source: Eurelectric

Greetings,

Would Europe’s large utilities have been able to circumvent the misery they are in today if they had looked seriously at things the US Solar Electric Power Association (SEPA) is trying to tell its members through its so-called Fact Finding Missions to other countries, where attendees can learn their lessons from local utilities, regulators, government representatives? 

Probably not. Oliver Schäfer, President of the European Photovoltaic Industry Association (EPIA) - and one of the speakers on the first day of SEPA’s trip to Germany in mid-September — pretty much hit the nail on the spot. “In Europe, such a meeting between execs of utilities and solar companies would have not taken place.” 

I fully agree. Even if you might argue that a few years ago, when solar output was still negligible in Europe’s large PV markets, no case studies were available on the problems PV causes to utilities by shaving peaks and profits. Well, at least as early as 2008 there was a chance to hear about what’s likely coming. At that time I was responsible for the Photon Group’s Conference Program - and we tried to wake up conventional utilities. Assuming that solar’s cost would decrease much quicker than most anticipated - with all its consequences, such as solar quickly shaving peak load and soon after medium load generation, dramatically dropping wholesale prices and negative network effects leading to shrinking customer base, revenues and profits -, we added a utility event to our conference series. But only polysilicon supply for solar was a hot top topic these days, pulling nearly 1,000 attendees to our silicon event, while just very few came to visit our first solar electric utility conference - and these were almost solely solar professionals. Representatives from traditional European electric utility companies were mostly unaccessible - we neither got them to talk nor to listen. As we envisioned the near-future impact of solar’s rise, our team tried harder. We published editorials and articles about that subject - e.g. The black Swan by Michael Rogol, the head of Photon Consulting, who also had the idea to rename the utility conference and call it “TECAF - Traditional Electricity Companies are F****d.” Admittedly not very welcoming at all. But the thinking was that the dramatic challenge arising for incumbent power companies needs a strong wake up call. Well, for the US TECAF event in 2008, we could win at least the California Energy Commission, the state’s power regulator, to talk - as well as the Chairman of the Board of SEPA.

I don’t want to give the impression that traditional US utilities are generally more open than their European counterparts. They have been probably rather lucky that solar didn’t come as a storm like in Spain, Italy and Germany. Despite SEPA’s early efforts, many of the big utilities are still very reluctant when it comes to solar power - if at all, they usually leave their unregulated arms explore that terrain. But it looks like they all have the demise of RWE & Co. now pretty much on their radar.

Dissent - will solar, wind and gas be the winners?

It is simply hard to oversee how bad the big European Gencos are doing - and we can all witness it at least once a quarter they announce their financial results. However, when EPIA’s Schäfer showed the market capitalisation development of the largest European utilities you could see the US utility execs listening very thoroughly (see graph).

source: EPIA

“If this trend continues there is no future for utilities. The time of their monopolies is over, they have to adapt to the new reality.” Still, consolidation will continue, like in solar - and those who don’t change their business models will not survive. Regarding Europe, Schäfer believes that solar, wind and natural gas will be the winning trio (see graph).

source: EPIA

Significant new capacities were only added for these three technologies in recent years. Despite the war in the Ukraine and the EU having just added further sanctions on Russia, Schäfer does not believe that Russians will dare to cut its gas supply to the EU; they simply need this money, he underlined.

“I disagree on Oliver’s view that solar, wind and gas will be winners. A lot of things are starting - we should not loose sight,” replied Susanne Nies, head of the Distribution System Operators unit at European utilities association Eurelectric. “Gas is absolutely unprofitable and it is not coming back. You must be in the church to do gas business in Europe other than for heating,” she said. “It is cheap to build gas power plants, but very expensive in operation with todays gas prices.” Operation of so many gas power plants has been stopped in recent times. Moreover, Nies was much more concerned on energy security, which will be a major focus in the new term of the European Commission, she emphasized.

Agreement - sleeping giants!

But there was also agreement. “Utilities have been sleeping. They have to wake up and accept there is a prosumer,” Nies admitted openly. And continued her self-analysis. “We are paying the price for extremely bad communication.” In Germany, people were totally fed up by arrogant utilities, which didn’t take their concerns about nuclear power serious but gave them ridiculous explanations, such as ‘Don’t worry, power does not come from nuclear but from your socket.’ On the other hand, she said that the people’s dismay of utilities is also unjustified. “Customers should hate the state for rising prices, but they hate us.” In fact, retail prices stayed more or less stable, it is taxes, etc. that caused the price to increase by nearly 170 percent over the last 12 years, she said.

End of European utilities descent reached soon?

Eurelectric believes that the value creation of conventional generation will continue to decline, though much slower - from €62 billion in 2011 to €55 billion in 2012 and an estimated €49 billion in 2020, assuming commodity prices won’t change (see graph).

source: Eurelectric

At the same time, the European utility association sees new growth areas to offset the decline in the traditional business fields. This should even increase the European power industries EBIT from €114 billion in 2012 to €138 billion in 2020. Renewables are believed to contribute the largest part, €14 billion, followed by downstream products, such as DG, EV infrastructure - and also storage, which Nies, however, considers much too expensive today (see graph).

source: Eurelectric

One reason for optimism, Nies emphazised, is the European utilities openness toward innovation. Between 2000 and 2010, R&D spending of European companies active in the electricity, gas and water supply sector increased by over 7%, compared to 5.5% in the US and a 3.1 percent decrease in Japan (see graph).

source: Eurelectric

Unfortunately, as we all can see that was spent on the wrong ventures - and today is late-2014. However, Nies obviously appreciated the US delegation’s visit to Europe. When resuming her talk, she said, “Good you are coming to talk to us. You are in many fields much more advanced - in market design, demand response, etc.”

So low: Installed PV costs only 90 euro cents per W

While the US utility execs were quite pleased with Nies’ compliments, many eyes and mouths within the audience opened wide when Stefan Müller, COO of Enerparc, presented how much cost for solar have decreased in Germany and that installed cost for a 1 MW solar system would be as low as 90 euro cents per watt - when using modules at 50 euro cents/W (see graph).

source: Enerparc

Moreover, technical guidelines and financing structures are well established, generally very easy to access and use for developers. Not only would it be rather easy to get a 100% non-recourse finance loan for a as little as 2.5% interest, Müller said, installation for a 10 MW system would take no longer than 4 weeks, with grid-connection averaging only 4-6 weeks for all of the around 600+ MW Enerparc has installed and operates in Germany so far. These positive boundary conditions would allow his company to still build new ground-mounted power plants with a return of up to 5 percent in Germany, although the feed-in tariff is now as low as 8.8 eurocents/kWh for that category of solar systems. This year Enerparc will still install around 50 MW in Germany, Müller told sunnybloke. 

The second day of the mission, the US delegates visited Eon at its headquarters, where presenters from the leading German utilities presented their views on the consequences of Germany’s Energiewende (energy transition) project. It will be interesting to read SEPA’s take aways - and see in a few years which members will actually have used these insights for their strategic planning. More soon.