The CEO’s of Europe’s major energy companies  seem to be in an unenviable position. They complain that they are facing a ‘perfect storm’ and warn policymakers that policies need to be drastically reformed or European security of supply might go under. In his first post for Energy Post, our chief editor Karel Beckman wonders if things are really that bad – and has some tips to offer to our beleaguered energy executives how they might withstand the storm.

Photo by Scamelot

A zen student came to a broad river. When he saw his master on the other side, he called: Master, how do I get to the other side? Fool, shouted his master. You are on the other side already!

Judging from recent statements by Europe’s energy business leaders, it seems that European energy companies are about to follow the example of Cyprus and Lehman Brothers, to the point where, unless quick action is taken, the lights may go out across the Old Continent.

 On 22 May, the CEO’s of eight European energy companies (Fulvio Conti of Enel, Gertjan Lankhorst of Gasterra, Gérard Mestrallet of GDF Suez, José Ignácio Sanchez Galan of Iberdrola, Paolo Scaroni of ENI, Peter Terium of RWE, Johannes Teyssen of Eon and Rafael Villaseca Marco of Gasnatural Fenosa) said in an alarming joint statement that  they “are experiencing a perfect storm which is endangering security of supply and the transformation towards a low-carbon economy, as well as undermining their capacity to attract capital.”

So what are the problems faced by these mighty CEO’s? That is more difficult to discern from their statement. It says that “The lack of visibility and regulatory uncertainty will inevitably lead to an absence of energy investments with negative effects on security of supply, employment and reactivation of the European economy.” I am not sure what they mean by “lack of visibility”, but yes, “regulatory uncertainty”, that’s no doubt a serious issue in the European Union. Then again, it is not exactly a new problem.

For the rest, the statement does not quite make clear why these energy companies are about to fall over. It does contain four recommendations for policymakers, from which we may perhaps infer what is keeping our CEO’s awake at night. They call for a “revamped EU approach” with the following “fresh elements”:

“1. An improved market design, including a European coordinated approach to capacity mechanisms in which all assets contributing to the security of supply of European customers are fairly remunerated.

2. A European carbon market able to support climate-friendly technologies and in which a reliable perspective is provided, notably, by establishing ambitious but realistic and stable post-2020 greenhouse gas emissions targets.

3. A more sustainable approach to the promotion of renewables so as to reduce costs for citizens and favour greater convergence between Member States.

4. A strengthening of policy framework to trigger investments in promising technologies, such as energy storage, new renewables, shale gas and smart grids.”

There does not seem to be too much wrong with these recommendations, except that they are rather vague. “An improved market design”, “a strengthening of policy framework”, “a more sustainable approach” – I am sure we can all agree to that. But what are the burning concrete issues here, except for the call to fix the carbon market?

The Vice-Chairman of GDF Suez, Jean-François Cirelli, who is also the President of Eurogas, was a bit clearer when interviewed by Reuters a week earlier, on 15 May. Speaking about the gas sector in particular, Cirelli said “The state of affairs in the gas sector in Europe is disastrous”, adding that without policies to boost investment the power supply of some countries could be at risk.

According to Cirelli, Europe’s gas sector has been hit by low growth in demand for electricity, the renewable energy boom and competition from coal-fired plants – the Three Riders of the Apocalypse which I am sure you are all familiar with by now. You know the story: US shale gas, cheap US coal imports, rock-bottom CO2 prices, and so on.

Cirelli called on European leaders to use the EU energy summit on 22 May to “find ways to restore investments”. He said “all investment in thermal power generation had ground to a halt, with only renewable energy still attracting investors, but only because of the associated subsidies.” He also said that “Europe needs gas-fired electricity plants as they alone are flexible enough to back up intermittent power from renewables and called for an EU-wide system to guarantee backup power.” Cirelli concluded that “the European market has the ingredients for a perfect storm.”

Tight supply situation

So how stormy are things really for our poor energy sector? Let’s look at the gas sector first. Cirelli said in the same Reuters interview that “EU gas consumption dropped two percent in 2012 after falling 10 percent in 2011. Half of the decrease was caused by lower gas consumption by power plants, the other half to a structural fall in final gas demand, notably the effects of energy efficiency and substitution.”

OK, 2% lower consumption coming on top of a 10% drop, not very nice. But come on guys, cheer up, you’re not the only ones who are having a hard time at the moment. There is an economic crisis going on, you know. Car dealers would be wildly happy if they could report a 2% drop in sales for 2012. And what do you think things are like in the journalism business?

Moreover, in addition to the crisis, there are some trends at work here that could have been anticipated. Energy efficiency. Substitution – by renewables presumably? Did this come as a surprise to the energy companies? Let’s face it, the EU and its member states have been pushing energy efficiency and renewable energy for some time now. No “regulatory uncertainty” there.

But there is more to this story. Because despite these tough conditions for the gas sector, gas prices in Europe are up! In the second half of 2012, gas prices jumped 10.3%, reports Eurostat. Gas prices have actually been steadily rising in Europe for the last 4 years. (You can’t say that much for car prices. Or real estate prices. Or hourly rates for freelance journalists!) So what is there to complain about? Indeed, the last time I looked, the likes of ENI and Gasterra were not doing too badly out of the gas market. The high gas prices also make it clear, by the way, why gas is currently not competitive in the European electricity market.

So why are gas prices getting higher while demand is falling off? According to Statoil, this has to do with the “tight supply situation” in Europe, as a result of “declining domestic production and increased reliance on imports”. Clearly if gas is to continue to play a central role in the European energy market, this is something European energy companies will have to deal with. They could expand their upstream activities outside Europe, for example, as many of them are already doing of course. Also, if they are really serious about making gas more competitive, they might consider diversifying their suppliers rather than making yet more deals with Gazprom, as e.g. GDF-Suez and ENI have been doing. And are ENI, ENEL and GDF Suez really doing all they can to supply gas at competitive prices in France and Italy? There is not much policymakers can do about this beyond what they are doing already, except stimulate shale gas production in Europe.

Overcapacity

If we turn to the electricity sector, many of the complaints from the CEO’s also seem to ring a bit hollow. So coal-fired electricity production went up – is that really a problem for e.g. RWE and Eon? Yes, CO2 emissions also went up – but since CO2-prices are at rock bottom levels, again there does not seem to be a real problem for the energy producers.

True, renewable energies are heavily subsidized – they have been for quite a while. Not nice for thermal power plants. But aren’t RWE, Eon, Enel and the others not making use of those subsidies too? After all, these companies regularly pride themselves on their investments in renewable energy. Or do they mean they don’t get enough subsidies?

Sure, there is overcapacity in the market. What this means is that the companies have built too much capacity in the past. They will have to adjust. A lot of businesses are facing the same problem at the moment. The energy companies are at least in the enviable position that there will always be a market for their product.

So how does this situation of overcapacity rhyme with the threat to “security of supply” that the CEO’s are scaring policymakers with? The more capacity, the more secure the supply, one would think. Yes, renewable energy needs back-up power, although this does not necessarily have to be gas-fired power, as Mr Cirelli is claiming. Coal-fired power stations can do this job just as well. But more to the point: shouldn’t the big energy companies make sure they have a portfolio that will ensure a secure energy supply for their customers? Rather than scaring people that supplies will become insecure?

Too big to fail

Don’t get me wrong. There are plenty of good reasons to be critical of European energy policies. But there are plenty of things that European energy companies can do to survive the perfect storm they are facing, regardless of any policies. Let me make some suggestions.

-If gas demand in the electricity sector falls, this is not a problem for the European energy market or for security of supply, but only for gas companies themselves. If gas companies want to sell more gas, they should find and stimulate new uses for gas, for example in transport. They might also throw their weight behind the development of electric cars, for example, as this will boost the demand for electricity and thereby indirectly for gas.

-Since “regulatory uncertainty” is a fact of life that won’t go away, energy companies would do well to prepare for it. For example, diversify as much as possible, but I am sure our CEO’s have drawn that same conclusion long ago. And if governments are generous/stupid enough to pay lavish subsidies for renewable energy, I’d say make use of them – but don’t expect them to continue forever.

-Another thing to do might be to get active on smart energy, smart grids, energy efficiency, decentralised power production. These could be the waves of the future. They will secure supply, if in a different way than in the past. Perhaps the energy companies should make sure they become part of those waves.

Rather than following the too-big-to-fail example of our shoddy banking institutions, frightening people that they might not survive and the lights may go out, wouldn’t energy companies look much cooler if they came out and said they will make sure the energy sector in Europe will thrive, despite the “regulatory mess” the policymakers are making of things?

Do you have tips for energy companies to weather the perfect storms in the European energy sector? Please let us know and leave your comments below. If we get enough responses, we will assemble them in a special article.