Monday, February 20, 2006

Generation gap

Guardian Unlimited Business Generation gap

Tony Blair's plan for an EU-wide power grid has won the support of one of Europe's top power executives. It could lead to a single market for Europe's electricity, writes David Gow Thursday February 16, 2006
Tony Blair has received support from a top European executive for an ambitious EU energy plan to meet the challenges of high oil prices, secure supplies and climate change.
Gérard Mestrallet, the chief executive of the French energy group, Suez, says the EU should invest €1,000bn (£682.7bn) in new unified grids for both electricity and gas transmission under a common energy policy.
Mr Mestrallet's comments come ahead of next month's EU spring summit to discuss a European commission paper on the contentious roles of renewables and nuclear power within Europe's energy supply.
The summit will also discuss how the EU's 25 national regulators can create the right policy framework for private sector investment. It is expected to endorse the common grid concept.
Meanwhile, Neelie Kroes, the EU competition commissioner, is today set to warn governments and energy groups in several big countries that they face sanctions after their failure to open up their energy markets in time for full-scale liberalisation in July next year.
But Mr Mestrallet said last week: "Opening markets to competition is not enough, and Europe has not thought enough about long-term security of supply, and the need for investment in new production facilities and sources of energy and transmission infrastructures."
With EU energy consumption expected to rise by 15%, including a 50% leap in electricity use, by 2030 when imports amount to 70% of the primary market, the Suez chief said Europe would require an extra 750 gigawatts (billion watts) of power plants or 1,500 new stations - at an estimated cost, according to the International Energy Agency, of € 650bn.
In addition, electricity grids would have to be upgraded to prevent the current bottlenecks, which led to power blackouts in Italy in 2003, and to create a genuine single market. This would cost an additional €100bn.
With 45% of EU natural gas already coming from Russia, an increasingly fractious supplier, the EU would need to spend €155bn on new production facilities and a further €100bn on developing a common grid - and on new liquefied natural gas (LNG) facilities to ease imports from other countries such as Algeria and Qatar.
Suez, Europe's fifth-largest provider of gas and electricity, acquired the Belgian operator Electrabel last year and runs Europe's largest LNG terminal at Zeebrugge, Belgium, on the North Sea coast - home to the gas interconnector (pipeline) with Britain in which it holds a 16% stake.
Mr Mestrallet said: "Europe is fragile and so is its electricity supply system ... Europe's own hydrocarbon reserves will run out in ten to 15 years and it has invested almost nothing in new generating capacity. If we don't wake up Europe will have one of the highest dependencies on imports of energy in the world, facing permanently high prices."
Creating unified electricity and gas grids does not require large-scale state intervention, Mr Mestrallet argues, and can be financed entirely by the private sector without a penny of public funding - provided the 25 national regulators act in common.
"These grids are natural monopolies and the regulator(s) have to give the correct signal. One can dream of coordinated activities by the regulators which would spur Europe's need for a modern infrastructure with a proper reward for capital and tariffs," he said, calling for a single regulator.
Suez, which has 58,000 megawatt of capacity globally, including two nuclear power stations in Belgium it acquired via Electrabel, believes Europe cannot survive without the nuclear option. It is a supplier to the third generation European Pressurised Reactor being built by the French manufacturer Areva in Finland.
Mr Mestrallet said: "It is up to each country to decide but collectively it's a solution which can't be avoided. Nuclear has to have a place in Europe's energy mix to combat global warming."
His group is considering plans to build its own pressurized reactor in France or to join forces, as a minority partner, with part-privatised energy company EDF to build a series there.
But he is less sanguine about the prospects for renewables, despite his group's investment in hydropower as well as wind power, biomass and solar energy, and a target of 18% of installed capacity by the end of the decade.
The group, which delivered a cargo of LNG to the Isle of Grain terminal in Kent last autumn to help ease the then UK shortage of gas, has dismissed as pointless the current inquiry by Ofgem, the British energy regulator, into the alleged failings of the interconnector.
Executives argue flows under the Channel were normal and, anyway, Suez had long-term contracts with continental purchasers it had to meet. Alain Janssens, the chief executive of Distrigas Suez, which holds the interconnector stake, points out capacity has been doubled to 16.5bn cubic metres of gas, and will be upgraded by the end of this year to 23bn.
The executives argue that Britain, which reported its first trade deficit in hydrocarbons (€96bn) last week for 26 years, miscalculated the speed at which North Sea reserves were being depleted - and failed to secure enough long-term contracts or invest in adequate gas storage.
For Mr Mestrallet the UK is a no-go area for large-scale acquisition of the kind being considered by energy groups such as Russia's Gazprom.
He insists that Suez is opting for organic growth, notably by expanding its LNG terminal at Everett, Massachusetts, the biggest US importer, and will only contemplate smaller acquisitions in, say, France and Belgium - despite the urgings of some of his advisers.


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