Financing the future of the electricity industry: the impact of competition

11 December 2007

The latest World Energy Outlook from the International Energy Agency (IEA) predicts that an average €140 million in investments in the European electricity industry will be required each and every day until 2030, EURELECTRIC Secretary-General Hans ten Berge reminded the audience as he opened EURELECTRIC's conference on Financing the Future of the Electricity Industry in Brussels on 3 December. The proposed targets for developing renewable energies will also place an extra financial burden on the industry, and moving to an auctioning system for the emissions rights under the EU Emissions Trading Scheme could cost a further €20-30 billion per year, he pointed out. Fifteen expert speakers and panellists set out the issues for investment decisions in the electricity industry and tried to discern where the key risks and opportunities would lie during the coming decades.

Sébastien Léger of McKinsey & Company highlighted the huge impacts of investment decisions made in the electricity sector today on the future of companies tomorrow. He stressed that in the new competitive environment it is "very difficult to pass on the cost of wrong decisions to the customer", so companies have lost the "safety net" they used to have. Meanwhile, company management is being carefully scrutinised by analysts who are closely tracking investment choices.

Looking at the impact of future energy policies - whether centred on a "traditional" supply-security approach or climate change issues or a "middle case" - and corresponding fuel market developments, Mr Léger offered three scenarios indicating different winners. The conclusion was that energy companies should take a "portfolio" approach if they wish to reduce their risk exposure. Meanwhile potential investors need to take account of the regulatory risk associated with an uncertain policy framework, plus the raw materials risk and also the capital intensity of the generation assets, Mr Léger explained.

He saw a current shortage of equipment, which he expected to cool down only after 5-8 years given the high demand and shortage of engineers. Fuel shipping prices would relax as capacity extensions are made, while turbine costs are likely to come down around 2012, he predicted.

Half of the worldwide increase in primary energy demand between 2005 and 2030 will be accounted for by China and India, Ian Cronshaw of the International Energy Agency told delegates. The IEA's latest World Energy Outlook sees the share of demand for coal from the "emerging giants" even reaching 80%, which will turn China from a net exporter into an importer and "coal prices are currently moving like never before". Consequently around 60% of the global increase in emissions of greenhouse gases between 2005 and 2030 will come from China and India, predicted Mr Cronshaw.

As for investments in the power sector, every year the total figure is rising while the forecast period is getting shorter. This is due to inflationary effects in the equipment market, he explained.

Explaining the IEA's "450 stabilisation case" - a scenario seeking to stabilise greenhouse-gas concentration inside the 445-490 ppm of CO2 range, which was modelled upon request from this year's G8 summit in Heiligendamm - Mr Cronshaw told the audience that commentators had described this scenario variously as "at the limit", "science fiction" or at best "very, very hard to achieve". The next ten years will be critical given that the global energy system is on "an increasingly unsustainable path", as the oil and gas markets "grow ever tighter", the pace of capacity additions will be extremely rapid and technology will be locked in for decades, warned Mr Cronshaw.

"The question is not whether competition policy contributes to competitiveness, but how, and why this is so", Dr Joachim Schwerin of the European Commission's Directorate-General for Enterprise told the audience as he attempted to set out a "coherent approach towards increasing the competitiveness of the European electricity industry". "When assessing the competitiveness of the electricity industry efficiency considerations are paramount", said Dr Schwerin, arguing that "it can be reasonably assumed that increased competition improves productive efficiency, notably with a view to cost reductions.
Liberalisation improves allocation efficiency, as the increased demand for services following any price reduction will on the whole increase total welfare." It is true that early uncertainties surrounding liberalisation and competition do affect decisions on R&D spending and overall investment. However, once the framework is stable and firms have adapted to their new environment, this trend should improve, he said.

Nevertheless, regulators should not simply trust that market mechanisms will ultimately do their work, and lean back. The European Commission is called upon to weigh up the pro- and anti-competitive effects of company behaviour - a good example being long-term contracts, which may restrict competition by foreclosing the market and giving incumbents an advantage over newcomers, but can also have pro-competitive effects by, for example, bringing greater price predictability, helping all players to hedge their risks, fostering the sharing of commercial risks and thus promoting investment. The Commission must retain clarity and consistency in its approach, so as to provide an element of guidance for industry, which will help to create stable expectations regarding the regulatory framework, he told the audience. In conclusion, Dr Schwerin argued that competition is having a positive impact on competitiveness and the best way forward is to ensure the "pro-competitive interplay of all tools", he underlined. 

Contact

  • Anamaria OLARU

    Advisor
    Press & Media Relations
    Distribution

    Tel.: +32 2 515 10 71