What is moving the coal market?

By Ondrej Zicha – Polish version

2016 could be a year marked by the trend reversal of world coal prices. After years of steady decline, coal prices rebounded in March. In October, API2-prices event hit the level of 65 dollar per tonne, a level last seen one and a half years ago.


Source: Own study

Since 2011, coal prices lost more than 70%. Coal was marked as a “dirty” fuel and in line with the wide spread policy of decarbonisation, other energy sources were preferred. This made demand decrease faster than supply, so prices continuously went down to reach levels below 40 dollars per tonne in February and March this year. These prices made it difficult for miners to be profitable, endangered the entire sector and even caused bankruptcy of some big players like Peabody.

China drives world coal prices

Changes of the Chinese policy are the main reason for the price rebound. China takes about 50% of both worldwide production and consumption. In February, Chinese officials announced the country will close more than 1000 coal mines before the end of year. The mines on the list were mostly rather small ones and had to be closed because of inadequate working conditions. In April, this decision was followed by another one limiting the number of working days in local mines by 16%.

Limiting the coal production should go hand in hand with decreasing coal consumption, as China is pushed to do so because of extremely high air pollution. However, changing to other more ecologically friendly fuels will take some time while mines will already be closed at the end of this year. China is now investing a lot in renewable sources but these investments need some time to be realised. Additionally, some analysts remark that the current grid system is not prepared for more and potentially unstable renewable sources and therefore requires further investments.

On top, we should take into account that China has proven its statements to not always be 100% correct. China claims it’s abandoning fossil fuels, but according to Greenpeace’s report published in July, the country is currently building another 400 GW of installed coal capacity while the shutdown is only 70 GW.

This means China mainly needs to import more coal in the short term (year-on-year increase in August was 52%), which brought coal prices back at profitable levels and is good news for coal miners all around the world.

Situation in Poland

The rising coal prices are great news for Polish miners as they are struggling with serious problems. Kompania Węglowa, the biggest coal producer in the EU was restructured to Polska Grupa Górnicza (PGG) in order to save the Polish coal sector from bankruptcy. The higher coal prices could help the company to stay alive in a tough market.

On the other hand, the new company is still facing many difficulties which decreases its competitiveness. First of all, the benchmark price index for coal mined by PGG unfortunately is the Polish Coal Index PSCMI1 (not the API2 like on other European markets). However, the Polish index usually follows the European benchmark but this hasn’t happened (yet). As we can see on the graph below, the polish coal prices are even below the API2 index since June.


Additionally, PGG is still struggling with too high mining costs. The unions have a very strong position in the Polish coal sector and generally are not willing to reduce the non-standard benefits of workers in the mining sector. Despite some positive changes in the last months like a temporary suspension of 14th month salaries, further and more radical changes are necessary to make PGG fully competitive.

Outlook for the future

Mining restrictions in China led to tight supply in certain regions. As a consequence, the Chinese government last month decided to ease the mining restrictions. In case of problems with supply, local mines would be allowed to increase production to meet demand. On top, the limited working days in the most efficient Chinese mines could be eased as well. However, this was not confirmed by the Chinese officials and for the time being, the market isn’t taking this into consideration.

Seeing the above, we can only be sure about one thing – China is the main driver of coal prices at this moment and any political decision there can impact the market situation.

Declining oil price: geopolitics or just plain economics?

The main event in 2014’s energy market has been the sharp decline in oil prices in the second half of the year. In the first six months, geopolitical tensions regarding Ukraine & Russia still caused hick-ups in the oil markets, with Brent prices reaching 115,06 dollars per barrel on the 19th of June. But then the barrel started a bear correction that even brought it below 60 dollars per barrel on the 16th and 18th of December. Even if oil pricing has lost much of its importance for European industrial energy consumers, due to the decoupling of natural gas from oil prices, I obviously want to share some thoughts on this sharp bear trend.

“It’s the economy, stupid”

 In general, the press is always quick in looking for geopolitical explanations of oil price trends. Even seasoned oil traders often have one eye on CNN and the other on their trading screen. However, a look at supply and demand dynamics of 2014’s oil markets is telling much more than the images of war and political leaders that color the many ‘the world in 2014’ retrospectives that we currently see on television. First of all, demand is not growing as fast as before. Economic growth in Europe and Asia is sluggish, and the one economy which is doing well, the US, is switching towards other fuels and higher efficiencies. Moreover, the US is producing more and more of their petroleum needs themselves. According to the International Energy Agency, the US have grown their oil production in the first nine months of 2014 by 3,5% compared to the same period in 2013. The US is now solidifying its position as the world’s biggest producer of oil. And they’re not there yet, but they could be heading for the enviable position of net crude exporter.

The increase of oil production in the US is caused by the rapid development of shale oil production, the petroleum equivalent of shale gas. This boom is obviously attracting much attention. But we shouldn’t forget that oil production booms are happening in other countries as well. Still according to the International Energy Agency, Canada has grown its oil production in the first nine months of 2014 by 6,5% compared to 2013, thanks to the development of oil sands. And the deep sea oil production of Brazil, causes that country to report an 11,5% increase of oil production in October compared to one year earlier (source: Forbes).

Is Opec waging a price war?

All that increasing production in non-OPEC countries should obviously provoke a reaction from OPEC countries. Traditionally, we expect OPEC to cut supplies when prices hit historical lows. But that’s not what it is doing. On Monday the 22nd of December, the Saudi oil minister, Saudi-Arabia still being the most important OPEC-member, announced that OPEC would not cut supplies, however low the oil price would drop. This strongly confirms the decision at the latest OPEC summit at the end of November not to cut.

A hawkish interpretation of OPEC’s policy of not cutting supplies sees it as a price war. OPEC is consciously dragging down prices, hoping that it will undercut the economics of that new oil production in the US, Canada and Brazil. We’ve seen OPEC (and Saudi-Arabia) attempting similar price wars in the 1980’s, then mostly hoping to stop the development of North Sea and Gulf of Mexico offshore oil production. It failed spectacularly, with the competitors continuing their development and the Saudi budget fatally hurt by low oil prices. Price wars are a tough game. Mostly because of the way that supply and demand dynamics or price elasticity work. For understanding them, you need to make a firm distinction between fixed or investment costs and variable or operating costs.

Short term price elasticity is mostly influenced by operating costs. If the price of a product drops below the operating costs, producers will stop producing the product. In terms of crude oil, if the price of crude drops below the variable costs of operating a well, the producers will shut down production from that well. Now, as far as oil production is concerned, we need to make an important remark here. Operating costs of oil wells are often quite low. Wells are often quite expensive to drill, causing a high investment cost. This is especially the case for the US shale oil and Brazilian deep sea offshore wells. But once drilled, the costs of letting the oil flow out are not very high. To understand this, look at the situation of Brazilian oil producer Petrobras. They have just invested hundreds of billions of dollars to develop their deep sea offshore oilfields. Why on earth would they stop producing from those wells now? Of course, they and their American shale oil colleagues would prefer getting the 110 dollar plus prices for their oil of a few months ago. But the less than 60 dollars that they get at this moment is still giving them some return on their massive investments. Stopping production and getting 0 dollars per 0 barrel is not paying back anything.

With its combination of high investment and low operational costs, the oil market is not a good place to see short term effect in a price war. Price warlords should therefore aim for the long term effects of lower oil prices. Investors in the US, Brazil and Canada could be frustrated and stop investing in the oil developments in those countries. Lower stock prices of oil companies seem to point in that direction. This could have only limited effect on large scale developments like those that we’ve seen in Brazil. However, it could be more effective in hurting the US shale oil development. Shale oil wells typically have steep production decline curves, meaning that most of the oil is produced in the first years after drilling the well and then the production volumes per well drop rapidly. So, you need to maintain investment in drilling new wells to keep up the overall production rate. If lower prices would cause a decline in investment, the expansion of US shale oil production could be slowed down or even reversed. However, experience in the shale gas industry has shown that investment has been more resilient to lower prices than initially thought, especially since a fall in natural gas prices coincided with a drop in the investment costs due to the falling cost of the newly developed horizontal fracking technology. Therefore, it’s all but certain that a conscious price war by OPEC (and/or the Saudis) against further investment in new oil production could produce results.

Maybe, what we are seeing is far from a conscious attempt by OPEC to wage a price war, but a simple struggle for market share. OPEC cannot idly sit by and watch the US, Brazil and Canada steal away its market share. Oil supply growth is currently outstripping oil demand growth, meaning that the oil market is currently a buyers’ market and not a sellers’ market. In such a market, price wars are usually not fought in an offensive attempt at hurting competitors, they are fought as a defensive strategy for keeping market share. In the end, at the sellers’ side everybody is hurt and only the strongest survive. The Saudis could be hopeful that they will prevail with their low cost oil production.

Are Opec and the US working together?

Amateurs of geopolitical explanations of the events in oil markets are pushing an opposite theory. Saudi-Arabia and the US are not fighting each other, they are collaborating. Flanked by the economic sanctions of the EU, they work together to lower the oil price down to levels that really hurt the Russian enemy. Early in November, Vladimir Putin himself put forward this theory by stating that he believed that politics were the cause of the lower energy price. Whether this global conspiracy theory is true or not, it is indeed effective, if you see the turmoil of the Russian economy and currency in the last weeks.


All in all, these events are showing once again how utterly unpredictable energy markets are. Six months ago, Russia, an important oil producing country was engaged in a deep geopolitical conflict, with concerns over the impact on supply causing oil prices to increase. Anyone that would have said then that by the end of 2014 the oil price would drop below 60 dollars per barrel would have been declared a nutcase. But it happened. We can make educated guesses about its causes: simple supply and demand dynamics, a conscious commercial policy by OPEC or a complicated geopolitical intrigue? Or a combination of two or even all three of these options? Which explanation we choose, probably depends more on our own personal convictions than on empirical reality. Which obviously shows that we shouldn’t attribute any predictive quality to our theories. What has happened has happened. The oil price is historically low, benefit from it. And prepare for the next move which will come just as unexpected as this decline.

Bedenkingen bij een nakend stroomtekort

Below you can find an interview in English about the Belgian situation

De angst voor een tekort aan stroom beheerst de krantenpagina’s. Terecht, want het stilleggen van drie kerncentrales maakt de kans op een (tijdelijk) deficit een stuk groter. In wezen is de situatie vrij eenvoudig. De combinatie van stroom invoeren uit Nederland en Frankrijk, industriële bedrijven tijdelijk uitschakelen en reservecapaciteiten aanspreken zou normaal gezien zelfs op een dag zonder wind en zon genoeg moeten zijn om het uitvallen van deze kerncentrales te compenseren. Problemen krijgen we wanneer het koud wordt. Dan verbruikt Frankrijk met zijn vele elektrische verwarmingstoestellen zijn stroom zelf en kan niet meer uitvoeren naar België. Dat maakt een stroomtekort waarschijnlijk.


Hoe dit stroomtekort zich zal manifesteren is een open vraag. De stroomvraag kan van uur tot uur zeer sterk verschillen. Daardoor zou een tekort zich maar gedurende beperkte tijd moeten voordoen. Wanneer elke stroomproductie installatie uit zijn voegen barst om voldoende te kunnen leveren, verhoogt uiteraard de kans op een echte black-out, een totaal stilvallen van het hele Belgische stroomsysteem. Het is de beheerder van ons transportnet Elia die dat moet vermijden. Zij lijken de nodige plannen daarvoor klaar te hebben. En Elia is een zeer gereputeerd bedrijf op het vlak van netbeheer. We mogen dus hopen dat het stroomtekort beperkt blijft tot enkele uurtjes zonder stroom in landelijke gebieden. Alhoewel ook dit voor de nodige ‘collateral damage’ zal zorgen bij bedrijven die toevallig in zo’n gebied liggen.


Als een stroomtekort zich al voordoet. Het zou ook opnieuw een milde winter kunnen zijn waardoor de vraag (in Frankrijk) niet piekt. Of koude dagen zouden met veel wind(-energie) kunnen komen. Of het zou kunnen blijken dat ons stroomsysteem over onverhoopte flexibiliteiten beschikt. Het is namelijk niet langer een systeem van alleen maar grote centrale productie-installaties maar van vele kleine installaties die in de rekenmodellen niet altijd correct in te schatten zijn. De kans op een tekort is verhoogd, maar het is geen certitude. Dit is wat beleidmaken inzake energie zo moeilijk maakt, zowel op de macro-schaal van een regering als de micro-schaal van een bedrijf dat zijn aankoop-opties overweegt. Over de toekomst kan je nooit iets met zekerheid zeggen.


Wat moet ik dan doen als bedrijf?

  • Goed opvolgen of je al dan niet in een zone ligt die Elia kan uitschakelen.
  • Samen met de technische mensen nagaan welke kritische processen je tegen stroompannes moet beschermen met noodaggregaten.
  • Indien een stroompanne grote economische schade kan aanrichten kan je verdere uitbouw van noodcapaciteit overwegen.
  • Indien je noodstroomvoorzieningen aanlegt, kan je zeker ook overwegen of je die kan gebruiken op uren waarin de spotprijzen hoog oplopen om ze op die manier wat terug te verdienen.
  • Bedenk bij dat alles zeer goed dat het geen certitude is dat een tekort met afschakelplan en hoge spotprijzen zich effectief voordoet. Kosten voor noodstroomvoorziening moet je dus in eerste instantie als een verzekeringspremie beschouwen.


Op economische vlak blijft deze situatie nu al niet zonder gevolgen. De prijs voor Belgische stroom in 2015 is al naar 50 euro per MWh gestegen. Dat is bijna 15 euro per MWh meer dan de prijzen die we momenteel zien in Duitsland en ook hoger dan in Nederland en Frankrijk. Enkel UK en Italië hebben op dit ogenblik hogere forward elektriciteitsprijzen dan België. Dit betekent dat iedereen die nu nog prijzen moet vastleggen voor volgend jaar een stuk meer betaalt. En ook hier moet je die forward prijs vooral als een verzekeringspremie zien. Indien we de winter beter doorkomen dan we dachten, dan zouden de spotmarkten wel eens flink onder die 50 euro per MWh kunnen handelen. Deze situatie toont nogmaals het belang aan van een goede energie inkoop strategie. Met een goed gedefinieerde strategie weet je precies hoe je op dergelijke situaties moet anticiperen en reageren.

Ook al doet het tekort zich straks niet voor, toch kan je er niet omheen dat de huidige situatie op een falend energiebeleid wijst in ons land. Dit is zeker zo wanneer je de problematiek in een bredere internationale context plaatst, iets wat ook de laatste weken maar al te weinig gebeurt. Het tekort aan productie-capaciteit in België doet zich voor in de context van een Noord-Europees overschot. De grote Europese stroombedrijven klagen op dit ogenblik vooral over het feit dat er te veel is geïnvesteerd. Dit maakt elke verklaring van het Belgisch probleem die veralgemeent zinloos. Professor Albrecht bijvoorbeeld, beweert dat een tekort aan investeringen in klassieke fossiele centrales onvermijdelijk is in een vrije energiemarkt waarin hernieuwbare energie wordt gesubsidieerd (zie hier). Dan luidt de vraag: waarom is er dan in Duitsland en Nederland wel geïnvesteerd? De vraag naar het waarom van de huidige situatie in België luidt dan ook best: “wat heeft België verkeerd gedaan waardoor de steenkool- en gascentrales in de omliggende landen en niet bij ons zijn gebouwd?”


Als ze deze vraag al durven stellen, dan beantwoorden politici ze vooral door naar elkaar te schieten. Politici die aan de nieuwe regering bouwen, schuiven de schuld van zich af naar de vorige regeringen. Politici die voordien het energiebeleid maakten proberen de handen in onschuld te wassen. Dat helpt ons natuurlijk niet veel vooruit. Feit is dat de Belgische politiek in de afgelopen vijftien jaar heeft gefaald in het voeren van een consequent energiebeleid. Op alle vlakken is er al te veel koud en warm tegelijkertijd geblazen. En met een grote diversiteit aan energieministers, omwille van de versnippering van bevoegdheden en vele regeringswissels, was er ook weinig coherentie. De volgende factoren in het bijzonder hadden een belangrijke bijdrage tot de huidige situatie:


  1. De oorlog die een aantal politici hebben gevoerd met eerst Electrabel en vervolgens GdF-Suez, waardoor onze grootste stroomproducent alle goesting om te investeren in zijn Belgisch productie-apparaat is verloren.
  2. Ondanks deze oorlog is de Belgische overheid er niet in geslaagd om de dominante positie van GdF-Suez echt te doorbreken. Daardoor was er sprake van grote koudwatervrees bij buitenlandse producenten om in België te investeren. Zoals een directeur van een buitenlandse energieleverancier het ooit tegen me zei: “De regering klopt zich op de borst omdat ze het aandeel van Electrabel in de productie van 90% naar 75% laten dalen. Voor mijn moederhuis is dat nog altijd een heel dominante positie en een rem op de zin om in België te investeren.”
  3. Dit probleem is aangewakkerd door het flip-flop beleid inzake de kernuitstap. Zonder zekerheid over de hoeveelheid (qua marginale kost goedkope) nucleaire productie waarmee je moet concurreren, is een investering in grootschalige stroomproductie uiteraard zeer riskant.
  4. Zelfs wanneer er al zin was om in België te investeren, is die volledig gesmoord in byzantijnse vergunningsprocedures. Zonder vergunningsproblemen had E-On een grote steenkoolcentrale gebouwd in Antwerpen, die goed van pas had kunnen komen volgende winter. Federaal minister Magnette had deze centrale een productievergunning gegeven, Vlaams minister Schauvlieghe weigerde de milieuvergunning. Een mooi voorbeeld van het totaal ontbreken van een gecoördineerd beleid. Het niet-bouwen van elektriciteitscentrales, van oplossingen voor het mobiliteitsprobleem of zelfs voetbalstadions maakt duidelijk dat het in dit land zeer moeilijk is geworden om grootschalige infrastructuurwerken vergund te krijgen. Daar moeten we ons toch vragen bij stellen.
  5. De vrijmaking van onze stroommarkt is onvoltooid. De overheid heeft zich enorm gefocust op de retailmarkt en weinig op de groothandelsmarkt. Zo is het financieel verzekeren van prijzen in de futuresmarkten nog altijd pover in vergelijking met andere landen. We hebben geen peakload en maar een beperkt aantal kwartaals- en maandenproducten beschikbaar op de Belgische futuresmarkt en de liquiditeit blijft laag. Wie een grote centrale bouwt wil goede hedgingmogelijkheden in een liquide groothandelsmarkt. Die hebben we dus niet in België.


De situatie die we nu kennen is dus eerder te wijten aan te weinig eerder dan te veel vrije markt. Het voorbeeld van omliggende landen toont aan dat een coherent energiemarktbeleid wel degelijk tot een positief investeringsklimaat kan leiden. Wat in vijftien jaar fout ging, krijgen we natuurlijk niet op een paar maanden tijd hersteld. Dit maakt de grootschalige verklaringen van de laatste dagen dan ook nutteloos. Johan Vandelanottes voorstel om kabels naar de omliggende landen leggen is een zeer goed idee. Zie hier. Maar de reeds geplande en vergunde kabel naar Duitsland bijvoorbeeld laat nog tot in 2019 op zich wachten, voor een kabel naar de Clauscentrale in Maasbracht moeten bij mijn weten de vergunningsprocedures nog opgestart worden. Ook de NVA-idee van een nieuwe kerncentrale is al even weinig een oplossing op korte termijn. Recente ervaring in Finland en Frankrijk heeft aangetoond dat tien jaar een minimum is om van de tekentafel tot productie te komen.


Bovendien lijkt nieuwe kernenergie nu ook niet zo’n goede idee, zeker niet in het licht van de huidige problematiek in Doel en Tihange. Proponenten van kerncentrales hebben altijd volgehouden dat deze betrouwbare, veilige en goedkope energie oplevert. De drie stellingen kan je in twijfel trekken.


  1. Zoals we op dit ogenblik in België merken is de betrouwbaarheid relatief. Door haar grootschaligheid maakt kernenergie onze globale energievoorziening net heel kwetsbaar. Een letterlijk klein probleem ter grootte van haarscheurtjes brengt onze hele energievoorziening in gevaar. Wanneer je de stroomproductie verdeelt over een groter aantal kleinere productie-installaties die verschillende technologieën gebruiken, ben je minder kwetsbaar.


  1. Net zoals Fukushima tonen de haarscheurtjes ook aan dat we qua veiligheid van kerncentrales niet altijd zo slim zijn als we denken. De veiligheid van kernenergie is altijd gepropageerd op basis van de lage kans op een ongeluk, wat op zich al een redeneerfout is (risico is namelijk de kans dat iets zich voordoet maal de ernst van de gevolgen, in het geval van kernergie maakt een zeer hoge ernst-factor de lage kansfactor ongedaan). Maar na Fukushima lieten geleerden weten dat de kans op een nucleair incident blijkbaar groter was dan tot dan toe was berekend. Onze kansrekening is dus niet zo robuust. Benieuwd met hoeveel de risicofactor gaat verhogen wanneer het haarscheurtjes-probleem terdege onderzocht is.


  1. En tenslotte is kernenergie helemaal niet zo goedkoop als velen beweren. De variabele productiekosten zijn inderdaad heel laag, wat hun marginale kost laag houdt. Maar kernenergie vraagt zo’n hoge investeringen dat energiebedrijven die maar willen maken mits flinke subsidies. De vaste kosten zijn immens. NVA zou er goed aan doen om eens naar het voorbeeld van de UK te kijken. EdF wil maar bouwen in de UK mits een gegarandeerde elektriciteitprijs van 92,5 pond per MWh gedurende 35 jaar. Dat is een pak meer dan wat we tegenwoordig in Vlaanderen aan subsidies betalen voor windmolens en zonnepanelen. Voor de 17 miljard pond die de UK wil geven aan een nieuwe kerncentrale kunnen ze een pak hernieuwbare energie en kabels naar de omliggende landen bouwen. Zeg me dus nooit meer dat kernenergie goedkoop is. Net zoals de regering in London zal ook NVA merken dat wij voor een nieuwe kerncentrale met flink veel subisidiegeld over de brug moeten komen. Is dat verstandig besteden van overheidsgeld wanneer de technologie minder veilig en betrouwbaar is?


Wat kunnen politici dan wel doen? Zij staan voor een zeer groot dilemma. Elke poging om als ingrijpende overheid de productie-capaciteit te verhogen, zal zich vertalen in subsidies die uiteindelijk bij de burger en/of stroomverbruiker terechtkomen. Denk maar aan de capaciteitsvergoedingen voor gasgestookte centrales. Is dat geld verstandig besteed wanneer er in de bredere Europese markt sprake is van overschotten aan stroomproductie? De keuze voor nieuwe kabels naar die overtollige MWh’en in de omliggende landen is dan ook economisch de beste. Voor een oplossing op middellange en lange termijn lijkt het me dan ook onontbeerlijk dat we nadenken over hoe we het vergunnen en bouwen van deze kabels kunnen versnellen. Moet het echt tot in 2019 duren voor die kabel naar Duitsland klaar is?


Nieuwe kabels leggen betekent echter dat we ons voor onze energiebevoorrading sterk afhankelijk maken van Europese solidariteit. En met name in het energiebeleid toont Europa zich daar niet altijd van zijn sterkste kant, waardoor een oproep tot meer eigen productie begrijpelijk is. Als we dus toch inzetten op meer inlandse stroomproductie dan lijkt het mij goed om vooral kleinschalige productie te stimuleren. We zouden bijvoorbeeld kunnen overwegen om de subsidie van wind, zon en WKK minder scherp terug te schroeven dan gepland. Investeringen in deze technologieën kunnen in kortere tijd gerealiseerd worden, de MWh’en die ze produceren dragen bij tot een verlaging van de commodityprijs en het behalen van de klimaatdoelstellingen. Ervaring in Nederland heeft aangetoond dat de WKK-capaciteit in de tuinbouwsector voor een mooi potentieel aan flexibele stroomproductie kan zorgen, wat de problemen van beschikbaarheid van hernieuwbare energie deels kan oplossen.


Over subsidies aan hiernieuwbare energie en WKK beslissen de gewesten, dus is eindelijk eens een coördinatie over de verschillende beleidsniveaus heen aangewezen. We kunnen alleen maar hopen dat de urgentie van de huidige situatie er toe leidt dat de nieuwe regering plaats maakt voor een energie-minister met daadkracht en een duidelijke bevoegdheid tot coördinatie van de gewestelijke initiatieven. Nationalistische gevoelens mogen dit niet in de weg staan. Onze markt is de Belgische markt en het probleem van de energievoorziening treft alle Belgen. Omdat de kabels erover heen lopen, zal een probleem met een stroomtekort niet aan de taalgrens stoppen.


Ondertussen is het voor komende winter “met de billen dicht”. Hopen op mild weer en/of onverhoopte flexibiliteiten in het systeem. De regering in lopende zaken heeft terecht aangegeven dat er in de afgelopen jaren wel degelijk één en ander is gebeurd om de flexibiliteit te verhogen door maatregelen te nemen inzake reserve productie-capaciteit, afschakelbaarheid van bedrijven en een noodplan. Het zou goed zijn dat politici nu kijken of er op korte termijn iets kan gebeuren om de mogelijkheden van deze maatregelen verder te maximaliseren. Zou het geen mooi gebaar zijn naar de Belgische burger dat de politici van de zittende en de zich vormende regering daarvoor samenwerken? De overheid moet ook duidelijk met de burger communiceren over het noodplan. Op die manier kunnen burgers en bedrijven zich voorbereiden. Inzake energiebeleid zijn er nu al lang genoeg politieke spelletjes gespeeld. Met een nakend stroomtekort is het tijd dat de politiek zich eens van zijn meest daadkrachtige kant toont.


E&C’s voorstellen voor het oplossen van het Belgische stroomprobleem zijn dus:


Op korte termijn (winter 2014 – 2015)
  • Kijken of de maatregelen inzake reservecapaciteit en afschakelbaarheid nog verder benut kunnen worden
  • Duidelijk communiceren over het noodplan
Op middellange termijn (winters 2015 – 2020)
  • Inzetten op kleinschalige productie door de subsidies van groen & WKK niet te snel terug te schroeven
  • Nagaan of de bouw van extra interconnectie-capaciteit met Duitsland en Nederland niet kan versneld worden
  • Onvolkomenheden inzake de werking van de Belgische groothandelsmarkt voor stroom wegwerken
Op lange termijn (na 2020)
  • In samenwerking met alle beleidsniveaus een strategisch plan voor het energiebeleid uitwerken dat België opnieuw aantrekkelijk maakt voor investeringen in productie-capaciteit
  • Het beleid inzake vergunningen van grootschalige projecten hervormen
  • Blijvend inzetten op energie-efficiëntie, daling van de vraag


The gap between Belgian and German electricity prices

Belgian year ahead baseload power in the wholesale market is now more than 14 euro per MWh more expensive than German power. In the spot markets, prices since the beginning of this year have on average been 6,72 euro per MWh more expensive in Belgium compared to Germany. Two years ago the German price was still more expensive than power in Belgium. But then German power started to drop more rapidly. I see two main reasons for these cheap wholesale prices in Germany. First of all, the rapid expansion of renewable electricity in Germany has had an undisputed bearish effect on prices. On top of that, Germany is producing much more electricity from coal than Belgium. And as coal prices have declined, this has helped to push down wholesale power prices in Germany even further.


In the last three years, wholesale electricity prices across Europe (UK being the most notable exception) have generally been falling. Simple supply and demand economics are responsible for that. With pockets full of cash due to the windfall profits of high wholesale prices in the 2005 – 2008 period and inspired by reports of a looming supply shortage, European energy companies engaged in an intensive investment campaign in new production capacity. The Netherlands, for example, has expanded its power production capacity by 8.846 MW in the 2009 to 2014 period, and most of that is conventional gas-fired and even coal-fired capacity (Source: Tennet). The supply capacity boom was further enhanced by the fact that renewable energy expanded much more rapidly than anyone had ever expected, specifically in Germany. This unexpectedly rapid expansion was provoked by generous subsidies and solidified by rapidly dropping technology costs. At the same time, the economic crisis and successful climate policies caused an electricity demand decline rather than the expected increase. The result is a global European market of overcapacity for power production.


The stupefying thing, as far as Belgium is concerned, is that amid all this excess supply it has managed to put itself in the position of a country with a supply shortage. This and only this is the explanation for the price rift between Belgium and its surrounding countries. The spread between Belgian and German wholesale prices widened recently due to the outage of two nuclear power stations in Belgium on security concerns. But this might just give policymakers a too easy excuse for the current situation. In the past years, Belgian power production capacity has dropped. It is clear that Belgian energy policy has failed to create the conditions for attracting investments in capacity expansion. Germany has not failed in achieving that. And that’s why the wholesale prices in Germany are lower.


The main reason for this failure of Belgian energy policymaking has an institutional character. I don’t want to tire foreign readers of this article with the quagmires of Belgian politics, but still, the complexity of its institutions has contributed a lot to this policy failure. In the last decade, Belgium has had many different energy ministers from many different parties. Energy policy tends to be a heavily colored by ideology, so all these changes in ministers have caused multiple turnarounds and flip-flops. On top of that, in Belgium with its complicated structure, the responsibility for energy policy is spread over the federal and regional decision-making level. Even if the federal minister seems to have most impact on security of supply issues, important aspects such as renewable support mechanisms or authorization procedures are decided by their Flemish, Walloon and Brussels counterparts (yes, city-region Brussels has a separate energy policy). This institutional framework isn’t exactly beneficial for the creation of the consistent policy that you need to attract investments in energy infrastructure which are typically high capital cost investments with extended realization periods. Examples of these policy failures are:


  1. Belgian energy policymakers have often focused on fighting highly symbolic battles with incumbent supplier and producer Electrabel (now part of the GdF-Suez group). Despite the rhetoric, it took them a very long time to really do something about Electrabel’s dominant position, discouraging alternative suppliers to invest in Belgium.
  2. Belgium launched a nuclear phase-out policy and then renegotiated it, and renegotiated it and renegotiated it. This obviously created a lot of uncertainty and refrained energy companies from investing in large-scale fossil fuel-fired power production in Belgium.
  3. Belgium (i.e. the Flemish, Walloon and Brussels’ regions) launched ambitious, generous support schemes for renewable but then rapidly withdrew them as the cost of this for the end consumer became clear.
  4. Politicians kept dreaming about energy independence and only realized the importance of increasing cross-border capacity when the security problems with the two plants surfaced. For example, there still is no cross-border capacity with Germany, it is only planned to be operational in 2019. This is obviously especially painful at this moment when German wholesale power is so much cheaper.


At the end of this month, the Belgians go to cast votes not only for their European representatives but also for their federal and regional parliaments. Many are hopeful that after these elections, having a few years in a row without new elections will create the sort of stable political climate necessary to put en route necessary reforms. Let’s hope we can also see the sort of reforms of energy policy necessary to normalize energy pricing. Now that investment costs in renewable energy have dropped a lot, it should be carefully considered whether some extra support for renewable couldn’t be a cheap and climate-friendly part of the solution. And there is no doubt that in a context of supply shortage with excess supply capacities in neighboring countries, rapid investment in cross-border capacity is an inevitable option. With the current price differential between Belgian and German power in view, we highly recommend to speed up the Alegro project that connects both markets. Do we really need five more years to build that line? Supporting gas-fired power stations with capacity payments is a bad idea. It will cause extra cost as these subsidies find their way to the end consumers’ bills. And with their high marginal costs, I can’t see how these gas-fired MWh’s will reduce the commodity price.


With the price rift peaking, industry representatives were very rapid to complain about the disadvantage it creates for Belgian companies competing with German companies. We obviously have to highlight here that the wholesale power price is only part of the overall electricity bills. On top of that, a consumer pays a retail margin to its supplier, but these margins are minimal in both countries, so they are not creating much difference. The main difference can be found in the grid fees and taxes. These are much higher in Germany than in Belgium, but energy-intensive consumers can benefit from large reductions on these high grid fees and taxes. The situation is therefore as follows. If you’re a German company for whom electricity cost is more than 14% of its added value and with more than 7.000 hours of load duration, you will pay almost nothing for grid fees and taxes. But many German companies that don’t meet only one or none of these criteria pay a lot more for consuming power than any Belgian company. Nevertheless, coming on top of important differences in grid fees and taxes, large price differentials in wholesale prices are creating unnecessary competitive disadvantages within Europe. However, we have to consider that today’s winners may be tomorrow’s winners. Belgian industry representatives pleaded for a long time to increase cross-border capacity on the French border and not on the Dutch and/or German borders. This wrong choice of border is now contributing to the competitiveness problem.

My best wishes for 2014 (wishes, not forecasts!)

Want a short resume? Watch our video here: https://www.youtube.com/watch?v=h1JkWacc8QA&feature=youtu.be  

In my home country Belgium, we have the nice tradition of ‘New Years letters’. Children write letters full of semi-philosophic observations and wishes which they read to their parents and grand-parents on New Year’s Day. In this tradition, I also want to write a few words in which I look back on trends observed in the past months and try to look forward on what could happen in the new year. As I have remarked before, I am not in the forecasting business. So don’t expect any forecasts on prices or events. I will try to think about what might happen to guide the reader as to what she/he should look out for in the next months in the news on energy markets.

1. Will the European gas prices move? Up? Down?

The gas markets in Europe have traded flat in the past two and a half years. Impossibly flat. The main concern of analysts in this market was trying not to fall asleep. Prices traded towards a level of 26 – 28 euro per MWh in the wake of the Fukushima disaster. Upward pressure continued as Asian demand remained high. And this was / is not just more demand in Japan due to nuclear shutdowns. New LNG import terminals in China, South-Korea and other Asian countries have also put pressure on the demand side. At the same time, expected LNG export projects in Australia were delayed. Without further delays, the first of the Aussie new LNG will start flowing in 2014. As of 2015, they are expected to hit the market in full strength and US LNG export projects add extra volumes. Can this (anticipated) increase in supply cause a downtrend in 2014? Or will, on the contrary, prices increase as supply projects suffer further delays, Asian demand continues to soar and European demand picks up in the wake of an economic recovery?

A downtrend in gas markets would be a welcome relief to Europe’s energy markets. In the last three years, consumers haven’t had any chances of securing some good prices for future gas budgets. The same would be true for power consumers in the UK, where power prices are closely linked to gas prices. A dip in the gas price would be even more welcome for the power production sector. With relatively high gas prices, low coal prices and large amounts of renewable power on the grid, the owners of gas-fired power stations have been butchered in the last two years. This became clear in the last days as Germany had to announce that its lignite consumption peaked in 2013. A drop in gas prices that improves gas power plant economics would therefore also be good news for our climate policy.

2. Will low wholesale prices for electricity persist?


Certainly in Germany and Central Europe, the wholesale electricity prices hit historically low levels in 2013. Causes have been: low coal prices, increasing renewable energy production, low prices for emission rights and declining power demand. This has obviously enabled end consumers to fix some really low budgets for power (commodity) for the next years. But we might see some dark clouds on the horizon:

  • The low prices have slashed the profitability of power production. Therefore, we should expect a normal economic reaction: i.e. shutdowns of power plants that lead to a decline in supply and increasing prices. This trend has started already, certainly as far as the unprofitable gas power stations are concerned. Governments are trying to stop this by denying plants the right to shut down or by considering capacity payments to gas-fired power plants (see below). Moreover, it is highly likely that other than economic reasons will also influence our power supply situation.
  • Seeing that their climate and other environmental policy efforts are undone by increasing coal and lignite consumption, governments might decide to shut down coal and lignite-fired power stations, a phenomenon we have seen already in the UK.
  • In many countries, governments are also turning back or rather reducing their programs for supporting renewable energy. They might take that a step too far and slow down the development of renewables too much.
  • And what if in 2014 measures are taken regarding the emission trading system (ETS) that go further than the cosmetics of the back-loading proposal? What if a real shortage of emission rights prices is created? Buyers (and policymakers) have to take into account that theoretically every 1 euro per ton increase in emission rights prices leads to a 0,5 euro per MWh increase in wholesale electricity prices. This theory was empirically proven in 2005 – 2006. And the impact might even be larger this time as more marginal MWh’s are produced from coal, which has higher emissions per MWh factors.
  • Many economists are quite upbeat about Europe’s economy in 2014. It would be very interesting to find ourselves in that situation, not just from a socio-economic point of view. A period of economic growth would show us whether the decline in power (and natural gas) demand observed in the last years can be purely attributed to the economic crisis or whether it was also caused by a more fundamental trend: the effect of climate policy. But a recovering power demand could have a price increasing effect.

As you can see, there are many reasons to observe power markets carefully this year and watch out for signs of a reversal of the current downtrend. However, in the first week of the year, the market was rather pointing in the other direction. It could therefore very well be that the combined forces of low coal prices, unstoppable renewable energy development and declining demand continue to push down prices. And – who knows – if we would see a downtrend in gas prices (see above), we might find even lower prices. If the past years have learned us anything about energy markets, it is ‘Never say never’.

3. Will the non-commodity part of the power bill continue to increase?

Even if commodity prices for electricity have reached historical lows, for many consumers across Europe the total price of electricity has increased sharply. This is due to the increase of the non-commodity part, the grid fees and taxes. Europe’s power supply system is being rapidly transformed from a centralized system with large-scale power stations to a locally distributed system with many small-scale power stations. It is logic that such a systemic transformation causes cost increases. Also, we have to consider that the market system in itself has been redesigned. In the past, markets were regulated and its operators were state-held and/or heavily politicized monopolists. Systemic transformations such as the construction of nuclear power plants or the continuing use of coal when it was no longer economic to produce it, have been and continue to be heavily subsidized. However, these subsidies were often paid from other sources than the power consumers’ bills. Therefore, they were less visible. In today’s liberal markets, every cost of the power market transformation is passed through in the bills of end consumers. This makes the cost of the transformation much more visible than what we have seen in the past.

This obviously doesn’t mean that the cost increases should be neglected. In those countries that have pushed for more renewables hardest, we now see impressive add-ons for renewable energy on the electricity bills. Germany is the most obvious example, with the contribution to support renewables now almost twice as high as the wholesale value of the electricity. In other countries such as Spain, Italy, Belgium (especially the Southern part) or (increasingly) the UK, we see a similarly high renewable energy bill for the end consumers. Even if price increases were perfectly predictable when politicians introduced the renewable support schemes, politicians have reacted to them with surprise and have announced reforms of the renewable support schemes. They might take this too far and stop the further development of renewables. I personally think that this would be a sorry thing. The efforts of the past decade have brought down the cost of renewable energy technology. It’s never been cheaper to invest in more renewables than at this moment. It would therefore be very disappointing if we stop the efforts right now. It would be like stopping while the finishing line is in sight. However, maybe countries that have so far been laggards, such as the Netherlands or many Central European countries, should take over the efforts. That would also be a good thing for the balance of both the grids and the internal market for electricity in itself.

The high add-ons for renewable in countries such as Germany, are largely caused by ‘stranded costs’, compensation for high subsidies that were guaranteed to investors in renewable energy when the technology cost was still much higher than it currently is. It should therefore be carefully considered how this cost is distributed in time and across the different actors. Protection of Europe’s electro-intensive industry should be an important consideration. And should we really pay back these costs in the next five to fifteen years or shouldn’t we rather finance them from a long term credit? The next generations will profit (from an environmental but also from an economic point of view) from our current efforts to develop renewable energy. Is it therefore a case of inter-generational injustice when we pass on part of the renewable energy bills to these future generations? In the North of Belgium (Flanders) reforms of the renewable energy support mechanisms seem to have succeeded in keeping the costs at bay without completely stopping the development of renewable energy. Germany has also started its reforms and is discussing the distribution questions actively at this moment. This week, we saw a rather disappointing ‘stopping in the bud’ of the intergenerational discussion by the President of Bayern and of government party CSU Ernst Seehofer. But I would be surprised if this ‘spreading the cost in time’ isn’t discussed again in Berlin.

I am not entirely confident that politicians will manage to make these reforms of Europe’s renewable energy policy a success. I have seen too many cases that prove that politicians’ interventions in the energy market always cause unwanted side effects and price increases. This lack of economic prudence shows itself again as the effects of more renewable are being discussed. Policymakers are loudly protesting the current cost increases caused by renewable energy development. However, at the same time they want to hand out money (capacity payments) to gas-fired power stations to solve a problem (power plant shortage) that hasn’t manifested itself yet, against all forecasts. Who will pay for such capacity payments? Yes, the end consumers in the shape of another add-on on the electricity bill. Worst case, we will see reforms that stop the development of renewable energy but because of the stranded costs issue that doesn’t lead to any cost improvements and capacity payments to gas-fired power stations continue to increase the power bill.

As in every ‘New Year’s letter’, I want to end this blog article with some good-hearted- if slightly naïve wishes. I wish all of you energy buyers out there for 2014:

–        A good dip in the gas markets,

–        Continuing low wholesale power prices (and, if possible, a little bit lower still?),

–        Politicians that manage to reform renewable energy support mechanisms in a cost-efficient and rationally distributed manner.

On the insanity of taxing imported solar

The European Commission has decided today to slap an import tax on solar panels from China. It is claimed that Chinese panels are sold at a price below their cost of production thanks to subsidies for solar manufacturers by the Chinese government. The cost of PV-cells has indeed dropped remarkably sharp since Chinese manufacturers have started to mass-produce them. And the flood of cheap Chinese panels has pushed European manufacturers out of the market and in some cases into bankruptcy. So, if it is indeed the case that this was due to subsidies, an import tax seems justified.


The fact that the solar panel market is now dominated by Chinese manufacturers is a particularly painful story for Germany. The country launched an ambitious subsidy scheme for the usage of solar power more than a decade ago. When the technology cost of solar panels was still 4 to 5 times higher than currently, Germany obliged its grid companies to pay as much as 450 euro as a feed-in tariff for the solar power produced on the grid. That is more than 10 times the current (wholesale) market value of that power! These stiff subsidies caused Germans to mount solar panels on their roof more rapidly than any other nation in Europe, or even the world. For your information, Germany isn’t a particularly sunny place. But all these costs of feed-in tariffs high above market values had to be compensated. Through electricity bills, German consumers pay EEG-Entgelte, and this payment for the green power has risen as high as 52,53 euro per MWh in 2013 and might rise to 75 euro per MWh next year. A large part of these costs are there for compensating solar power plants built when technology cost was still much higher than today, plants that continue to receive high feed-in tariffs.


With the heavy subsidies, the demand for solar panels soared and a market was created in Germany. Out of the blue, solar technology champions arose. And as these companies applied the robust German engineering capabilities, the sector saw a rapid increase in economies of scale and rapid decrease of technology cost which brought PV to the point where the Chinese took over. Adding their low-cost manufacturing capacities and – as assumed by the European Commission – subsidies, they brought down the cost of solar panels even lower, below the costs at which the German companies could produce. So, from a German point of view, this is more or less how the situation looks like. A German electricity consumer still pays a massive EEG bill, as a sort of pay-down on the capital necessary to develop economically viable solar technology. But now the wealth and jobs in the solar industry are delocalizing to export subsidizing China. Germany invested (and continues to invest) massively in the development of solar technology, and now other are running away with the bounty. Hurray to import taxes then?


Not really. The decreasing cost of the panels has brought solar technology near the ‘grid parity’ level. Households, with their higher power bills than industrial consumers, can pay back the investment in solar panels within a reasonable timeframe with the economies on power bills only, they no longer need subsidies. In those countries where generous subsidies were granted earlier, like Germany, Belgium and Spain, they have been brought down thanks to this. Grid parity means that the solar power production can continue to expand without the need for extra subsidies that continue to push up the green power bill for end consumers. Import taxes on the cheaper solar panels will push their price up again, away from that grid parity level.


If European countries want to continue to expand their solar power productions without cheap Chinese panels, they will have to raise the subsidies again. We should expect this to happen, if Europe is serious about its climate policy ambitions (20% renewable power production by 2020). In that perspective, this move to increase the cost of renewable energy production seems like an act of masochism. No country or group of countries is anyway near as ambitious as Europe in terms of climate policies. And even if we don’t always realize it, the results are quite spectacular. On some days, Germany is producing as much as 50% of its electricity with solar panels. For some environmentalists, the cost argument of this greenery is hardly valid. They see only benefits. I agree that in the long term, the green transformation of our power production apparatus will be a great asset for Europe for several reasons:


  • In economic terms, you have to take into account that even if they have high investment costs, solar panels and wind power have very low operational costs. That means that once the investment costs have been amortized, the cost of producing electricity with them is quasi zero. We are already seeing the effects of this in terms of decreasing wholesale prices for German power. So, in the long term, large shares of renewable power production will result in lower energy prices.
  • In environmental terms, the positive effects on carbon reduction are undeniable. However, we have to take into account that Europe’s reductions in carbon emissions are more and more just a drop in the ocean of extra emissions from emerging economies. Still, if Europe’s carbon emissions went down again last year, the many solar panels that you can see on European rooftops now contributed to this. Moreover, producing more energy with solar panels (and windmills) also generates extra environmental benefits, such as reduced emissions of other pollutants such as mercury.
  • As the wind and the sun are not to be imported from the Middle East or elsewhere, increasing renewable energy production will also have beneficial effects on Europe’s security of supply.


However important these long term benefits might be, we should not be naïve about the economic impact of expanding renewable energy consumption in the short term. The high investment costs will continue to be pushed through to end consumers in terms of subsidy compensation schemes. And on top of that, the delocalized and intermittent character of the solar (and wind) power will necessitate extra investment in grids and in back-up power production facilities and/or storage, pushing up the non-commodity part of the electricity bill even more. In this perspective of rising short term costs due to greenery, it looks foolish to push an investment cost increasing measure such as import taxes on cheap solar panels.


The EU needs to become more adult about its energy policies. Several countries want to shut down their nuclear power plants. Coal-fired power plants are also under pressure because of ever stricter emission regulations. And we refuse to add more home-produced natural gas production from our shale layers. That means that Europe is counting heavily on its climate policies for reducing consumption and increasing the share of renewables. There are many figures to support that this policy is quite successful. The good news is that the technology cost has fallen. This means that we can continue along this road at a cheaper (extra) cost. In the middle of a crippling economic recession it looks like utter foolishness to spoil that by introducing stupid import taxes. The EU policymakers have to listen very carefully at the local politics in the Member States. When renewable power subsidy schemes are introduced, all is glory. Politicians proudly open the first renewable power plants. But later on, as the cost for the public is revealed, they become more critical. Many countries are now at that saturation point. An increase in the cost of solar panels could kill off their last enthusiasm for renewables. It would be a pity if Europe stops its road towards more renewable energy exactly when that energy has become so much cheaper. Pragmatism about the short term economics can help us achieve the larger good of our long term goals regarding renewable energy.

Time for action on Belgian industrial power prices

Febeliec, the Organization of large Belgian energy consumers published an alarming report this week on the prices that Belgian industrial consumers pay for electricity compared to their competitors in the Netherlands, Germany and France. For both parts of the country and for all types of consumers, Belgian power prices are clearly more expensive than in any of the surrounding countries. Industrial consumers pay 6,5 to 10 EUR/MWh more on the total electricity price in Flanders and 7 to 25 EUR/MWh more in the Walloon region. And that is compared to the average price similar consumers pay in surrounding countries. More than these figures, the relative differences are telling. Large industrial consumers face a 12% (1 TWh consumer in Flanders) up to 45% (100 GWh consumer in Wallonia) price handicap for electricity compared to their Dutch, French and German competitors. Recently, several large Belgian industrial companies have announced that they will close down plants in Belgian, with the loss of many jobs as a result: Ford, ArcelorMittal, Caterpillar, Duferco, Saint-Gobain. Not all of them are energy-intensive, but it is clear that such an energy price handicap is not keeping these companies here. Febeliec is more than right in calling for action.

First of all, my compliments to Deloitte, that made this study for Febeliec. Often, studies comparing energy prices fail to produce relevant results, especially when they are based on empirical data such as traditional surveys. What individual companies pay is the result of a large number of parameters. It is hard to find much line in such diversified empirical data. Deloitte has chosen a more theoretical approach. Studying baseload prices, they avoid the trap of drawing conclusions from incomplete and/or unrepresentative data. Deloitte has studied baseload prices for the commodity part of the bill and the official tariff structures for grid fees and taxes. Doing so, it can draw pertinent conclusions on structural differences. These have been checked by the expertise of Febeliec, but I can’t imagine anything else than a broad confirmation.

In the conclusions, we can see a few big lines:

1. The bad position for Belgium can be explained by: lower exemptions for Belgian large consumers compared to Germany, lower reduction on wholesale commodity compared to France and higher overall tax levels compared to the Netherlands and France.

2. Inside Belgium, there is a structural difference between the Walloon Region and Flanders, which is completely due to the difference in taxes on power consumption.

3. The competitive disadvantage is biggest for the ‘smaller’ large consumers, the consumers of ‘hundreds of GWh’s rather than those of TWh’s’. But obviously, the larger consumption of a TWh consumer leads to a larger disadvantage in total euros per year.

Having an insight into the energy bills of more than 200 mid-sized and large energy consumers in all of the countries in the study, we can only confirm these conclusions. They are the logical consequence of the power market policy in the different countries. We can summarize that policy as follows:

France has never fully embraced electricity market liberalization. It wants to continue to give the price advantage of its nuclear power production to its consumers, both industrial and residential. The loi NOME introduced an element of competition, but the mechanism still causes prices to be lower than those in the liberalized surrounding markets, although recently, the drop in prices in Germany has caused the French power price advantage to disappear.

The Netherlands manages to keep its industrial power prices reasonable by keeping grid fees and taxes at bay. Contrary to popular belief, the Netherlands is not the Walhalla of renewable power. Yes, there are many windmills, but if you look at them closely, you will see how old most of them are. In the last decade, the Netherlands hasn’t had the programs of massive subsidies for renewable energy like we have seen in Germany and Belgium.

Germany has very high grid fees and taxes. But it has also adopted a policy of conscious protection of large consumers of energy. With the Härtefall regulation, an German energy-intensive company can get massive exemption of the extremely high EEG-entgelte, the tax for paying renewable power subsidies. And it gets even better if your load duration exceeds 7000 hours, which means that you have an extremely stable off-take of power, which is only possible if you use the power for stable, around-the-clock and electro-intensive processes. Such companies pay 0 euros for using the grid in Germany. This might give the impression that Germany is a power consumer’s paradise. But that is not the case. The Febeliec study is focusing on those very energy-intensive companies only. For many others, the cost of power in Germany is extremely prohibitive, much more expensive than in Belgium.

Belgium has a power market policy that is … typically Belgian. And I’m not just referring to the difference between the regions. Belgian energy policy fails to make firm choices, such as the deliberate measures for protecting large consumers in Germany. Belgian energy policymakers try to protect small consumers (especially residential) which waters down the potential for protecting large industrial consumers. Moreover, politicians don’t always take their responsibility. They broadly smile before the camera’s when they open another renewable energy production site. But when it becomes clear that the subsidies for renewable have caused a derailing of the tax part of the power bill, they look the other side. They blame the suppliers and the lack of competition and refuse to take responsibility over the cost-increasing effect of renewable energy policy. Well, the Febeliec study is clearly showing that the main problem are the taxes, and not the market. Energy producers in Belgium are not selling their product at a structurally higher price than producers in neighboring fully liberalized markets such as Germany and the Netherlands (although there is quite a big gap with Germany at this moment, but it is explicable).

The problem is clearly larger in Wallonia. The Green Certificates system in the Southern Region of Belgium has continued to pay out much larger subsidies to owner of solar panels for a much longer time than the system in Flanders. The Walloon Government is currently reviewing the green certificates system, but the high subsidies have caused an investment boom, meaning that a lot of owners will continue to benefit from these high subsidies, causing further inflation of the cost to be reflected in energy taxes on consumers’ bills. The Febeliec study is confirming what we are seeing in the power bills of our Belgian clients: there is a big problem with the cost of green power in Wallonia. If you know how much investment costs in solar panels have decreased in the last four years, this problem of over-subsidizing is shocking. It might have caused the creation of jobs in the solar panel sector. Subsidized jobs, I should clearly say. If that causes the loss of industrial companies and non-(or less-) subsidized jobs, this is a very painful evolution. We hope that it is not too late to cure this, and that the Walloon government will increase the exemption of green certificates costs to industrial consumers, just like the Flemish government has done earlier. And we hope that the Febeliec study will inspire both governments to make even bigger efforts to protect the energy-competitiveness of our economy. And they should not just think about the large single-site companies. There are many companies that use a lot of electricity scattered over different sites. As exemptions are calculated on a site-by-site basis, they often pay an extremely high power bill. This should be considered when reviewing exemption systems. Finally, we hope ministers think about the Febeliec study before they air unnecessary and cost-increasing ideas such as the creation of a capacity subsidy for gas-fired power stations, or the construction of a doughnut artificial island to store renewable energy at sea.

German Cal 14 baseload power drops below 42 euro per MWh

It was the summer of 2005 and we had just created E&C, a brand new energy procurement consultancy focused on servicing clients in taking energy price fixing decisions. The price of year ahead electricity in Belgium rose above 50 euro per MWh. Our phone was red hot with clients in panic. Such price levels were unsupportable! Little did we know then that this was just the beginning of an uptrend that would culminate in baseload prices near 100 euro per MWh in the spring of 2008. Then came the crisis and a sharp correction of the energy markets. As soon as the price dropped below 50 euro per MWh, every client wanted to fix. What seemed like a nightmare price level three years before was now generally described as “an opportunity we don’t want to miss”. And when in the spring of 2011 and in the wake of the Fukushima disaster baseload power prices in North-Western-Europe jumped back above 60 euro per MWh, everybody was so sad for not having fixed more at levels around 50 euro per MWh.

Today, the Belgian Cal 14 baseload has traded at 44,5 euro per MWh. And late in the afternoon, our jaws dropped as we saw the German Cal 14 baseload contract drop below 42 euro per MWh and as low as 41,7. Who would have thought that within less than two years we would see such historically low prices, when in March 2011, Frau Merkel announced the shutdown of seven nuclear power plants? If anything, today’s prices are once again reminding us of the fundamental unpredictability of energy markets. The only thing you should expect in energy markets is the unexpected. The clients I speak to these days can only express disbelieve. Is this possible? Yes, it is, and it is happening right now. Moreover, there are solid reasons for power prices to drop so low:

  • Coal prices have dropped back below 100 dollar per ton. There are two main reasons for this. The first one is the increased (shale) gas production in the US. Across the Atlantic, power producers have switched to gas-fired production. Excess American coal is flooding the world markets. On top of that, China has started to import less coal as it is expanding its coal production.
  • Demand for power is in a steadily declining trend. This is obviously due to the weak economic performance in Europe. But that is not the only reason. Heavy energy intensive industry moving out of Europe is another cause. And I am convinced that the declining demand is also a result of Europe’s climate change commitments. Just think about the lamps you currently buy. They consume just ten percent or even less of what you frequently bought eight years ago. We also observe that many industrial power consumers have gone through effective power consumption reduction programs.
  • Increasing production of renewable energy is another reason for declining power markets that is to be attributed to climate policy. It is not a coincidence that Germany, with its continuing expansion of renewable power production is currently at the lowest level. MWh’s produced with windmills or solar panels have a zero marginal cost and their increasingly massive presence on the grids causes overall price levels to decline. And despite the fact that in many countries the subsidies to install renewable technology have been reduced, the growth of renewables continues.  Solar panels are claimed to have reached grid parity. Thanks to the rapid decrease of the price of the technology, residential consumers in many countries now no longer need any subsidies to earn money with the panels they mount on their rooftops.
  • The declining price of emission rights is an example of how European climate policy has failed. In the EEX spot market emission rights have been trading below 5 euro per MWh this week. As everybody starts to realize that the European Union is not capable of solving the problem of over-allocation, will we see that price drop back to levels near zero?

The downtrend is strong, supported by fundamentals and is still going on. Of course, at any time something can happen that makes the downtrend turn around. Emission regulations could oblige power producers to shut down coal-fired plants. Or the failure of emission rights trading might be compensated with the introduction of carbon taxes, like we have seen in the UK. Or demand for power might pick up in a strong economic recovery, something we all hope for. Or more nuclear power plants might be shut down in the wake of some safety incident. At this moment we can only recommend to keep yourselves ready to fix prices when this fine downtrend comes to an end. In the meantime, “don’t catch a falling knife”. So many clients are unhappy today for fixing too much of their 2014 prices at levels just below 50, as they esteemed that the market would never drop much lower than that level. Again, their expectations about the market trumped them. So, don’t think you are dreaming, the price in Germany really has dropped below 42 and the downtrend continues.