Capgemini calls for urgent digitalisation measures1 January 2016
Capgemini has published the seventeenth edition of its European Energy Markets Observatory (EEMO). The study shows that in 2015, as in 2014, European electricity and gas markets remained very unsettled and that despite the strengthening effects of the proposed European Energy Union, measures that will be implemented to restore a consistent market and improve security of supply are neither fast enough nor tangible. In this somewhat gloomy context, it is imperative that utilities take steps urgently to reap the benefits of the digital transformation. In relation to the Paris climate conference, COP21, the Observatory welcomes the initiatives outlined by the USA, China and Europe but draws the attention of national governments to the specific context created by the present low price of hydrocarbons.
1. The energy transition and digital transformation are two major changes that benefit from each other. In Europe, while utilities need to improve their productivity, they face an energy transition which strongly impacts their business models. Perry Stoneman, Utilities Global Sector leader at Capgemini commented, "In this dual context, it is imperative that utilities fully and rapidly implement their digital transformation because it will allow them to adapt to the new market situation and to make productivity gains. The coincidence of these two changes provides an opportunity for utilities to transform into services businesses and they must seize it quickly."
The changes triggered by the energy transition are cited as distributed generation, complexities in managing electricity grids with an increasing share of renewables (smart grids), demand-side management, 'prosumers', smart meters improving operators' knowledge of customers (data mining), new customer relationships, and the 'Internet of Things', among others.
These changes coincide with depressed wholesale electricity and gas markets and with a dramatic drop in oil prices that accentuates the decline of all energy prices. Utilities' financial situations remains difficult and their stock performance is poor. A number of European electricity operators are strongly impacted by the wholesale prices downward trend. In this context, in recent years, European utilities have taken various balance sheet strengthening initiatives such as asset sales and hybrid debt issuance. However, their debt levels remain high.
2. The measures put in place at COP21 will not lead to outcomes effective enough to limit the increase in global temperature to 2°C. It is crucial that, in addition to mitigation efforts, adaptation measures limiting global warming effects on the population and infrastructures are taken and financed.
COP21 took place in an unfavourable short-term context. With low hydrocarbon prices, return on investments aimed at replacing hydrocarbons and thus limiting greenhouse gas emissions are insufficient. With the scheduled end of feed-in tariffs, the decrease of these prices will also impact the renewable development speed as their selling prices will be increasingly linked to wholesale market prices. However the Observatory noted the positive progress made by major emitters of CO2.
President Obama has committed to reducing by 26-28% the USA's CO2 emissions in 2025 (compared to 2005), and is trying to impose a stricter regulation on coal plants. In China, Premier Li Keqiang committed to reduce the country's carbon intensity per unit of GDP by 60-65% by 2030 (compared to 2005). The Observatory noted that Europe is to some extent the "good student in the class" but it must establish consistency among the various measures taken to reduce CO2 emissions (eg ETS, renewables, energy efficiency, CCS, as these measures generate different costs for the community and send inconsistent signals to the market.
3.The European energy markets remain very unsettled. Wholesale electricity market prices are low (less than €40/MWh in H1 2015, down from 2014) while retail prices are increasing (+2.9% between H2 2014 and H2 2013). And in some European countries there are electricity or gas supply security risks, in the context of a strained relationship with Russia. And although long-term investment in schedulable generation capacities is low, investment in electricity and gas infrastructures should reach €1.1 trillion by 2025, with €500 million in generation.
“Energy Union announcements in early 2015 do not provide sufficiently quick and tangible enough measures to restore a
consistent market and improve security of supply," commented Colette Lewiner, Capgemini's Energy and Utilities worldwide consultant. "A consistent market recovery would involve the acceleration of the EU ETS market reform with the implementation, before the end of the decade, of the Market Stability Reserve adopted by the European Union and the introduction of a central regulatory body for this market; the mandatory implementation of new energy efficiency norms and standards for buildings; and for all intermittent renewables a quick feed-in tariffs termination and replacement by selling prices linked to the market."
To improve energy security of supply, the Observatory makes four recommendations:
- implementing capacity remuneration mechanisms quickly and consistently
- continuing shale gas exploration which is a source of domestic gas
- studying and financing a truly unified and smarter HV grid implementation
- allocating more R&D resources to competitive electricity storage solutions.
The full report can be downloaded from: https://www.capgemini.com/download-your-copy-of- european-energy-markets-observatory-17th-edition
(Originally published in MPS January 2016)