Europe’s energy markets – the new realities

European utilities need to quickly adapt their business models to the new market realities.
Published: Tue 15 Nov 2016

Utilities are quickly getting to grips with the technical integration of renewables in Europe. Virtual power plants, storage and microgrids along with advanced energy management systems are some of the options being developed to manage and optimize the uneven and rapidly fluctuating solar and wind generation. [Engerati-Power in Europe 2016]

Countries such as Portugal and Germany are increasingly running for extended periods on renewables alone. [Engerati-Portugal runs for 107 hours on renewables] Increasingly ambitious targets, including 100% renewables, are being set by countries such as Denmark. [Engerati-Denmark On Target for 85% Renewables by 2040]

That’s not to say there aren’t still challenges with large-scale renewable integration and for example the efficiency of storage needs to be improved and its costs need to drop further.

But where Europe’s utilities are generally falling behind is in adapting to the business realities of this new panorama, according to Capgemini’s latest European Energy Markets Observatory. The markets have been destabilised by the rapid increase in renewables. Moreover, they have been distorted by the uneven pace of development between countries.

Europe’s renewable costs

The European Energy Markets Observatory reports that during the past 12 months since the previous review, renewable prices have continued on a downward trend. Onshore wind costs are becoming competitive, while offshore wind costs have fallen for the first time, reaching a lower threshold of €87/MWh. Additionally, a fall in the cost of photovoltaic solar installations is continuing, with a further drop of 20% expected in the next three years.

However, there also has been a fall in electricity wholesale market prices, with the growth in renewables in a market experiencing overcapacity, combined with the low oil and gas prices. A low point was reached at the beginning of 2016 of €22/MWh compared to €40/MWh on average in 2015.

With priority given to renewables in the merit order, utilities, like in previous years, are closing gas or coal power stations, which operate for too little time to be profitable. As a result, 7GW in capacity should be withdrawn from the market this year, in addition to the 10.7MW in 2015, resulting in depreciation on electricity company accounts. The closing of these capacities, used to meet peak demand, weakens the security of supply.

With the deregulation of the markets, a large part of utilities’ turnover is exposed to low wholesale market prices and as such their financial situation has continued to deteriorate.

Nor are utilities the only parties being affected, the report notes. Since 2004, Europe has invested a total of €750 billion in research, development and deployment of renewables, accounting for a quarter of the total global investment, despite making up only 7% of the global population. This has resulted in costs to purchase being significantly higher than the utilities’ generation costs, with subsidies financed by the end consumer resulting in high retail prices. For example, in Germany, one of the most dynamic European countries, end consumers will pay €20 billion in extra taxes in 2016 with more than 25% of the bill going towards renewable energy subsidies.

New energy models

As a result of this development of renewables, new decentralized production and consumption models are emerging. Market models are switching from centralized, long-term planning management to a decentralized approach based on the philosophy of customer-centricity and shared economy. Customers are increasingly desiring more information and autonomy in managing their energy consumption. Individual customers, districts and cities are willing to manage their own energy needs.

From a network perspective, distribution network managers have an increasingly central role in the new market operations, the Observatory states. They face high activity with the connection of renewable plants, the deployment of smart meters, and the exploitation of the large volume of data coming from these meters.

Network managers need to invest more in smart grids. They also need to further pursue storage such as batteries and power to gas and other incentives such as demand side management and flexible and transparent pricing to help balance demand and production on the network.

From a market perspective, the impacts of these developments on utility bottom lines is resulting in their financial situation becoming critical, according to the Observatory. Utilities need to adapt their business both by restructuring their assets and/or shifting from being a commodity company to an energy services company for new revenue generation. [Engerati-From Utility To Energy Services and Using disruption to your advantage]

In addition there is a need for clarity and reform of market policy and design at the EU level.

Commenting on the findings, Perry Stoneman, Global Head of Energy & Utilities sector at Capgemini, says: “The rhythm of development of renewable energy has long been dictated by regional objectives, rather than where the investment was most needed to service infrastructure and consumers. We now need to maximize advances in technology to establish competitive storage, using batteries, for example, that can optimize the use of energy that is being produced.”

Utilities need to quickly adapt their business models and embrace disruption to address the new market realities, he continues. “They must simplify their organization and accelerate digital transformation, which will enable them to boost productivity, adopt customer centricity, grow profitable revenue streams and become more innovative and agile.”

The Observatory was prepared by Capgemini in partnership with I4CE and Vaasa ETT

Further reading

Capgemini: The European Energy Markets Observatory, 18th edition

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