Wholesale power prices in Belgium are now considerably higher than in its big neighbour Germany. In addition, Belgium is the only country in North West Europe to be faced with an electricity supply shortage. This situation is caused by a long series of policy failures on the part of the Belgian government, which has failed to create stable investment conditions, a competitive market and adequate interconnections, argues Benedict de Meulemeester, CEO of the international energy procurement consultancy E&C.
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 higher than in Belgium. But then German power prices started to drop more rapidly. I see two main reasons for these low wholesale prices in Germany. First of all, the rapid expansion of renewable electricity in Germany has had a bearish effect. 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 further.
In the last three years, wholesale electricity prices across Europe have generally been falling (UK being the most notable exception). 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 period 2009 to 2014, 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, especially in Germany. This unexpectedly rapid expansion was caused 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.
Different energy ministers
But this might just give policymakers too easy an excuse for the current situation. Over the past few years, Belgian power production capacity has actually declined. It is clear that Belgian energy policy has failed to create the conditions for attracting investment in capacity expansion. Germany has not failed in achieving that. And that’s why 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 heavily coloured by ideology, so all these changes in ministers have caused multiple turnarounds and flip-flops.
Supporting gas-fired power stations with capacity payments is a bad idea
On top of that, in Belgium with its complicated political 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.
Here some concrete examples of these policy failures:
- 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.
- 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 prevented energy companies from investing in large-scale fossil fuel-fired power production in Belgium.
- Belgium (i.e. the Flemish, Walloon and Brussels’ regions) launched ambitious, generous support schemes for renewables but then rapidly withdrew them as the cost became clear.
- 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 in place 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 renewables 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 neighbouring countries, rapid investment in cross-border capacity is a good option. With the current price differential between Belgian and German power in view, we highly recommend to speed up the Alegro project – the first direct link between the German and Belgian electricity markets. This is now scheduled for 2019, but do we really need five more years to build that line?
By contrast, supporting gas-fired power stations with capacity payments is a bad idea. It will cause extra cost as these subsidies find their way to 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 growing, industry representatives were quick to complain about the disadvantage it creates for Belgian companies competing with German companies. That’s understandable, although it should be noted that comparisons between the German and Belgian situation are not that simple. First, the wholesale power price is only part of the overall electricity bill of course. Consumers also pay a retail margin to their suppliers. As these margins are minimal in both countries, they don’t create much difference.
The main difference can be found in grid fees and taxes. These are much higher in Germany than in Belgium, although many energy-intensive consumers in Germany benefit from exemptions or reductions on grid fees and taxes.
It should also be noted that, ironically, in the past those same Belgian industry representatives lobbied to increase cross-border capacity on the French border rather than the Dutch and/or German borders, as they wanted to profit from (what was then) cheap nuclear power, That now turns out to have been the wrong choice.
Nevertheless, large price differentials in wholesale prices do create unnecessary competitive imbalances within Europe and should be remedied. It is high time for Belgium to catch up with its neighbours.
Benedict de Meulemeester is owner/founder of the international energy and environment consultancy E&C. This article was reproduced with permission from his blog http://energytics.wordpress.com.