25/06/2010

By Mark Ritson

Europe is experiencing an increasing demand for electricity while also looking to replace ageing generation sources and improve its ‘green’ credentials through reduced CO² emissions and more renewable generation sources. Half of its energy demand is met from imported fuels, which will increase further as reserves such as the North Sea run out.
The EU’s energy portal projects the world’s fossil fuel reserves will be progressively depleted in future: oil by 2047, natural gas by 2068 and coal by 2140, with uranium reserves lasting to 2144. With extensive exploration by major oil and gas companies carried out around the world, new major discoveries could lend these dates a longer lifeline. The clock is nonetheless ticking, and viable commercial alternatives to fossil fuels need to be incorporated into the power generation industry.
Europe already has diverse sources of power generation.
In 2009 the split was: nuclear 30%; coal 29%; gas 21%; renewable 15% and oil 4% although percentages in individual countries vary widely.
France generates over 75% of its total through nuclear power, while Poland derives more than 90% from coal. Italy generates over 50% of its power from gas, while Austria utilises renewable sources for as much as 60% of its needs.
Reliance on oil as a power generation source for Europe is not high, and there appear to be sufficient plans in place to move further away before falling reserves play their part. Oil demand in Europe has peaked, but is likely to remain near current levels of demand.
Opec estimates European demand for oil in 2010 at 14.6m barrels a day, and still little changed at 14.3m barrels by 2020. Over the same period world demand for oil grows from 84.6m barrels to 95.4m a day,
the bulk of the increase coming from China, India and elsewhere in Asia.

King coal
Europe relies heavily on gas as a source of power generation; pipeline disputes between Russia and the Ukraine underlining how vulnerable this dependency is. In recent years alternative suppliers have emerged, which will benefit European buyers not only in reliability of supply but ultimately in price as suppliers look to offer their product cheaper than the competition. The addition of new gas pipelines in Europe has eased reliance on the Russia/Ukraine route, and will improve security of supply. Some alternative suppliers such as Qatar have strong links with European countries; others such as Iran need a little more work.
Coal is the fossil fuel that emits most carbon into the atmosphere, yet it will continue to be a dominant source for power generation due mainly to large reserves that still exist globally. Poland has Europe’s biggest reserves and Germany is its largest consumer. Based on EU figures for fossil fuel lifelines coal has 100 years of additional reserves, offering reliability of supply for power generators.
Going forward, Europe’s main area for development will be renewable power generation. Member countries have signed up to the 20-20-20 pact, for a 20% reduction in carbon emissions, and 20% of power to be generated from renewable sources by 2020. Can this be achieved? The simple answer is it has to be. As EU energy commissioner Andris Piebelgs recently stated: “The 2020 national renewable energy targets set by the Directive are not political objectives but legally binding targets.” If not met, the European leaders responsible will have failed to meet legally-binding objectives and must face the penalties.
The EU Observer reports that 10 of the 27 EU member states are on track to exceed their 2020 targets, 12 are set to meet them and Italy, Belgium, Denmark, Luxembourg and Malta must improve and may have to look at imports to meet their targets.
To reach the target of 20% from renewable sources requires huge investment in new projects. The financial crisis put many new projects on hold, but governments are urging banks to increase their support. Government-backed lenders have already replaced three of the largest publicly traded banks from the top 10 institutions lending money for new solar, wind and other renewable projects. Bloomberg recently announced that worldwide investment in renewable energy could reach $200bn in 2010. In addition to banks financing renewable projects there is also assistance from organisations such as the World Bank Group, which pledged to increase its investment in alternative energies by more than 20% a year.
Not only is investment in renewable energy important to meet the 2020 target; the industry has become a great employer in Europe, with turnover of €30bn and employing more than 350,000 people. The biggest question for all renewable energy is whether the source is reliable enough to meet energy needs. Can natural resources deliver enough power over the period to satisfy our increasing demands?

Europe’s ageing plants
As a form of risk transfer, insurance cover can be purchased by operators and investors if the sun doesn’t shine, or the wind either doesn’t blow or blows too hard (at speeds of 90 km/h-plus turbines are shut down), so power generation companies themselves can be reimbursed for potential financial losses.
Research and technology invested in the renewable energy industry would indicate there is sufficient resource to meet future requirements, but many believe this can only be confirmed once more projects are actually up and running.
Another concern for future power supply is not in the renewable sector but in traditional power generation sources, where Europe depends on ageing power plants and equipment. Not just investment in renewable energy is needed, but also in the nuclear, gas and coal powered sectors.
World Energy Council figures below illustrate the age of Europe’s power plants by source:
Nuclear Coal Natural Gas Oil
Under 10 years 4% 6% 50% 6%
10-20 years 48% 19% 17% 19%
20-30 years 44% 23% 22% 38%
Over 30 years 4% 52% 11% 38%
The average lifeline of a power plant depends on the maintenance programmes implemented and the way in which it is run, but 40 years is typical. By 2020 many existing plants
will need replacing, and it is debatable whether renewable sources can totally replace lost capacity from ageing and decommissioned plants. Tough emission rules may force companies to reconsider replacing power plants like-for-like. Alternatives such as carbon capture, carbon storage and carbon disposal facilities can be more costly and reduce the plant’s financial efficiency, or result in increased costs to the buyer. Carbon credit trading can provide a power generator with an additional stream of income to mitigate such a price hike.
By not including the relevant carbon reduction facilities, power generators then face financial penalties for continued emissions. So there is a need for major investment in carbon emission reduction on existing facilities. With lower carbon emissions also being legally binding objectives, EU members have to meet these figures.

Deep pockets
The final important piece of the jigsaw is the transmission and distribution systems. If these cannot deliver the power generated, we face a massive problem and potential shortages.
The European Network of Transmission System Operators for Electricity (ENTSO-E) estimates that investment of up to €28bn in Europe’s electricity grid system is needed by 2015 to meet ambitious energy goals. This total would consist of 500 projects, and include the construction of 35,000 km of new transmission lines and upgrade of 7,000 km of existing lines.
There is much talk of Europe investing in North Africa’s renewable energy industry and developing the region’s solar power potential. Technology for power parks/plants should not be a problem, but without improved technology and efficiency in a transmission system between North Africa and Southern Europe the projects would be of little benefit. The European power market is in the process of huge changes that will transform the way it operates. Europe is regarded as a world leader in the renewable energy industry, and will make major investments to meet the ambitious targets set for 2020.
Power generating companies have vehicles available such as insurance as a source of risk transfer. The insurance market will follow advances in power technology and provide bespoke solutions to meet the new challenges. One example is insurance cover now available for loss of income due to insufficient sun or wind. Electricity buyers also have elements of risk transfer available, and should look to include cover for failure and/or variation in utility supply in their policies.
UK energy regulator Ofgem suggests energy bills could rise 14% to 25% by 2020 as the industry invests £200bn to overhaul the market. Others argue that introducing more renewable power will actually reduce prices as the cost of purchasing fossil fuels is removed. Either way electricity buyers should carry out risk assessment exercises and evaluate how future utility costs could impact their business and the avenues of risk transfer available. They should also enter into negotiations with their suppliers to discuss possible long-term arrangements.

Mark Ritson is account executive, non-marine and energy division at United Insurance Brokers

Other stories you may find of interest:

Africa 'offers massive scope for microinsurance'
Little morer than 2% of Africa's 700 million working poor are covered by insurance, representing a vast untapped opportunity for social and economic development, suggests a new study by the Microinsurance Innovation Facility of the International Labour Office (ILO).

SMEs 'chasing unpaid debts of £63bn'
More than seven in 10 smaller businesses have experienced late payments over the past year and are collectively chasing unpaid debts of £63 billion, a survey finds.

KPMG: Bribery Act could trip up the innocent
The 2010 Bribery Act is easier to fall foul of than previous laws. So says KPMG, which has just published a compliance guide to the new Act.