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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "IssueAlert" <IssueAlert@scientech.com< X-To: X-cc: X-bcc: X-Folder: \Drew_Fossum_Dec2000_June2001_1\Notes Folders\All documents X-Origin: FOSSUM-D X-FileName: dfossum.nsf http://www.consultrci.com ********************************************************************* Learn about SCIENTECH'S most popular competitive tools, including the Mergers and Acquisitions, Telecommunications, and E-Commerce InfoGrids at: http://www.consultrci.com ********************************************************************* =============================================================== SCIENTECH IssueAlert, November 16, 2000 Europe May Need 69,000 MW by 2005; What Generation Mix Will the Continent Use to Reach that Goal? By: Will McNamara, Director, Electric Industry Analysis =============================================================== Demand growth for electricity in European countries over the next five years may prompt the need for an additional 69,000 MW of generating capacity to be built, according to a new report from Financial Times Energy. The additional capacity includes the proposed capacity for Spain through 2004, but also includes Finland, France, Germany, Sweden, and the United Kingdom. At the same time, concerns about supply and demand in Europe are being exacerbated by Germany's plan to reduce its reliance on nuclear power. ANALYSIS: If FT Energy's projections for necessary generation additions in Europe are accurate, I think there are some real challenges that the Continent will face in reaching this goal. First off, for perspective, let's be clear on the amount of generating capacity that FT Energy is claiming Europe will need by 2005. The figure of 69,000 MW is roughly equivalent to the generating capacity in the state of California or the ERCOT system in Texas. When we consider also that the United States consumes about double the amount of power that Europe consumes, the projection that Europe will need an additional 69,000 MW of new generating capacity is a staggering proposition. Granted, like other developed areas of the world, Europe's energy consumption has grown over the last two years. According to data included in its report, FT Energy claims that demand for power in Europe has risen from 2,409 terrawatt-hours (TWh) in 1998 to 2,446 TWh in 1999, an increase of about 1.5 percent per year. While this may seem like a minimal increase, it is important to note that in some European markets growth has exceeded that average. For instance, estimated new capacity additions through 2005 are mainly concentrated in Spain, France, Germany and Sweden. The growth in demand, coupled with market liberalization, has created many opportunities in Europe for the construction or purchase of generation assets. Although reportedly 60 percent of the electricity market across Europe has been liberalized to date, the Continent remains rather disjointed as it is composed of 16 national markets that are all approaching privatization at different speeds. The United Kingdom and the Netherlands began their privatization movements in the early 1990s. Spain required its state-owned utility companies to begin divesting their assets in February 1999, a process that will continue through 2007. Germany decided to open 100 percent of its market all at once in April 1998. And France resisted efforts to privatize, and only began to liberalize its market under pressure from the European Union. Consequently, although Europe may in fact need the 69,000 MW of new generating capacity that FT Energy has projected, the type and extent to which new generating capacity will be built in Europe will depend on the energy policy of each independent nation. A variety of restrictions may be found that will limit the opportunities to generate this huge amount of capacity. Each European country is developing its own policy toward privatization and, by extension, its approach to generation development. I can't examine the policy of each country in this forum, but I think a look at Germany is warranted, both because it is a major component of Europe's total energy market and because Germany poses some interesting dilemmas that will impact the Continent as a whole. Germany has largely been considered the crown jewel of European deregulation, due to the fact that the totality of the German market has been opened to competition. It follows that generation coming from Germany should contribute a large percentage of the Continent's future power needs. However, a large percentage of Germany's power has come from nuclear power, but that has all changed over the last year. After the Social Democratic Party formed a coalition with the antinuclear Green Party, nuclear energy became an unacceptable energy source. The German government has essentially put a moratorium on nuclear power, and in fact decided to eventually shut down 19 nuclear power plants in the country. Just last month, Germany's two largest power producers, RWE AG and E.ON AG, announced plans to cut output from their nuclear plants as a reaction to the squeeze on prices that has developed since Germany liberalized its market. The measures amount to a reduction of about 10 percent in Germany's overall power generating capacity. Moreover, nuclear energy has generated over one-third of Germany's nearly 500 billion kilowatt-hours of annual electricity demand, and one-third of Western Europe's total electricity supply. As the future of nuclear power in Germany looks rather dim, big questions surround what will replace nuclear as a power source in this country that is critical to Europe's energy industry. Coal currently produces about 50 percent of the power generation in Germany, but as a result of the country's attempts to lower emissions, coal also appears to be on a decline. Also, in Germany, as in the rest of Europe, coal-industry subsidies will come to an end as early as 2005, making it less economical to invest in coal-fired plants. At the same time, other countries like France are exploring clean-coal technologies, but it is questionable how much this production will contribute to the overall demand across the Continent. Generally, natural gas has been considered the ascending fuel that will take the place of nuclear power in Europe, given the seemingly abundant supplies of natural gas in Russia and the North Sea. However, as demand across other continents such as Asia and Africa also increases, this may impact the prospects of securing natural gas in Europe. In addition, there are no effective rules across Europe for third-party access to private pipeline grids, also putting into question the future of natural-gas supplies. Also, as we have seen in the United States, as demand for natural gas increases, so will the prices, which could impact the viability of natural gas a primary power source. As a result, much of the attention in Europe has turned toward renewable energy. In fact, the German government wants to double renewable energy output to 10 percent of total energy demand by 2010, using such forms as hydroelectric and wind power. This seems consistent with what the rest of Europe is doing. The United Kingdom also said that it wants to generate 10 percent of its electricity from renewable resources by 2010. Scandinavian countries already have become predominantly based in renewable and low-emission forms of energy, with hydroelectric power comprising more than half of the Nordic region's total electricity production. Wind power in particular is being given a great deal of attention in Western Europe, with projects in Germany, Denmark and Spain ranking among the fastest-growing in the world. Again, according to the U.S. DOE, wind power is projected to grow by 1.9 percent per year in Western Europe. This growth prospective is pretty dismal, and casts doubt on whether or not renewable energy will be sufficient to meet the demand in Europe. Renewable energy works fine when planning overall energy needs, but it rarely can be relied on to meet peak demand. The laws of nature ensure that wind blows when it wants to and the sun shines when it wants to, which can make peak planning based on renewable energy difficult if not impossible. This being the case, many critics say Europe's current move toward renewable energy is completely unrealistic, arguing that it would take nearly 2,000 wind turbines to equal one nuclear plant. In addition, the growth for renewable energy is plotted over the course of ten to fifteen years. FT Energy marks the year 2005 as the point at which Europe will need the additional 69,000 MW of generating capacity. In addition, despite the fact that coal-fired generation poses pollution problems, it is still a comparatively low-cost form of generation. This will make it difficult for renewable energy sources to emerge in the absence of a strong worldwide commitment. The U.S. Department of Energy projects only a moderate increase in hydroelectric and other renewable forms of energy through 2020, just enough for renewable energy sources to maintain a slim 8-percent share of the total world energy consumption. So what is the answer to this contradiction between the apparent need for new generating capacity in Europe and the restrictions on power sources that could help the Continent to reach its supply needs? First, keep in mind that I've focused on Germany because it plays such a pivotal role in Europe as a whole. However, the restrictions on nuclear power are not necessarily indicative of the approach of other European countries. For instance, the neighboring Czech Republic is embracing nuclear power by opening a plant in Temelin. The question is, without Germany's contribution of nuclear power, will Europe be able to derive enough capacity from other power sources and other countries? Although the 69,000 MW goal seems very ambitious, Europe as a whole may get closer to this goal through the use of merchant plants. As competition continues, wholesale power buyers are demanding shorter-term contracts, which in turn is supporting a growing trend toward merchant plants throughout the Continent. Presently, only the United Kingdom has moved aggressively to merchant power, but there are signs that the trend is extending to Italy, Spain, the Netherlands, and even Germany. In addition to compensating for the move away from nuclear power, merchant plants could also support a renewed growth of Europe's natural-gas market. Yet, as we have seen in California, the plant siting process offers its own array of regulatory hurdles, and it is not clear if European governments will facilitate plant siting in various countries. Plus, the merchant plants that are being discussed are all primarily natural-gas fired, which again raises risks of relying so heavily on one power source. Moreover, just as North America enters what could be a very volatile winter due to our own brand of energy supply problems, we are finding that the problem is not limited to our part of the world. It is, of course, unknown if Europe will meet its additional supply projections of 69,000 MW by 2005. Yet, at the same time, it is clear that demand on the Continent continues to rise while traditional forms of power supply are on the decline. =============================================================== Learn more about SCIENTECH's Issues and Analysis products and services at: http://www.consultrci.com/web/rciweb.nsf/web/Depts-IA.html ============================================================== SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =============================================================== Feedback regarding SCIENTECH's IssueAlert should be sent to wmcnamara@scientech.com =============================================================== SCIENTECH's IssueAlerts are compiled based on independent analysis by SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, please reply to this message and in the body of the email type "remove."
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