Fuel for Thought – 24 Jun 2011

24 Jun, 2011

The IEA recently set the record straight on some popular energy-related misperceptions. Particularly interesting is the misperception that coal consumption is in decline. Coal is the primary global fuel source for power generation and is still meeting 47% of new electricity demand. Reducing developing economy dependence on coal consumption is a critical issue in tackling global carbon emissions. But it is a transition to gas and nuclear rather than renewable generation that has the greatest potential to reduce developing world carbon emissions over the next decade.

As European countries scale back their ambitions for nuclear generation in response to the Fukushima disaster Gazprom has announced a push into the European power market. Germany in particular will need flexible new thermal generation over the next decade as intermittent renewable capacity expands and nuclear capacity is retired. The challenge for Gazprom and other thermal generation investors is how they secure a reasonable market return on their investment in an environment of depressed generator margins. This is a theme we explore in our blog articles over the next few weeks.

Confusion reigns again in the EU ETS carbon market as the EU struggles to define a policy on setting aside carbon permits to offset emissions reductions from energy efficiency measures. As a result the very efficiency measures the ETS should be encouraging, threaten to undermine the carbon price signal, the key mechanism for incentivising European decarbonisation.  The credibility of the EU ETS depends on a clear and decisive ruling from the EU commission.

The recent commissioning of the 1 GW BritNed power interconnector between the UK and the Netherlands should boost price convergence and market liquidity in North West Europe. This will be assisted by the fact that a number of energy companies have large asset positions in both markets (particularly Centrica and RWE). However BritNed will not be enough to overcome some fundamental differences in pricing dynamics across the two markets (eg the UK having a much flatter average daily price shape given the dominance of CCGT generation capacity in setting prices).