Are Europe’s gas power generators turning into zombie companies?

“Gas power is losing money hand over fist”

By:Nicholas Newman 12 March 2013

It appears that Europe’s gas generators are in danger of turning into zombie companies, [i]suggests Hugh Sharman Owner, Incoteco (Denmark) ApS. [ii] They finding it increasingly difficult coping with the market created by uncontrolled expansion of “free” but heavily subsidised renewables and the dumping of cheap imported coal from the United States. Unfavourable market conditions and negative gas power generation are forcing companies to lose money hand over fist, suggests Guido Custer Managing Director at Delta Energy.

Gas plants in crisis

This is particularly the case in both Holland and Germany which is full of zombie gas power plants. It is not surprising we are hearing about gas power plants like Dong Energy idling its brand new Rotterdam plant for most of the time. It is cheaper for Dong Energy to buy imported German wind and coal generated electricity at €45 per megawatt hour than produce it themselves at €50 per megawatt hour. Throughout Europe, we are seeing plans to moth ball gas plants by major utilities such as E.on, Statkraft, GDF Suez SA and Centrica Plc. Whilst, Gabrielle Seeling-Hochmuth, head of gas strategy at Vattenfall’s gas competence centre, suggested, “that the company is unlikely to invest in new gas capacity until the 2030s”. [iii]

An oversupply of conventional power

Currently, in both in Germany and the Netherlands, both countries are facing a dire oversupply of conventional power capacity. [iv] In Holland, this is due in part to a gas power plant building boom by investors keen to take advantage of the countries natural gas resources. Their ambition was to turn the Netherlands into a major exporter of power to the rest of Europe. As a result, the country is facing an oversupply of conventional generation capacity made worse by the country’s encouragement of biomass, wind and solar power.

At the same time in Germany, the policy of giving renewables the highest priority in supplying the market when it comes to despatching power, and the very success of the €4 billion a year subsidies to promote renewables, has drastically shrunk the market for gas power stations. On sunny and windy days, onshore wind and photovoltaic meet over 85 per cent of Germany’s mid-day electricity needs reports Renewable Energy World. This is despite Germany closing nearly a third of its nuclear power plants reactors in spring 2011, it exports electricity to its neighbours – and indeed sold more abroad in 2012 (23 gigawatts) than ever before. [v]So industry analysts are suggesting Germany is dumping its power on its neighbours.

Cheap coal in Europe has dramatically increased the output from coal generation dramatically. As a result, this is drastically reducing the demand for gas generation in many states. This has resulted in numerous gas plants operating in the red in France, the Netherlands, Spain and the Czech Republic, according to data compiled by Bloomberg. In Britain, gas generation is barely breaking even. It is not surprising operators are making a dash away from gas; after all, they are not charities.

The creation of zombie power companies?

“In fact, most of Europe’s major generators are turning into zombie companies, saddled with huge debts and heritage assets that are fast turning into liabilities,” suggests Hugh Sharman. Unfortunately, this dash away from gas is causing a problem for Europe’s energy leaders concerned about such issues as competition, stability and security of power supplies. Since if there is not adequate conventional reserve backup capacity to deal with lack of wind or sunshine for several days, then Europe faces the threat of continent wide blackouts.

Need for reform?

It has been suggested by various energy leaders, including Guido Custer that something must be done to end this cycle of zombie failure for gas generation and ensure that there is an adequate supply of reserve conventional capacity available. Guido Custer has proposed at Flame a series of measures to ensure adequate investment in maintaining current capacity and encourage new investment when it required. Certainly his proposals for a minimum price for the emissions trading system and widening the scope of members of European emission trading system sound reasonable.

A solution?

However, it is expected that many European governments will look not look kindly at lobbying efforts by the power sector for further subsidies known as capacity mechanism, given the current recession. [vi] Instead it would be more politically practicable for policy makers if government’s reduced subsidies for renewables and fixed the European emissions trading system so that gas is on a more equal footing with coal, renewables and nuclear. Unless something is done, the prospect of zombified European power companies could be a serious prospect. Even so, it looks like the size of Europe’s gas generation portfolio will be in future years, considerably reduced.

[i] Zombie Company is a media term for a company that needs constant bailouts in order to operate, or an indebted company that is able to repay the interest on its debts but not reduce its debts. There are several types of zombie companies. The term regained popularity in the media during 2008 for companies receiving bailouts from the U.S. Troubled Asset Relief Program (TARP). A 2002 New York Times article about Japanese companies kept on “life-support” with loans include a headline that stated, “They’re Alive! They’re Alive! Not!; Japan Hesitates to Put an End to Its ‘Zombie’ Businesses

Renewable Energies in the UK

As in many other countries, the share of renewable energies in the UK is growing dramatically. During the past two decades renewables have surged at an impressive pace. In fact, supply from renewable energy sources has more than quadrupled since 1990 whereas overall consumption has remained fairly constant. The raw data of this analysis stem from Eurostat and UK National Statistics.

The huge gap in the respective trends between the overall energy demand and the contribution of renewables can be seen in Fig. 1 where the data for final energy consumption and the supply figures from renewable energies are shown. To make comparison easier we present the figures in an indexed form with 1990=100.

Fig. 1 Final energy consumption (FEC) and energy supply from renewable sources in the UK. 1990=100.

Whereas final energy consumption has increased only slightly (index value 105 in 2010) with a decreasing tendency since 2001, supply from renewables has more than quadrupled over the same period. Accordingly, the weight of  hydro, wind, biomass etc. in the energy mix has risen sharply. Nevertheless, this picture should not obscure the fact that in 2010 renewables contributed only 7 % to the entire energy production.

One interesting aspect of looking at the UK figures is to check the specific output of the various renewable energy sources, i.e. MWh produced per MW of installed capacity. Here we find significant differences between hydro, wind and other renewables as shown in Fig. 2. The latter comprise landfill gas, biofuels, waste combustion etc.

Fig. 2 Specific output of renewable energy sources in MWh per MW installed.

All of them show annual fluctuations which is normal since not the entire capacity is available all the time. Wind and hydro are particularly vulnerable to external factors. However, there is a significant difference between the two as regards short-term availability. Electricity generated from water is much more stable for the grid than wind which is by definition more erratic in its availability.

Apart from that we can see clearly in Fig.2 that the specific output of the various sources differs enormously. The least efficient way to produce electricity from renewables is wind as becomes apparent from Fig. 2. This conclusion is fairly independent of the fluctuating nature of all the sources taken into consideration. The average output of wind farms is 2140 MWh per MW installed. The values for hydro and others are 3060 MWh/MW and 5200 MWh/MW, respectively. Thus we may safely conclude that using hydroelectric plants is on average 43 % more efficient than using wind turbines. The difference is even more striking for the other renewables which tend to be more than 140 % more efficient than wind.

Given this state of affairs it might be worthwhile to put more emphasis on other green power sources rather than wind. However, wind farms have already become a significant factor in several countries as we have shown in some of our previous posts, e.g. here, here and here. Bearing in mind the inherent weaknesses of wind power, it appears that other renewables such as hydro and biomass are not only more reliable, but also more efficient. They, too, deserve their chance.

Renewables in Europe 3: Wind Power

In some European countries wind power is contributing significantly to the energy mix. At EU level, wind is the second largest source of renewable energy after hydro. Since its early stages in the 1990s the development of wind-generated electricity can only be described as breathtaking. In 2010 the biggest producers were Spain (44,165 GWh) and Germany (37,793 GWh), followed by UK (10,183 GWh) and France (9,969 GWh). All data for this brief analysis covering the period from 1990 to 2010 have been taken from Eurostat.

To get a feeling for the tremendous growth of the sector we may note that at EU level wind power has soared by a whopping 537,000 % during the past two decades, delivering some 149,000 GWh in 2010. The result of this incredible surge is that in some countries like Germany, Spain, and Denmark wind can no longer be considered a negligible contributor to the energy grid.

Fig. 1 gives an overview of the annual changes of power produced from windmills during the period in question.

Fig. 1 Wind power generation in selected countries, relative change compared to previous year

One stiking feature of this graphic is that the changes may also be negative, indicating that in the year n less energy has been produced than in n-1. This may happen as the amount of wind is fluctuating over the years. However, the negative growth rates are generally quite small, because new capacities are added every year. Moreover, with growing capacities in various areas the influence of prevailing calm tends to get weaker.

The other noteworthy issue is that the growths rates are slowly getting smaller. This is not surprising as the countries in our selection have already sizeable quantities of wind mills operating and the extra capacities added are small compared to the existing ones.

Fig. 2 gives an overview over the indexed production of wind-generated electricity with 1990 = 100.

Fig. 2 Wind power generation in some EU countries, 1990=100.

The picture gives a vivid impression of the potential of this source of renewable energy. Although Spain and Germany are the top producers of wind energy, the top performers are Portugal and Italy. It may be noted that the countries selected are significantly outperforming the EU average. The reason is that in some Member States like Poland (1700 GWh), Bulgaria (680 GWh), Romania (310 GWh), and the Baltic states (550 GWh in total) wind power is still in its infancy stage, contributing very little, both in absolute and relative terms, to primary energy production. That may, however, be expected to change in the future. In Malta and Slovenia wind-generated electricity is virtually non-existing.

In spite of being an ever growing contributor to the energy grid wind power faces some intrinsic weaknesses which, paradoxically, tend to become more serious the bigger its contribution becomes. The main source of concern is the fluctuating availability of wind in the atmosphere. This, in turn, leads to fluctuations in the energy supply which put additional strain on the entire grid. Conventional power plants have to be kept in reserve in order to counterbalance the variable inflow from wind energy. This is one of the most pressing challenges to be tackled in the near future, if wind power is to be not only a significant but also a stable  and reliable player in the whole energy mix.

Renewables in Europe – Who Is the Champion?

In this posting we analyse the contribution of various renewables to the energy mix. All raw data for the subsequent analysis have been taken from Eurostat.

Renewable sources of energy have seen a dramatic increase in the past decade. However, the relative growth is not distributed equally between the various sources. Solar panels and wind mills are mainly associated with the increasing use of renewables. This is mainly due to the media giving considerable room to them when it comes to emphasizing the importance of alternative energies.

And indeed the growth rates of solar and wind energy have been outstanding and, what is more, they are likely to continue growing over the next decades. However, growth rates may look impressive, especially when starting from a very low level. One should not forget that solar panels were hardly existing some twenty years ago, and the same is true for wind mills. Clearly, political targets served as a backbone for boosting their widespread use. This, in turn, has also led to considerable technological improvements, making solar and wind more competitive.

Put in perspective, hydro power, though lacking any increase during the past decade, is still by far the biggest source of renewable energy. Although their advance is impressive, solar and wind are currently much smaller contributors to the energy mix than hydro, as can be seen in Fig. 1. Actually, wind mills may have a realistic chance to outnumber their hydroelectric competitors within the next 10 to 15 years, depending on their pace of growth.

Fig. 1 Renewables in Europe. Production in GWh.

From Fig. 1 it is obvious that all other sources except hydro and wind are for the time being less important. In fact, in this figure wind, TWO (tide, wave and ocean) and biomass are hardly distinguishable. Let us therefore zoom in on that picture, taking into account all renewables except hydro. As a result we obtain Fig. 2.

Fig. 2 Renewables in Europe, all except hydro. Production in GWh.

Then it becomes obvious how much bigger the input from wind mills to the energy mix is than the production from solar, biomass and TWO. Still, the difference is at least one order of magnitude. Nevertheless, with solar growth rates being considerably bigger than the ones for wind power it is possible that the latter might be overtaken by the former within the next 15 to 20 years.

In order to get a feeling for the relative importance for solar, TWO and biomass, we zoom in once again on Fig. 2, thereby dropping the curve for wind energy. The results can be seen in Fig. 3.

Fig. 3 As in Fig.2, but without wind. Production in GWh.

From this, two things become clear immediately. First, the contribution of TWO has been essentially stable over the period in question. In addition, its input to the power grid is virtually negligible with less than 500 GWh in 2009. In fact, production figures for TWO have gone down since 1998, when 590 GWh were produced, amounting to a reduction of 15% over the period in question. The second observation is that solar energy is growing much more rapidly than biomass. Actually, solar could overtake biomass in 2009.

Hydropower and TWO may be considered as “established” technologies, i.e. they have been in place for the past 40 years or more. Their production capacity has remained unchanged for at least a decade. As a consequence, their output figures have deacreased rather than increased during that period. Wind, solar and biomass on the other hand have proven their potential to grow substantially. Their full capacity is still not exploited. In any case, it appears that their relative weight in the energy mix is going to become bigger in the future.

Renewable Energy in Europe

It goes without saying that renewable energies have received a lot of attention recently. Particularly Europe has been eager to extend its production capacities of solar energy, wind etc. Although, on a European scale, renewables are still playing a smaller role, their contribution to the energy mix has constantly risen during the past decade. This growing impact is likely to continue thoughout the continent ove the years to come.

Let us first have a glance at the situation of renewables in the EU-27. During the period 1998-2009 its production level has been up by 60.7%, contributing in 2009 some 148.4 Mtoe to the energy mix. Fig.1 shows the evolution of production figures for the respective period. All raw data for this figures as well as for the following ones have been taken from Eurostat.

Fig. 1 Production of renewable energy in Europe 1998-2009, Mtoe

There is, of course, a huge variety among the EU Member States when it comes to producing energy from renewables. Political, economic and geographical factors come into play, determining the pace at which new sources might replace the conventional ones. Some countries have already a certain tradition of using renewables, mainly water, while others have been starting more or less from scratch.

Fig. 2 provides us with an overview of the biggest producers of renewables in Europe. Only those countries were selected which in 2009 produced more than 10 Mtoe. The list comprises Germany, Spain, Italy, France and Sweden. Only two of them, France and Sweden, would have passed the selection criterion already in 1998.

Fig. 2 Production of renewables in selected countries, Mtoe

The eye-catching feature in this picture is Germany which starting from a relatively low level (7.8 Mtoe in 1998) managed to outgrow all the other big producers. In 2009, it produced some 27.7 Mtoe from renewables, an increase of 255%. However, this may be considered an intermediate step only, given that Germany recently decided to phase out its entire nuclear production capacity by 2022. It is very likely that a substantial part, if not all, of the nuclear output will be taken over by renewables. I have discussed this issue in one of my previous posts, Germany´s Energy Future.

Finally, let us have a look at the growth rates in those countries which are demonstrated in Fig. 3.

Fig. 3 Growth rate of renewable energy production in %, 1998-2009

Germany is the clear champion which does not come as a surprise after having seen Fig. 2. Spain and Italy saw an increase of renewable production of 75.5% and 69.9%, respectively. These two countries performed better than the EU average. On the other hand, France and Sweden show less than average growth rates with 22.2% and 13.0%, respectively. Why is that so?

France is the biggest producer of nuclear energy in Europe, generating some 75% of its electricity from nuclear power plants. Thus, unless France is closing down a substantial amount of its nuclear capacities, its potential for using renewables appears to be quite limited. The case of Sweden is slightly different. As can be seen from Fig. 2, it has always been a big player among the users of renewable energy with water being the main source. It appears that the potential for using hydroelectricity is largely exploited. Therefore Sweden must increase its usage of biomass etc. in order to see production from renewables going up.