Presentation on theme: "The outlook for electricity in Western Europe"— Presentation transcript:
1 The outlook for electricity in Western Europe CERNThe outlook for electricity in Western EuropeMatthew WittensteinIEA Gas, Coal & Power Markets Division26 November 2014
2 Outline of Presentation The outlook for demandOECD versus Non-OECDThe changing shape of demandThe outlook for supplyThe rise of renewablesThe outlook for electricity pricesA brief aside on wholesale electricity price formationThe components of electricity pricesPrices in Europe
4 Demand growth to 2040 Globally, expected to be 2.1 % p.a. But slower in OECD economiesFrom 2012 to 2040:Global Demand: 78% growth (51% to 2030)OECD Europe demand: 22% growth (14% growth to 2030)OECD Total demand: 25% growth (17% growth to 2030)US demand: 24% growth (16% growth to 2030)Non-OECD demand: 129% growth (82% to 2030)Electrification and industrialization are main drivers.China sees the biggest increase in demand, by far, of any country – increasing by about the same amount that the US, Canada and Japan consume today.China demand: 119% growth (89% to 2030)India also sees tremendous growthElectricity demand growth is decoupling from GDP growth. GDP growth in OECD countries over this period is expected to be 1.9% per year on average, while electricity demand growth is only 0.8% on average.Source: IEA, World Energy Outlook 2014, New Policies Scenario
5 The changing shape of demand: the duck curve Source: Regulatory Assistance Project
7 Europe will see significant investment Source: IEA, World Energy Outlook 2014
8 Most investment will be in renewables The EU has demonstrated that it is possible to deploy sufficient renewable generation over a relatively short period of time. But note that if the 2DS target is to be met, nuclear must be a significant part of the mix.Source: IEA, World Energy Outlook Investment Report
9 Competitive markets are not driving investment Source: IEA, World Energy Outlook Investment Report
10 What will drive investment? How much generation?Demand will play a limited role (slow growth)Replacement of existing generation (retirements)What kind of generation?Cost of generationRenewables will continue to get cheaperThe future of natural gas and coal prices is uncertainGlobal (and EU) climate policiesNew climate agreement in 2015?National policiesSecurity of supplySupport for renewables, nuclearSlow demand growth in Europe will require some additional investment in generation capacity, but it is not the major driverRetirements will play a big role. Globally, around 2,450 GW of existing and new capacity is expected to retire by 2040 – or about 1/3 of global capacity additions over that same period. 45% of these retirements will be in OECD economies, where the infrastructure is older on average.In the EU, almost 60% of existing capacity will retire by 2040.In non-OECD, 4/5 of projected gross capacity additions are needed just to meet rising demand.Renewables will make up 2/3 of all investment in OECD countries, exceeding combined investment in fossil and nuclear generation. It is important to note that renewables tend to have shorter lifespans than fossil generation, so this is an area where we expect to see lots of retirements and re-investment over the next few decades.
11 The rise of renewablesSource: IEA, World Energy Outlook Investment Report
12 Cost convergence of renewables Low-carbon generation will remain more expensive than fossil generation on an LCOE basis going forward. These figures, though, do not include a carbon price. A carbon price would make low-carbon sources more competitive by raising the per-kWh price that carbon intensive generation would have to earn in order to cover all of its costs (in this case, to cover the additional variable cost)Source: IEA, Energy Technology Perspectives 2014
15 Retail prices for industrial customers, 2013 Source: IEA statistics
16 A brief aside on price formation in wholesale power markets $400/MWhD1$120/MWhThe marginal unit sets the price for all generatorsOCGTNuclearCoalCCGTHydro/RE
17 The impact of renewables D1Increasing renewables lowers wholesale pricesOCGT$120/MWh$36/MWhNuclearCoalCCGTHydro/RE
18 Investors are unable to recover costs Variable Cost= Marginal CostSource: IEA, World Energy Outlook Investment Report
19 The components of electricity prices Lower wholesale prices more than offset by other costsWholesale prices in the EU have been declining because of weakened demand (mainly due to the financial crisis, but also to some extent by de-industrialization) and incentives for renewables that have created, in some countries, significant over capacity. Retail tariffs, meanwhile have continued to rise, because the incentive payments for renewables have been passed on to consumers in the form of higher taxes and levies. As a result, retail prices continue to rise, while at the same time conventional generators have seen their revenues decline.
20 Prices: going upWholesale prices in EU are projected to increase by 50%, on average, by 2040Current prices average around 70 USD/MWhNot high enough to recover fixed costsTo recover the cost of needed investment, prices will need to rise to around 100 USD/MWh by 2030, and 110 USD/MWh by 2040Prices in EU will be higher, on average, than in other OECD countries, because of the relatively high investment needsThis is highly dependent on the future of EU renewable policies and wholesale market reformsWhether and how much prices will go up depends on a number of factors, including how the cost of generation evolves, future fuel prices (and the degree to which the power sector remains dependent on fossil fuels in general), and the efficacy of climate and security of supply policies.Currently, in Europe, prices are not sufficient to meet existing investment needs, let alone future needs. As a result, our expectation is that wholesale prices in Europe will rise. However, this is highly dependent on implementing reforms to the wholesale market that will allow prices to rise. Alternatively, governments may choose to continue to support investment through non-market interventions such as direct subsidies for particular types of generation. In that case, wholesale prices may remain low. Retail prices, meanwhile, would continue to rise to the degree that these costs are passed on in the form of additional taxes and levies on electricity.We would also expect prices in Europe as a whole to converge somewhat, as the continent continues to increase its physical and market interconnections.