Politics and Recession Fears Hurt European Energy Investment

Author

Gaurav Sharma, Contributor

November 4, 2014

European energy companies are getting the worst of all worlds at the moment. Fears of a recession in the wider continent, politics of the hour and slapdash policymaking both at pan-European and local market level have darkened the mood of investors.

Relatively recent developments in the UK and Germany provide noteworthy examples of political impediments energy companies have to contend with. After Japan’s Fukushima nuclear disaster in 2011, Germany’s haste in turning off nuclear power plants left its domestic market reeling and confused. More so, planning for alternative sources of energy was hardly sound leaving a mishmash of guidelines and half-baked decisions.

In the UK, which is in dire need of fresh investment, a populist pledge last year by opposition Labour Party leader Ed Miliband to freeze energy prices for 20 months were he to be elected Prime Minister in May 2015, sapped confidence and created complete uncertainty in the market.

Sector bosses claimed their forward planning at a time when they are being asked to invest more towards infrastructure and renewable energy in the country had been thrown into chaos.  Furthermore, how an energy price freeze would work under a private ownership structure is anybody’s guess.

Colette Lewiner, Energy and Utilities Advisor to the Chairman of Capgemini, says short of nationalization where the state would bear the brunt of gas market volatility, a price freeze would not work. “In order to mitigate effects of the freeze, companies could cut infrastructural investment which the UK can ill afford or they’ll raise revenue by other means including above average prices rises ahead of a freeze.”

The industry veteran who serves on the boards of several major companies including EDF, Bouygues Group and Eurotunnel, says political interference is a sign of times. “It is not something that’s exclusive to the UK. Many European utility providers in the UK market have felt it elsewhere from Poland to Spain.”

“Germany’s haphazard nuclear turn-off is largely attributed to the pressure Chancellor Angela Merkel’s Christian Democratic Union (CDU) party was facing from the Greens in May 2011. She had to come up with a response to Fukushima within a very short window under pressure from her opponents in an election year.

“Her administration took a quick political decision to immediately shut down nine nuclear reactors and to phase out the eight remaining reactors by 2022. It could have been handled better had circumstances been different,” Lewiner says.

Timing for politics within the European Union to turn sour couldn’t be worse. According to a recent survey of money managers with €7.1 trillion ($9 trillion) in assets conducted by Fitch Ratings, respondents’ concerns about political pressure, geopolitical risk (in wake of sanctions on Russia), and the economic climate have almost doubled. Investors were also increasingly concerned about deflation with 53% ranking it a high risk.

The sector is witnessing flat or decreasing consumption (-0.5% for electricity, -1.4% for gas), according to Capgemini’s European Energy Markets Observatory report. The consultancy’s report links this to the economic climate accompanied by energy efficiency measures to a certain extent. It also notes that by 2035, Europe will need to invest US$2.2 trillion in electricity infrastructure alone.

Given the difficult financial environment for utilities, these investments could be delayed endangering security of electricity supply in the long-term. Substantial investment would also be needed in order to reduce reliance on Russian gas imports. But both Capgemini and Fitch Ratings reckon the best that can be hoped for, even if European shale production were to come onstream in meaningful volumes, would be a flat-lining of Russian imports.

“A real term imported volume cut relative to consumption patterns seems unlikely at the moment. Still it would be a start, albeit one needing stable investment conditions. An uncertain climate would also result in slower growth in renewables’ new capacity build, something which most European politicians claim they want more of,” Lewiner adds.

Meanwhile, the chaotic situation on the electricity wholesale markets has continued with larger time intervals of negative prices and continued closures of gas-fired plants needed to guarantee security of supply. Over 10GW was decommissioned last year. Additionally, CO2 prices are too low on the EU Energy Trading Scheme (ETS) to push for de-carbonized investments.

Effective decoupling of oil and gas prices has meant major utilities companies keep an eye on the falling oil prices, but it brings little short-term respite for them. However, one positive is that Russia in general and Gazprom in particular, have started acknowledging the decoupling in new supply contract negotiations with utilities and it matters.

Lewiner says the Russia-Ukraine conflict has been an eyeopener for European policymakers. “The hope is that Europe will push its energy providers to be better grid managers, smarter at collating data, and responding to changing consumer and situational demands. However, for this pipe-dream to be achieved, politics, economics and policymaking will have to align favorably which isn’t the case at the moment in many EU markets.”

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