Paying the green energy bill

On Thursday the 1^st of March, the government of the Walloon region (the South of Belgium) adapted the green electricity targets. By 2016, 30,4% of all electricity consumed in Wallonia is to be green. This is a near doubling of the current target for 2012 which is at 15,75%.  These targets are to be viewed in the light of the green certificate systems that Belgium’s regions apply to promote the production of green electricity.

First, let me explain the basics of a green certificate system. Every producer of green electricity receives a green certificate for every MWh of electricity produced by its windmill, solar panel, biofuel-fired power station, etc.  Energy suppliers are to prove that a certain percentage of the electricity that they supply to end consumers has been produced from renewable sources. They do this by submitting green certificates to the authorities. They get these certificates for the green power stations that they own themselves or they buy them from others. As such, a green power producer that is not an energy supplier gets an extra source of income by selling green certificates to energy suppliers. The revenue on certificates is even the largest source of income on green power, more than the power sales. A Flemish, a Walloon and a Brussels market for green certificates have developed.

The prices in these market are limited to the upside and the downside by two further measures. On the upside, we have the penalty that suppliers are to pay when they don’t submit enough certificates.  This is 125 euro for Flanders and 100 euro for Wallonia. On the downside, there is the price that grid operators are obliged to pay for certificates. When the system was conceived, green energy investors expressed their worries that in case of over-supply of certificates (i.e. when the production of green power exceeds the target), the prices would collapse to zero. They argued that this risk would keep anyone from investing in green energy. The legislators therefore added an obligation for grid operators to buy the certificates at a certain price, e.g. 90 euro for a windmill built in Flanders after 1/1/2010. To add to the complexity, the minimum prices have been diversified according to the technologies. For solar panels, the minimum price was put above the penalty price, at a staggering 450 euro per MWh at the beginning (this has been brought down recently).  Owners of solar panels never sell their certificates to suppliers, they always sell them to the grid operators. These sell them on to the suppliers at the much lower market price, bearing the loss between the minimum price and the market. This loss is then passed on to the end consumer through increasing grid fees. This system gave birth to a heavy discussion as adverseries of green electricity argued that people that put solar panels on their rooftops have these paid for by their neighbours.

For a long time, the prices of green certificates were stable, at around 110 euro per MWh. However, we recently saw a collapse of the prices. The reason is over-supply. The system has been more succesful than anyone had ever imagined. Initial resistance to windmill construction has declined a lot recently, solar panels became the favorite investment of house-owning Belgians and the government was very lenient in applying the tag ‘green’ to biofuel projects. Above all, the economics were wonderful. A windmill has a payback period of less than three years if you can sell certificates at 100 euro. Solar panels’ payback got reduced to five years. That’s excellent investment. As over-supply causes prices to collapse, everyone starts to sell the certificates to the grid operators, increasing the bill for the end consumer. Some even prefer not to wait (as they need the cash immediately) and sell below the minimum price to suppliers.

The governments of both regions are looking for solutions for the chaos currently caused by over-supply of certificates. The Walloon region is taking the obvious solution, i.e. raising the targets. What will this mean for economic development in that region? More green electricity will mean higher costs of electricity for the end consumer. Ever since the creation of the green certificate system, the cost of buying the certificates is passed through to the end consumer. Wit a 30,4% green electricity target, the green electricity bill for an end consumer will rise to 24 to 30 euro per MWh by 2016.  It is remarkable that at a moment when the federal government is taking a reckless measure to reduce the energy bill for end consumers (see my previous blog), the Walloon government adopts a green power policy that is sure to increase it, without giving much thought to alternatives. Moreover, Wallonia wants to add to the regulatory uncertainty of pricing energy in Belgium by obliging suppliers to pass through the real cost of buying green certificates, an obligation which we think is completely impossible to enforce. We are still waiting for the exact details of the Walloon regulation, but it looks like bad news for the consumers of power in that region (and good news for the investors in green energy).

The Flemish government seems to be more sensitive about the energy cost-increasing consequences of the certificates system. It wants to rethink the whole system, a laudable initiative. I realize that every subsidizing system will produce unwanted side-effects. The certificates system has been an attempt to minimize these by introducing a market element. I think that this attempt has massively failed, due to the following reasons:

1. This is not a ‘natural’ market but a ‘constructed’ market, hence, prone to construction flaws. It has become clear that due to the construction of this particular market there are only two scenarios. Either we get a very stable price near the penalty price in case of shortage, or we get a rapidly collapsing price when there is over-supply. There is no such thing as the equilibrium price that the market rationalists that created this system thought of. The stable price reduces the added value of the market element. The possibility of collapsing creates uncertainty for investors. What does the element of ‘market’ add for the investor but uncertainty over future subsidy revenue? For many years, the price was so stable, that you could rightfully argue: why don’t we just give the 110 euro’s? Why do the green power investors have to go through the trouble of finding a buyer, keeping track of prices, etc.? The extra value that you could get by ‘playing the market’ added only marginally to the profitability of your green energy investment. Therefore, most of the investors don’t even bother and make a long-term agreement with an energy supplier.
2. Investment costs in renewable technology drop. If the certificate prices remain stable, this means that the technologies get over-subsidized. Windmills are currently turning in more than 15% annual return. I don’t think that these machines wouldn’t have been built if the return had been 7 or 8%. This over-subsidizing is a waste of money, money paid by the energy consumers.
3. The governments try to counter this by reducing the minimum prices paid by grid operators. However, in the shortage scenario this is ineffective. Producers sell at the higher market prices to suppliers that pass through these costs to energy consumers. In the collapse scenario the lower minimum prices make the market drop even deeper.
4. Reducing the penalties is impossible. This would drive down the certificate prices for everyone, also the people that invested in windmills many years ago, when investment costs were much higher. They would rightfully claim that the government defaults on its obligations to create a stable investment climate for green energy.
5. The passing through of certificates costs disturbs the functioning of the Belgian retail electricity market. At this moment, for example, it is the company that bought green certificates at the lowest price that wins most electricity contracts. Supplying electricity in Belgium comes down to trying to make the right bets on the development of the green certificate market.

In the late nineties, when the Kyoto protocol was hammered out and our climate policies conceptualized, ‘market mechanisms’ were conceived by proponents of the rational market theory as a panacea for reducing the cost of reducing carbon impact. The European Trading System of carbon emission rights is a good example of the application of this market mechanism. Emissions trading has failed, as I have argued before in this blog (see my entries of 6/7/2011, 31/1/2011, 2/12/2009 and 28/8/2009).  From the above, it should be clear that certificates trading is also failing to deliver a stable, low-cost subsidies system for promoting green electricity. This is not because markets are not efficient or always fail. It is because too much in these market is constructed. The problem isn’t that the laws of supply and demand do not function. It is that supply and demand in these markets are constructs, they are artificially created and the design flaws in their creation have unwanted side effects.

I recommend the Flemish government to get back to basics. Investors want stability. Society wants cost-efficiency. I think that a simple direct subsidy system is the most effective way of achieving this double goal. A subsidy is a subsidy, point. Just award an annual aid amount to every new green energy project (production of heat included), guaranteed for a period of 10 or 15 years. Yearly adapt the subsidies to the evolution of the investment costs. Oblige the green investors to share the information on investment costs with your administration so that they can make a correct assessment of that evolution and drive the adaptations. Work together with other European governments on this price observatory. Aim to give investors of green electricity a stable return of 7 to 8% on their renewable energy investment. Have the average market price for the energy that they produce deducted from the annual aids. Pass through the cost of these subsidies to the end consumers in a clear and transparent green energy tax. Create a system of tax reduction for energy-intensive industries.

As a father of two children, I can only cheer for the rapid development of green energy in my country. However, as an advisor to energy consumers and producers of green energy, I dissaprove the inefficiency and unnecessary complexity of the current certificates systems.

 

In French:

 

Jeudi 1er Mars, le gouvernement de la région wallonne a approuvé en troisième lecture un arrêté fixant les objectifs d’électricité verte pour les prochaines années. D’ici 2016, 30.4% de l’électricité consommée en Wallonie devra être verte. Il s’agit pratiquement d’un doublement par- rapport à l’objectif de 2012, fixé à 15.75%. Ce  texte s’intègre dans le cadre du système de certificats verts appliqué par les régions belges pour promouvoir la production d’électricité renouvelable.

Dans un premier temps, détaillons les règles liées aux certificats verts. Chaque producteur d’électricité verte reçoit un certificat vert pour chaque MWh produit par ses éoliennes, ses panneaux solaires, etc. Les fournisseurs d’énergie doivent prouver qu’un certain pourcentage d’électricité fournie au consommateur final a été produit à partir de sources renouvelables. Pour ce faire,  ils sont tenus de soumettre en retour des certificats verts aux autorités. Ceux-ci peuvent être obtenus à partir de leur propre production d’électricité renouvelable, ou par l’achat à un tiers dans le cas échéant. Ainsi, un producteur d’électricité verte, qui n’est pas un fournisseur d’énergie, peut se voir crédité de revenus supplémentaires en vendant ses certificats aux différents fournisseurs. Ce revenu peut même être supérieur à celui lié à la vente de l’électricité produite. Un marché wallon, flamand et bruxellois s’est alors développé sur ce principe.

Les prix de marché sont contenus dans un intervalle, dont les bornes sont définies par deux principes. D’un côté, la valeur maximale correspond à la pénalité que les fournisseurs doivent payer lorsqu’ils ne sont pas en mesure de soumettre assez de certificats et dont la  somme est fixée à 125€ en Flandres et à 100€ en Wallonie. A l’opposé, le prix minimal correspond au prix auquel les gestionnaires de réseau sont tenus de racheter les certificats.

Lorsque le système fut conçu, les investisseurs ont exprimé leurs craintes face à un éventuel effondrement des prix en cas de sur-allocation des certificats (c’est-à-dire lorsque la production d’énergie verte dépasserait  les quotas fixés). Ils affirmèrent que ce risque dissuaderait quiconque d’investir dans l’énergie verte. Les législateurs ont alors modifié le texte, en obligeant les gestionnaires de réseau à acheter les certificats à un certain montant (par exemple à 90€ pour une installation éolienne construite en Flandres avant le 1er janvier 2012). La complexité du système a été renforcée par des prix d’achats dépendants du mode de production. Pour les panneaux solaires, le prix minimum a été fixé bien au-delà de la pénalité, initialement au prix édifiant de 450€ par MWh (ce prix a été diminué récemment).  En conséquence, les propriétaires de ces installations ne vendent jamais leurs certificats aux fournisseurs, mais toujours aux gestionnaires de réseaux. Ces derniers les revendent ensuite aux fournisseurs au prix du marché, supportant la perte avec le tarif d’achat. Cette perte est ensuite répercutée au client final via une augmentation des tarifs de réseau. Un tel système a donné naissance à de vives discussions, dans la mesure où les adversaires de ce système affirmèrent que les personnes installant des panneaux solaires sur leur toit avaient été indirectement financées par leurs voisins.

 

 

 

 

 

 

 

Les prix des certificats verts ont été stables pendant une longue période, aux alentours de 110€ par MWh. Cependant, une rupture a été observée récemment, en raison d’une sur-abondance de certificats. La réussite de ce système a dépassé les espérances. Les vives oppositions contre la construction d’éoliennes se sont adoucies, les panneaux solaires sont devenus l’investissement préféré des belges et le gouvernement s’est montré très souple en accordant la mention “verte” aux biocarburants. Les investissements étaient très rentables. Par exemple, avec un tarif d’achat de 100€ par certificat, le retour sur investissement est inférieur à 3 ans pour une installation éolienne. En cas de sur-abondance, lorsque le prix s’écroule, les certificats sont alors vendus aux gestionnaires de réseau, augmentant ainsi la facture du consommateur final. Comme certains ne souhaitent cependant pas attendre (afin de toucher l’argent immédiatement), des certificats sont vendus en-dessous du prix minimum aux fournisseurs.

Chaque gouvernement cherche des solutions pour mettre fin au chaos engendré par cette sur-abondance de certificats. La région wallonne s’est engagée sur la voie la plus évidente, en augmentant les quotas. Quelle va être la conséquence sur le développement économique de cette région? Plus d’électricité verte se veut synonyme d’une facture plus élevée pour le consommateur final. Depuis la création de ce système, les coûts ont toujours été supportés par le consommateur final. En se fixant pour cible 30.4% d’électricité verte en 2016, il faut s’attendre à une augmentation de 24 à 30€ par MWh. Alors que le gouvernement fédéral prend des mesures insouciantes pour réduire la facture énergétique des consommateurs (voir le blog précédent),  la région wallonne adopte curieusement une politique impliquant une hausse des prix, sans réellement prêter attention aux autres alternatives possibles. La Wallonie  favorise également les incertitudes liées au prix en contraignant les fournisseurs à répercuter le prix réel du certificat vert au consommateur, obligation qui est de notre point de vue impossible à appliquer et à contrôler.

A l’heure actuelle, les détails de l’arrêté ne sont pas encore connus, mais cela s’annonce comme étant un coup dur pour les consommateurs d’électricité dans cette région (et une bonne nouvelle pour les investisseurs dans les énergies vertes). Le gouvernement flamand semble être plus raisonnable face aux conséquences d’une augmentation des prix des certificats. Il veut repenser le système, ce qui est une initiative louable. Je suis conscient que chaque système subventionné possède son lot d’effets indésirables. Le système de certificats a donc été une tentative visant à les réduire, au travers de la mise en place d’un marché. Je suis cependant persuadé qu’il s’agit d’un échec majeur, pour les raisons suivantes:

1)    Ce n’est pas un marché “naturel”, mais un marché construit de toute pièce, sujet à des défauts de construction. Il est désormais clair que depuis la mise en place de ce marché, il ne peut y avoir que deux scénarios. Soit le prix est très stable et proche de la pénalité (en cas de pénurie de certificats), soit le prix s’effondre (en cas de sur-abondance). Le prix d’équilibre imaginé par les économistes n’existe pas. Un prix stable réduit la valeur ajoutée du marché. Un possible effondrement crée des incertitudes pour les investisseurs. Que peut bien ajouter le “marché” hormis des incertitudes sur les revenus? Pendant des années, le prix était si stable qu’il est possible de se demander à juste titre  « pourquoi ne pas accorder simplement 110€? » Pourquoi les investisseurs  doivent-il passer par la recherche d’un acheteur, suivre l’évolution des prix, etc.? Le profit additionnel  que vous pourriez obtenir en ‘jouant” sur le marché n’est qu’une part marginale de la profitabilité de votre investissement. En conséquence, la plupart des investisseurs concluent tout simplement un contrat long terme avec un fournisseur en énergie.

2)    Le coût des technologies vertes diminue. Si les certificats se maintiennent à un prix stable, cela signifie que la technologie devient trop subventionnée. Le taux de rentabilité d’une éolienne est actuellement supérieur à 15%. Je ne pense pas qu’elles auraient construites si ce taux avait été de 8%. Ces subventions trop fortes constituent un gaspillage d’argent, supporté par les consommateurs.

 

3)    Les gouvernements tentent de contrer cela en réduisant les prix minimum payés par les gestionnaires de réseau. Cependant, dans le scénario de pénurie de certificats, ceci est inefficace. Les producteurs vendent alors les certificats au prix de marché aux fournisseurs (à un prix plus élevé), et ce prix est répercuté au consommateur. Dans le scénario opposé, un prix plus faible ne verra que s’effondrer davantage le marché.

 

4)    Réduire la pénalité est impossible. Ceci tirerait les prix des certificats vers le bas pour tout le monde, y compris pour ceux qui ont, lorsque l’investissement était plus important il y a quelques années, investis dans les installations éoliennes. Ceci reviendrait à proclamer (à juste titre) l’échec du gouvernement dans ses obligations de mise en place d’un marché stable.

 

5)    La modification du prix des certificats perturbe le bon fonctionnement du marché de détail belge. En ce moment, par exemple, c’est le fournisseur qui achètera les certificats au meilleur prix qui remportera la plupart des appels d’offres. Etre fournisseur en Belgique consiste à faire les meilleurs pronostics sur le développement du marché des certificats.

 

A la fin des années 90, lorsque le protocole de Kyoto fut négocié et nos politiques climatiques conceptualisées, les mécanismes de marché furent conçus par les défenseurs de la rationalité des marchés, et décris comme étant la panacée pour optimiser les coûts liés à la décarbonisation. Le système communautaire d’échange de quotas d’émission est un bon exemple de l’application de ces mécanismes. Ce marché est un échec, comme détaillé auparavant dans ce blog (voir les références   6/7/2011, 31/1/2011, 2/12/2009 et 28/8/2009). Il faut impérativement souligner  que ce système d’échange de certificats ne parvient pas à fournir des subventions stables au meilleur coût pour promouvoir l’électricité verte. Ceci n’est pas dû au fait que  les marchés ne sont  pas efficaces, ou sont voués à l’échec: la raison principale est la construction du marché en elle-même. Le problème n’est pas que la loi offre-demande ne fonctionne pas. L’offre et la demande sont ici artificiellement crées, et les défauts de construction ont des effets indésirables.

Je recommande au gouvernement flamand de revenir aux fondamentaux. Les investisseurs veulent de la stabilité. La société souhaite  un système optimal en termes de coût et d’efficacité. Je pense qu’un simple système de subventions est la façon la plus efficace d’atteindre ce double objectif.

Accordez simplement un certain montant pour encourager le développement de nouveaux projets verts (incluant la production de chaleur), garanti pour une période de 10 à 15 ans. Adaptez chaque année la subvention pour tenir compte de l’évolution des coûts d’investissement. Obligez les investisseurs à partager ces informations afin de tendre vers une évaluation correcte des évolutions et procédez aux adaptations. Permettez aux investisseurs d’avoir un taux de retour de 7 ou 8%. Déduisez le prix de marché moyen pour l’énergie produite en fonction de l’aide annuelle. Répercutez les coûts de ces subventions au consommateur au travers d’une taxe claire et transparente. Créez un système de réduction des taxes pour les industries électro-intensives.

En tant que père de deux enfants, je ne peux que me féliciter du rapide développement des énergies vertes dans mon pays. Cependant, en tant que conseiller auprès des consommateurs et producteurs d’énergie verte, je désapprouve l’inefficacité et la vaine complexité du système de certificats actuel.

 

In Dutch:

Wie betaalt de groene stroomrekening?

Op donderdag 1 maart, heeft de Waalse regering de doelstellingen voor groene stroom aangepast. Tegen 2016 moet 30,4% van alle verbruikte elektriciteit in Wallonië groene stroom zijn. Dit is ongeveer een verdubbeling van de doelstelling van 2012, waarvoor het percentage op 15,75% werd vastgelegd. Deze targets moeten worden gezien in het licht van het systeem voor groene stroom certificaten die de gewesten hanteren om de productie van groene stroom te promoten.

Sta mij toe eerst de grondbeginselen uit te leggen van het groene stroom certificatensysteem. Elke producent van groene stroom ontvangt een certificaat voor elke geproduceerde MWh komende van windmolens, zonnepanelen, bio-energie centrales,…
Energieleveranciers moeten bewijzen dat een bepaald percentage van hun geleverde energie geproduceerd werd vanuit hernieuwbare energie. Ze doen dit door middel van het afleveren van groene stroom certificaten aan de autoriteiten. Ze halen de groene stroom certificaten uit de groene stroom centrales die ze bezitten enerzijds en anderzijds kopen ze ook de groene stroom certificaten van de Groene stroom producenten. Zodoende kan een groene stroom producent die geen energieleverancier is een extra bron van inkomsten aanboren door het verkopen van groene stroom certificaten aan energieleveranciers. Het is zelfs zo dat de inkomsten uit groene stroom certificaten de grootste bron van inkomsten zijn, groter nog dan de verkoop van energie. Zo is er een Vlaamse, Waalse en Brusselse nieuwe markt ontstaan.

De prijsschommelingen in deze markt zijn aan de boven- en onderkant gelimiteerd door 2 zaken. Voor de bovengrens speelt de boete die de leveranciers moeten betalen als ze niet genoeg certificaten inleveren. Voor Vlaanderen is dit 125 euro en voor Wallonië 100 euro. Voor de ondergrens is er de prijs die de distributienetbeheerders moeten betalen voor de certificaten. Toen het systeem in werking werd gesteld, waarschuwden de investeerders in groene energie voor een prijscrash in geval van overaanbod van de certificaten (d.w.z. wanneer er meer groene stroom wordt geproduceerd dan voorzien). Ze argumenteerden dat mede door dit risico elke investeerder er zich van zou weerhouden om te investeren in groene energie. De wetgever besliste dan maar om de netbeheerders te verplichten om de certificaten tegen een bepaalde prijs te kopen (bvb. 90 euro voor een windmolen gebouwd na 1/1/2010). Om het nog wat ingewikkelder te maken, werd voor stroom uit zonnepanelen in het begin de minimum prijs boven de boeteprijs gesteld op 450 MWh (deze werd recent verlaagd). De eigenaars van zonnepanelen verkopen hun certificaten nooit aan de leverancier, maar aan de distributienetbeheerders. Op hun beurt verkopen de distributienetbeheerders aan een veel lager markttarief met verlies, als gevolg van het verschil tussen de minimumprijs en de marktprijs. Dit verlies wordt doorgeschoven naar de eindgebruiker d.m.v. het verhogen van de nettarieven. Zo komt het dat er hevige discussies ontstaan waarbij de tegenstanders van groene stroom beweren dat zij de zonnepanelen op het dak van hun buren betalen.

Gedurende een hele periode was de prijs van groene stroom certificaten stabiel rond de 110 euro per MWh. Recent zagen we de prijs echter in elkaar zakken. De reden? Overaanbod. Het systeem is succesvoller gebleken dan iemand ooit voor mogelijk had gehouden. Er is veel minder weerstand tegen de constructie van windmolens en zonnepanelen zijn de favoriete investeringen geworden van alle Belgische woonhuisbezitters. Daarnaast was de regering wel heel mild in het labelen van biobrandstofprojecten als zijnde “groen”.

Windmolens hebben een terugverdientijd van minder dan 3 jaar en als je certificaten kan verkopen aan 100 euro, dan zijn de investeringen op zonnepanelen op 5 jaar terugverdiend. Een prima investering dus. Doordat de prijzen dreigen in te storten door het overaanbod, begint iedereen zijn certificaten te verkopen aan de netbeheerders, die op hun beurt de rekening van de eindgebruikers laten doorstijgen. Sommigen wachten zelfs niet (omdat ze het geld onmiddellijk nodig hebben) en verkopen certificaten onder de minimumprijs aan de leveranciers.

Zowel de Waalse als de Vlaamse regering zijn op zoek naar oplossingen voor deze chaotische toestand. De Waalse regering neemt een op zich voor de hand liggende beslissing, namelijk het optrekken van de targets. Wat zal dat betekenen voor de economische ontwikkeling in deze regie? Meer groene stroom,  betekent hogere elektriciteitskosten voor de eindgebruiker. Al van in het begin wordt de eindafrekening van de kost voor de aankoop van groene stroom doorgeschoven naar de eindgebruiker. Met een doelstelling van 30,4% voor de productie van groene stroom, zal de rekening voor de eindgebruiker stijgen tot 24 – 30 euro per MWh tegen 2016.

Het is opmerkelijk dat op het moment dat een federale regering ongeziene maatregelen neemt om de energiefactuur voor de eindgebruikers te laten dalen (zie vorige blog), de Waalse regering beslist om een politiek te voeren die er zeker toe zal bijdragen de rekening te laten stijgen, zonder ook maar goed na te denken over alternatieven. Daarenboven, voegt de Waalse regering nog wat meer onduidelijkheid toe door de leveranciers te verplichten om de werkelijke kosten voor het kopen van groene certificaten door te rekenen. Een verplichting die mijns inziens onmogelijk kan doorgedrukt worden. We wachten nog op de precieze details van de Waalse regulering, maar het ziet er naar uit dat dit slecht nieuws is voor de energieverbruikers in Wallonië (en goed nieuws voor de investeerders in groene stroom).

De Vlaamse regering blijkt in elk geval omzichtiger om te springen met de stijging van de energiefactuur. Ze wil het hele systeem herbekijken. Ik ben van oordeel dat elk subsidiesysteem ongewilde neveneffecten zal veroorzaken. Het certificatensysteem was een poging om deze effecten te minimaliseren door er een marktelement aan te koppelen. Ik denk dat deze poging volledig mislukt is, omwille van volgende redenen.

1. Dit is geen natuurlijke markt, maar een geconstrueerde markt en bijgevolg heel erg vatbaar voor constructiefouten. Het is duidelijk geworden dat door deze constructie de markt maar twee mogelijke scenario’s heeft. Of we krijgen een heel stabiele prijs vlak onder de “boeteprijs” in geval van schaarste, of we krijgen een prijscrash bij overproductie. Er kan onmogelijk een fictief marktevenwicht gecreëerd worden door marktspecialisten. De stabiele prijs reduceert de toegevoegde waarde van het marktelement. De mogelijkheid tot ineenstorten van de markt zorgt voor onzekerheid voor investeerders. Welke toegevoegde waarde kan de markt brengen naast de onzekerheid over de toekomstige subsidie-inkomsten?
   Gedurende heel wat jaren was de prijs zo stabiel dat men gemakkelijk kon zeggen: “Waarom geven we niet gewoon die 110 euro?” Waarom moeten de groene stroom investeerders moeite doen om een koper te vinden, prijzen op te volgen,…?
   De extra waarde die kon verkregen worden door te “spelen” op de markt was slechts minimaal in verhouding tot de winstgevendheid van de investering in groene energie. Dus ze deden de moeite niet en dat resulteerde in lange termijn overeenkomsten met energieleveranciers.
2. Investeringskosten voor hernieuwbare energie dalen. Als de prijs van de certificaten stabiel blijft betekent dit oversubsidiëring. De jaarlijkse return voor windmolens ligt momenteel op 15%. Ik denk niet dat deze molens niet zouden geplaatst geweest zijn moest de return slechts 7 of 8% geweest zijn. Deze oversubsidiëring is geldverspilling gefinancierd door de consument.
3. De overheid probeert dit tegen te gaan door de minimumprijs die betaald moet worden door de netbeheerders te verlagen. Deze korte termijn remedie is echter niet efficiënt. Producenten verkopen tegen hogere marktprijzen aan de leveranciers en zij schuiven op hun beurt de kosten door naar de consument. En in het scenario van de prijscrash zakken de minimumprijzen zelfs nog dieper weg.
4. De boetes verlagen is onmogelijk. Dit zou de prijs van de certificaten naar beneden halen voor iedereen. Ook voor degene die lang geleden al in windmolens investeerden en de investeringen veel duurder waren. Ze zouden terecht uitschreeuwen dat de overheid zijn verplichting om een stabiel klimaat te creëren voor de investeringen in groene stroom niet nakomt.
5. Het doorgeven van de certificaten verstoort de werking van de Belgische retailmarkt in stroom.  Op dit moment rijft die onderneming die de certificaten op hun laagste waarde heeft gekocht het meest elektriciteitscontracten binnen. Elektriciteit leveren in België komt er dus op neer om zo goed mogelijk in te zetten op de ontwikkeling van de markt van groenestroomcertificaten.

Eind jaren negentig, bij de onderhandeling van het Kyoto akkoord en het ontwerp van het klimaatbeleid, ontwikkelden voorstanders van de rationele markt theorie bepaalde marktmechanismes als een soort wondermiddel om de kost van koolstofdioxide-uitstoot te verlagen. Het Europees systeem van emissiehandel voor de uitstoot van koolstof is hiervan een mooi voorbeeld. Dit mechanisme heeft gefaald, (zie mijn vorige blogs 6/7/2011, 31/1/2011 en 2/12/2009 en 28/8/2009). Uit het voorgaande moeten we concluderen dat ook de handel in groene stroom certificaten niet resulteert in een stabiel beleid voor het promoten van groene stroom. Het probleem is niet dat de basisprincipes van vraag en aanbod niet werken, maar het systeem is gewoon té kunstmatig opgebouwd. De kunstmatige creatie van dit specifieke vraag en aanbod systeem veroorzaakt ongewilde neveneffecten.

Ik zou de Vlaamse regering adviseren om opnieuw te beginnen bij het begin. Investeerders willen stabiliteit. De maatschappij wil een systeem met een goede verhouding tussen kosten en baten. Een subsidie is een subsidie, punt. Bied een jaarlijkse steun aan elk nieuw groen “project” (inclusief de productie van warmte), gedurende een periode van 10 – 15 jaar. Maar pas die subsidie jaarlijks aan naargelang de investeringskost. Verplicht de investeerders om die investeringsinformatie met u te delen. Zodoende kunnen de ontwikkelingen hier correct worden ingeschat en bijgestuurd. Werk samen met andere Europese overheden voor deze prijsopvolging. Focus er op dat groene stroominvesteerders een vaste return hebben van 7 – 8%. Verminder de jaarlijkse steun naargelang de gemiddelde marktprijs van de geproduceerde groene energie. Schuif de kosten van de subsidies door naar de eindgebruiker onder de vorm van een duidelijke transparante energiebelasting. En creëer een systeem van belastingsvermindering voor de energieverslindende industrieën.

Zijnde een vader van 2 kinderen, kan ik alleen maar blij zijn met de snelle ontwikkeling van de groene energie. Anderzijds als consultant voor energieverbruikers en groene stroomproducenten, keur ik de inefficiëntie en de onnodige complexiteit van het huidige certificatensysteem grondig af.

Filed under: Belgium, emission trading, Energy policy, Energy technology

Can the world be powered without nuclear?

The nuclear disaster in Fukushima is still far from over. I am not a nuclear scientist or a radiation specialist, so it’s as hard for me to judge how much harm has been done exactly to the environment and human health. As an energy market specialist however, I am pretty sure that this event will influence energy and environmental commodity markets in the coming years. I was surprised to find this report by the WHO, the UN outfit for worldwide healthcare. It states that the deaths caused by the Tsjernobyl disaster are actually much lower that often presumed. Again, I am not scientist enough to judge the truth of this statement or the solidity of the analysis that led to it. But it could be that nuclear disasters are a little bit less apocalyptic then we mostly presume.

However, such scientific evidence will never win from the popular perception. As of now, the world’s population has these images in their memory of men in radiation suits and with masks on scanning little babies with spooky devices to check whether they are contaminated. This has already become an important political reality. Last Sunday the German Green party made a historic victory in elections for the regional parliament of Baden-Würtemberg. The region is home to six of Germany’s seventeen nuclear power plants. The Greens have pledged to shut them down. Italy has delayed its plans to build its first nuclear power station by two years.

 

Politicians across Europe that have previously decided to turn back nuclear phase-out schemes try to save their skins by promising their voters a thorough stress-test of the nuclear power plants. I am afraid that these tests might lead to further shut-downs. The stress tests will undoubtedly unveil security failures. A few years ago, a Belgian activist managed to get on the premises of the Doel nuclear power station. According to her, it was very easy to get in. Electrabel, the operator of the Doel plant claimed that she never made it to the nuclear part of the plant. However, the Fukushima disaster has shown us that the non-nuclear part is vulnerable as well. If somebody gets in and seriously damages the pumps that are to supply the cooling water, what happens? Are nuclear facilities really capable of surviving a plane crashing on top of them? And again, as Fukushima has shown us, will the non-nuclear facilities on the sites pass the stress-tests?

If security issues arise in the stress tests, I believe that politicians will most likely copy Angela Merkel and shut down plants. In the post-Fukushima era, no politician will want to take the risk of keeping open a power plant that is not declared 200% safe. Any small issue with safety will lead to temporary or even definitive closures. Therefore, these stress-test swill also be a period of stress for the energy markets.

In the past weeks we have clearly seen how the markets react to the shutting down of nuclear power plants:

1. Power prices obviously rise as less supply of electricity is available and extra, gas-fired power plants with higher marginal costs need to be fired up.
2. This causes increases in gas prices as well, as gas demand goes up.
3. Less nuclear and more gas-fired power means that more carbon dioxide is emitted, which results in rising emission rights prices.
4. The higher prices for gas and emission rights feed back into the power price.

So far, these effects have mostly been observed in the forward markets. In Germany, the Netherlands, Belgium and France, Cal 12 electricity now trades at almost 60 euro per MWh. The spot price has continued at a reasonable level. This clearly signifies that the forward price increases signal a fear of supply shortage, but in the real world, no shortages have occurred yet, even if 7% of Germany’s power capacity is down. Spare capacity and cross-border trading explain why no supply crunch has occurred yet. However, we should watch very carefully at what happens in Q2. This is traditionally maintenance season and a lot of nuclear power stations across Europe are up for planned maintenance. If some unexpected shutdowns due to stress-test issues would be added to that, we could see a supply crunch materializing.

For the longer term, it is highly probable that in many countries the plans for building new nuclear power plants or for keeping existing plants open for a longer period will be ditched. This obviously raises the question whether the world is capable of powering itself without using the nuclear option. According to this article in the Economist we can. They point out that nuclear power plants produce only 14% of the world’s energy. In recent years we have seen several countries grow to 20% shares of power production for wind and solar, countries such as Germany, Denmark or Spain. If the whole world would follow that lead, we could replace nuclear power plants by renewable power plants, without pumping extra CO2 in the air. (Pro-nuclear proponents often make the argument that without nuclear power plants we cannot reach the Kyoto targets). Of course, if our electricity consumption continues to grow, or starts to grow even more rapidly, e.g. because we all start driving electrical cars, the 14% target will become ever more challenging.

Buyers of energy need to be aware that this transition will come with a high bill. German power consumers currently pay 35 euro per MWh for green energy, money that goes to the producers of green energy in the shape of a feed-in tariff. This makes Germany one of the most expensive countries in Europe for industrial power consumption.

Even if we can transfer to a non-nuclear power production in the world as a whole, in Europe, this will be significantly more difficult. The proportion of electricity produced in nuclear facilities in Europe is twice as high as in the rest of the world, almost 28%. Face it as it is, Europe is the must nuclearized zone of the world. France for example, produces as good as all its electricity with its 58 nuclear plants. This can’t simply be replaced by renewable energy, which due to its intermittent character cannot provide all the energy. When the sun doesn’t shine and the wind doesn’t blow, you need another technology to make the power. That technology is likely going to be natural gas-fired power plants due to a variety of reasons:

• Gas-fired power plants have a lot of flexibility for firing up and scaling down the production. This makes them very suitable as stand-in power stations.
• The economics of gas-fired power plants also fit perfectly well with the economics of renewable power stations. With their low investment costs and high fuel costs, they are the marginal power stations of choice.
• Recent developments in the gas markets, such as the development of Qatari LNG business or the shale gas development have inspired optimism that we might have a lot of the stuff left.
• Natural gas burns cleaner than coal, which emits roughly twice as much CO2.

A combination of renewable and gas-fired power plants seems to be the most likely option for a non-nuclear power market. Switching over to this market will demand huge investments. Part of those investments will be passed through to the end consumer in the form of feed-in tariff financing or green certificates to support the construction of windmills and solar panels. The gas transport infrastructure in a country like France will need to be expanded. And the increased demand for gas will put pressure on the gas markets. The volatility that we have recently witnessed in power and gas markets is therefore likely to continue.

Nuclear power enthusiast minted the term nuclear renaissance a few years ago to describe the trend that they saw of a return to more nuclear power production. However, if you look at the graph below, you will notice that in Europe the share of electricity produced in nuclear power stations has systematically decreased in the past ten years. The situation in Fukushima could speed up this decline.

Filed under: Climate change, Energy history, Energy policy, Energy technology, The market today

Earthquake shakes energy markets

German Cal 12 power ended above 58 euro per MWh today. The disastrous events in Japan have sent ripples across the worldwide energy markets. A brief résumé of the consequences of the earthquake that we currently observe:

1. Oil prices have declined. The Brent traded below 110 dollar per barrel today. Oil traders fear that the economic disruptions due to the earthquake will reduce oil demand in Japan, the world’s third largest consumer of oil. For the moment, it looks like the earthquake has (temporarily?) stopped the bull run in the oil markets.
2. Gas prices increased rapidly. TTF Cal 12 traded above 27 euro per MWh today. Nuclear power production in Japan is out due to the earthquake. It is assumed that the MWh’s not produced by the nuclear facilities will be produced in gas-fired power plants. The extra MWh’s of gas will probably come with LNG shipments from (mostly) Qatar. This sparks fears that the LNG supply to Europe, so important in keeping European gas prices at a reasonable price level, will be reduced.
3. Power prices rallied. This was not only due to the rising gas price. The problems with Japan’s nuclear facility could mean the end of plans to keep nuclear power plants in Europe open for longer than originally planned. Today, German Chancellor Merkel even announced that seven nuclear power plants in Germany would be shut down immediately for safety controls. If other countries would adopt similar measures, we would see a severe shortage of electricity in Europe.

The energy markets have changed completely in less than two months time. Revolution and war in the Middle east and an earthquake in Japan have severely shaken the supply / demand balance. The short term price movements might just be speculation or panic reactions. They could also be the start of a further bull trend. But then the question is: can the recovering economy stand this combination of: 1. Commodity price inflation, 2. Severe disruption of one of the world’s most important economies, 3. A massive switch of insurance money towards the Japanese reconstruction? Is the current crash of stock exchanges the precursor of a new economic crisis looming? Or is it just a panic reaction?

No better illustration of the unpredictable character of energy markets than the past two months. Keep counting on that lack of predictability and spread your buying decisions is the best that we can advise in such circumstances. We have to watch carefully in the next days whether the spot gas prices continue to rise. Because that would clearly indicate that increased Japanese LNG buying is affecting supply to Europe.

For the longer term, it is clear that the Japanese disaster will affect the nuclear power sector. It was the Tsjernobyl disaster in 1986 that inspired European governments to decide to phase out nuclear power production. The 25 years that followed without nuclear incidents inspired those governments to turn back those plans of shutting down nuclear power plants. But what politician will dare to defend expanded lifetimes for nuclear power plants after what has happened in Japan? Let alone decide whether to build a new nuclear power plant. If the nuclear phase-out plans would be resumed, this would inevitably have consequences for power pricing in Europe. But that’s the longer term. No idea what it will bring, as every morning we get up in surprise over a new explosion or fire in the Japanese nuclear power plant.

Filed under: Energy history, Energy policy, Energy technology, Germany, Market analysis, The economy, The market today

Days of truth for renewable energy

Renewable energy in Europe is a success. In the past one-and-a-half year, every time I drove through the streets of my hometown, I discovered a new solar panel installation. In some parts of Germany, there seem to be more windmills than trees (is that good for the environment?). Almost all of our clients have approached us with questions regarding some project for producing renewable energy on their sites. The figures are also there. In countries such as Germany, renewables are now producing more than 20% of all the electricity on the grid. They are a part of the power production to be reckoned with.

However, in the past weeks, some serious counter-noises were heard:

1. The German government raised the EEG-umlage for 2011 to a staggering 35,3 euro per MWh. This “Umlage” is a contribution that energy consumers pay that is to compensate the grid companies for the extra costs that they have for buying green electricity at feed-in tariffs. If you mounted solar panels on your roof (less than 30 kW of capacity) in 2010, you could sell the power at a price of 391,4 euro per MWh to the grid company (see http://www.germanenergyblog.de/?page_id=965 for more details). The grid companies can claim the extra-costs of this expensive green electricity through the EEG-umlage. The more green electricity, the higher the cost of this umlage. To give you an idea of the effect of this for the end-consumer. In France, industrial consumers who still enjoy the old tariff system pay less than 50 euro per MWh for electricity, all costs included. Their German counterparts will easily pay twice as much. So it is clear that if Germany is a success-story in terms of development of renewable energy, this comes at a very high cost for its industry and its citizens.

2. In Flanders, the government slashed the financial aid for solar panels, the so-called ‘green certificates’. Owners of solar panels got 450 euro per MWh in 2009, this was brought down to 350 euro per MWh in 2010. In 2011 it will be brought down progressively towards 270 euro per MWh as of the first of October. The government claims that it is speeding up the winding down of subsidies for solar panels because they want to avoid that the bill for the energy consumers gets inflated like it has in Germany.

3. A group of environmental NGO’s, among them Greenpeace and Friends of the Earth, published a study that stated that the development of energy from biomass as put forward in the European 20 – 20 – 20 policy, would lead to increasing instead of decreasing emissions of carbon dioxide. Environmentalists are increasingly skeptical about the potential of biomass to abate climate change. In Belgium, a big discussion started last weekend, after a newspaper made clear that dominant power producer Electrabel will generate a hundred million euro per year of income on the sales of green certificates awarded to a biomass power station. For this power station green pellets will be brought from Canada to Gent to be burned and produce power.

It is clear that citizens and governments are increasingly critical about green electricity. This is a good thing. Uncritical adoption of whatever technology, just because it is labeled as green, will lead to disillusions, both ecologically ánd financially in the future. It is curious that the debate over green energy is often so emotional and irrational and that there is such limited space for sound discussion over facts and figures. Many actors are such convinced proponents or opponents of this or that technology, that they are willing to interpret the data in whatever direction that fits their story. Two weeks ago, I almost choked in my Sunday Morning “croissant”, when I read an interview in the Sunday paper with Flanders’ most successful entrepreneur in solar energy. The good man had the guts to declare that subsidies contributed ‘only marginally’ to the payback of solar panel installations. For installations built before 2010, green certificates make up 90% of all the income that you receive on your PV-installation ! And that same man was the first one to protest on the radio about bringing down the price for green certificates. I’d think he wouldn’t really care if their contribution to the profitability is only marginal.

Three renewable energy sources are currently composing the bulk of the growth of green power production in Europe. How should we evaluate them?

1. Wind power is clearly the most developed and most cost-efficient technology currently available. Off-shore is more expensive than on-shore. The biggest restraint on building windmills remains getting permits to build them. A recent study has made clear that after they have been built, the number of neighbors opposing windmills declines. This clearly shows that much of the nuisance of having a windmill is exaggerated. But still, (local) politicians remain sensitive to the loud voices of the 20% of the population that seems to hate windmills. The cost of building a windmill has been brought down by increasing their efficiency. Part of that cost decrease was undone by rising steel prices. However, it will still take you more than ten years to earn back your investment in a wind turbine if you don’t have any aid. So without the subsidy systems there wouldn’t be much investment in wind power. Still, the same can be said about nuclear power, which, if you include all costs (those of waste disposal also) is more expensive at the moment than building a wind turbine.

2. Biomass is clearly problematic on many fronts. The basic problem is that you need a lot of bio material to produce a reasonable amount of energy. In my opinion, biomass makes sense if it is making use of a local, fatal waste product, e.g. methane produced from a food industry’s sewage water treatment plant. But as soon as you start importing biomass, problems arise. If you bring wood pellets with ships from Canada to Belgium, how does the amount of energy that you consume to cut the trees, bring them to pelletizers, dry them, pelletize them, transport the pellets to the port, transport them in the ship, unload the ship, etc. compare to the amount of energy that you produce with the pellets? Moreover, there is a problem with the basic ‘CO2-neutral’ theory of biomass power production. The idea is that the carbon that you emit when burning the pellets, is compensated by the newly growing trees. How sure are we that all the pellets will come from ‘new’ trees? Not just replacements of trees that we have cut before? And, as has become clear with palm oil, are we not cutting diversified (tropical or other) forest to make place for our energy crops? Nothing beats the CO2 reducing capacities of a diversified forest. Biomass power production can even clash with other environmental concerns. Flanders plans to burn massive amounts of waste wood to produce green electricity. Now, first of all, in terms of CO2 cycle this is problematic, as I have never seen a waste wood tree growing on the corner of the street. And it even becomes absurd, if we burn wood that we could have recycled by making a chipboard from it. Lastly, with a growing world population, will we use land now used for growing food to grow energy?

3. Solar energy is clean and I must admit that I have panels on my roof also. To say even more, thanks to all the subsidies, it is the best private investment that I ever made! However, I’m not that cynical not to have any doubts about the cost-effectiveness of all this. If the same panels would have been installed 2.000 kilometers to the south, they would have produced twice as much electricity. I’m currently sitting in our office in Barcelona. The sun is shining and it is 15°C. I wish I had brought my solar panels which are now lying idle under the Belgian fog. Is it logical, that most solar panels in Europe are installed in the North rather than in the sunny South? I don’t think there is much to be said against the ecological effectiveness of solar panels. Agreed, there is some CO2-emission necessary for producing them, but if we would produce all the electricity in the world with solar panels (yes, I know that this is impossible), our overall emission would go down massively. My biggest problem with solar is its cost-effectiveness.

Renewable energy is a success in Europe, but this is only thanks to the largesse of Europe’s subsidies. I can see only two ways of making sure that renewable energy is used. The first one is to drastically increase the price of conventional energy, e.g. by imposing a big carbon tax. This approach would have the benefit of having those renewable energies selected that are most cost-effective. But the economical and social consequences of raising the price of conventional energy are not to be underestimated. Therefore, we took the second option, subsidizing. Subsidies have the bad characteristic that they inevitably blur the economic picture. Producers of wind turbines and solar panels sell their products at a premium in Western-Europe because they know that thanks to the subsidies, their clients still have a reasonable payback even with such higher investment costs. Large power producers buy their turbines and panels through Eastern-European affiliates to circumvent this. Wherever there are subsidies, there will be people that unduly profit from them.

All in all the financial aid of renewable energy is now a considerable amount of public money invested in the greening of our planet. As keepers of that wallet, our politicians have an important moral responsibility in guarding over the cost-effectiveness. In that perspective, it is a very good evolution that the public debate regarding renewable energy has come to this degree of critical attitude.

Filed under: Climate change, Energy policy, Energy technology

Shale gas: mankind’s second chance?

In the past five years, it looked like we were coming very close to the point where we would have to say, “We’ve done it, we’ve spoiled the earth’s riches”. As a larger share of mankind took its part in the global wealth, the consumption of energy rose steadily. Production of energy was unable to keep pace. The oil price peaked to almost 150 dollar per barrel. Peak oil seemed to move from theory to fact. On top of that, scientific consensus grew that burning all that fossil fuel was destroying a fundamental characteristic of life on earth: the climate. The end of fossil fuel burning seemed near. Oil, gas and coal would become increasingly scarce and unwanted because of their environmental impact. Many industrial consumers of energy told me in those past five years: “In the long term energy prices can only rise”, and adopted an energy buying strategy with such long term bullishness in mind.

It looks like the earth is prepared to give mankind a second chance, or at least a few extra decades to look for a good energy solution without burning hydrocarbons. Recent technological developments have opened up a vast reserve of those fossil fuels that have the lowest impact on climate change: natural gas. Engineers have found out ways to tap into unconventional gas sources such as shale gas, tight gas and coal-bed methane. It’s not that we have discovered a new reserve of energy wealth, it’s just that we have developed technologically so that we can extract more from the soil than we previously could. And this is not some technology which lies ahead of us in the future. Thanks to shale gas production, it looks like the US surpassed Russian production in 2009 !

This sudden glut of natural gas is not without consequences for energy prices. Since the middle of 2009, natural gas prices in Europe have decoupled from the oil prices. Whereas the oil price was rising, gas just kept falling lower and lower and lower. In the past winter, the coldest in 25 years in North-Western Europe, the spot price for natural gas (on the British NBP, Belgian Zeebrugge, Dutch TTF and German Gaspool market), never went much higher than 15 euro per MWh, to be compared with prices above 40 at the beginning of 2008.

Now, many will say that these lower gas prices are due to the decline in industrial and power production demand in the wake of to the economic downturn. But that is not exactly true. As I have said, the past winter was exceptionally cold. This has caused gas consumption to rise to record highs. Of course, these highs would have been even higher if the industrial demand was at its 2008 level. But they were record high, and despite that, no price spikes occurred. The reason for that? Every week LNG ships unloaded their cargo in one of the UK’s new LNG terminals or in the recently expanded terminal in Zeebrugge. All this LNG gas was available, not only because of investment in LNG production in e.g. Qatar, but also because of the lack of LNG demand in the US, where the shale gas was supplying the extra winter gas.

We should be very careful about shouting ‘bonanza’ in the energy market. Conventional gas producers and resellers will be quick to point out the risks of some backlash. This could for example be the environmental impact of the horizontal drilling and rock shattering necessary to produce shale gas. But with every article that I read about this shale gas thing, it looks more and more like this could be the big game changer. An illustration of this could be the situation at the Kitimat LNG terminal in Canada. Originally designed to be an LNG import terminal, it is now being refitted to become an export facility of LNG coming from shale gas sources. Instead of becoming a major importer, Northern America is preparing to become a major exporter of natural gas. This clearly illustrates that if this shale gas is becoming a reality, how deeply it changes the rules of worldwide natural gas economics. The massive flow of gas from Russia and the Middle-East to the US and Europe might not materialize. For Europe, it looks like there are vast reserves in Poland and maybe also Germany. China is hopeful about its underground holding shale gas as well.

I think that the world will gladly adopt natural gas as its main source of energy, for three reasons:

1. Natural gas is cleaner that coal and oil. So, if we replace coal and oil consumption at a faster pace than we use extra energy, the net result for the environment will be positive.

2. Gas-fired power plants and CHP’s are proven technology. Moreover, for a utility, building a gas-fired power plant is currently the cheapest option.

3. Gas-fired power plants are easy to fire up and scale down. Therefore, they are excellent peak-load producers. We need more such peak-load capacity as a back-up for the renewable power that we increasingly use.

If we continue to invest in wind, solar and other renewable energies like we do now, if we build gas-fired power plants as back-up facilities, if we don’t massively pull out of nuclear power production, if we keep improving the energy efficiency of our appliances, we could even switch to electricity for driving our cars and still reduce the overall greenhouse gas emissions. It is maybe my optimistic nature that makes me say this, but it looks like the doomsayers got it wrong (once more). More pessimistic natures will point out that the availability of cheap gas will slow down the development of renewable power production. I partly agree, we will need continued political will to support renewable. I even partly cheer that prospect, in as far as cheap gas will keep us from investing in those sometimes insane biomass projects that are currently running.

To me, the shale gas development looks like the most important event in the energy markets in decades. But as I’ve said, we should carefully watch out for any unsuspected backlashes that shatters the optimism to pieces. E&C will carefully watch this for you and inform you what it means for your energy buying.

Filed under: Climate change, Energy history, Energy technology, Natural gas, US

Whaaw – instant (Fisker) Karma has arrived

Old-fashioned petroleum addicts tend to deride the idea of electric cars as ‘unsexy’. In their conception, the eco-friendly cars of the future will be square-edged clunky mini-automobiles. They think they will resemble the Fiat Multipla rather than an Aston Martin. Just take a look at ‘Top Gear’, the car TV-show on the BBC, and you’ll know what I’m talking about. This is their idea of the electric car: http://www.youtube.com/watch?v=PCH4NgobgwE. How wrong they are!

This week I ran into the pictures of the Karma, a car built by Fisker from California. Just have a look and tell me if you haven’t fallen in love: http://karma.fiskerautomotive.com/. This is not only an eco-friendly car, it’s also an absolute beauty. If this is what the electric car future will look like, then let it start tomorrow. The combination of aerodynamics and the eco-chic snobs at which these cars are aimed results in absolute beauties. (By the way, in many blogs the car is described as an ‘electric’ car, that is false. It is a plug-in hybrid. This means you drive the car electrically for the first 80 kilometers. After that a gasoline engine will start to work to charge the battery.)

The economics also start to look better. The autonomy of this car is almost 500 kilometers (with the help of the gasoline battery charger). The price is 90.000 dollar. This is obviously a huge amount of money. But then you have to consider that this is, what Jeremy Clarkson of Top Gear would describe as a ‘Supercar’. This car won’t be bought as a replacement of an Opel Astra. It will be the people that now drive Porsches that will drive this. The rest of us will have to wait for Renault to bring out its eco-models: http://www.renault.com/en/capeco2/Pages/cap-eco2.aspx.

Cars and mobility have a lot to do with emotion. I truly think that Fisker can bring the instant Karma that will make the car lovers accept the idea of driving a sexy car without a huge exhaust pipe.

Filed under: Climate change, Energy technology

7 questions that will determine energy prices in the next decade

I am not in the forecasting business, so futurology is even less my cup of tea. Still, last week, in the margin of the E-World fair in Essen, I had a very interesting conversation with a client. Over dinner, we discussed the current outlook for the energy markets and some interesting ideas popped up. We are today facing some evolutions which will very probably have an important influence on worldwide prices for oil, coal, gas and electricity. Asking these questions is interesting in itself. Anyone with a good sense of reality will acknowledge that making a forecast about the outcome of any single one of them is impossible. The energy prices of the future will be determined by the combination of outcomes of all of these questions, which makes it even more difficult to forecast them. So, according to me, these are the issues:

1. Will we all drive an electrical car in ten years? Car companies, and even governments, are betting heavily on this. Today, oil is mainly consumed for transportation. If we all (or most of us) drive an electrical car, the consumption of oil will fall in favor of electricity. Where will that electricity come from (see questions 4 and 5)? Will this cause prices of oil to fall and prices of coal and natural gas to rise?

2. Will the peak oil theory materialize? According to some we are already witnessing the peak. According to some dissidents from the International Energy Agency, oil producers are not able to produce more than 90 million barrels per day. They claim that they were forced by their organization not to tell the world about this fact.

3. Will there be a post-Kyoto climate change policy? And how stringent will that be? Will Europe continue to try to be the best of the class? Or will it be joined by the other countries? And if Europe is that lonely front-runner, how enthusiastic will it continue to be? Or will it rather scale down its efforts? Or is the drive towards greenery unstoppable, even without a world agreement on climate change efforts? This will obviously have impact on the outcome of other questions such as 1 or 4 or even 6.

4. Will renewable energy technologies such as wind or (large-scale) solar become competitive with traditional methods of power production? Or will these technologies continue to need state aid to become widespread? The outcome of this question obviously depends on what the outcome of all the other questions is on the energy price. The higher the energy prices, the more competitive the renewable energy technologies will become. But then, because of their low variable cost, renewable power production pulls down the electricity prices.

5. Will shale gas cause a glut of natural gas in the United States, Europe or China? Shale gas is now being produced and all big energy companies (even Exxonmobil) are investing in it. If it is really recoverable in the quantities such as announced, even with a huge increase in gas consumption, we are not facing a gas supply shortage in the next decades. With abundant gas around the corner (Germany and Poland are said to have big prospects in shale gas), the fundamentals of energy shortages change completely.

6. Are we really at the brink of a nuclear renaissance? In Asia, many new nuclear power plants are being started up. In the US, Mr. Obama is betting on nuclear also. In Europe, governments are more hesitant. As with renewables, the low variable cost of nuclear tends to pull down electricity prices (which again, makes investment in nuclear less interesting).

7. Will Europe continue to be a liberalized energy market? It’s hard to see a way of turning it back. Is it possible in democratic, open market countries to create new monopolies without a cavalcade of court cases from the heavily disadvantaged competitors? But on the other hand, consumers (voters) and their governments are growing increasingly frustrated with the results and – logical – consequences of energy market liberalization. But maybe, the market will take some hybrid shape, something in the line of what France is currently trying to create.

None of these questions is hypothetical. I am not speculating about some undeveloped question, such as the possibility of nuclear fission. Electric car technology is being developed, peak oil theory discussed as a real possibility, Copenhagen was a failure to reach a post-Kyoto agreement, prices per kWh of renewable electricity are falling, the gas market is massively investing in shale gas, nuclear power stations are being built in Asia and the discussion on liberalization was opened even in ultra-liberal Britain last week. These are all factors that will determine the price we will pay for energy in the next decade. And moreover, new questions and issues will pop up.

Filed under: Energy history, Energy technology, Forecasting, Market analysis

No nuclear phase-out for Belgium

Belgium produces approximately 60% of its electricity in the nuclear power plants situated in Doel and Tihange. A decade ago it was decided that these would be phased out. That decision has now been reversed. The oldest plants will keep on running beyond 2015, the date put forward for their shutdown.

In 1999, Belgium lived through a political earthquake. Right before the elections, a food scandal broke out, with chickens polluted with dioxin coming from industrial oil that got mixed up in chicken food. The result was a landslide electoral victory for the Green parties in both Flanders and the Walloon Region. The Greens made a government together with liberals and socialists.

The green parties in Belgium, like in most European countries, have their roots in the anti-nuclear movement, the mass protests against nuclear arms of the late seventies and eighties. To them, the triple danger of nuclear accidents, storage of nuclear waste and proliferation of nuclear technology, makes nuclear the worst possible technology for producing electricity. It was therefore not surprising that the green parties enforced legislation for a nuclear phase-out. As of 2015, when the oldest nuclear power plants reach the end of their lifetime, the law asked for them to be shut down. As such, the share of electricity produced by nuclear power, currently approximately 60%, would start to fall.

One would suspect that politicians that have just voted to close nuclear power plants would draw up a plan for investing in the transition towards a new power production. Not so in Belgium. Since 1999, no new large scale power plants have opened. Admitted, renewable energy is developing remarkably swift, thanks to strong incentives. But the small scale of renewable energy plants make it an unlikely replacement for the massive amounts of energy currently produced by nuclear power plants. The result is undeniable. In the past decade, Belgium has switched from being an exporter into becoming an importer of electricity.

Most of that electricity is coming from France, where it is produced in … nuclear power plants. Proponents of keeping Belgian nuclear power plants therefore have a valid argument when they point out that shutting them down is hypocrisy. The Belgians won’t stop consuming nuclear energy, they will just bring it in from abroad instead of producing it inside their own borders. Therefore, the decision to keep the Belgian nuclear plants open for longer than 2015 looks like sound policy. Moreover, it was probably inevitable. The initial phase-out law included a passage that said that the phase-out would be turned back if it could be proven that it would cause problems for the power supply of the country. As such, the current decision was already embedded in the initial decision to shut down.

Still, I am disappointed by the way our politicians treat this important issue regarding the energy supply of our country for several reasons:

1. Nobody ever seriously studied how a non-nuclear power supply for Belgium could have looked like. Greens naively held on to the doctrine that the combination of more renewable production and reducing consumption would be able to replace 60% of current power production. Socialists did the same, although they admitted that it would also mean extra import of French electricity. Other parties simply waited for the moment to reverse the phase-out decision.
2. That moment is now, because of budgetary concerns. It is unacceptable that important long term decisions regarding our energy supply are taken to ease short term concerns such as the current budgetary situation only. The cabinet seems to be mostly concerned about how much money they can get from Electrabel in exchange for the phase-out reversal, much more than with the safety questions or what this decision means for the Belgian energy market. Some politicians openly plead to pocket a lot of Electrabel money in a short time, saving the budget during their constituencies, rather than getting the compensation money over a longer period and investing it in the long term energy future of the country.
3. Some politicians show a clear lack of understanding of how electricity markets work. They proclaim that keeping open the nuclear power plants will lower the cost of electricity in Belgium. That is not true. The price of electricity in Belgium is set by fossil fuel fired power plants. It is therefore determined by the cost of gas and coal, and nuclear power plants do nothing to lower it. Open power markets work with a mechanism called ‘marginal cost pricing’, but in the past days I have heard only one politician, Bruno Tobback, that seems to understand how that works.

The political bickering of the past days makes me pessimistic. I fear that Electrabel compensation will take the shape of a tax that will be passed through to the consumers of power. And I also fear that another good opportunity of negotiating measures to improve the situation of the Belgian power market will get lost.

Filed under: Belgium, Energy history, Energy policy, Energy technology, France

ExxonMobil goes for algae bio-fuel

Energy giant ExxonMobil has decided to invest in a firm that is to develop algae that can transform CO2 into hydrocarbons that can be used as a fuel: http://www.economist.com/sciencetechnology/displayStory.cfm?story_id=14029874. Many observers of biomass markets had already betted on marine organisms such as algae as the most promising choice of biology for production of non-fossil hydrocarbon fuel. And indeed, it sounds fantastic. You pump the CO2 into the aquatic milieu where you keep your algae. The little creatures eat it and excrete oil that you can scrape from the surface. The firm that ExxonMobil invests in, is Synthetic Genomics, the commercial outfit of a certain Craig Venter, the first man to produce the genetic sequence of a living organism. The objective hence, seems clear. Genetically engineer algae so that they become super fuel producers.

That it is ExxonMobil that invests in this technology, is remarkable. The company isn’t exactly famous for its ambition to stop climate change. In the past few years, the public appreciation for ExxonMobil fell to lows which were close to the public outrage that caused its ancestor Standard Oil to split up. This was because of the fact that the company cheerily produced record profit figures when the whole world was suffering from rising oil and gas prices. But it was also because of the stubbornness with which ExxonMobil refused to do anything to switch our economy away from fossil fuels. ExxonMobil continued to deny that global warming could be a huge problem for mankind. And whereas its competitor BP rebranded itself into ‘Beyond Petroleum’, ExxonMobil scrapped budgets for research into traditional renewable energy such as solar power and windmills. Just bring up the name of the firm at a green tea party, and you are sure to have a nice discussion. But if we look beyond the green zealot talk to the arguments brought forward by ExxonMobil, they make some sense. The company didn’t want to invest in those technologies because it didn’t believe in its prospects of becoming economically viable. I don’t agree with that, but I do believe that every company has the right to choose in which technologies it believes and in which not. The fact that ExxonMobil has decided to invest in algae indicates that they are convinced that this might be the renewable technology of the future. And I wouldn’t underestimate their abilities of scientific judgement. Algae bio-fuel is something to keep on our radar! Something to think about when I plunge my feet into the Atlantic Ocean in the next few days.

Filed under: Climate change, Energy history, Energy technology

A North Sea full of wind?

How proudly were they spinning, the six 5 MW windmills that were inaugurated today as Belgium’s first off-shore windmill park. And they had several reasons to be proud:

- They stand 30 kilometers away from the coastline, no other windmill park is so far off-shore.

- They have a capacity of 5 MW each, which means that they are among the biggest windmills on the planet.

- It took a lot of pioneering engineering to build windmills at such a location. The concrete bases on which they stand, were constructed on shore in the port of Ostend and then dragged into the open sea. A huge crowd came to watch this spectacle.

- The investors in this project (C-Power) deserve applause for their perseverance. It took them eleven years to go from idea to realization. They had to edit 720 kilograms of files to apply for the 29 authorisations that were necessary for the windmills to be constructed.

I have the impression that in those eleven years the public attitude towards wind power has shifted remarkably. When plans for windmills in front of the Belgian Coast were first aired, they caused public outrage. Owners of appartments on the sea front didn’t want their sight blurred by spinning blades.  The protest of inhabitants and politicians of the posh seaside resort Knokke became symbolic. Today, inhabitants of Knokke have asked C-Power to invest in fixed binoculars on the promenade for them to see the windmills. (Which is quite ironic, the mills have been constructed so far from the promenade, to avoid that they could be seen.) In my hometown, two windmills have recently been erected. If there was any protest, it certainly was very quiet. I have heard none of my neighbors complain that those mills are destroying their quality of life. I have personally grown quite attached to them. You can see them standing from quite far. This means that when I’m driving home after a long trip, I have that nice ‘coming home’ feeling for a longer period then in the past. Maybe the images of icebears scrambling to find some ice left in the Artic have created enough of an impression for people to accept that we have to look for alternative ways of producing energy. Although ‘alternative’ is a badly chosen word. Wind energy has left the world of tree-hugging and has become an integral part of modern life. The technological achievement of constructing 5 MW windmills so far into the sea is clear proof of that.

So my guess is that when another eleven years have passed, many more windmills will have been erected. Maybe the ring-fence of windpower in the North-Sea that some European politicians dream about will have become a reality. This idea is all about constructing multiple off-shore parks in the Belgian, Dutch, Danish, Norwegian and British zones of the North Sea and connecting them with cables. Some Dutch politicians are talking about building up to 20.000 MW of wind power production capacity in the Dutch part of the sea. That would be equal to what the Netherlands today has installed in conventional capacity.

Such huge amounts of wind energy on the grid will create new market conditions. Wind power changes energy pricing in two perspectives: 1. as its fuel cost is zero, it reduces the marginal cost price of energy, 2. as it comes only when the wind blows, an important element of unpredictability enters the power markets. In countries like Germany and Denmark, with large windmill capacities, we can already see how this influences the markets. When the wind starts to blow spot power prices fall, when it is windstill, spot power prices rise. This changes the conditions for maximizing profits at e.g. gas-fired power plants. With wind power, the energy market economics become a lot more exciting! In the future, you will have to check the wind conditions on the North Sea not to plan your sailing weekend, but when you want to buy energy.

Filed under: Belgium, Climate change, Energy history, Energy policy, Energy technology, the Netherlands