Resources: The power bill arrives

The EU leads the world in renewable energy and has set more ambitious targets for it than any other leading economy. It hopes the US will follow. Yet many in the industry are beginning to argue that Europe's commitment may be unsustainable.

The pledge to make the continent the global pioneer for renewables and emissions reduction was sealed by a previous generation of leaders, including Tony Blair of Britain and Jacques Chirac of France, at the Brussels summit in March 2007. There was a mood in the EU of climate "hysteria", as Günter Verheugen, industry commissioner, put it at the time. The vulnerability of Europe's energy supplies had also been highlighted by the most serious clash in a long-running dispute over gas prices between Russia and Ukraine, in January 2006.

Ohhh... stupid European politicians behaving hysterically and making silly commitments

European energy companies, particularly in France, Germany and Italy, were already facing a big task in replacing the generation of infrastructure installed in the prosperous decades after the second world war. The new targets added an extra degree of difficulty. The combination of the two objectives agreed in Brussels is much harder to achieve than a simple reduction in carbon dioxide emissions would have been.

"Replacing obsolete infrastructure is costly enough, but if you do it with emissions reductions and then put a renewables objective on top, it is incredibly expensive," says Dieter Helm, an energy expert at New College Oxford.

(we're so much poorer than after WW2 now...)

The cheapest way to cut emissions is to replace coal-fired power stations with gas-fired plants, which produce half the carbon dioxide per megawatt of electricity. Yet with the EU's commitment to renewables, prompted by concerns about the security of gas supplies from Russia and other potentially unreliable countries, European countries are making commitments to invest in costly wind farms.

Never mind that wind is cheaper than gas. Never mind that gas power still emits a lot of carbon.

While governments have set the objectives, it is the private sector that is being expected to deliver the investment.

Arghhh - government is incompetent, so only the private sector should do things, but government is asking for silly things so the poor private sector can't deliver...

That will put a big strain on European energy companies, which - confronted by a shortage of finance and a slide in demand caused by the recession - have cut their capital spending programmes sharply for this year. As things stand, they seem unlikely to be able to step up again to deliver the investment needed.

The energy industries of the EU's five largest economies - Germany, France, Britain, Italy and Spain - invested about €35bn a year for most of the 2000s, then boosted outlays to €60bn in 2008 and €65bn in 2009. But spending will fall back to about €54bn this year, according to analysts at Citigroup - whereas to contribute their share of the €1,000bn, companies in the five economies must invest €80bn a year for the rest of the decade.

So, they've doubled investment in the past two years, but one analyst at Citi saying it will go slightly down means doom. Doom!

Shareholders are aware that the requirements are daunting. In the three years since the Brussels summit, the stock market ratings of European energy companies have wilted as the scale of the investment challenge has become apparent.

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Ultimately, however, the only way that the industry will stand any chance at all of attracting the capital it needs is if governments make commitments to guarantee investors' returns. Nick Luff, finance director of Centrica, the owner of British Gas, argues: "If you put the right framework around them, these assets are very suitable for pension funds and other long-term investors."

Every European country has a subsidy system such as feed-in tariffs, which offer set prices for electricity generated from renewables, paid for by a premium added on to customers' bills. If investment is to grow, those subsidies will have to increase too. That means higher profits for companies

And as we know, higher profits are a bad thing. So, there is all that's needed to make the investments, including the holy grail, higher profits, but let's do concern trolling anyway...

Every European country has a subsidy system such as feed-in tariffs, which offer set prices for electricity generated from renewables, paid for by a premium added on to customers' bills. If investment is to grow, those subsidies will have to increase too. That means higher profits for companies and higher prices for consumers.

Hitting European consumers with higher energy bills, at a time when their resources are already about to be squeezed by the increased taxes needed to bolster governments' finances, could be a significant additional drag on economic growth. It is also likely to become an increasingly contentious political issue.

1. as I've said many times, there is also a downward effect on prices of wind, so the "premium" is not that high and can even be negative.
   
2. There is no reason for the premium to increase going forward; indeed as we see it goes down in most countries

Energy bills have already proved a flashpoint in a number of European countries. Pierre Gadonneix lost his job as chief executive of EDF of France last year after arguing, to the fury of President Nicolas Sarkozy, that prices would have to rise to fund investment. The severity of that treatment may be unusual but energy companies in Britain and Germany are familiar with newspaper headlines blasting them for high bills and excessive profits.

Actually, EDF wants price increases to invest in nukes, or to pass on wholesale price increases caued by higher gas prices - not because of renewable tariffs - these are billed separately already. Way to mix and muddle the issue...

Barf.

In the long run, we're all dead. John Maynard Keynes