Power market developments
Powering the new Europe22 March 2004
The liberalisation of electricity and gas supplies in the European Union was finally agreed in 2003 and will come into full effect this year for business customers and in 2007 for households and all others. By Alan Osborn and Mark Rowe
The nuclear energy industry has not been directly targeted by the European Union’s (EU’s) package of directives and regulations on power market liberalisation, but clearly any move that enhances the competitive position of one source of energy through liberalisation is bound to have an effect on all others. This has already proved true in some countries, such as the UK, where a sharp fall in energy prices generally has significantly worsened the position of nuclear operators.
The liberalisation directives are directive 96/92/EC and 2003/54/EC. The first (96/92/EC), adopted in 1996, established common rules for the production, transmission and distribution of electricity and laid down detailed rules on the organisation and functioning of the electricity sector. However the adoption last year by the European Council, the European Commission (EC) and the European Parliament of 2003/54/EC served to repeal this legislation and replace it with a measure aimed at accelerating the complete liberalisation of the market. The directive should be implemented by the EU member states by 1 July 2004. The regulation is directly applicable EU law and it also enters into force on 1 July 2004.
One issue that makes it harder for the nuclear industry to take advantage of liberalisation is the huge funds it is obliged to set aside for decommissioning, which in turn has restricted the companies’ ability to engage in competitive pricing.
Although some members of European Parliament (MEPs) argued for a more flexible use of the huge decommissioning funds that the nuclear companies had set aside, this language was thrown out in committee and the EP eventually agreed to a joint declaration with the EC and Council that effectively ring-fenced these funds. The inter-institutional statement underlined the need for member states “to ensure that adequate financial resources for the decommissioning and waste management activities are actually available for the purpose for which they have been established and are managed in a transparent way thus avoiding obstacles to fair competition in the energy market.”
In a separate statement the EC noted that the funds had been established for decommissioning and waste management activities and underlined the importance of ensuring that they were managed in a transparent way “and used only for the said purpose.” In this context the EC said it intended to publish an annual report on the use of the funds, “paying particular attention to ensuring the full application of the relevant provisions of Community law.” It is now widely believed that the first of these reports later this year could re-open the debate over the use of the decommissioning funds.
Security of supply
Meanwhile the nuclear industry is likely to be directly affected by a shift in energy policy objectives by the EC away from liberalisation and towards security of supply where a directive was proposed late last year. The new emphasis on security of supply is in a sense a step away from liberalisation and could work to the nuclear industry’s advantage as a basic power supplier, though the legislation is still far from agreed.
More immediately the enlargement of the EU on 1 May this year will bring into the EU a number of central and eastern European countries with large and efficient nuclear power plants, notably the Czech Republic, and some with rather less productive generation capacity. These more effective producers are likely to benefit substantially from selling power into the open EU market, most of which will be nuclear-generated.
Indeed the contrast between the good and the bad in eastern Europe could not be more striking. Take the Czech Republic and Bulgaria: while the former leads the vanguard of energy liberalisation among accession countries, the latter is barely hanging onto the coat tails of EU expansion. And the nuclear industries of both countries lie at the heart of their fortunes.
The Czech Republic, according to Eurelectric, has fallen in line with the EU’s old energy directive and is expected to comply with the new directive, along with existing member states by July this year. Sami Tulonen, head of unit, nuclear generation at Foratom, which represents the nuclear industry within European institutions, goes further: “The Czech Republic is the crown jewels of the energy sector of the application states,” he said.
Indeed, the country has established the creation of the framework conditions for opening up its electricity market and setting-up an Energy Regulatory Office, and is concentrating research and development on furthering nuclear technology. Under the republic’s Energy Act of 2002, an electricity market regulator was set up to provide for progressive liberalisation of the electricity market, with the expectation that it will be fully opened by 2006. Nuclear power, produced at four reactors at Dukovany and two reactors at Temelin, is central to this policy. Currently, coal-fired power plants account for 68% of Czech electricity generation, with nuclear power providing a quarter of all electricity produced. In the period of years 1991-2000, old brown coal plants were decommissioned and replaced by the capacity of Temelin.
“The Czech production capacity is in good shape,” said Tulonen. “In some respects they have a more liberalised market than some existing EU Member States. They have created a structure that allows them to liberalise the market in a way that will not create huge price hikes.”
Although the safety standards of eastern Europe’s nuclear power stations is a distinct issue from that of nuclear energy liberalisation, the EU is finding it difficult to separate the two as enlargement approaches. The EU has repeatedly emphasised the importance of a high level of nuclear safety in the candidate countries. Bulgaria, which hopes to join the EU in 2007, has been required to close four of the six reactors at its Kozloduy nuclear power station, which once accounted for 44% of all the electricity produced in Bulgaria. Opposition politicians in Bulgaria’s parliament have claimed that closure will cost the country $1 billion and increase the price of electricity on the domestic market by 17%.
In Bulgaria, NEK, the national electric utility set up in 1992, has, since mid-2000, been responsible for transmission and hydropower generation. The restructuring of the power sector started in April 2000 with the legal separation of NEK into seven commercial companies for generation, distribution and a transmission company.
High and unrealistic forecasts for electricity demand – the government has stated its intention to become the leading supplier of energy across the Balkans and remains self-sufficient in energy production – have also continued to give Eurelectric and others serious concerns.
“The nuclear industry is in disarray,” said Tulonen. “Bulgaria is simply fighting for its industry. The country has promoted itself as a regional hub for energy but the closure of the plants at Kozloduy means they will lose that export revenue. They have some capacity but it is in the form of old polluting coal fire plants.”
Beset by these production and safety problems, a deadline for the total liberalisation of energy prices in Bulgaria before the end of 2001 came and passed and private investment has been slow to move in to the country. It was only last year that private money was first used to boost post-communist Bulgaria’s electricity sector. In this case, private financing of Euro 235.9 million - mainly from the major shareholders US company Entergy and Italy’s Enel – was combined with loans of Euro 112.2 million from the European Bank for Reconstruction and Development to help rehabilitate and improve the environmental performance of Bulgaria’s privately owned lignite-fired 840MWe power plant Maritza East III.
If the harsh light of free enterprise is illuminating inefficiencies and opportunities in Bulgaria and the Czech Republic, there is still no room for complacency in western Europe. France – as ever in matters nuclear – is the country to watch in Europe. The French energy market is characterised by the highest dependence of any EU country on nuclear power, which provides over 75% of the country’s needs, a striking characteristic combined with (until recently) a stubborn resistance to liberalisation. In an interview with NEI, Bruno Lescoeur, group executive vice president and head of generation and trading at the state-owned utility Electricité de France (EdF), agreed that market liberalisation in France had been “at a relatively slow pace compared to some other countries.” But France was now making “good progress, and we can say that the wholesale market is now quite competitive,” he said.
Lescoeur continued: “The first impact of this opening of the market has been to reveal in the prices in the wholesale market, the slight over-capacity we had on the continent. Up to the beginning of 2003 pries were quite low. Now we face an evolution of wholesale prices in France which is linked to wholesale prices in other countries and we face a quite significant increase – since the beginning of 2003 prices have risen almost 30%.”
EdF was now entering a period when it would have to consider investment in new capacities, he said. In essence there would have to be a decision by EdF about a new reactor, but because the company was state-owned it was a matter for the state. “There’s been a lot of comment that we’re considering bringing in partners from other countries, and some potential partners like German utilities have already expressed an interest,” Lescoeur said. He added this was “a good reason why we feel extremely positive about the future of nuclear energy in Europe.” The immediate challenge confronting France, as in the rest of Europe, was the impact of the ‘CO2 question’ (emissions trading, permits, quota allocation and so on) with an EU directive due to come into effect at the start of 2005. Lescoeur said this would have a real impact on the prices of electricity and would further enhance the position of nuclear. “I am therefore extremely confident of the competitiveness of the electricity generated by nuclear power in the future liberalised electricity markets,” he told NEI.
A similarly confident tone is adopted by the nuclear industry in Germany, which has held its own in a liberalised market, populated by consumers that are often hostile to the very idea of nuclear power. Energy market liberalisation in Germany was among the earliest and most sweeping in the EU. Following passage of the Energy Act of 1998 there has been a rapid and virtual 100% opening of the market according to Helmut Alt, honorary professor at the Aachen University of Applied Sciences. “What used to be a market of providers has now turned into a buyer’s market – there are no fixed rules any more,” he said. Even so, nuclear power remains (along with brown coal) the cheapest source of energy in Germany and has held its share of the market at around 30%, (50% in the baseload sector).
Christian Wilson, spokesman for the German Atomic Forum, said that not only had nuclear power remained fully competitive but “we are now expecting that once the emissions trading scheme starts then nuclear power will become even more competitive.”
The problem in Germany is, of course, a political one following the government decision to phase out nuclear power by 2020 and to promote the use of wind power, among other things, for environmental reasons. This remains the subject of heated debate and the issues are not clear-cut. Alt believes that the policy could lead to ‘an economic disaster’ and said it is unrealistic to suppose that it could happen without damage to economic growth.
“The nuclear power compromise in Germany cannot be understood as a phase-out decision but rather more as a decision to continue with the undisturbed operation of the existing nuclear power plants with specified residual operating lives and the question of their substitution yet unresolved,” he said. “The successful operation over many years of eight of the top ten nuclear power plants worldwide in our country should be enough motivation to continue following this successful path,” he added.
No such political problems face the nuclear industry in Finland, however, which is unique in the EU in being the first country in Europe to lay plans for a new nuclear power station in more than ten years. This decision, approved by parliament in 2002, was taken basically on economic grounds since nuclear power is by far the cheapest fuel available in the country. A 2002 study by the University of Technology at Lappeenranta found that nuclear energy production costs were Euro 24.1 per MWh compared to Euro 32.1 for coal-fired electricity stations and Euro 30.5 for gas-fired generators. More recent surveys show that this gap has not been appreciably narrowed. However in pressing for the new nuclear reactor the government also cited energy security and greenhouse benefits. Finland gets about a quarter of its total energy from its four nuclear reactors, which are among the world’s most efficient with average load factors during the 1990s of 94%.
Liberalisation of the energy markets in Finland has not changed this rosy picture, rather strengthening the position of nuclear energy by making the relative costs of different power sources all the more apparent.
Pekka Tiusanen, manager of communications at the Finnish Energy Industries Federation stressed that although a nuclear plant costs about three times as much as a gas plant to build, fuel costs are much lower and given the capacity utilisation of around 93-94% that the industry has reported in recent years, nuclear is by far the cheapest option.
Tiusanen told NEI that the basic price differential between nuclear and other forms of energy had not changed in the past year or so, adding that projected industrial demand for energy from the new reactor already exceeded the plant’s projected capacity.
As for decommissioning funds, Tiusanen said these were not a concern and did not inhibit the companies’ room for manoeuvre where pricing policy was concerned. The funds had been collected since nuclear power was introduced in the late seventies “and because we were so early this hasn’t been a problem at all,” he said.