The outlook for electricity in Western Europe CERN The outlook for electricity in Western Europe Matthew Wittenstein IEA Gas, Coal & Power Markets Division 26 November 2014

Outline of Presentation The outlook for demand OECD versus Non-OECD The changing shape of demand The outlook for supply The rise of renewables The outlook for electricity prices A brief aside on wholesale electricity price formation The components of electricity prices Prices in Europe

1. The outlook for demand

Demand growth to 2040 Globally, expected to be 2.1 % p.a. But slower in OECD economies From 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 growth Electricity 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

The changing shape of demand: the duck curve Source: Regulatory Assistance Project

2. The outlook for supply

Europe will see significant investment Source: IEA, World Energy Outlook 2014

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

Competitive markets are not driving investment Source: IEA, World Energy Outlook Investment Report

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 generation Renewables will continue to get cheaper The future of natural gas and coal prices is uncertain Global (and EU) climate policies New climate agreement in 2015? National policies Security of supply Support for renewables, nuclear Slow demand growth in Europe will require some additional investment in generation capacity, but it is not the major driver Retirements 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.

The rise of renewables Source: IEA, World Energy Outlook Investment Report

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

EU 2030 Framework for Climate and Energy

3. The outlook for electricity prices

Retail prices for industrial customers, 2013 Source: IEA statistics

A brief aside on price formation in wholesale power markets $400/MWh D1 $120/MWh The marginal unit sets the price for all generators OCGT Nuclear Coal CCGT Hydro/RE

The impact of renewables D1 Increasing renewables lowers wholesale prices OCGT $120/MWh $36/MWh Nuclear Coal CCGT Hydro/RE

Investors are unable to recover costs Variable Cost = Marginal Cost Source: IEA, World Energy Outlook Investment Report

The components of electricity prices Lower wholesale prices more than offset by other costs Wholesale 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.

Prices: going up Wholesale prices in EU are projected to increase by 50%, on average, by 2040 Current prices average around 70 USD/MWh Not high enough to recover fixed costs To recover the cost of needed investment, prices will need to rise to around 100 USD/MWh by 2030, and 110 USD/MWh by 2040 Prices in EU will be higher, on average, than in other OECD countries, because of the relatively high investment needs This is highly dependent on the future of EU renewable policies and wholesale market reforms Whether 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.

Annex

Energy intensity decoupling from GDP growth Global Demand: 2012 = 19 562 2030 = 26 761 37% growth EU demand: 2012 = 3 188 TWh 2030 = 3 529 TWh 11% growth Source: IEA, World Energy Outlook 2014, New Policies Scenario

Europe is already quite efficient

Electricity and economic growth have decoupled Source: The Wall Street Journal, “Electric Utilities Get No Jolt From Gadgets, Improving Economy”, July 28, 2014

Low-carbon technologies are capital intensive ETP assumptions on investment cost per kW of installed capacity, United States Source: Energy Technology Perspectives 2014