CEDIGAZ: Europe faces crisis in electric power reliability

Europe faces “a major structural crisis” of electric power reliability as thermal generation capacity needed to back up electricity from renewable energy falls, according to a report by CEDIGAZ (International Center for Natural Gas Information).

Europe faces “a major structural crisis” of electric power reliability as thermal generation capacity needed to back up electricity from renewable energy falls, according to a report by CEDIGAZ (International Center for Natural Gas Information).

Because the price of coal in Europe is a third that of natural gas, generation fired by the lower-carbon fuel is plummeting. Gas demand for power generation in the European Union has declined by one-third from the historical peak in 2010. Almost 30% of gas-fired capacity in the EU might be closed or mothballed by 2015-16, CEDIGAZ says.

Gas prices are high relative to coal because many import contracts remain linked to the price of oil and because coal prices have been suppressed by increasing imports from the US, where the gas-price relationship is the reverse.

But coal-fired capacity, too, is under pressure. With electricity from renewable energy increasing, coal demand in the EU fell by an estimated 5% in 2013. And EU limits on emissions of local air pollutants encourage retirement of aging coal-fired plants.

CO2 price low

The report predicts an easing of gas prices in Europe and a bottoming of coal prices. It nevertheless expects coal to retain its cost advantage over gas in power generation unless carbon dioxide prices in the EU Emission Trading Scheme (ETS) recover from the low levels to which they have settled.

To encourage switching from coal to gas in power generation, CEDIGAZ says, the CO2 price would have to be five or six times its recent level with coal and gas prices at their levels at the beginning of May. With coal and gas prices at January 2014 levels, the CO2 price would have to be as much as 10 times recent levels to encourage fuel-switching.

Generation capacity totaling 115-120 Gw, a third of gas and coal capacity in the EU, is closing or at risk of closure, CEDIGAZ says.

“These trends pose a serious challenge for security of supply as thermal power generation is needed to back up variable RES [renewable energy sources],” CEDIGAZ says. “The building of flexible power capacity required to support the development of RES is threatened by the lack of market signals and adverse investment climate. The current situation has the potential to unfold into a major structural crisis.”

Needed conditions

CEDIGAZ said these conditions are needed to solve the problem and allow gas to “play its role as an enabler of the transition to a low-carbon economy”:

· Reform of the ETS to ensure a CO2 price high enough to encourage decarbonization of the power industry.

· Lower gas prices through gas-on-gas competition, partnerships between gas suppliers and utilities, and new pricing arrangements.

· A solution to what it called “the missing-money problem” to restore confidence in the gas-fired power market and encourage investment.

More in Economics & Markets