Capgemini Launches 10th Edition of Euro Energy Markets Observatory (EEMO) Report

December 8, 2008 // Published as a news service by IHS

Although today's credit crunch could severely hurt the investment cycle, analysts also anticipate a difficult period for the European energy markets once the recession is over.

The EEMO is an annual report that tracks the progress in establishing an open and competitive electricity and gas market in the 27 European countries, including Norway and Switzerland.

This tenth edition is based on 2007 and winter 2007-2008 data sets.

The Capgemini report said that Europe has yet to solve the related issues of responding to its energy demand, while curbing its carbon dioxide (CO2) emissions.

In 2007, even at a slower pace than previous years, analysts said European electricity consumption still increased by 0.9% and carbon dioxide (CO2) emissions stabilized, instead of decreasing.

Despite the mild weather, the electricity security of supply deteriorated, analysts said. The Union for the Coordination of Transmission of Electricity (UCTE) real margin - which takes into account non-usable and unavailable generation capacities - dropped from 7.6% in 2006 to 5.3% in 2007.

Analysts said without a significant and vigorous investment program in electricity and gas infrastructures, Europe's energy supply security will be threatened. Since the low point in 2005, utilities started to invest again, but have made energy mix choices that are not moving toward a reduction in CO2 emissions as the majority (58%) of the planned generation capacities will be fossil-fueled.

In 2007, investments in renewable capacities grew fast, wind being the industry's preference, with an addition of 8.3 gigawatt (GW) renewables in Europe. However, analysts said this type of "non-scheduable" source is not always available during peak hours. This partially explains the security of supply deterioration.

While today's world economic crisis should reduce energy demand, decrease CO2 emissions and decrease electricity and gas prices, the credit crunch will likely delay the needed investments in infrastructure to replace aging plants or to build new plants, electrical lines and gas pipelines.

Also, governments will have less tax revenues and will have to limit their spending, analysts said. They might be tempted to reduce financial subsidies to renewable energies, as did the Spanish government in October 2008, limiting its incentives to solar development. Analysts said such decisions could jeopardize the growth of renewable energies, especially wind and solar, which need subsidies to be financially competitive.

Governments could also impose new taxes on certain utilities; for example, windfall profits linked to CO2 certificates obtained for free and incorporated in the wholesale prices at their market price. Also, many governments may want to protect their citizens' purchasing power by taking measures such as capping electricity prices (as announced by the Belgian minister of Energy in October 2008) or imposing special measures to protect vulnerable customers (as per discussions currently taking place in the U.K.).

During the first half of 2008, some long-awaited mergers and acquisitions were closed, in turn triggering acquisitions of the divested assets following these transactions. The crisis should trigger an increased market consolidation, the acquirers being those with solid balance sheets and cash. Analysts said young companies and new entrants with weak balance sheets could be acquired by stronger ones, thus decreasing market competition.

Utilities have to quickly adapt to the new landscape by thriving toward operational excellence, analysts said. This means they will have to streamline their internal processes, simplify their organizations and increase their reactivity while continuously benchmarking their results with the "best in class."

If investments are not completed in time, analysts said European energy markets are likely to have a difficult time once the recession is over. The credit crunch should short-circuit the investment cycle, leading to a lack of generation capacities and infrastructures. It will likely slow down renewable projects and some nuclear investments, consequently raising CO2 emissions due to an increased output from fossil-fueled plants.

"Security of supply and CO2 emissions curbing issues will be exacerbated after the crisis," said Colette Lewiner, global leader of energy, utilities and chemicals at Capgemini. "To avoid this, utilities and governments should keep their investment plans in zero carbon generation investments."

Source: Capgemini.