|This article appears in the July 25, 2003 issue of Executive Intelligence Review.
Europe's Energy Supply:
by Lothar Komp
On the Way to California
Italy is in an energy emergency. For the first time since the end of the Second World War, the Italian energy system stood on the verge of collapse at the end of June. In order to avert the worst, the manager of the national energy grid was forced to impose targetted blackouts on several sections of Rome and other parts of Italy. There was no time for advance warnings. Thus, on June 26, thousands of Italians were suddenly in the dark; on the roads, chaos broke out on account of the disconnected traffic lights, and throughout Rome, people were locked in traffic jams, and had to be freed with help of the Fire Department. Altogether, 6 million Italians were temporarily cut off from electric power. Alberto Clo, managing director of the energy firm ENI, commented: "That the sixth-most powerful economy in the world cannot supply itself with sufficient energy, is absurd and pitiable."
Since the partial privatization of Italy's electricity sector (see article following), assured supply to the population is no longer the highest priority for the stockmarket shares of the competing power generators. Now each puts the blame on the other; besides, they say, "The national emergency was recognized for a long time."
Problem Is Europe-Wide
No one should think that Italy, even for now, is an isolated case. Everywhere in the European Unionfrom nation to nationthe energy sectors have, for several years, been hit with a whirlwind of confusion, as a consequence of managed deregulation at varying tempos. National suppliers were privatized; monopolies were broken up; and the electricity markets opened up even to foreign producers. All this, according to the theory, promoted competition and promised households, as it did businesses, low energy prices.
In practice, it then appears to have turned out otherwise, unfortunately. First of all, suddenly, a cross-border takeover battle has broken out in the European energy markets, just like in the telecom sector. Companies encumber themselves with debts, or go to the stock enchange in order to absorb smaller rivals. At the same time, the companies occasionally offer a ruinous price war, so that in the first two or three years after the beginning of deregulation in one area, the price of electricity actually declines. Thus the maxim holds: Whoever invests, loses. Capital expenditures in the safety and delivery capacity of electrical systems are reduced to a minimum; there are no capital expeditures on new units after the one time when they are built.
Very quickly, then, a small group of market-dominating big companies have become more and more ubiquitous, and those low prices are now a thing of the past.
Altogether, by this means, the precious reserve capacities for peak consumption periods have been driven down in the afflicted economic systems; and in some nations, even in normal times, the energy supply has been made dependent on buying considerable additional supplies from foreign countries. Finally, all that is needed now is an unusually cold Winter, or an unusually hot June or July, and catastrophe strikes.
Energy Crisis in the Land of Milk and Honey
The Scandinavian example: Norway is in a virtual paradise, with a wealth of energy production permitted. That nation is, after Saudi Arabia, the second-largest oil and gas exporter in the world. Moreover, there is an enormous potential in hydropower, so that today, 99% of Norway's own electricity requirement is generated from water. In addition to this, Norway exports electricity from hydropower on a large scale to neighboring Scandinavian countries. Norway ranks near Switzerland and a few sheikhdoms, among the nations with the highest per-capita income in the world.
Yet, in the past Winter, elderly Norwegians died in freezing cold in their homes, because they were terrified of high electric bills! The immediate cause was a particularly warm and dry Summer in 2002, followed by a dry Autumn, so that the water level of the reservoirs fell. The Winter was especially cold, and even the water supply in the reservoirs of the hydroelectric power plants froze. An energy emergency has erupted throughout Scandinavia. The prices in the northern energy Exchange North Pool tripled within a few days. In Sweden, energy prices rose 260% compared to the previous year. In Norway itself, the price of electricity exploded in February 2003 to 87 öre [[per kilowatt-hour?]], while during the typical year 2002, it was around 20 öre. In some districts in the middle of Norway, the local authorities even terminated energy distribution. Since the reservoirs are for the near future almost empty, emergency gas power plants must now be built from the ground up, on an urgent basis.
In Norway in particular, the energy crisis provoked displeasure at the market-determined energy supply. The conservative Aftenposten itself demanded a reversal of energy policy, and characterized the extreme deviations "politically explosive." Thousands of Norwegians demonstrated in front of Parliament for government intervention; for instance, by setting maximum prices or granting government subsidies for heating repairs to low-income families. The Homeowners Association, which organized the demonstration, warned of "Russian conditions" in Norwegian energy supplies.
At the beginning of the 1990s, Norway and Sweden jointly deregulated their energy sectors. Since then, electricity supply and demand alone have regulated the price. That is also to say, however, that the energy providers only make money, if the electricity each company and each private household requires to survive, is kept in short supply"California style." Thus, the Norwegian energy companies were blamed, when, in the Summer and Fall of 2002, as the calamity in the coming Winter was already in sight, they continued to direct undiminished exports to Swedenso that the water levels of Norway's reservoirs were deliberately allowed to fall to record lows.
In Sweden, electricity prices were hiked up in the Winter not only because of the dependence on imports from Norway. In some parts of Sweden, including Stockholm's Kista suburbthe Swedish "Silicon Valley"there were, in addition, power shortages due to defective maintenance of the electric grid. Here, re-regulation and investments in new energy generating facilities are being considered now, along with the division between sense and nonsense about nuclear power. The cancellation of the nuclear power plant Barsebäck 2 has been deferred for the second time. The opposition demands that the Swedish law that prohibits the construction of new nuclear plants be rescinded. Finland recently declared that it wanted to build a fifth nuclear reactor.
When Will the Lights Go Out in Britain?
The deregulation of the energy sector in Great Britainmeasured in electricity priceswas extremely successful, in striking contrast to the previously mentioned examples of the Italians and Scandinavians. The only problem is: It was so successful, that the largest British power producer, British Energy, has been put into bankruptcy by it, and in Autumn 2002, only a last-minute rescue package by the government saved it from going under.
British Energy, which was privatized in 1996, manages 15 nuclear plants, of which eight are in Great Britain. A quarter of all British private households get their power from British Energy. In the course of the early deregulation, numerous foreign firms, not the least of which were [[Eon and RWE]] from Germany, had bought themselves into the British electricity market. In the meantime, the wholesale prices for power had fallen by more than a third, and quite obviously below the cost of production. At the beginning of September 2002, British Energy announced that it had indebted itself so much, by problems at home and for its companies abroad, that without an immediate government rescue, it would have to file bankruptcy. The stock price of British Energy collapsed 65% within one day. The bonded debt was downgraded to "junk." The market value of the firm crashed to one-ninth of the value immediately after privatization. In the end, the government offered a financial injection in the sum of 650 million Euros for the short-term survival of the company.
Only a few weeks later, TXU Europe ran out of money. The company operated three coal power plants in Great Britain and provided four million customers with power. Here, too, the government was called on for help. In the middle of October 2002, a liquidity crisis escalated in the power company UK Coal, so that the management, in a kind of panic reaction, suddenly halted all coal deliveries to the biggest British power plant, AES Drax in North Yorkshire.
On July 1, 2003, the British Institution of Civil Engineers published an alarming study, in which it said that projecting present trends, by 2020 at the latest the lights could literally go out in Great Britain. The study reported that coal and nuclear shutdowns will make 80% of the of the energy supply of Great Britain depend on gas pipelines from politically "unstable" regions of the world: "If future gas supplies were interrupted, this country would have major difficulty in keeping the lights on ... What would happen then? Under current plans, with no gas, this country would have no electricity."
German Electric Price in Updraft
Energy market "liberalization" began in Germany in April 1998. In that country, somewhat differently than in Great Britain, state regulating authority is supposed to be renounced, and all matters are supposed to be decided through self-regulation and free agreement among associations. Here also, at first, the electricity price clearly went down, at least for industrial users. The immediate result was a dramatic clearing-out of the workforce. Altogether, within a few years, about 40,000 jobsthat is, one-quarter of the workforce of the electricity production and distribution sectorwere wiped out. Meanwhile, the concentration process advanced so rapidly through countless takeovers and mergers, that the electricity price rose again, across a broad front, in the Summer of 2000. Among private households, taxes for the support of renewable energy resources and other extra energy taxes and fees had already long since eaten up the price decreases. For this year, the Electric Power Association expects an increase in average electricity costs of about 6% for Germany's private households.
Much worse, is the fact that in Germany, as in almost all other European nations, the energy infrastructure is becoming obsolete, because the investment-hostile phase of deregulation followed upon more than a decade of already-existing drops in investment in production sites and distribution networks. Thus, the yearly investment level of electricity providers in the country, since the middle of the 1980s, was halved from a barely sufficient 8 billion euros, to 4 billion euros now. Only in the first three years after reunification of East and West Germany in 1990, did the level of electricity industry investment manage a brief pickup.
For the coming years, according to energy firms' existing plans, a further drop in annual investment to 3 billion euros is foreseeable.
Up to the beginning of the next decade, one coal- and gas-fired power plant after another will have to be replaced by new capacity. Starting in 2005, on top of this, the politically motivated removal from the electricity grid of 19 nuclear energy unitswhich presently provide one-third of Germany's supplyis supposed to take place. To maintain the German electricity supply under these circumstances, gigantic investments by the energy firmsfor the most part already highly indebtedwill be necessary. An explosion of electricity prices were the likely result then.
However, the reliability of the energy supply is already in danger in Germany now. It appears paradoxical, but, with every new electric fan that is turned on in Germany, the danger of uncontrolled power cutoffs, like those in Italy and Russia, increases.
Electricity is no ordinary commodity. Once produced, it can be stored only in very limited quantities. On the other hand, the exact amount of electricity must continuously be fed into the electric grid to match the exact amount required by users, so that the grid frequency always remains around 50 Hz. Otherwise, if fluctuations in frequency occur, anything can happenfrom local interruptions of power, to blackouts in large sectors. However, since the wattage of an electric fan, as everybody knows, fluctuates between 0% and 100% output, and, in practice, cannot be known, for every megawatt in an installed electric fan, one must at the same time hold an additional megawatt of electrical generating capacity in reserve. Thus, the electric fans themselves are already a subsidized business, and must be subsidized on an ongoing basis by taxpayers and electricity consumers.
Reregulate, Return to Reality
The North German Refinery (Norddeutsche Affinerie, NA), Europe's greatest copper producer, wants to redeploy half of its total 3100 workforce into a service business, because the company would otherwise have to pay out 4.5 million eurosalmost a quarter of its annual profitfor special eco-electric fees. Only if one spins off the labor-intensive part of a German company, does it fall under the hard-case provision of the Renewable Energy Law (Erneuerbare-Energien-Gesetzes-EEG). NA Chief Werner Marnette said: "If this ideologically-driven nonsense does not cease, soon the raw materials industry in Germany will no longer have a chance."
It is high time to rethink the politics of energy in Europe. Decades-long neglect of investments in infrastructure; the ecological-ideological aberrations of the '70s and '80s; and, finally, the deregulation experiments of past years, have undermined the reliability of the European electricity supply to an unparalleled extent. Reregulation is necessary, to stop extreme fluctuations in the price of electricity, and make the reliability of the electricity supply again the top priority. After that, massive investments in new energy plants are needed, in which the emphasis must be placed on the most advanced technologies, including nuclear energy. At the same time, the European nations must quadruple their efforts to develop the energy production of the futurenuclear fusion power.
By carrying on with current policies, Europe will soon be subject to California conditions on a daily basis, with catastrophic consequences for workplaces and income.