Benjamin Tait runs Prospex Research Ltd, a London-based consultancy specializing in analysis of strategic and financial issues for the international power business
Tired of brave-new-world reports from Europe? Sick of the ignorant hype, the brash self-promotion, the dramatic calls to surely futile action, the endless arguments about regulation? Horrified by what is happening in the trading rooms, where a centenarian industry is coming under the command of a bunch of brilliant young lunatics from the financial markets? If you are in the equipment industry, perhaps you should be. The European equipment business of 1999 is actually locked in nothing more dramatic than a phoney war. Allegiances have been declared, objectives identified and new strategies prepared for ruthless implementation. But action? Pessimists can claim they don’t even see a skirmish along some very long front lines.
The situation in Spain is typical of what is happening around Europe. Spanish utilities and their potential rivals have something incredible like 20 000 MWe of major CCGT plant capacity on the drawing boards, but have not announced a single order. This cannot be blamed on slow authorisation processes. These do play a role, but there are much deeper issues. Here are a few of them:
From the equipment supply point of view, other big European markets are in even worse shape. As reported here last month, power policy in Italy appears to be more focused on legacy distortions and how to maintain them than on creating a level playing field, fast, and getting out of the way. Even if liberal promises are in place, they must be respected and be seen to be respected before cautious new entrants will spend hundreds of millions of euros on gas turbines. That could take years.
In Germany, power market competition has taken off. This is great news for German industry, and a huge boost for the liberal cause. But new entrants may only have more doubts. The German price premium they are targeting is shrinking rapidly, and the incumbents may become much nastier and more effective rivals than expected. Meanwhile grid access is, again, a headache. Today’s cumbersome patchwork system should be revised by September. But there is much to fix, and there is no guarantee that Germany will ever rival the Nordic region in pro-market grid system excellence.
Although only time will tell, it seems today that France is a write-off. Foreign followers of the electricity reform debate there must wonder if they are living in the same world as French officials. They certainly won’t see a reason to forecast a near-term dash for gas (although the change is happening even in France – see panel below). The same conclusions should probably also apply in Portugal and Austria. These anti-liberals have been joined, in fact if not in name, by the UK, which is still maintaining its so-called ‘gas moratorium’, despite the anti-competitive effect that policy is having.
In the Benelux, there is probably some room for growth, but the region is already an enthusiastic promoter of gas-fired cogeneration. There is a limited and broadly stagnant supply of refineries, chemical complexes and steel mills worth using as an anchor for a major CCGT plant. The Nordic region, meanwhile, is a web of complexity. Finland and Denmark are not hostile to gas-fired power, but Sweden and Norway are. In any case, building a CCGT to sell gas-fired output at current Nord Pool power exchange prices would be suicidal. Unless prices pick up and green consciousness fades, little may happen.
Yet the chilling thought is that phoney war is no excuse for inaction. The pace of change in the European power business, if not the equipment segment, really is worth some ugly hype, self-promotion, ordering about, arguing, and crazy trading rocket science (with live and armed rockets). If the forces at work do finally order in the heavy artillery, the factories providing it will probably never have been busier. What a way to run a war.
|European Market, French Solution