Europe's energy costs to rise until 2030-EC draft

Fri Dec 9, 2011 3:14pm GMT

* Average power price could rise to nearly 200 eur/MWh

* Renewables, nuclear, gas key to lower carbon

By Barbara Lewis and Henning Gloystein

DURBAN/LONDON, Dec 9 (Reuters) - The European Commission is expected to unveil its latest vision on how to plan for a greener energy future next week and a draft document seen by Reuters points to a jump in the average capital costs of the energy system in coming years.

Electricity prices would rise until around 2030 but new energy systems could lower prices after that, it said.

The EC envisions five scenarios regarding how the energy mix could look by 2050.

At its cheapest, the average price for electricity is seen at 146.2 euros per megawatt-hour (MWh), while at the highest, prices are forecast at 198.9 euros per MWh.

Key to curbing price rises will be increasing energy efficiency, the draft said.

"Improving energy efficiency is a priority in all decarbonisation scenarios. Current initiatives need to be implemented swiftly to achieve change.

"In all our scenarios the share of renewables has to rise significantly in order to achieve our climate goals, and renewables will become the core of the energy mix," the EC's energy commissioner Guenther Oettinger said.

Renewable energy will account for at least 55 percent of gross final energy consumption in 2050 versus today's roughly 10 percent.

The document said that Europe needed "much greater political ambition and a greater sense of urgency" to make the necessary transformation in time.

"The European Commission acknowledges that there is inadequate direction as to what should follow the 2020 agenda," it said.

This, it said, created uncertainty which could create disruption and higher costs in the longer term.

NUCLEAR AND GAS

The document also said that nuclear power would remain an important factor in Europe's decarbonisation process despite this year's meltdown at Japan's Fukushima reactor.

"Nuclear energy will be needed to provide a significant contribution in the energy transformation process in those member states where it is pursued. It remains a key source of low carbon electricity generation."

The Commission said that natural gas would also be critical for the transformation of the energy system.

"Substitution of coal (and oil) with gas in the short to medium term could help to reduce emissions with existing technologies until at least 2030 or 2035."

GAS PRICING

The draft argued that long-term gas supply contracts would be necessary to underwrite investments in gas production and transmission infrastructure.

But it also said that "greater flexibility in price formula, moving away from pure oil-indexation, will be needed if gas is to remain a competitive fuel for electricity generation."

Around 40 percent of Europe's gas imports come from Russia and oil-indexation represents up to 69 percent of the pricing.

That indexing has hurt European gas companies tied into long-term deals with suppliers linked to oil prices while being forced to sell gas at lower retail prices linked to the freely traded spot market.

The EC also said that unconventional gas resources and an expanded liquefied natural gas (LNG) market could relax concerns on gas import dependency, but that it was too early to say when unconventional resources might become significant.

CARBON

The EC said that carbon capture and storage (CCS) technology could contribute significantly to Europe's energy roadmap, if it reached commercial operations.

"If CCS is available and applied at large scale, gas may become a low-carbon technology, but without CCS, the long term role of gas may be limited to a flexible back-up and balancing capacity where renewable energy supplies are variable."

The Commission's draft report also said that its carbon trading scheme remained the central pillar of European climate policy, but added that too high carbon prices may harm European competitiveness and increase the risk of carbon leakage.

"It is important to prevent significant risks of carbon leakage and take action depending on efforts of third countries." (Editing by Jason Neely)