September 19-20, 2012.
As the UK moves back to being a substantial net energy importer, its interactions with the wider European energy markets take on a new importance. The task of decarbonising the electricity sector, requiring around £200 billion of investment by 2020, may be eased by additional interconnections with neighbouring systems. Swings in oil prices show what can happen when supply and demand are subject to shocks, and the emerging economies are forecast to add substantially to demand for oil and gas over the next decade. Against this, could Shale gas supplies have the same effect on European prices as in the USA? We also need to lay the technological foundations for decarbonised heat and transport – which routes will be successful, and how can we choose between them? Do the EU and its member states have appropriate, integrated, policies for this challenging decade? This conference examined the economic and policy implications of these developing trends. The conference examined whether existing policies (with suitable amendments) could meet the challenges ahead, or whether a more radical approach would be required?
Steve Riley (CEO and President, UK-Europe, International Power GdF-Suez) gave the keynote address. He pointed out that his company had to allocate investment funds between projects in number of countries, taking account of the risks they face. He saw the British market as one that is moving from a “merchant” model (but with relatively low risk) to one based on contracts, but with relatively high risk, given the uncertainties over the UK government’s Electricity Market Reform. He described the attractive long term contracts available to generators in some emerging economies and asked what Europe could do to make investment there attractive.
The first plenary session looked at the long-term future to 2050. Jeremy Bentham (Vice President, Global Business Environment, Shell) described the way in which his company used scenarios to free their minds from focusing on short-term trends and understand longer-term factors. He saw several potential game changers over the next decades, including the rise of Shale gas and increasing urbanisation. He thought the world could be entering an era of volatile transitions; it was facing a 40% global shortfall of fresh water supplies by 2030.
Steven Fries (Chief Economist, Department for Energy and Climate Change) described the UK government’s plans to reduce emissions. The years to 2020 could be described as a period for completing financially cost-effective energy efficiency measures and preparing for new generation technologies, while the 2020s would see the mass deployment of low-carbon electricity generation. The 2030s and beyond would see this process finalised, and electricity used for low-carbon heating and transport. There were huge uncertainties about the cost and acceptability of key technologies; nonetheless, DECC’s best estimates implied that while spending on energy would have to rise, the least-cost low carbon energy mix would cost slightly less than a business as usual mix.
Peter Dodd (Director of Stakeholder Relations, Energy Technologies Institute) warned that Europe faced a competitiveness challenge if it decarbonised with high-cost technology and other regions did not. The UK needed to generate is own energy innovations: other countries may have different needs from us. Innovation, regulation and investment would interact, since regulators face a tension between getting value for money and reducing risk. The energy industries need to attract funds from outside sources: governments are constrained, investment banks and venture capitalists seek high returns, and so the solution may be to make energy investments attractive to low-risk investors such as pension funds.
The second plenary session looked at “international pressures on Europe’s energy supplies”. Jonathan Stern (Oxford Institute for Energy Studies) thought that there was too much ideology in the debate over the security of Europe’s gas supplies and the role of new pipelines from the east. Events in the Middle East and North Africa could have significant impacts – all of Libya’s production was lost to Italy for much of 2011, and while the many Liquefied Natural Gas terminals being built or proposed would allow more flexibility, this often came in return for higher prices. He thought that pipelines in the Southern Corridor to Europe, with its 30-year history of failed projects, and shale gas (just 3% of gas production outside North America came from unconventional sources) were largely distractions from the main issues.
Angus Miller (Caspian Energy Advisor, Foreign and Commonwealth Office) saw that the energy debate had changed dramatically since 2006, when securing access to supplies was one of the biggest issues amid fears of peak oil and peak gas. For Europe, carbon dependency is a major concern, and the solution is likely to involve adapting technology to meet our needs. Unfortunately, there is a growing lack of confidence over which pathway Europe will take, investors are reluctant to commit funds, and the role of the state is unclear – is it the legislator, the facilitator or the investor? Resources are not scarce – the continent is surrounded by competing energy suppliers – but European governments need to adopt the right policies to access them.
Christof Rühl (Chief Economist, BP plc) analysed the way that markets responded to the big supply disruptions of 2011. The Arab Spring reduced oil and gas supplies just as the Fukushima disaster led Japan to switch from nuclear to gas-fired power, but other producers increased their output, and countries receiving a different mix of crudes had enough spare capacity at refineries to cope. The recession in Europe and coal imported from the US (freed for export by shale gas being used in power generation) reduced its demand for gas, allowing Japanese imports to rise. Gas prices, however, varied widely between regions, despite the rising proportion of LNG (now 32% of international gas trades). Oil prices have been high, with supply interruptions and demand growing outside the OECD, but production is now above the level of consumption; fears about Iran are keeping prices up. Looking to the future, unconventional oil and gas production techniques could spread from the competitive North American market to areas with even greater resources (Venezuelan oil sands and Chinese shale gas). Vulnerability to higher energy prices depends on the balance between energy imports and exports to energy exporters, since the latter are likely to buy more if their revenues increase. Europe is roughly in balance on this measure, while the Middle East and Africa (considered as regions) are next exporters to Asia. North America has been a net importer and will soon be in balance: will the United States retain a strategic interest in Middle Eastern oil if its dependence on imports falls?
The final plenary session was about “paying for investment”. Mathew Rose (Group Head of Strategic Partnering, National Grid) discussed the challenges facing a low-risk regulated business that needed to invest £35 billion over the years to 2021, more than its market capitalisation of £25 billion. National Grid actually had a portfolio of network businesses, for some generated cash, others needed it, and there were also unregulated activities with the prospect of higher yields (and risks). National Grid invested through its balance sheet; the company had been able to raise bond funds from retail investors but was also interested in strategic partnerships with bodies such as Sovereign Wealth Funds, subject to finding a fit between their aspirations.
Michael Liebreich (Chief Executive, Bloomberg New Energy Finance) spoke of the €2 trillion of investment in energy that Europe would need in the years to 2030. World-wide, there had been €1 trillion of investment in clean energy over the last few years – Europe had led the way but investment had then declined, with the US and Asia following, and the latter still growing. The NEX index of clean energy stocks had quadrupled in the five years to 2008, but has since fallen back to the starting level. It was important to recognise that industries did consolidate, and levels of government support should not be so generous that all solar firms (for example) could survive. Technology costs were falling from learning-by-doing, but the fundamental re-engineering of world energy would cost trillions of dollars and take decades – it would be supported by governments but funded by capital markets. In that context, the UK had too many policies, which it changed too often.
Kirsty Hamilton (Low Carbon Finance Group) had been working with the financiers who actually got projects moving. The balance of risk and reward was critical, and government policy was central to this, given that capital did not have to be invested in the UK. Policy needed to be “long, loud and legal”, or, quoting Deutsche Bank, it should have “transparency, longevity and certainty”. Clear objectives helped – the Renewables Obligation had originally focused on the least-cost deployment of renewable energy, but banding had been introduced to ensure that not all the investment was in onshore wind. Newspaper stories about arguments within government over the level of support to be given to different technologies than led investors to query its commitment to renewable energy. It was important to realise that finance practitioners assess the cost of capital in different ways from theoretical economic models, and an important question for energy economists was “how do economics and finance interact”?
It is impossible to give more than a flavour of these talks, to say nothing of the parallel sessions, in a brief report – I recommend that you come to the next BIEE Academic Conference in September 2014.
Richard Green
Imperial College Business School
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