by Jerome a Paris
Wed Dec 30th, 2009 at 08:45:33 AM EST
The EU had an public consultation last year concerning measures to safeguard security of natural gas supply (it closed last March), which focused mainly on how to organize solidarity towards members that would be cut off in their gas supplies.
I've been writing about this with an other purpose in mind, but it would have been useful to send them this back then:
Current market mechanisms in the European electricity sector are fundamentally biased towards gas-fired power plants. As statistics show, other than wind, nothing else but gas-fired generation capacity has been built in Europe in the past 10 years. Wind did get built because it benefits from mechanisms that protect windfarms from the normal market rules, whether these were FITs or ROCs or other.
While it is possible to continue on such a basis, it might be worth raising the issue of new rules, applying to all, that completely change the landscape and end up favoring wind over gas in a much more "natural" way.
The reason gas-fired plants are preferred is two-fold: one of cost, and one of risk, both linked to the way prices are formed:
- cost-wise, gas-fired plants are much less capital intensive than others (in particular windfarms) and thus they are less penalised by the fact that the sector is now funded at a cost of capital that must reward private investors over their shorter horizons rather than be borne by public entities over long maturities. "Letting the market decide" means a systemic tax on capital-intensive technologies. Within a market-based system, a solution might be to argue for public funding (without any risk taking) for the sector through banks, like Germany did for the onshore sector in the past. Such funding could be made available to all technologies - and would thus be "neutral" - but would benefit wind most, as well as nuclear - they could be a useful lobbying ally in that respect, if that's a palatable idea...
- risk-wise, gas-fired plants are much less likely to be "underwater" for long periods of time (ie stuck with production costs which are higher than market prices), given that most of their costs come from fuel and that they tend to be the price-setting technology in most markets under merit-order rules. Wind, with largely fixed costs (debt repayment) is much more at risk. In fact, its average cost being lower is not sufficient: its costs need to be lower than the expected cost of gas-fired plants at low gas prices for the investment not to be unduly risky, in the absence of price protection mechanisms (whether FITs or long term PPAs). "Economic" and "profitable" are not the same thing, and gas is more profitable for investors even though it tends to be more expensive in the long run. Mechanisms to protect against this bias of markets towards short term profitability are thus necessary - and can be defended both using security of supply arguments and economic arguments. Floor prices are a solution (and FITs work well in that respect), as can be a price for carbon, which adds a fixed component to the cost of gas-fired electricity.
I've been making this argument at various conferences and venues over the past months, and every single time, people appear stunned by it. Describing the reality that Europe, if you exclude the special-regime renewables, is building exclusively gas-fired plants seems to surprise absolutely everybody other than industry insiders. Presenting why financing modes matter so much similarly comes as a striking insight. What's most depressing to me is that nobody else ever makes this very basic point.