Weekly Overview: Politics, Commerce and Power
The Russian-European Nord Stream 2 project is generally described – especially by its opponents – as a political rather than a commercial project. If they are right, it is very much in keeping with the spirit of the age, as a look around Europe reveals politics rather than hard-nosed commerce as the motive for many of Europe’s schemes, and the cause of some of the problems where energy is concerned.
The most prominent example of the former is France’s ambitions to take its nuclear generation technology into the UK at almost any cost.
President Francois Hollande gave his backing to the 3.2-GW Hinkley Point C project this week: by an expression of political will, the 85% state-owned EDF was propelled closer to the UK deal as he stressed the importance of leadership in technology and jobs.
Not once did he refer to the high price that consumers in the UK would be paying for all this electricity for years to come, which would have made the commercial argument. Instead there is the prospect of a €3bn injection from the state for its national champion.
EDF’s untested EPR technology, recently in the headlines for the wrong reasons, will be set to work on the £18bn project, with an additional 15% contingency funding, if the positive final investment decision is taken this September. The finance chief Thomas Piquemal resigned over the matter in early March.
EDF stressed this week that the £18bn is only a maximum. Savings on that figure may be shared. But ratings agencies warn that the existing debt is already too great, or conversely that planned divestments are too small, for the company to take on this giant undertaking and emerge unscathed.
While UK consumers may have French technology thrust on them, France’s energy minister Segolene Royal is looking at ways of banning US LNG imports, on the grounds that they include shale gas production, derived from hydraulic fracturing – a technology currently prohibited in France.
That too could be classed as a political rather than a commercial decision. As the CEO of France’s biggest oil company Total told the senate this week, it is not possible to separate the molecules so that only those produced by conventional drilling are admitted into the French grid.
And as Mikhail Korchemkin of East European Gas Analysis also points out, fracking is used in Russian oil and gas production too, including at the giant Yamburg field, supplier of gas to France, among others. “For the sake of consistency, the French energy minister should also consider banning the imports of Russian oil and natural gas,” he writes. With the cap on Groningen output only likely to fall, success for Royal would leave France vulnerable to gas supply shocks.
Royal, who is a former partner of Hollande, also questioned the wisdom of Hinkley Point C: “I am wondering if we should go ahead with the project. The sums involved are colossal,” she told the Financial Times May 13.
Belgium’s energy shortcomings were pointed out by the International Energy Agency this week. Its three nuclear power stations, operated by French-owned Electrabel, are due to be closed by law in 2025; although, at 40 years old now, they might well be technically good for another 20 years yet. Electrabel is after all investing €1.3bn in them now, but nothing has been outlined for the future, leaving power generators ignorant of any framework in which to invest.
Only last year the government scrapped its tender for gas-fired power capacity, with arguments over how the capacity mechanism would work. And surrounded as it is by liquid, well-supplied, markets, relying on interconnections with its more forward-thinking neighbours might be an adequate approach.
Other governments have stuck to their guns, and burned coal such as Poland, Germany and Spain, with no thought for a future where power is supposed to be decarbonised and coal mining a thing of the past. Raising the carbon price will help push coal out, but only the UK has done that in Europe, with dramatic results: breaking a record of over a 130 years, there was no coal-fired power in the UK grid for four hours in early morning of May 10.
The UK also won praise for a promise to do its best to close power plants down in a decade, when it will be someone else’s problem. Plans to build gas-fired capacity remain on the shelf, while other aspects of policy – such as the newbuild nuclear plan (see above) remain uncertain of success: both the operator and the customer could lose money from it.
Germany is phasing out its nuclear plants for political reasons in a decision taken soon after the Japanese earthquake of 2011, and the generators are still arguing about how much they should be asked to pay for it.
In order to achieve such an agreement, E.ON said late April, “the companies have transparently presented their financials and offered to go as far as their utmost economic limits would permit.”
However, these limits have been exceeded by the amount of the risk premium suggested by the independent body overseeing the closure. Collectively, they are looking at €23bn in a few years – quite a regulatory risk. German consumers though are also spending almost as much as that each year, on subsidies for other forms of energy.
There is perhaps in these policy vacuums and capacity shortfalls a good opportunity for gas. It is likely to be sold at prices that will be set to reflect the needs of the power market, where the marginal cost of supply from the growing fleet of renewables is trending towards zero, while fortunately the long-term trend in the carbon price is upwards.
If technology cannot move fast enough with power storage and only gas meets the twin requirements of lower carbon and quick start-up, and governments and their electorates continue to push for more solar and wind, and there is no improvement in the economics of carbon capture and storage, that price could be high.
William Powell