This special publication documents the findings of the 2012 European Power Leadership Forum, hosted by Bloomberg New Energy Finance on 13-14 November in Königswinter, Germany. The Forum convened more than 50 thought-leading experts from across the European power industry, from utilities, technology and service companies, government bodies, finance providers and nongovernmental organisations.
Participants discussed the challenges and opportunities facing the industry through focussed panel discussions and an interactive business simulation. They invested in, and compared, different market designs reflecting the debate on rewarding reliable capacity now taking place across Europe.
Executive Summary
Critical issues facing the European power industry: participants felt that the major issues facing the industry in 2012 had shifted from the state of the economy caused by the European financial crisis in 2011 to the effects of renewable support and capability of the transmission network to meet the demands being placed on it.
Demand has disappeared: participants were notably more pessimistic on demand compared with the 2011 Forum. The significant decline in power demand over the last 12 months has hit home and there was a strong feeling that this demand has gone forever as a result of lost industrial capacity, at least partly driven by low US natural gas prices.
Investment will still flow: negative spark spreads, reflecting the collapse in demand, continued renewable build-out, low carbon prices and relatively high gas prices have stalled much investment in gas-fired generation. Nonetheless, some investment is still going ahead without the mooted capacity payments. This reflects equity investors taking very long-term perspectives, or looking to make strategic geographical or industry moves. For these investors, the debt market is still open. Investors at the Forum felt that the investments needed in renewable capacity would continue to flow, attracted by solid revenue streams in a time of great uncertainty.
Reliable capacity: policy-makers have identified the need for additional payments for reliable capacity, and several regulators are moving to implement these types of scheme. While depressed spreads are limiting new investment, regulators are nervous about allowing existing plant to retire. However, there remain significant concerns about the need for capacity payment schemes and their impact on the ability of the EU to build a truly integrated energy market.
Forum participants were split on whether energy-only markets could deliver the capacity needed without these new mechanisms. Deeper analysis of this issue revealed that the ability of energyonly markets to provide sufficient incentives and the need for capacity mechanisms is probably one of scale. At moderate levels of renewable penetration, energy-only markets are likely to provide sufficient incentives for new entrants to make required returns. However at higher levels of penetration, the decline in prices and run hours created by the renewable build dominates and some form of incentive to build and maintain dispatchable capacity will likely be needed.
The challenge to industry is to navigate a future comprising negligible demand growth and increasing penetration of renewable energy, much of it distributed. The main pressure will be felt by incumbent utilities whose fossil assets will face fewer run hours as more renewable energy is built. The big question is whether these major players can find ways to reinvent their business models to allow them to come through this period without full re-regulation of the electricity market.