but probably well before, is that power prices will be "highly variable". They will probably be higher than present, for starters - but on occasions power may also be literally given away - as happens in Germany today, when its a windy and sunny day and power demand is low, for example at weekends in May 2012. The reason is very simple: the combined wind and solar generating capacity of Germany is about 55 000 MW, and growing, but when national power demand is at its lowest, it is around 35 000 MW.

Spain is rapidly approaching the same massive overcapacity of intermittent supply wind and solar-source electricity, which has the very special characteristic - over and above the global warming mitigation rhetoric - of zero fuel cost. In other words, and apart from giving it away, there is no way to prevent this free-fuel electricity from being produced. It can, and is sometimes simply shorted to ground, through long electrodes embedded in the ground. Germany's already massive free-fuel power supplies are marketed as best they can be, on days of low national demand, namely through trying to export power to any neighboring country that can or will take it. One immediate problem is the biggest of German tielines, to France, only has 6 000 MW of power transport capacity - and France has a national policy and strategy of trying to always have an exportable surplus of power. For Spain, the problem will be even worse, because its largest power grid tieline with another country - France - only has the capacity to transport 1 400 MW, although work is in process to double this before 2020. Germany's attempts at exporting large blocs of power east, to Poland, have already created a politicized dispute at national policy level  in both countries: one accusation by Poland is that Germany is trying to "sabotage" Poland's power transport, transformer and national grid system, when Germany isnt simply trying to ruin Poland's coal-fired electricity producers.

Poland is incensed by what it considers as pure and simple dumping of power that Germany does not know what to do with, and Poland has applied its national veto on moves inside the EU, led by Germany and France, to further raise "carbon taxes" and CO2 permit prices. This reaction is also motivated by Poland's aim of developing its shale gas resources, to break Russian Gazprom's near monopoly, and high prices for its pipeline gas exports to Europe. For reasons that have a lot to do with corporate maneuvring by French and German energy companies - who are developing shale gas and LNG supply outside Europe - there are plentiful vested interests in keeping gas prices high, in Europe.

Sounds good for electricity (and gas) consumers in Europe ?

On paper and nicely produced Powerpoints, and by about 2030 or 2040, God willing, Europe could theoretically have a vast interconnected electric power system with as much as 50%, perhaps 65% or more, of the electricity sent around the 42 000 kilometre Super Grid that would have to be built by then, coming from free-fuel renewable sources. As we know, today in 2012, Germany can get 120% of its power needs, on low demand days, from wind and solar power plants. Spain is at about 72% today. What would be the "fair market price" ? Using Germany as the leading example or theoretical model of what is coming and depending whether its a bad day or good day for demand, and for renewable-source power production, its bulk power prices can range from zero euro per 1000 kWh (1 MWh), to more than 150 euros per MWh on weekdays of extreme cold, as in January-February.

If there was a big, continent-wide power transport system and power trading system there would tend to be relatively predictable, less variable electricity prices. However, that Super Grid would first have to be built, and according to ENTSO-E (the European power transport operators association) it would have to about 42 000 kilometres long. The cost would be fantastic. Today, there is not a trace of actual work on the ground, towards that supposed "obligatory' stage, phase or component of 'European power system integration". Purists can say that isn't true and point to current work on the Spain-France tieline, of 75 kms long, costing 700 million euros, that should be finished before 2020. Sheer cost in fact militates the hardest against this theoretical stage, of a European Super Grid, in creating a theoretical pan-European power space.

There are plenty of alternatives, also. One is national-scale Smart Grids, heavily reducing the quantities of unneeded, overproduced, and wasted electricity - so much so that in some cases, such as South Korea, the claim is that Korea's Smart Grid, if it is finished by 2020, will eliminate any need for new power plant building in the country, to that date, and perhaps also for several years beyond. Another option is totally decentralized Mini Grids, local and autonomous power production and distribution networks using the maximum possible renewable-source power production. For major industrial users of electricity, for example the aluminium smelting or paper pulp and cement industries, this was already traditional - they produced their own power - but other industries can do the same thing. They can also develop and apply corporate-wide electricity conservation strategies and projects. Both of these strategies feature in Germany, today, alongside its national renewable source electricity plan.

Making it totally uncertain as to which part of the mix-and-mingle power strategy options will win, costing these alternatives is made fantastically difficult by trying to compare new and old electric power system concepts, ideas and rationales. In Germany for example, its car makers did not wait to be hit by vastly variable and generally higher power prices delivered with the cream on the cherry pie of possible power blackouts and brownouts on an increasing basis. They have all engaged their own independent or semi-autonomous corporate electric power strategies. Many intend to heavily pare their company needs for electricity, and produce a large amount of their electricity by 2020, at latest. Some prefer gas-fired generation, like Mercedes, while others like Porsche prefer solar electricity. As we know, one of the "basic rationales" behind the need for a Super Grid in Germany is, or was, the supposed obligation to transport electricity from North Sea windfarms to the car manufacturing belt in southern Germany.

Jumping up one level, national electricity demand in Germany and more or less any other EU27 country has no cast-iron and inevitable growth trajectory anymore: forecasting power demand beyond about 2015, in Europe today, has a crystal ball feel to it and for good reason. Apart from recession, a host of other factors - technical, technological, economic, social - are tending to push down power demand growth rates, sometimes below zero: contracting demand is certainly possible.When we add in bulk power prices that range from zero to 150 euros per MWh (in some cases as in UK they are forecast as able to attain 190 GBP per MWh), doubt about what exactly will be the future power demand of any one EU27 country becomes so high we have a pure guessing game.

Opening Pandora's Box, Europe's clean energy quest as enshrined in its December 2008 "climate-energy package" voted by the European Parliament, which already has a heavily outdated feel to it, very surely spills across the entire energy sector. Taking just one totally unclear example - of electric cars - these ulitmate vanity tech consumer goods could, in theory, be easily defended. If electricity is free, and we want to store it whenever and wherever possible, electric cars are a better solution that telling Europeans to buy more rechargeable LED flashlights made in China and jollied-up with Donald Duck logos. A lot less fantasist, free or surplus electricity can be converted to heat, and used to run local district heating and hot water supply systems, glasshouses, and all manner of other things: therefore, lets go on building the windmills and solar power plants !

Back in the days of EURATOM (the late 1950s) the Soviet-inspired quest of Europe's elites was to "convert everything to electricity", using clean and safe nuclear power, delivering electricity too cheap to meter. That boast of the nuclear lobby went disastrously wrong, and never happened - but is happening today, every day that national demand is low, with windpower and solar power in Europe. The upper limit, in theory, for renewable-source power production capacity, for Germany, is in fact well below what it already has today - but that power capacity is growing. Serial bankruptcies and equity value implosions in the renewable energy business, driven by a host of factors including corporate gung-ho development of equipment manufacturing capacities, only have one massively ironical result: they further drive down the price of solar and wind energy equipment, at least in the short term, which can last for years.

In Europe of today, the new Merkel-Hollande team which replaced the one-headed "Merkozy", that only preached recession and austerity, will itself and certainly be preaching green and clean energy development - as Merkozy did - simply to make work and create jobs. Production by Europe's renewable energy equipment makers will almost certainly go on growing.

With power producing equipment at no more than about 800 euros per kW ($1000 per kW), able to produce free electricity on the wrong days for producers but right days for consumers, the total change in how we have to see and treat the energy sector begins to get visible. At exactly that moment, the global gas surge has started.

European (and Asian) 'traditional' prices for imported LNG and pipeline gas, of $15 per million BTU, often more, can and likely will be divided by two, or by three, before 2020. Even a near-symbolic 40% cut in the price of gas in Europe will have major impacts across the energy economy: gas is the real solution and alternative to oil for almost any transport application - except airplanes, which as we know can fly (at about 50 miles per hour) on solar cells ! By or before 2020, if its politicians wanted to govern, that is decide instead of talking, Europe could cut could its oil demand for transport by at least 1 million barrels per day. At current, if declining oil prices, this would be worth about $36 billion a year which would come in handy for a Eurozone where the euro's exchange value can only fall.

What we find is there is no such thing as a fair price for energy, especially when there is a phase shift or sea change right across the energy economy. Tomorrow will not be like today, and that is the only sure conclusion to make on what happens to European energy: the word "transition" (transformation in German) has levered its own special meanings and powerful momentum.

By Andrew McKillop


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

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

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.

© 2012 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.

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