by David Porter

David Porter is Chairman of EURELECTRIC’s Energy Policy & Generation Committee and of EURELECTRIC’s Task Force on Investment, which was set up earlier this year to investigate the investment climate in the European power sector.  He explains why EURELECTRIC is focusing on investment – and which conclusions can already be drawn from the task force’s work.

Why did EURELECTRIC decide to launch an action plan on investment? Isn’t the reality that we have a situation of overcapacity in Europe?

Investment is an issue that has to be addressed seriously by EURELECTRIC. People think first of new investment, which is very important, but there is more to it than that. The companies represented in EURELECTRIC have already made huge investments in the industry and they are anxious to ensure that they get a reasonable return from them. If they don’t, then investors may be less confident about putting more money in.

Electricity supply is a vital industry and one which should have the confidence to invest in its own future. But this is also an industry where it is now more difficult than it should be to make investment decisions. It is heavily influenced by politics and regulation, so it is no longer just a case of judging an investment against expected customer demand.

Public policy affecting the industry was drawn up before the financial crisis hit us. Today we have more or less the same policy even though financial conditions are now very tough. So we have to ask whether the money is available. The political agenda is led by the reduction of greenhouse gas emissions, demanding not just the replacement of ageing plant, but a transition to low-carbon technologies which tend to be more expensive and are less familiar to investors. Some of these technologies are riskier than conventional investments of the past. This makes investors more cautious and it may prompt them to look for a higher return.

As we have struggled to deal with the economic crisis, there has also been huge pressure on Europe’s energy companies: lower energy sales, high levels of debt, pressure on credit ratings and government threats to their finances. Their customers are being squeezed, too, of course.

It is true that, at the moment, there is a reasonable amount of generating capacity available in Europe and a few parts of the EU would say that they have no obvious investment problems. But others can see serious problems coming in a few years’ time, when ageing plant will have to be closed, largely because of air quality regulations. The single market has not developed as well as it should have, so it is not yet as easy as it should be for one region’s surplus to meet another region’s shortage. On top of this, of course, we have the legally-binding targets of the Renewable Energy Directive to meet and the challenge of providing alternative capacity for renewables that run at the command of the weather, rather than the customer.

The full results of EURELECTRIC’s work won’t be published until a EURELECTRIC event on 6 December, but could you already give us a flavour of the main findings?

The draft report points to a number of important issues. It reveals concern that the investment climate is poor and that the attractiveness of investment in the major utilities has declined just when we are facing a big investment challenge. Part of the problem is that investors have other opportunities around the globe and some are inclined to avoid Europe. But there are other worries: policy is sometimes muddled; the single market remains incomplete and at times it seems as if policymakers have forgotten its advantages; individual member states are pursuing their own agenda; and the Renewables Directive, which forces particular technologies onto the system, is not only causing price distortions, but beginning to make it difficult for conventional plant to earn a proper return.

So we are likely to be calling for more attention to be given to the completion of the single market, greater harmony between EU energy policy and that of member states, a better climate for innovation and much greater clarity regarding the relative importance of the three main strands of energy policy – security of supply, competitive prices and reduction of carbon emissions.

Aren’t you in essence shifting the responsibility for investments from the power sector to policymakers? Is this report just an elaborate way of asking politicians for money?

No. We are simply pointing out that clear and stable policy is vital if the industry is to be able to raise the money to deliver what policymakers want to achieve. It is fair to say that the industry would benefit from EU funding of research to stimulate innovation – vital for delivering the low-carbon agenda cost-effectively. But the huge investments in new power production are the responsibility of the power sector. It doesn’t have anything like enough cash on the balance sheet though, so it has to offer attractive returns to investors who have competing offers from around the globe to consider. They are not obliged to invest in European energy projects. The role of the policymakers is to give everyone the confidence that policy will be stable and acceptable returns can be earned.