European energy policy falters amid economic downturn

Mon Feb 25, 2013 12:00am GMT

* Utilities may not be able to finance improvements - report

* Identifies 110 GW of gas-fired generation at risk of closure

* Carbon market reform key for renewable energy

By Barbara Lewis

BRUSSELS, Feb 25 (Reuters) - Economic crisis has bought time to tackle the problem of unreliable and costly European power but raised the risk that no one will pick up a 1 trillion euro ($1.3 trillion) bill to improve the supply network, a new report has found.

The European Union's economic woes have crushed energy demand, which means that the market is oversupplied for now. However, this also leaves big utilities short of cash.

"Without the motor of growth, the traditional draw on the balance sheets of Europe's major utilities to finance energy build can no longer be relied upon," international energy consultancy IHS CERA said in its report, "The Energy Investment Imperative".

Assuming a return to economic growth, the report estimated that about 750 billion euros is needed over the next decade for power generation, 90 billion euros for transmission lines and approximately 150 billion euros for new gas supply and transmission capacity.

Investments would include cross-border grid connections to even out the fluctuations associated with rising volumes of power from green sources, such as wind and solar.

Efforts to set aside European Union money for strategic infrastructure, thereby attracting further outside investment, have been undermined by haggling over the bloc's 2014-20 budget. The planned 50 billion euros ($65.8 billion) for energy, transport and telecoms networks has been cut to less than 30 billion euros.

The European Commission last week began debate on a new decade of energy policy to follow the 2020 EU goals to obtain 20 percent of all energy from renewable sources, cut CO2 emissions by 20 percent from 1990 levels and improve energy efficiency by 20 percent.

Whereas the environment was high on the agenda when political leaders first set the 2020 green energy goals in 2007, cost is now the priority.

POLITICALLY SENSITIVE

With leading EU member Germany heading into elections this year, subsidies and the competitive disadvantage of high energy prices are a sensitive political issue.

Europe has looked on with envy as abundant shale gas has cut costs in the United States and even lowered greenhouse gas emissions by displacing coal.

In Europe, however, renewable subsidies are a rising cost, while a breakdown in the carbon market has taken away the economic incentives for low-carbon fuel.

IHS CERA's analysis predicts that renewable subsidies will rise by a further 40 percent, from about 30 billion euros ($39.5 billion) today to 49 billion euros by 2020, if the current approach to renewables support is maintained.

At the same time, a surplus of pollution allowances - another result of recession - on the EU's Emissions Trading Scheme (ETS) pushed the market to a record low of less than 3 euros per tonne of carbon last month.

"If suitably designed and overseen, we advocate (carbon markets) as having a central role to play in guiding economically efficient, low-cost investment decisions," the report said.

However, European Commission efforts to reform the ETS have encountered stiff resistance.

Natural gas plants, which are about half as polluting as coal, have already been mothballed because it is cheaper to burn coal when permits to offset its emissions cost next to nothing.

The result of gas-to-coal displacement is that power sector emissions rose by 7 percent by the end of 2012 compared with those produced by the 2008-11 average fuel mix, the report said.

IHS CERA has identified 110 gigawatts of gas-fired generation at risk of closure, with 25 gigawatts likely to close by 2014, despite its value as a balance for fluctuations in renewable power. ($1 = 0.7598 euros) (Editing by David Goodman)