European Energy Markets Observatory 2010 - Editorial

Energy, Utilities and Chemicals the way we see it

European Energy
Markets Observatory
2009 and Winter 2009/2010 Data Set
Twelfth Edition, November 2010

In collaboration with

Contents

A Strategic Overview of the European Energy Markets 4

Competitive Power 12
Electricity Generation 12
Electricity Wholesale Markets 22
Electricity Retail Markets 28

Competitive Gas 34
Upstream 34
LNG 40
Gas Wholesale Markets 44
Gas Retail Markets 49

Infrastructures and Regulated Activities 56
Electricity Transmission 56
Electricity Distribution 64
Gas Transmission 68
Gas Storage 72
Gas Distribution 77

Sustainable Energy and Climate Change 79

Finance and Valuation 89

Glossary 96

Country Abbreviations and Energy Authorities 100

Team and Authors 101

©2010 Capgemini.
Reproduction in part or in whole is strictly prohibited.


Tables Country Focus

Table 1.1 Peak load, generation capacity Table 8.2 Investments from selected Key issues in the United Kingdom .................... 18
and electricity mix (2009).................................. 13 electricity TSOs in their national grid Key issues in Switzerland ................................. 39
Table 1.2 Real margin versus theoretical (2004 to 2009) .................................................. 58
Key issues in Portugal ...................................... 43
margin (2009).................................................... 14 Table 8.3 Electricity TSOs investments in the
national grid as a % of their revenues Key issues in Sweden ....................................... 47
Table 1.3 Map of generation capacity
projects, as of May 2010 .................................. 15 (2008 and 2009) ............................................... 58 Key issues in Belgium ....................................... 50
Table 1.4 Generation market concentration Table 8.4. Map of interconnections levels, Key issues in Spain........................................... 60
(2009)................................................................ 19 bottlenecks and priority interconnections Key issues in Norway ....................................... 63
(2009)................................................................ 59
Table 2.1 Commodity prices Key issues in the Netherlands .......................... 67
(2009 and H1 2010) .......................................... 22 Table 9.1. Map of electricity DNOs and their
unbundling status (2009) .................................. 64 Key issues in France ......................................... 75
Table 2.2 Yearly (2008 and 2009) and winter Key issues in Slovakia ...................................... 76
(2008/2009 and 2009/2010) average Table 9.2 Number of new generation
electricity spot prices ....................................... 23 connections (basis 100 = 2005) ....................... 66 Key issues in Italy ............................................. 80
Table 2.3 Electricity spot prices on the main Table 10.1 Ownership unbundling status Key issues in Germany ..................................... 87
European markets (2009 and H1 2010) ............ 24 of gas TSOs (as of July 2010) ........................... 68
Table 2.4 Electricity futures prices Table 10.2 Map of physical congestions
(year ahead) on the main European markets on gas infrastructures (2009) ............................ 69
(2009 and H1 2010) .......................................... 25 Table 10.3 Investments from selected
Table 2.5 Map of electricity trading (2009) ....... 26 gas TSOs in their national grid
(2007 to 2009) .................................................. 70
Table 3.1 Total electricity consumption and
size of I&C and residential markets (2009) ....... 28 Table 10.4 Gas TSOs investments in the
national grid as a % of their revenues
Tables 3.2 I&C electricity prices - VAT excluded (2008 and 2009) ............................................... 70
(H2 2009 and % change with H2 2008) ........... 29 Topic Focus
Table 11.1 Gas storage capacities (2009) ......... 72
Table 3.3 Residential electricity prices -
all taxes included and with PPP Table 11.2 Map of gas storage (2009) .............. 73 Hydroelectric concessions renewal
(H2 2009 and % change with H2 2008) ........... 30 Table 11.3 Gas storage facilities projects in France: a contribution to the
Table 3.4 Households Energy Price Index (2009)................................................................ 75 Grenelle de l’Environment’s goals but with
(HEPI) in the EU-15 capitals - electricity Table 11.4 Gas storage regulation regimes uncertain profitability ........................................ 17
without taxes (2009 and H1 2010).................... 30 (2009)................................................................ 76 The reactors manufacturers are preparing
Table 3.5 Status of electricity price regimes Table 12.1 Map of gas DNOs and their to fight for a share in the promised
(as of July 2010) ................................................ 31 unbundling status (2009) .................................. 77 nuclear rush ...................................................... 20
Table 3.6 Electricity retail market concentration Tables 13.1 3x20 European Union 2009 has been a record year for European
(2009) .............................................................. 32 climate change objectives (status as of 2009 switching........................................................... 33
Table 4.1 Domestic gas production versus with provisional data) ........................................ 79 Retail energy providers still have to face
imports (2009) .................................................. 34 Table 13.2 CO2 prices (2009 and H1 2010)...... 82 low net margin levels. Therefore, Cost to Serve
and Cost to Acquire control remains key to
Table 4.2 Gas production and share of Table 13.3 Growth rate of renewable energy ensuring profitability ......................................... 55
European proven reserves by company sources (2005 to 2008 or 2009) ...................... 84
(2008 and 2009) ............................................... 35 Desertec and Transgreen:
Table 14.1 Companies on the panel and two complementary projects following
Table 4.3 Proven gas reserves (2009) .............. 35 their main characteristics (2009)....................... 90 the same objective .......................................... 57
Table 4.4 Map of gas imports through Table 14.2 Evolution of electricity Utilities’ Smart metering implementation across
pipelines and pipeline projects (2009) .............. 36 revenues and volumes sold .............................. 91 Europe is slow .................................................. 61
Table 5.1. Map of LNG terminals and flows Table 14.3 EBITDA margin evolution Will smart grid technologies compete with
(2009)................................................................ 40 (2004 to 2010e)................................................. 91 telecom technologies?...................................... 62
Table 5.2 LNG imports to Europe (2009) .......... 42 Table 14.4 CAPEX to revenues ratio Smart Energy Services deployment requires
Table 6.1 Gas spot prices (1990 to 2009) .................................................. 92 all stakeholders to organize if they want
(2009 and H1 2010) .......................................... 44 Table 14.5 Breakdown of investments by to reap all the benefits ...................................... 62
Table 6.2 Gas futures prices segment (2009)................................................. 92 Smart Energy Services - Experience
(summer 2011 and winter 2011/2012) ............... 46 Table 14.6 Utilities sector performance Reduces Risk ................................................... 63
Table 6.3 Map of gas trading (2009)................. 48 versus DJ Eurostoxx 50 Transposition of the EU 3rd Energy Package
(base 1 on January 1, 1990) ............................. 93 is heterogeneous across Member States ......... 71
Table 7.1 Total gas consumption and size of
I&C and residential gas markets (2009) ............ 49 Table 14.7 5-year Utilities sector performance Copenhagen: what’s next?............................... 81
versus DJ Eurostoxx 50
Tables 7.2 I&C gas prices - VAT excluded (base 1 on September 1, 2005) ........................ 93 The comeback of concentrating
(H2 2009 and % change with H2 2008) ........... 50 solar power (CSP) ............................................. 85
Table 14.8 Utilities sector performance versus
Table 7.3 Households Energy Price Index DJ Eurostoxx 50, as of September 21, 2010
(HEPI) in the EU-15 capitals - gas without taxes (base 1 on January 1, 2010) ............................. 93
(2009 and H1 2010) .......................................... 52
Table 14.9 “Electricity” versus “gas” stocks,
Table 7.4 Residential gas prices - all taxes share performance
included and with PPP (base 100 on January 1, 2009) ......................... 94
(H2 2009 and % change with H2 2008) ........... 52
Table 14.10 Utilities sector P/E,
Table 7.5 Status of gas price regimes Europe and US (5 years) ................................... 95
(as of July 2010) ................................................ 53
Table 14.11 Relative sector P/E,
Table 7.6 Gas retail market concentration Europe and US (5 years) ................................... 95
(2009)................................................................ 54
Table 14.12 Average P/E for network
Table 8.1 Ownership unbundling status of companies ........................................................ 95
electricity TSOs (as of July 2010)...................... 56

European Energy Markets Observatory 3

A Strategic Overview of the European
Energy Markets
Editorial by Colette Lewiner

The economic situation impacted Developing countries, and especially the in January 2010. They are significantly
energy trends Asian recovery, have triggered higher lower in the US than in Europe.
As foreseen, 2009 was a crisis year in oil demand. Consensus now expects
Europe and in the US. While other oil demand to increase by 1.8mb/d It is interesting to note that gas prices in
regions in the world recovered by mid (+2.2%) and by 1.3mb/d (+1.5%) in 2010 the US and to a certain extent in the UK
2009, it was only at the end of 2009 that and 2011 respectively2. With limited are no longer correlated to oil prices. On
green shoots appeared in North America production growth from non-OPEC continental Europe, Gazprom is publicly
followed by Europe. Hopes were high in regions, and the expectation that few new opposed to gas contracts indexation to
early 2010 that the economy would grow, fields will be brought on stream in the spot prices arguing that European trading
albeit even slowly, however the solvency of OPEC countries, one can forecast tighter hubs are not liquid enough and that prices
certain European countries highlighted the oil markets. A tighter oil market, with a could be manipulated by the large players
eurozone fragility. Combined with a slower need for OPEC to increase production, who are at the same time their clients!
growth in the US and other countries, it should trigger higher oil prices. Prices However, during the winter of 2009/2010,
has introduced doubts about a sustained have already increased from about US$50 due to surplus supply in Europe and
recovery. Bumpy recovery scenarios have per barrel in the spring of 2009 to about full storages, Gazprom accepted some
emerged again in Europe. US$80 per barrel at the beginning of concessions to its usual contractual policy
September 2010. In addition, the fall of (take-or-pay contractual obligations and oil
In China, India and other developing the euro against the US dollar has made prices indexed contracts) by accepting to
countries such as Brazil, the crisis, if any, European imported energy even more cancel some committed quantities and, for
was for a short duration and they are now expensive, possibly impacting the fragile limited volumes, to sell at spot prices. Gas
enjoying a healthy growth. economic recovery. spot prices were down in 2009 with little
rebound (at €12/MWh on average). On
While we need to acknowledge these This upward oil prices trend should the contrary, and because of increases in
regional differences related to economic continue in the future as unconventional oil prices, long-term continental European
recovery, let’s recognize that many supply will be at a high cost. For gas supply prices increased at the end of
commodity markets including oil are example, heavy oil extracted from tar 2009 and into early 2010 (at €21/MWh
global. Moreover, worldwide energy related sands in Canada will be more costly to on average). In certain countries such as
resources are limited – around 40 years of exploit (extracting oil from tar sands France this wholesale price increase was
consumption in conventional oil reserves; is economically viable with a barrel at reflected in retail tariffs that triggered
60 years for conventional gas reserves US$80) and in addition the projects public protests.
(with non conventional gas, the technically are facing opposition linked to their
recoverable gas resources would be environmental impact. Needless to say that At equal energetic content, with these low
worth 250 years of current production1); the BP Macondo well accident in the Gulf spot prices, gas is significantly cheaper
and much more for coal and uranium of Mexico will push regulators to tighten than oil while being less polluting. This
of around 100 years. Energy markets security rules on deepwater exploration anomaly should be corrected in the
are, therefore, operating within not so and production and to possibly increase long-term. Two things could happen (or a
long-term boundaries and what happens liability caps resulting in higher producing combination of both): either a massive gas
in one region of the world impacts the costs. substitution to oil happens or gas prices go
others. While oil and coal are true global up as investments in gas exploration and
markets, gas and electricity markets are In an opposite movement, the spectacular production (onshore, offshore or shale gas)
not. However, the growing market share development of unconventional gas in become less attractive, thereby, creating a
of liquefied natural gas (LNG) is allowing the US, that today provides around 50% tense supply situation.
increasing global gas exchanges and, with of their production combined with the
electricity interconnections development, economic crisis, has led to a sharp gas In Europe, electricity wholesale prices
today’s national electricity markets are price decrease. Prices in the US fell to went down on average in 2009 compared
moving regional. historical lows of US$4/MBtu in September to 2008 and are stable since the beginning
2009 and have rebounded to US$6/MBtu of 2010. Retail prices for all customer
segments followed this trend.

1 IEA World Energy Outlook 2009
2 IEA Oil market report, August 2010

4


Some retail electricity tariff increases that are linked to the fundamental • Price signals, as time of use rates or
occurred in mid 2010. In France, for needs of heating or cooling for example. energy prices increases, also contribute
example, electricity tariffs were raised by Accordingly, the economic crisis has to virtuous customer behaviors.
3.4% on average in order to finance heavy triggered a decrease in the electricity However, during economic recession
investments needed mainly in generation and gas industrial consumption as times, governments that try to avoid
plants. Electricity tariff increases took plants’ capacity was only partially deteriorating their citizens’ purchasing
place in other European countries (+2% needed. With the necessity to replenish power were reluctant to increase
in Germany in H1 2010; +4% in Spain; low stockpiles, plants have operated, electricity and gas prices. However,
and +4.2% in Sweden announced on since the beginning of the year, at a prices have to increase on a mid-term
July 1, 2010). higher capacity (the EU-27 industry horizon;
production index gained more than four • Demand response programs: New
Energy consumption decreased in points since January 2010). However, devices – smart meters and intelligent
2009 and has started to increase this crisis has accelerated the industry home devices – are a key investment
again in early 2010 production geographical shift to Asia that improves customer energy
In 2009, we witnessed a historical despite governments’ pressure to stop or consumption awareness and energy
consumption decrease worldwide for at least slow down these relocations as demand management efficiency. The
all forms of energy: oil, coal, gas and they destroy European jobs. This trend EU 3rd Legislative Package (adopted
electricity. should continue to bring down energy in April 2009) recommends that 80%
consumption and CO2 emissions; of the European population to be
In Europe, 2009 electricity and gas ■■ Future regulation effects: In addition provided with intelligent meters by
consumption decreased compared to to the European Climate-Energy package 2020. Up to now, this recommendation
2008 (-4.7% and -6.1% respectively3) effects, energy savings regulations had little impact as the Return on
triggered by the industrial sector with, at recently adopted by the Member States Investment (ROI) for Utilities on
the beginning of 2009, a 10% or more will impact energy consumption in the smart meters and for individuals on
monthly decrease. The residential sector mid-term. As an example, the French intelligent home devices is not good
was resilient with, in certain countries, Grenelle de l’Environment5 comprises enough. A key benefit for Utilities
even an increase in demand. various measures to improve building comes from the winter or summer
insulation (400,000 homes per year demand peak shavings, thus avoiding
In last year’s edition of our Observatory, at cruising speed), to reduce the cars new plants’ or grids’ construction.
we predicted a recovery in 2010 which gasoline consumption with a “green However, following the European
has happened. In H1 2010, electricity sticker” (in order to meet the European market liberalization, the Utilities value
consumption increased by 3.4% and standard of 120 g/km in 2012) and to chain is now split between regulated
gas consumption increased even more encourage the use of rail transportation. (transmission and distribution) and
by 10.3%4.This apparent electricity and The energy savings related to these unregulated (generation, trading and
gas growth was, however, higher than in regulatory effects will take longer to sales) activities. As metering is usually
normal conditions as we experienced a produce results but they will be more part of the distribution regulated
very cold winter of 2009/2010 in Europe sustained than those linked to the business and as a large proportion
with temperatures below the decennial economic crisis; of savings related to smart metering
average by 2 to 4°C. ■■ Customer behaviors that are a key investments come from the unregulated
element for sustainability: generation unit (i.e. peak load costs
Future energy consumption evolution will savings), the distribution unit’s smart
• There is a general need for more
be mainly linked to three factors: metering ROI is unattractive and
comprehensive public information
Economic situation: For certain sectors investment decisions are difficult to
■■
on energy. Explanations on energy
such as industry, there is a significant take. In Italy, smart meters are fully
resources boundaries, on energy
elasticity between the economic implemented. Sweden took the roll
savings necessity and also on the need
situation and energy consumption while out decision in 2003 while France
to build energy related infrastructure
elasticity is low for residential usages has just decided to implement them
should trigger savvier behaviors;

3 Amended geographical perimeter (EU-27 but Malta and Cyprus + Norway and Switzerland), the reference used in this report
4 SG Energy Pulse index tracks the monthly consumption of a focus group comprising, for electricity: France, the UK, Italy, Belgium, Greece Portugal, Denmark,
Spain and Poland (i.e. 60% of EU-27 electricity consumption) and for gas: France, Portugal, Spain and the UK (i.e. 36% of EU-27 gas consumption)
5 The “Grenelle de l’Environnement” is a Round Table on environmental issues to define the key points of government policy on ecological and sustainable
development issues for the coming five years. More information are available at http://www.legrenelle-environnement.fr


(September 20106). Many other out, could push up evening electricity In 2010, worldwide funding is increasing
European Member States’ governments peaks. It is worthwhile noting that electric as US$248 billion of the stimulus funding
have been slow to impose smart meters vehicles while contributing to reduce local should go on green projects. In Europe,
deployment. This is regrettable as smart pollution do not automatically reduce a €4 billion energy infrastructure
meters, in conjunction with demand global CO2 emissions unless the electricity investment plan was adopted by the EU
side management Utilities programs, generation is predominantly CO2 free Member States in May 2009 of which
should lead to significant savings in produced by renewable and nuclear €565 million was dedicated to specific
electricity consumption, peak power plants. This is the case in France but not in offshore wind projects and €910 millions
and CO2 emissions. A Capgemini Germany for example. to smart grids.
study7 shows that dynamic programs
launched in the EU-158 countries could New generation plants However, this improved 2010 investments’
save 200 TWh per year by 2020 (which As predicted in last year’s edition of our situation could be hit again by
represents the combined residential Observatory, real engagements in new governmental subsidy decreases linked to
consumption of Spain and Germany). generation plant constructions have the rigorous plans that are being adopted
Remote control programs of electrical slowed down in 2009, while the longer in most European countries. Many
appliances that have shown very term plans are officially untouched. This countries, including Spain, Italy, France
positive results in the US (for is a reflection of the financial crisis, the and Germany, have reduced their subsidies
example in Florida and Texas) should Utilities sector financial situation, and the to renewables (especially wind and solar
also be considered in addition to short-term consumption decrease. energy). Recently, in addition to cuts
or replacement of smart meters on subsidies to wind and thermo-solar
■■ Gas: Our Observatory also shows that
deployment in Europe. plants, Spain announced in June 2010
Utilities are investing mainly in gas-
its intention to cut by 45% guaranteed
fired plants, taking advantage of lower
In the mid-term, all these combined subsidized electricity prices paid to new
investment costs than for other types of
factors should lead to a slower electricity solar photovoltaic (PV) power plants.
plants, shorter construction duration and
consumption growth. In France, on September 1, 2010, the
hoping that the present low gas prices
government decreased the solar PV feed-in
will remain in the future. In France, for
The European energy mix is slowly tariffs by 12% in an attempt to prevent a
example, these plants are mainly used
becoming greener speculative bubble.
in peak and semi-peak hours. As in
According to the EU objectives, and in many European countries, winter (and
addition to the energy savings, the energy even summer) load peaks are predicted Until green energy becomes profitable,
mix should evolve towards lower CO2 to be sharper and sharper; the related the industry will rely on government
emitting energy sources. Both energy gas consumption should go up unless incentives to keep it alive. Solar power, for
usages and types of new plants impact this efficient demand side management example, is still about three times more
energy mix. projects, helping to “shave” the peaks, expensive than coal and onshore wind is
are implemented; the only green energy source considered a
Energy usages break-even prospect. However, higher and
■■ Despite the dominance of gas and other sustained oil prices could improve green
As an example, the transportation sector fossil fuels, year-after-year the primary energy development.
which is heavily oil dependant, is one energy mix tends to become “greener”. In
of the biggest CO2 emitters and has to 2009, regional investments in renewable
evolve to both low consumption vehicles We are continuing to witness a nuclear
energies were impacted differently renaissance in Europe and more countries
and other types of fuels (2nd generation by the crisis. Global investments in
biomass and / or electricity). Nearly all now have a positive attitude towards
clean energy only decreased by 7% to nuclear plants. Lifetime extension
of the world’s largest car manufacturers US$162 billion according to Bloomberg
now plan plug-in hybrid vehicles or fully programs have been launched in Belgium,
New Energy Finance with contrasted Spain and are envisaged in France (with
electric vehicles within two years. Battery situations: growth in Asia especially
improvement is a bottleneck for the an investment spending of around
in China (+53%) which offsets falls in €3 billion). Provided safety is kept at high
massive deployment of electric vehicles. North America (-38%) and in Europe
Manufacturers are developing efforts to levels, these programs have a high ROI:
(-10%). China is now the biggest wind in France, around €0.5 billion should be
increase batteries’ autonomy between power market, doubling its installed
two loads and to decrease their weight. spent per reactor for a ten year – or more
wind capacity in 2009 by adding over – lifetime extension compared to around
Commercial innovations such as renting 13,000 MW, and the biggest wind
batteries instead of buying them will also €5 billion cost of a new EPR plant.
turbines manufacturer. China is also the
help the electric vehicles deployment. world’s leading solar panel producer,
Massive electric cars adoption, when it In Germany, the coalition government has
with a 32% market share in 2008, taken a position in September 2010 to
happens, will impact the distribution grid and solar panels exports valued at
management and, if not carefully thought extend the nuclear power plants lifetime
US$15 billion. by 12 years on average. To compensate

6 Decree imposing the start of smart meters roll out in 2012 and 95% of clients equipped in 2016 – September 2, 2010
7 “Demand Response: a decisive breakthrough for Europe”, a Point of View by Capgemini, Enerdata and VaasaETT, 2008
8 EU-15: original 15 Members of the European Union until May 1, 2004: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal, Spain, Sweden and the UK

6


for the windfall profits that they make Many Utilities are focusing on Finally, rigor plans and a commitment
because of lifetime extensions, nuclear reducing their debts to reduce national debts are pushing
power plant operators will have to pay a As a consequence of a bullish acquisition governments to consider privatizing their
“fuel-element tax” totaling €2.3 billion strategy from 2006 to 2008, many large Utilities: ESB and Bord Gáis in Ireland; Galp,
per year for six years. They will also have Utilities’ war chests have significantly EDP and REN in Portugal; Enea in Poland;
to pay a supplementary “eco-tax” that decreased triggering divestments in order and PPC in Greece. Others could follow.
amounts to an estimated €15 billion to restore the balance sheet. Networks,
during the remaining lifetime of Germany’s having long-term recurrent revenues, were Electricity and gas security of supply
nuclear units. They will continue to pay a seen as easier to sell assets. For example, have generally improved except
voluntary contribution of €300 million a EDF has agreed to sell its UK distribution during the very cold winter in certain
year in 2011 and 2012, and €200 million regions
networks to a consortium headed by
a year from 2014 to 2016 for the Hong Kong billionaire Li Ka-Shing for Electricity security of supply was
construction of renewable energy plants. UK£5.8 billion. threatened during extreme weather
They will pay more after 2016 when conditions
the windfall-profit tax will no longer be In addition to cash, Germany’s During the observed period, thanks to
payable. Despite all these extra taxes, transmission network sales allowed E.ON a consumption slow down and new
analysts view these decisions as favorable and Vattenfall Europe to obtain from plants’ commissioning, security of supply
for the German nuclear operators, E.ON, the EU DG Competition a drop of their improved globally (from 9.2% in 2008 to
RWE and EnBW. charges. 9.8% in 2009). However, the exceptionally
cold weather threatened electricity supply
Finland, France and the UK were the first In a similar move, Italian Eni announced in a few countries. A case in point was the
European countries to take decisions to that it plans to sell stakes in three major French situation, where in December 2009
build new plants. They were followed by pipelines (valued at €1.5 billion) as part and in early January 2010, temperature
a number of Eastern European countries of a potential settlement with the EU was 6 to 8°C degrees below normal.
including Slovakia, the Czech Republic, regulators over alleged anti-competitive Each one degree drop in temperature
Bulgaria and Romania. In July 2009, Italy behavior by the company’s natural gas triggers an extra electricity capacity need
removed its nuclear moratorium and in pipeline business. of 2,100 MW and the electricity peak
June 2010 Sweden voted to allow new went up to a record of 92,400 MW. At the
plants to be built. Other countries will Following the same trend, Enel sold time, the nuclear plants’ availability was
follow (possibly Switzerland and the 80% of Endesa’s gas pipelines to two not good so France had to import up to
Netherlands). Goldman Sachs’ infrastructures funds for 8,000 MW from its neighbors for several
€800 million. consecutive days. This import level was
However, the first European plant near the upper possible limit of 9,000 MW.
completion (Olkiluoto in Finland and This cash situation explains that, while The situation was even more tense in
Flamanville in France) are delayed mainly we are witnessing many mergers and certain French regions having a fragile
because of EPR’s9 design complexity and acquisitions in the Oil and Gas sector, transmission grid and messages were sent
construction difficulties. there are fewer in Utilities. However, by the TSO, RTE, to the population asking
GDF SUEZ after the time needed to them to lower their consumption around
These EPR delays are also an illustration digest their initial merger has announced 7 PM (the peak time). These messages
of the necessity for the industry as a whole the first very large acquisition since the were very well received and the population
to ramp up its facilities, quality insurance crisis. By combining GDF SUEZ Energy behavior helped to avoid black-outs.
and human capabilities as it seems to International assets (which includes North
be more painful than forecasted. On the America, Latin America and the Middle This demand and supply balance in peak
positive side, as consumption growth is East) with International Power’s and load situations is a real threat to security
slowing down, the need for these new adding UK£1.4 billion in cash, GDF SUEZ of supply.
plants is delayed, thus leaving more time took a 70% stake in the new International
for their completion. On the negative What to do?
Power Company. This new company,
side, the present delays are increasing the will be a leading global energy producer ■■ Peak power plants investments: In France,
final electricity cost as initial investment with strong market positions in America, in the RTE scenario, peak load demand
accounts for 60 to 80% of the generated Europe, the Middle East, Asia and is estimated at around 30,000 MW
electricity costs. These construction Australia with a total generating capacity of at 2025 horizon which represents an
risks could threaten the nuclear energy 66 GW. GDF SUEZ is also planning €4 to investment of €15 to 20 billion to be
competitiveness and render new nuclear 5 billion divestments in 2011-2012 and matched;
plants more difficult to finance. has started this program by selling its 5% ■■ Network investments: Let’s not forget that
stake in Gas Natural. the origin of many recent black-outs
was linked to grids’ collapse. There is,

9 EPR: European Pressurized Water Reactor


thus, a necessity to reinforce both the Even if in 2009, Gazprom’s gas share in LNG bubble. In the long-term, the
transmission and distribution grids. Europe’s imports fell from 39% to 35%, prediction is that it will take a few years
Smart grids’ investments are also aimed in the long-term, as much as 50% of EU to absorb this LNG “bubble” and that
at improving grid reliability. Progress has gas could be imported from this Russian a tense supply market could prevail
been made on this front as reflected by supplier. This could be a threat to the again. However, this trend could be
the 2009 increase of 15% in the national security of supply as demonstrated in the mitigated by domestic gas production
transmission grids investments; previous years when disputes between in importing countries such as China or
■■ As extreme weather events don’t Russia and Ukraine (one of the transit other developing countries. According
always happen at the same time in countries) deprived the EU of Russian to Wood Mckenzie studies, Chinese coal
European countries and as the demand/ gas during three very cold weeks in early gasification, coal bed methane and shale
temperature correlation (often linked 2009. This year’s shorter dispute between gas are expected to cut from 2020 the
to electric heating market share) is not Russia and Belarus had a much smaller country’s need for new LNG to 8 million
the same in all countries, increasing impact as the crisis was of a shorter tons a year against 16 million annually
importation capacity increases security duration and gas storages were full. during the next decade;
of supply. Investing in European ■■ Develop unconventional gas production:
interconnections and decreasing the What to do? Europe has probably lower reserves
bottlenecks is, thus, important. While ■■ Increase storage capacity: The EU than the US and they are not yet well
little progress in interconnections recommends that each country has known. The IEA estimation amounts
investments has been made in 2009 a storage capacity of 60 days of to 35 tcm compared to conventional
some new large electrical links such consumption. The situation is very reserves of 3 tcm for the EU and 3 tcm
as Spain-Portugal, UK-Netherlands or different from one country to another. for Norway. Exploration projects are
Ireland-UK should be commissioned in Germany, France and Italy having the underway in different parts of Europe
2010 and 2011; largest capacity while the UK has one and unconventional gas production
■■ The importance of demand response of the smallest. Thanks to the past would certainly contribute to security
programs has been demonstrated again year’s investments, storage capacity of supply improvement. However, the
during the 2010 exceptionally hot in Europe has increased by 15% in environmental issues could be more
summer in the US. This could have 2009 representing 19% of its annual difficult to overcome than in the US;
triggered electricity black-outs on the consumption. More than 120 new ■■ Invest in reverse flows infrastructure: Gas
East Coast as transmission capacity facilities or extensions projects have been flows are mainly directed from East to
was insufficient. These black-outs were listed but only 23% of these projects West. The latest Russia-Ukraine crisis
avoided thanks to the dynamics demand benefit from a final investment decision; highlighted the difficulty in reversing
response programs – as those deployed ■■ Increase LNG’s share in the total gas flows and the importance of developing
by PJM10 – that resulted in peak shavings supply, as LNG enables access to 80% West to East gas flows. The projects
and increased electrical supply reliability. of worldwide proven gas reserves thus (about 40 in total) aim at shipping more
providing a good supply diversification. easily gas coming from North Europe
In conclusion, European Utilities and 2009 and early 2010 have seen the and LNG terminals to the East and
regulators need to move quickly on opening of LNG terminals in Wales and easing gas flows between neighboring
smart metering implementation and near Venice (an offshore terminal able countries in case of a supply crisis. These
other devices deployment in order to to supply 10% of Italy’s needs) and the projects cost estimates have reached
boost demand side management and load partial opening (20%) of Fos Cavaou €1.5 billion, and some of them could
management programs thus increasing in France. However, the economic benefit from EU subsidies (€80 million
electricity supply reliability. crisis had an impact on the 30 new for reverse flows);
terminal projects. Several of them (e.g. ■■ Improving gas market fluidity: Some
Gas security of supply is a long-term Brindisi, Rosignano, Civitavecchia and progress is being observed. The Balkans
concern Alpi Adriatico in Italy; Dunkirk and is a case in point with plans being
During the crisis, gas consumption Le Verdon in France) were postponed implemented to integrate the various
decreased even more significantly than or cancelled. All together and boosted pipeline networks into a single system.
that of electricity as it was hit both by cheap international gas prices, LNG The Greek pipeline operator, DEFSA,
by direct consumption decrease and imports increased by 27% in 2009; has been improving delivery capacity to
indirectly by the gas-fired electricity plants’ ■■ Since mid 2008, demand side events, neighboring Bulgaria with gas sourced
consumption decrease. While impacting such as the economic recession and the via Greece’s LNG import terminal
negatively the Utilities’ revenue, this development of US non conventional near Athens. In December 2009, the
consumption decrease was positive on the gas11 and those on the supply side, opening of the Central European gas
European gas security of supply, as shown such as the commissioning of new hub (CEGH) at Baumgarten in Austria,
by the high March 2010 gas level in the liquefaction plants in Yemen and Qatar, close to the Hungarian and Slovakian
European reservoirs despite a cold winter. have transformed the LNG market. From borders, is already improving the ability
a 2008 suppliers’ market it changed of the region to store and distribute gas
into a buyer’s market creating today’s

10 PJM is a Regional Transmission Operator (RTO), operating 51 million customers on the US East coast. PJM offers several demand response solutions such
as economic load response (the customers reduce their consumption when locational marginal prices are high) or emergency load response (customers are
compensated during emergency conditions on the PJM system)
11 Non conventional gas (or unconventional gas) designates: shale gas (the most important resource), tight gas and coal bed methane found in former coal mines

8


to neighboring states in Central and generation adequacy should be maintained EU CO2 emissions reduction objective
Eastern Europe; until 2025 in its best estimate scenario13. is likely to be reached
■■ Build new pipelines routes: The EU’s This is good news providing that current Thanks to the economic recession and
strategy is to enable the gas import planned investments will not be delayed. to national legislations (even if these will
from Central Asia (mainly Azerbaijan, have mainly a longer time effect) the EU
Turkmenistan and Kazakhstan) through While the EU CO2 reduction objective has basically achieved its Kyoto target as
a new pipeline route so as to avoid is likely to be reached, the renewables a bloc, although some Member States are
and the energy efficiency objectives still a long way away from their individual
Gazprom’s infrastructure. On the
could be more difficult to attain
contrary, Gazprom advocates that new targets.
pipelines avoiding transit countries (as Let us recall that in June 2009, the EU
Ukraine – 80% of transit – and Poland) parliament adopted the so-called 3x20 In 2009, a drop of around 7%15 in the CO2
and thus decreasing conflict situations objectives to be met by 2020: 20% CO2 emissions under the European Trading
that have in the past deprived Europe emissions reduction compared to 1990 Scheme (ETS) system was observed and
from gas supplies will improve security level, sourcing 20% of all final energy the 2020 target is less challenging. The
of supply. The Nabucco pipeline is the consumed from renewable sources and EU will have to achieve a reduction of the
EU’s flagship project with a forecasted 20% energy consumption reduction. same absolute magnitude as that expected
6% of annual European consumption Before looking at Europe’s current situation over the years 1990 to 2010 but in only
capacity and a planned start operations and examining the likelihood of these half the time and without the benefit of
date in 2014. However, this project objectives to be met, let us have a glance at favorable one-off factors16. However, the
is encountering a lot of difficulties to the international situation. probable soft economy and regulatory
secure its future gas supply. measures adopted at the EU and Member
On the contrary, the competing On the international front, very little States levels will help.
has been achieved
project, South Stream pipeline has
made progress, on one hand, through The results from the December 2009 Renewables share in final energy
intergovernmental agreements signed Copenhagen conference fell short of the consumption is a challenging target
between Russia and future transit EU’s goal of achieving maximum progress Even if lower than the previous 2008
countries (Bulgaria, Serbia, Hungary, towards finalizing a legally binding global exceptional growth, renewable energies
Greece, Slovenia and soon Austria) climate treaty to succeed the Kyoto generation continued to increase in 2009
and, on another hand, in extending its Protocol in 2013. (15% for wind and 53% in solar PV).
shareholders portfolio with EDF’s future However, despite this growth and as
entry at 10% in the capital. The Copenhagen Accord endorses, at reflected in our projection, one can fear
On the Northern side, the Russia/ a global level, the objective of keeping that the 20% target will be very difficult
Germany led project, Nord Stream, has warming to less than 2°C above the pre- to meet. The European Commission’s
extended its shareholders with Gasunie industrial temperature. The Accord also assumptions imply that by 2020 the
from Netherlands, and GDF SUEZ lays the basis for a substantial “fast start” renewables output will effectively double
from France. It is built to transport gas finance package for developing countries, from around 600 TWh today to around
directly from Russia to Germany across approaching US$30 billion for the period 1,200 TWh by 2020, with about 500 TWh
the Baltic Sea, avoiding Poland (and 2010 to 2012, and medium-term financing of this increase coming from wind. This
Ukraine). Its construction started in of US$100 billion annually by 2020. could be very difficult to meet as:
April 2010 and the first gas delivery is However, this non binding Accord leaves ■■ In much of Western Europe the most
scheduled for early 2012. many important details to be worked out favorable onshore-wind sites have
However, with investments of around in 2010 to make it operational. It seems already been taken, necessitating the
€10 billion per pipeline and the slower that the UNFCCC14 Bonn intermediate development of offshore wind farms that
growth of pipeline gas supplies, the conference results were disappointing and are more expensive and more technically
probability of having the three pipelines that a lot of progress needs to be done challenging to build and maintain;
built before 2020 is slim. before the year-end conference in Mexico.
■■ Project finance capital is likely to be
Outside the EU, no new binding more constrained over the next decade
Longer term view: the crisis has than over the last; and
negatively impacted investment in commitment CO2 emissions reductions
energy infrastructures as well as energy and/or on cap and trade system, were ■■ The subsidies needed to drive the
consumption trends. It is hard to say if adopted at the country level. No legislation development of offshore wind and
both decreases will match and if security will pass in the US before the November solar energy in many EU countries over
of supply will improve or at least not 2010 mid-term elections (and even the next few years will be negatively
deteriorate. According to ENTSO-E12, perhaps after) and the Australian law was impacted by their financial situation.
rejected.

12 ENTSO-E (European Network of Transmission System Operators for Electricity) was created at the end of 2008 and is operational since July 1, 2009. ENTSO-E is
the unique association of European electricity TSOs comprising all former regional organizations such as UCTE or ETSO
13 ENTSO-E System Adequacy Forecast 2010-2025
14 UNFCCC: United Nations Framework Convention on Climate Change
15 http://www.eea.europa.eu/highlights/recession-accelerates-the-decline-in
16 Carbon Emission Reports, Deutsche Bank – 2010


Improving energy efficiency by 20% is a This is why, unless the economy growth
difficult but achievable goal stays flat during the next decade, the EU
As far as the energy efficiency goal is goal is ambitious and all the more so given
concerned, this consists in significantly that – unlike the emissions and renewables
reducing the EU’s primary energy targets – it is not legally binding.
consumption from 1,750 Mtoe in 2005
to 1,520 Mtoe by 2020. In 2009, primary CO2 prices were too low to trigger
energy consumption dropped by 5.6%. switches to lower carbon generation
As a consequence of the above analyzed
While the Western European industry factors, the spot EUA prices remained
has already contributed widely to energy stable, in a €13-14/t of carbon range.
savings, improvements in new EU Member Because of production slowdown, the
States could be expected. industry had an excess of certificates while
Utilities were short. Even with the present
In addition, this crisis has accelerated low gas spot prices, a price of €20/t
plant’s relocating outside of Europe, would be needed (on a short run marginal
resulting in lesser industrial energy cost) to trigger switches from coal to gas.
consumption. One could believe that the This price level should rise to €80/t to
industrial energy future savings are mainly economically justify Carbon Capture and
linked to the economy softness level. Storage (CCS) equipment and this has
a low probability to happen in the years
More savings should come from other coming.
sectors (buildings, transportation) with
longer lead times. As already outlined, Many factors will impact the ETS future
many national legislations are focusing prices including new EU legislation
on building’s energy consumption – new (a 30% CO2 reduction objective for
isolation regulations and renovation example), the economic situation and the
programs – and transportation where huge implementation of auctioning for Utilities
investments and technology breakthrough starting in 2013.
are needed.
Some politicians in the UK (and the US)
However, let’s not forget that 2020 is advocate for a carbon price floor in order
a short-term horizon compared to car to give more visibility to investors in CO2
fleet’s renewals or even more so to the free generation – mainly in nuclear plants
renovation of buildings and thus, these that have a long lead time – and to push
new legislations will have only for more renewable.
long-term effects.
Other politicians want to implement a
European carbon tax which would
push customers


to buy or use less CO2 rich products. To respond to these new challenges, a new
According to some economists, these grid concept, smart grids, has emerged.
carbon taxes have enabled a “green These smart grids will necessitate new
industry” growth, reduced CO2 emissions equipments and will be more digitally
and contributed to the economic managed. Managing a dramatic increase
growth in the countries where they were in data flow, data storage and exchanges
implemented (Denmark, Sweden and both for grid balance and customer
Finland). Their effectiveness is, however, relations will become a significant and new
controversial as polluting industrial challenge.
activities’ relocations are partly responsible
for the observed CO2 savings. Thus, communication protocols will need
to be standardized in order to manage the
Generation mix and customer information flow on the net and with the
behaviors changes are calling for customers as well as within buildings. The
smart grids US Department of Energy took the lead
The above analysis concludes that while on these crucial standardization points
overall security of supply increased and, unfortunately, Europe is lagging
during the observed period, very tense behind which could penalize the European
situations were observed in electricity electrical equipment industry.
during the peak periods necessitating
either significant peak power generation Smart grids implementation will
investment or vigorous demand response necessitate new investments. Today,
programs enabled by devices such as smart there is funding in Europe and, more
metering. so, in the US, for smart grid studies and
prototype buildings but not for their real
Boosted by the EU Climate-Energy deployment.
directive, the generation mix is becoming
greener implying a high growth of As discussed above, with the European
renewable energy share in electricity Utilities unbundled value chain, separate
production. ROI for the regulated and unregulated
entities is not obvious to demonstrate
These new trends related to energy mix even for smart meters. Massive smart
and customer behavior, are strongly grids’ deployment will need a regulatory
impacting the electricity grid management, push and funding through transmission
which is a key factor in electricity security and distribution tariffs increase and by
of supply. consequence higher electricity prices.
These are difficult but needed decisions to
Today, balancing supply and demand on take during fragile economic periods.
the grid is a complex exercise requiring
already sophisticated equipment,
automatisms and data management. With
the increase of the renewable energies
Paris, October 20, 2010
percentage of generation capacity, the
electrical grid’s management is facing
new challenges as these energies provide
unforeseeable and intermittent power
generation that is thus not schedulable17.

Wind and solar power units are
generally small providing decentralized
type generation and normally they are Colette Lewiner
connected to the distribution networks. Global Leader of Energy,
Utilities and Chemicals Sector at Capgemini
Also, with decentralized generation,
notably solar PV, customers will become
occasional producers. Instead of receiving
electricity from the grid they will inject
it onto the grid. Today, the distribution
network management is not designed to
manage these decentralized and sometimes
bi-directional flows.

17 “The Impact of Renewables on the Electric Grid”, Point of View by Capgemini – 2009



Team and Authors
Report Coordination Competitive Gas France
Sopha Ang Upstream Gas Sébastien Chirié
+33 1 49 00 22 30 Florent Andrillon sebastien.chirie@capgemini.com
sopha.ang@capgemini.com florent.andrillon@capgemini.com

Philippe Coquet LNG Germany/Switzerland
philippe.coquet@capgemini.com Nick Sharma Marc Sauthoff
nick.sharma@capgemini.com marc.sauthoff@capgemini.com

Our partners Gas Wholesale Markets Jan Strobel
Sébastien Chirié jan.strobel@capgemini.com
European Energy Policy insights
sebastien.chirie@capgemini.com
CMS Bureau Francis Lefebvre
Christophe Barthélémy Italy
Gas Retail Markets
+33 1 47 38 55 00 Carlo Gatti
Antonio Michelon
christophe.barthelemy@cms-bfl.com carlo.gatti@capgemini.com
antonio.michelon@capgemini.com

Finance and Valuation insights Netherlands
Infrastructures and Regulated
Société Générale Global Research Tjard Brons
Activities
John Honoré tjard.brons@capgemini.com
Electricity Transmission
+33 1 42 13 51 55 Bernard Malfliet
john.honore@sgcib.com bernard.malfliet@capgemini.com Norway
Magnus Haggstrom
Electricity Distribution magnus.haggstrom@capgemini.com
Switching and prices insights
Fabrice Catala
VaasaETT
fabrice.catala@capgemini.com
Dr Philip Lewis Portugal
+358 40 529 5852 Gas Transmission João Torres
philip.lewis@vaasaett.com Antonio Michelon joao.torres@capgemini.com
antonio.michelon@capgemini.com
Jessica Strömbäck
+358 40 725 6023 Gas Storage Slovakia
jessica.stromback@vaasaett.com Alexandre Leondaridis Michal Geci
alexandre.leondaridis@capgemini.com michal.geci@capgemini.com

Competitive Power Gas Distribution
Spain
Generation Fabrice Catala
Oscar Barrero Gil
Ana-Maria Popa fabrice.catala@capgemini.com
oscar.barrero-gil@capgemini.com
ana-maria.popa@capgemini.com
Sustainable Energy and
Arnault Prêtet Sweden
Climate Change
arnault.pretet@capgemini.com Peter Cassel
Alain Chardon
peter.cassel@capgemini.com
Electricity Wholesale Markets alain.chardon@capgemini.com
Edouard de la Jonquière
Jeanne Michon-Savarit UK
edouard.a.de-la-jonquiere@capgemini.com
jeanne.michon-savarit@capgemini.com Alistair Green
Sébastien Chirié alistair.green@capgemini.com
sebastien.chirie@capgemini.com Finance and Valuation
Acknowledgements to Chiel Blokvoort,
François-Xavier Chambre
Electricity Retail Markets Alain Bourguignon, Katarina Bråkenhielm,
francois-xavier.chambre@capgemini.com
Bettina Buchert Djothi Ficot, Martin Fischer, Bérénice
bettina.buchert@capgemini.com Germain, Emmanuel Gourbesville, Bettina
Regional Focus Grötschel, Katia Houpert, Subhash Jha,
Vincent Escoffier Belgium Pierre Lorquet, Lars Molde, Sundhar
vincent.escoffier@capgemini.com Bernard Malfliet Parthasarathy, Sean Ryan and Stéphane
bernard.malfliet@capgemini.com Tchirieff

Country Abbrevations and Energy Authorities/Team and Authors 101

About Société Générale Global About CMS Bureau Francis Lefebvre About VaasaETT Global Energy Think-
Research Tank
CMS Bureau Francis Lefebvre is one of the
Société Générale Global Research teams leading business law firms in France. Its The VaasaETT Global Energy Think-
comprise 300 professionals including organisation based on the active assistance Tank shares, develops and envisions best
economists, rates, forex and commodities by specialist lawyers and its recognised practice for the global Utilities industry
strategists, credit and equity analysts and know-how for over 80 years ensure that through a network of thousands of senior
strategists, quantitative and derivatives companies are provided with reliable and executives, officials, researchers and other
specialists. Based in London, Paris, New sound advice relating to their strategic experts who are for the most part known
York, Tokyo and Hong Kong they combine and tactical decisions at national and and trusted personally. Value is provided to
their expertise to offer: international level. partners through the synergy of Interactive
■■ A unique cross-asset approach Forums and Collaborative Projects. The
CMS Bureau Francis Lefebvre is a member Think-Tank focuses broadly on strategic
■■ Top-rated strategic, sector, company and
of CMS, the organisation of 9 major business, market, innovation and
thematic analysis
independent European law firms providing regulatory issues, and is world renowned
■■ A customized offering and bespoke businesses with legal and tax services for its expertise in fields such as Customer
products across Europe and beyond. Operating in Psychology & Behaviour, Smart Metering
■■ Independent and innovative views with a 47 business centres around the world, and Demand Response.
focus on trade ideas CMS has over 773 partners, more than
2,800 legal and tax advisers and a total More information at www.vaasaett.com
More information at www.sgresearch.com complement of over 5,000 staff.

CMS main member firms’ offices and
associated offices worldwide: Amsterdam,
Berlin, Brussels, London, Madrid, Paris,
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More information at info@cms-bfl.com
and www.cms-bfl.com

About Capgemini
and the Collaborative Business Experience™
®

Capgemini, one of the 2009 global revenues of EUR 8.4 billion
world’s foremost providers of and employs 95,000 people worldwide.
consulting, technology and outsourcing
services, enables its clients to transform With 1.13 billion euros revenue in 2009
and perform through technologies. and 12,000+ dedicated consultants
Capgemini provides its clients with engaged in Energy, Utilities and
insights and capabilities that boost their Chemicals projects across Europe, North
freedom to achieve superior results America and Asia Pacific, Capgemini’s
through a unique way of working, the Energy, Utilities & Chemicals Global
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The Group relies on its global delivery information technology needs of many
model called Rightshore®, which aims of the world’s largest players of this
to get the right balance of the best talent industry.
from multiple locations, working as one
team to create and deliver the optimum More information about our services,
solution for clients. Present in more offices and research is available at
than 30 countries, Capgemini reported www.capgemini.com/energy

102

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