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Europe: Picture of a Stalled Competitive Model

Fortnightly Magazine - February 2005

composition of fuel drivers and ongoing economic availability of that fuel; the age and state of plant; and, given Europe's ambitious Kyoto targets, the availability of renewable resources and policies for encouraging their use.

Sufficient generation capacity is a crucial part of energy security. In general, a reserve margin of 15 percent of operational installed capacity above expected peak demand is required to ensure a reasonable level of reliability. By this measure, markets that are currently in an overcapacity situation in Europe include Austria, France, Germany, Lithuania, and Slovakia. All of these countries have reserve margins well above 15 percent and are significant exporters. Countries currently suffering a lack of sufficient capacity include Greece, Hungary, Ireland, Italy, and Spain.

Supply-demand balances change with time. Supply must be adequate to meet demand over time. Thus load forecasts are crucial in determining sufficient levels of generation capacity. There are pockets of very low growth in Europe where anticipated load growth through 2010 is not expected to exceed 1 percent per annum. Countries in this category include Denmark, England and Wales, Germany, and Sweden.

At the other end of the spectrum is a group of high load-growth countries, where growth rates are expected to be consistently 4 percent or higher per year through 2010. These countries include Bulgaria, the Czech Republic, Greece, Italy, Lithuania, the Netherlands, Portugal, Slovenia, and Spain. These countries thus will have to not only replace the assets that need to be retired in the next 10 years, but will need to add significant new plant to meet increased load. Likewise, the supply context is likely to change as certain countries retire all of their nuclear capacity (Germany and Belgium), and Eastern Europe shuts down its more polluting plants and replaces the nuclear plants that the EU has stated are not safe.

Europe's fuel sources are diverse, with many energy rich countries-Germany, Poland, and Greece (coal), Scandinavia, Latvia, and Austria (hydro), the UK, the Netherlands, and Romania (natural gas), Estonia (oil shale), and Russia and Norway (gas and oil). The presence of natural resources can sometimes further complicate electricity reforms due to state ownership of natural resources, high levels of employment provided by natural resource industries, and union support for these industries. Hydroelectric resources also can complicate electricity policy. Hydro capacity usually decreases in the summer when rivers and lakes are somewhat drier. In addition, having a disproportionate percentage of hydroelectric generating capacity can leave the country exposed to price spikes during periods of poor hydrology conditions, which occurred in Scandinavia in the summer of 2003.

At the same time, other countries that have practically no natural energy resources, such as France, Belgium, and Lithuania became original proponents of nuclear power in the 1970s and 1980s. But nuclear power has become a divisive issue in Europe, with several countries politically opposed to its continued use, such as Germany, Belgium, and Italy, while other countries, such as France and Finland, are committed to its continued use as a reliable and environmentally safe energy source.

The nuclear question is particularly provocative in Eastern Europe,