The power sector needs to focus public and private investments on appropriate technologies to achieve long-terms goals of security of supply, climate mitigation (i.e. reduced environmental impact) and affordability. It is now widely accepted that the mix of fuels and technologies used to generate electricity will have to change dramatically. A long-term vision of the generation and delivery of electricity must carefully balance these goals.
Historically, for most countries the sources of energy – mainly fossil fuels – have been imported. Countries lacking significant indigenous sources of fuel, such as nations in Europe, have struggled to ensure the ongoing security of supply of essential fuels. Additional oil and gas pipelines, shipping terminals for liquid natural gas, and long-term fuel import contracts are at the heart of their strategies. Meanwhile, national transmission operators and distribution network operators have worked on the resilience of electricity supply to end users.
Nowadays, the volatility of fuel prices and the increasingly urgent attention given to climate-change issues are altering the rules of the game, prompting two major developments. Firstly, governments are laying down national plans to promote the generation of electricity from alternative, renewable and indigenous sources (e.g. sunshine, wind, biomass), sometimes complemented with nuclear plants. Secondly, recognising the economic potential of new energy systems, countries have entered a race to establish strong research and development and manufacturing industries to answer the demand for these systems.
Regulation and policies therefore have a crucial role to play in reshaping the energy industry, most obviously in the form of high subsidies that are offered to attract investments. These subsidies are being used to send immediate price signals to the industry in the form of incentives (e.g. feed-in tariffs). However such policies are not always structured so as to create the required long-term visibility of how these incentives and the wider market will evolve.
In some cases, policies are designed to support a wide array of technologies, but in doing so fail to take into consideration the specific, indigenous resources that are available in particular regions. The capacity and efficiency of renewable energy systems are especially dependent on the local energy density (e.g. sunshine, wind speed), and it is often only economical in the long term to generate energy where system efficiency is the highest. There is a danger, therefore, that indiscriminate policies may lead to inappropriate choices – solar plants in more northerly latitudes (e.g. north of the French city of Bordeaux) or wind farms in relatively calm areas – simply on the basis of a short-lived investment opportunity supported by government subsidies. Meanwhile, governments should look at building up an energy generation mix, but without supporting low-potential technologies.
It is a characteristic of an open market that, theoretically, energy will be generated from the most economically efficient sources. Taking Europe as an example, it is possible that most of its solar energy could be best harvested around the Mediterranean Sea, wind and marine energy in north-western regions and biomass where waste is produced (dense population areas, forests). As electricity transmission costs are (and will remain) a function of distance between the energy source and the end customer, there is a balance to be found. Investors should therefore be looking at opportunities that combine technology and market fundamentals, rather than short-term subsidies. Meanwhile policy makers should ensure that subsidies support the best long-term options to achieve energy affordability and security of supply.
Analysys Mason’s energy strategy consultants work with public- and private-sector clients worldwide on key issues related to energy strategy and climate change. Our company was at the forefront of the transformation of the telecoms sector and is now helping the energy sector to undergo a similar, but faster, radical shift.
For more information, please contact David Eurin, Head of Analysys Mason’s Energy sector, at david.eurin@analysysmason.com.