Focus on regulationas losses mountGovernment pressure toreshape the industrysees asectorin astateof fluxPage 5

FT SPECIAL REPORT

European Energywww.ft.com/reports | @ftreportsThursday October 23 2014

Inside

Continent aims to weanitself off Russian gasUkraine crisis forces EUleaders to face up to theextent of its dependencePage 2

District heating to playstarring roleScandinavia offersmodel for using excesspower station heatPage 3

CommentPhilip StephensBarriers to exploitationof Greenland’s resourcesare not just physicalPage 4W hen Guenther Oet-

tinger, the EU’s com-missioner for energy,warned last month thatRussia might cut

natural gas supplies to the continent inretaliation to western sanctions, hefirmly placed energy security front andcentre of the debate surrounding esca-latingtensionswithMoscow.

“That [Russia’s President Vladimir]Putin would use false information, liesand weapons was beyond my imagina-tion,” Mr Oettinger was widely reportedto have said at a Brussels event. “That’swhy I am not ruling out worst-case sce-nariosanymore.”

The clash between the west and theKremlin over the latter’s military actionin Ukraine has led to the worst stand-offbetween both sides since the cold war,and the threat to energy supplies hasaccelerated calls for a move away fromRussianenergysources.

The EU imports more than half theenergy it consumes, and Russia is itsbiggest supplier of oil, coal and naturalgas. In Europe’s capitals there is a palpa-ble sense of déjà vu, in view of the 2006

and 2009 stand-offs between MoscowandKiev, thatheldEuropetoransom.

As Mr Oettinger mediates talksbetween Russia and Ukraine to resolve agas pricing row in an attempt to avert adamaging supply cut in the winter, thelatest dispute has not only revealedwhat little room for manoeuvre Europehas, but also the diverging interests ofEUmembercountries.

The conflict has also underlined –again – the competing claims of the EU’sthree energy policy objectives: security

of supply, environmental concerns andcompetitiveness.

JonathanStern, seniorresearchfellowat the Oxford Institute for Energy Stud-ies, says: “If you want to use less gas, inmany countries that will mean morecoal [usage] and you kiss your carbondioxide emissions targets goodbye.”Renewables would need subsidies,whilealternativegas importswouldcostmore,headds.

In recognising the continent’s vulner-ability to external energy shocks, the

European Commission has spent thepast few months conducting stress teststoassesshowthecontinent’senergynet-workswouldcope intheeventofdisrup-tions, particularly during the winterwhengasusage isat itshighest.

The aim of the tests is to developshort-term back-up mechanisms foremergency situations. The results willbe released this month, before thecommission meets to discuss its 2030policy framework for climate andenergy. This includes moves to increase

EU seeks alternative suppliersAs Europe’s biggestsupplier of oil, coal andnatural gas, Moscow hasflexed its political andeconomic muscle.Anjli Raval andHenry Foy look at acontinent learningto fight back

Line of attack: Russia’s Gazprom, supplier of a quarter of Europe’s natural gas, has expanded production and storage capacity – Alexander Zemlianichenko/Bloomberg

gasstocks,develop infrastructure–suchas reverse flow pipelines – reduceenergy demand and switch to alterna-tive fuels intheshort term.

Longer-term aims include improvingenergy efficiency, boosting productionwithin the EU, diversifying suppliercountries and access routes, construct-ing infrastructure and creating a moreunified energy policy – a demandformer Soviet states, such as Poland,havemadestrongly.

continued on page 5

Simple solutions offera greener futureSaving energy could cutcosts for industry andsolve climate changePage 5

2 FINANCIAL TIMES Thursday 23 October 2014

European Energy

A n interim gas deal betweenUkraine and Russia hasbeen in the works. If a newprice and a timetable forpaying off $5.3bn in gas

debts can be agreed – at the time of pub-lishing, although progress had beenmade, a final deal had not been reached– there is hope that large areas of Europewill not be shivering in the cold thiswinter.

Efforts to end the row have collapsedseveral times and take place in theshadow of a wider political crisis. The annexation of Crimea this year and thesubsequent sanctions on Moscow haveforced Europe to face up to the extent ofits dependence on Russian energyexports.

Patryk Figiel, a Poland-based lawyerfor Linklaters, says: “Despite geopoliti-cal tensions with Russia, from an indus-try perspective, it was thought that[Russian President Vladimir] Putinwould not put at risk the country’s gascontracts.Butsentimenthaschanged.”

Russia stoppedgas flowstoUkraine inJune – awakening memories of the gascrises of 2006 and 2009. The continentreceived about a third of its needs fromRussia in 2013 – more than 160bn cubicmetres (bcm) – and close to 40 per centof this amount is pumped via Ukraine.However, state-controlled Gazprom hasin recent weeks cut supplies to Poland,Slovakia,AustriaandHungary.

Gas storage reservoirs throughoutEurope are close to full and govern-ments have already talked about waysto ration resources through the winter.But the prospect of sustained stoppagesif the matter is not resolved has raisedconcerns. The Institute of Energy Eco-

nomics at the University of Cologne esti-mates that in the case of a Russianexport embargo starting in Novemberthe most dependent countries, Estonia,Finland, Latvia and Bulgaria, would suf-fer in the first three months. Germanywould be affected after six months andFrance and Italy during a nine-monthstoppage. About 46bcm would not bedelivered.

“This winter is crucial to determiningthe relationship Europe has with Rus-sia,” says Thierry Bros, analyst atSociété Générale. “Europe has to scrap50 years of the way it does business withRussia.”

The Russian Ministry could not bereachedimmediately forcomment.

Dmitry Medvedev, Russia’s primeminister, has said in recent months thatthecountry“shouldn’tclose thewindowfor dialogue”, while officials havestressed that supplies to Europe wouldcontinue.

Efforts have been made to improveEurope’s gas infrastructure resilience.Pipelines that allow supplies to movebetween Romania and Hungary or Slov-enia and Austria, among others, havebeenbuilt.

Reverse flow mechanisms that ensuretwo-way movement of gas have beenimplemented and liquefied natural gas(LNG) import terminals and storagefacilitieshavebeenconstructed.

Marlene Holzner, an EU energyspokeswoman, says: “We have con-ducted stress tests, ensured that eachcountry has one month’s reserve gassupply, [made] infrastructure improve-ments, and we have fast-tracked permitapprovals for key projects across thecontinent.”

Even so, the Oxford Institute forEnergy Studies estimates that in 2030Europe will still need at least 100bcm ofRussia’s natural gas – approximately60percentof2013 imports.

“Many of the ‘highly dependent’countries can reduce or even eliminatedependence on Russian gas by the early2020s, by means of LNG imports andmore pipeline connections,” saysJonathan Stern, senior research fellowat the institute. “[But] which countriesare going to be willing to pay thesecosts?”

Although infrastructure is an integralpart of any emergency response, it can-not be regarded as the primary source ofsupply security, says Trevor Sikorski ofEnergy Aspects, a consultancy. “Europeneeds[diversified]supplies.”

Europe’sgasreserves, fromNorwaytothe UK, are drying up, while domesticshale gas industries are in doubt

because of perceived environmentalrisks. Supplies from north Africa, theeastern Mediterranean, central Asia,Iran and Iraq are a possibility, but willtake time to be realised. Expensive LNGimports are the most viable option, butvolumesarequestionable.

Generating electricity from coalinstead of gas may be favoured by somenations, but would come at the expenseof goals to reduce greenhouse gas emis-sions. On nuclear policy, Europe doesnot speak with one voice, while renewa-blesarecostly toscaleup.

As yet it is not understood how com-mercially viable many flagship infra-structureprojectsare.

Countries keen to make the shiftwould also need to terminate long-termcontracts with Gazprom, even as pricesremain at attractive rates for at least thenext decade. Regional variations alsopersist.

Continent strivesto wean itself offdependence onRussian gasUkraine crisis Infrastructure improvements are nosubstitute for diversified supplies, says Anjli Raval

In the 1970s, France started a revolutionin its national energy policy, installingnuclear power plants at a speed and on ascale unprecedented anywhere in theworldoutsidetheUS.

Some 40 years later, it could be on thebrink of another: a bill passed last weekin the lower house of parliament envis-ages Europe’s second-largest economyhalving its energy consumption by 2050compared with 2012 levels and puttingrenewableenergysourcescentrestage.

France’s energy transition bill, one ofthe most ambitious legislative changes

proposed for the three remaining yearsof Socialist President François Hol-lande’s term in office, contemplates a 30per cent reduction in fossil-fuel con-sumption by 2030, thanks in large partto incentives toswitchtoelectriccars.

As Ségolène Royal, energy minister,said recently, the bill aims “to giveFrance the most advanced energy tran-sition legislation inEurope”.

But the most controversial part of thebill is its aim to reduce France’s relianceonnuclearenergyasasourceofelectric-ity, from 73.7 per cent of the total lastyearto50percentby2025.

Several factors explain the speed andambition of the plans. One is the 2011accident at Fukushima in Japan, whichserved as a wake-up call to all govern-ments of the potential environmentalimplications of nuclear energy and ofthe immenseclean-upcosts involved.

Germany, Europe’s largest economy

and France’s most influential neighbourhad already decided to abandon nuclearpower; Fukushima made it acceleratetheplan.

A second factor, argues Jean-MarieChevalier, economics professor at Paris-Dauphine University and an energyexpert, was more domestic in nature:adopting a far-reaching programme onenergy transition won Mr Hollande thesupport of the Green party, helping tosecurehiselectionvictory in2012.

“There was a clear, political dimen-siontothegovernment’splans,”hesays.

Yet the proposals have drawncriticism from several quarters.

Unsurprisingly, one of them is the pro-nuclear lobby. For a start, they insist,thepolicyonnuclear fuelhasresulted inreliableandabundantelectricity.

The programme, developed againstthebackdropof the1970soil shocks,hasfor decades helped France overcome itsrelatively limited access to traditionalfossil fuels. Proponents say the resultingenergy security is no less importanttoday, given the west’s desire to lessenits dependence on Russia’s huge naturalgasreserves.

Advocates of nuclear fuel also arguethat the programme has long providedFrench consumers – both residentialand industrial –withmuchlowerenergycosts thantheirEuropeanneighbours.

During the 1970s and 1980s, Francespent billions constructing nuclearpower plants, and today has 58. But thebulk of those costs were front-loaded,leaving the French state today with

relatively cheap running costs thatmany experts say would be impossibletoreplicateusingothersources.

The Union Française de l’Électricité,the French professional association forthe electricity industry, says any prema-ture closure of French nuclear reactorswould lead to a substantial rise in elec-tricitycosts.

With shale gas pushing down energyprices in the US, the InternationalEnergyAgencylastyearwarnedthat thewidening gap between US and Europeanenergy prices would translate into a lossof market share for Europe’s energy-intensiveexports.

Ms Royal has underlined that the pro-posed legislation does not mean Franceis turning its back on nuclear. “That isnot thechoicewearemaking,”shesaid.

Areva, themajoritystate-ownedcom-pany that builds nuclear power plants,says it is optimistic about the latest pro-

posals.Callingthebill “verybalanced”,arepresentative told the FT: “It actuallyconfirms the important role for nuclearinthefutureFrenchenergymix”.

Yet some question whether nuclear isa suitable partner to renewable fuels,pointing out that renewables such assolar and wind power are volatile interms of output, while nuclear powerplants are not best suited to the sort ofshort-term surges and falls in outputrequiredtocompensate.

Prof Chevalier is concerned about theproposed timetable, saying it wouldinvolve shutting down plants – at a hugecost – that still have a viable life of 20years or more. Estimates suggest the billwould lead to the closure of between 23and25nuclearplantsby2025.

“You should not close a unit for politi-cal reasons,” he says. “You have to assessthe costs involved and make your deci-sionbasedoneconomicarguments.”

Politics helps drive France’s newfound commitment to renewablesNuclear

Critics say shutting downnuclear plants would notmake economic sense,writes Adam Thomson

73.7%France’s relianceon nuclear energyas a source ofelectricity fromtotal generated

50%Targeted relianceby 2025, whichwould involveshutting down upto 25 plants

Under slate-grey skies one chilly Octo-ber morning in Warsaw, Ewa Kopacz,Poland’s new prime minister, saw first-hand the front line in Europe’s high-stakesbattleoverthefutureofcoal.

Outside parliament, where she was tomake her maiden speech as the coun-try’s leader, hundreds of helmeted min-ers sounded foghorns, chanted slogansand waved banners in a protest callingforactiontosavetheir industry.

Coal is at a crossroads in Europe. Forsome, the fuel is too polluting to keepburning in such high quantities. But forothers, it is too cheap, too abundant andtoopoliticallystrategic toabandon.

The midterm future of Europe’senergy mix, and that of coal, may wellbe decided in Poland, the EU’s second-largest producer and consumer of theblackstuff.

Coal is the dirtiest of all fossil fuels.

Historically, its use in environmentallyaware Europe has been falling. But con-sumption has ticked up since the USshale gas boom sent coal prices tum-bling, and countries such as Poland areresisting calls to switch to lower-emis-sionalternatives.

“It will be extremely difficult politi-cally and economically for us just to endour dependence on coal,” says OktawianZajac,headof thecoalpracticeatBostonConsulting Group in Warsaw. “In themedium term, the top priority is not toswitch away from coal, but to producecoal that iseconomically justifiable.”

That is not the view in Brussels, wherediplomats are trying to hammer out anEU deal to curb the bloc’s carbon emis-sions by 2030. That deal is likely torevolve around whether countries arewilling to pay for the environmentalbenefits of reducing their fossil fuelusagegiventhecostlieralternatives.

The biggest impediment to agree-ment is coal-hungry Poland, and theangry miners who won support in MsKopacz’s speech. “I realise how impor-tant environmental concerns are . . .but my government will not acceptincreases in the costs of energy inPolandandthe impact ontheeconomy,”the prime minister said, adding that the

fuel was of strategic national impor-tance.

Heavy coal consumers in the EU, suchas Poland, the Czech Republic and Bul-garia, say the proposed reduction tar-gets would cripple their economies byraising energy prices. Poland says itswouldrocket120percent.

Coal accounts for 27 per cent of theEU’s gross power generation, accordingto Eurostat, just behind natural gas, andbelow the US and global average ofabout 40 per cent. Consumption in theEU fell 40 per cent between 1990 and2009, and with large users, such as theUK and Germany committed to furtherreductions, use of coal – which producesmore carbon dioxide than the equiva-lent amount of gas or nuclear power –shoulddeclineoverthecomingdecades.

But a series of unrelated events haveconspired to make coal very attractiveto European power producers, muddy-ingthedebateandcausing frustrationtoenvironmentalcampaigners.

The surge in US shale gas productionover the past half decade has pusheddown gas prices and made imports of UScoal cheaper. That effect may increaseas environmental laws passed in the USto curb emissions could lead toincreased dumping of American coal on

the European market. Add to that theuncertainty over Russian gas suppliesandthefear inEuropeancapitalsofrely-ing on Moscow to supply their powerneeds, and a still-sluggish EU economywhere countries face tight budgets, andit is easy to see why coal is a temptingproposition.

Since 2009, consumption has crept up10 per cent, according to Eurostat. Evenin Germany, which has been at pains tostress its commitment to cutting emis-sions, coal use has risen since 2010,partly as a result of its decision to shutall itsnuclearpowerplantsby2022.

That increase in coal use, analysts say,is inevitable, as Europe seeks to keep itsindustrialbasegloballycompetitive.

“The truth is that it will be impossiblefor Europe to stay cost-competitive withthe US without using coal,” says BCG’sMr Zajac. “Coal is still very much part ofthefutureenergymix.”

The UK, the EU’s third-largest con-sumerofcoal, isanotheroutspokensup-porterofemissionsreductions.

But with many of its nuclear powerstations heading for decommissioningandthepotentialof itsshalegasdepositsstill not fully known, coal will probablycontinue to be an important elementof itsenergymix.

Several factors conspire to increase fossil fuel useCoal

The black rock is cheap butits use is hard to reconcilewith plans to cut carbonemissions, writes Henry Foy

Poland saysthe EU’sfossil fuelreductiontargetswould meanits energyprices wouldrise 120per cent

As the US shale revolutioncontinues to transform thecountry’s energy supply,progress towardsestablishing whetherEurope can follow in NorthAmerica’s footsteps is at asnail’s pace.

Fracking bans acrossmany EU countriescontinue, with little signthat heightened concernsabout energy securityprompted by Russia’sbehaviour over gassupplies will prompt asignificant reversal inpolicy.

Meanwhile, in Polandand the UK – the twocountries with plenty ofshale resources and cleargovernment support forexploration – there is stillno clear evidence thatshale gas and liquids canbe extracted oncommercial terms.

But, despite setbacksand opposition fromenvironmental groups,early stage explorersremain confident they arepoised to go some waytowards replicating thesuccess of US pioneers inestablishing shale gas as asignificant energy sourcein Europe.

Andrew Austin, of IGasEnergy, a UK explorer, sayshis company is to flow-testtwo wells aimed atdemonstrating thecommercial potential of theBowland Basin, whichstretches across northernEngland.

Further work is expectedfrom Cuadrilla Resources,whose appraisal work ineast Lancashire wasblamed for minor earthtremors and prompted atemporary ban on frackingin 2011.

Mr Austin says: “Weknow there’s lots of gasthere, but we need to knowwhat it takes to make itflow in a commercialoperation.”

He believes theinvestment market couldbe transformed bysuccessful outcomes froma wave of flow-testing atfracked wells plannedacross UK sites.

Amid all the hypesurrounding the UK’s shalepotential, exploration workremains extremely limited.

But Mr Austin says thatstake building in acreagepositions by Centrica ofthe UK and Total and GDFSuez of France over thepast two years hasdemonstrated the interestof energy companies intaking early stagepositions.

“A lot of areas of interestthat are potentiallyavailable for licensing are

already operated. I thinkwe will see some newentrants and surprisingfaces,” he adds.

But, in Poland, wherefracking tests have beenmore extensive than inBritain, disappointment indrilling has cast a shadowover the shale explorationsector, which has seen anumber of groups abandonthe field.

Last month, 3LegsResources, a London-listedearly player in Poland,became the latest to throwin the towel by announcingit would be relinquishingits interests in a concessionwhere it has beenpartnering US majorConocoPhillips. Althoughsome gas and oil had beenproduced at its latestfracking well in Poland’sBaltic Basin, the companyconcluded that flow rateswere not commerciallyviable and did not justifyfurther investment.

In Poland, more thanmost countries in Europe,the ambition of looseningdependence on gassupplied from Russia hasbeen a big factor inensuring governmentsupport for fracking.

Oisin Fanning, executivechairman of San LeonEnergy, insists hisexploration commitment inthe country remainsunaffected by 3Legs’decision to fold its position.

Operators in Poland arecontinuing to co-operate inthe sharing of data from agrowing number of wellsthat have demonstratedthe potential for gas andoil to be economicallyextracted, he insists.

Mr Fanning suggests awilling Poland remains wellpositioned to beat the UKto the line in establishingitself as a commerciallyviable shale producer ofnote.

“Eighty per cent of thepopulation is in favour,” henotes. “The UK won’t be aseasy as Poland.”

Melissa Stark, an analystat Accenture, aconsultancy, says bothcountries are wellpositioned in terms ofaccess to workers, oilservices equipment andinfrastructure to bring anyshale gas and liquids tomarket, should they bediscovered in commercialquantities. However, sheconcedes, there has beenlittle change in generallyhostile attitudes across theEU this year.

Such a shift would berequired to challenge thewidespread bans thatprevent shale explorationacross much of westernand central Europe.

“Not much has changedin recent months and not

much will change untilwe see success,” shesays. “What’s neededare commercialgeologies in the UK andPoland.”

Michael Kavanagh

Fracking Hostility limits growth

Oisin Fanning,executivechairman of SanLeon Energy

Breaking point:Ukraine hashad to importgas from itsneighbourssince Russia cutoff its supply– Yuriy Dyachyshyn/AFP

Thursday 23 October 2014 FINANCIAL TIMES 3

European Energy

I n 1978, Bulgarians flocked to see afilm called Toplo (“Heat”). Nowhailedasacomicclassic inBulgaria,the movie catches the giddy moodof an era when “district heating”

networks were being rapidly expandedacross the eastern bloc and representedtheapogeeofsocialistengineering.

Little known in much of westernEurope, district heating takes heat thatwould otherwise be wasted from powerstations and uses it to warm water,which is then pumped round city neigh-bourhoods. Toplo focuses on the shiver-ing residents of an apartment block inSofia and their slapstick adventures try-ing to connect themselves (illegally) tothehotwaterpipes.

Almost 40 years later, people in theformer communist bloc are keener totake the law into their own hands to dis-connect themselves. Residents in bigblocks often have no control over whenthe heating comes on or off. There is lit-tle accurate metering of individual flatsand, therefore, no incentive to takeresponsibility forconsumption.

For European policy makers, increas-ingly worried about greenhouse gasemissions and the EU’s dependence onfuel imports from Russia, these net-works from Poland to Bulgaria would, atfirst glance, seem to be wasteful blackholes. In the central European citieswhere they predominate, renovationwork is urgently required, with poorlyinsulatedpipesrunningaboveground.

These technical problems have been

compounded by poor regulation andcorruption scandals, notably in Bul-garia,RomaniaandUkraine.

But it would be a mistake to write offdistrict heating. EU and UN policy mak-ers are coming to a rather unexpectedconclusion about how to cut energywastage, one in which district heatingmay play a starring role. Done effi-ciently, as in Copenhagen and Helsinki,districtheatingcouldbeaglobalmodel.

Until recently, heating lingered at thebottom of the political agenda, but itsimportance is increasinglyevident.

According to the UN, cities accountfor 70 per cent of all energy use, and 50percentofurbanenergyconsumption isfor heating and cooling. If the EU wantsto rein in consumption, it has toundergo a revolution in the way it heatsbuildings. That revolution appears to becoming.

Copenhagen is widely hailed as themodel for a rethinking of Europe’s heat-ing system. The city started a districtheating network in the 1890s, but the oilshocks of the 1970s sparked a massiveexpansion. Some 98 per cent of heat isnow provided by the district heatingnetwork, theworld’sbiggest.

According to the OECD and Interna-tional Energy Agency, a regular thermalpower station only makes efficient useof 36 per cent of the fuel fed into it,whereas so-called cogeneration plants(producing electricity and heattogether) convert 58 per cent of energyinputs. Capturing the heat reduces elec-

tricity produced, but the trade-off addsup. The latest Scandinavian projects, aworld apart from those in easternEurope,canbe85-90percentefficient.

Jørgen Abildgaard, executive climateproject director for Copenhagen, saysthe Danish paradigm is attracting inter-national attention, particularly fromBritain. London has set a target ofexpanding district heating networks to25 per cent of supply by 2025. Rotter-dam last year completed the Warmte-bedrijf project, using 26km of pipelineto transmit waste heat from industry tohouseholdsandbusinesses.

The shift to renewable fuels is the sec-ond phase of the district heating revolu-tion, with power stations moving fromcoal and gas to biomass and geothermalpower.

There is also a trend towardsusing smaller power stations to serveindividual districts more efficiently.

Copenhagen is planning to run entirelyonrenewablesby2025.

The biggest challenge is to find afinancing model for such huge struc-tural changes across the EU. MrAbildgaard notes that the Danish capi-tal’s network runs on a non-profit basis,which is not necessarily a model othercitieswouldseektofollow.

Leading companies that would bene-fit from any overhaul of heating net-works include Denmark’s Danfoss, Swe-den’sVattenfallandFrance’sDalkia.

Paul Voss, managing director of Euro-heat & Power, which represents theheating industry in Brussels, says he hasstruggled in recent years to persuade EUpolicy makers to focus on cutting con-sumption, saying their priorities lie infinding new gas supplies. However, theconflict in Ukraine and fears about Rus-sian deliveries have steered the debatetowardsenergyefficiency,hesays.

EU warms tothe potentialefficiencies ofdistrict heatingConsumption Scandinavia offers a model for usingexcess power station heat, writes Christian Oliver

Some Germans see the latest phase in thecountry’s renewable energy push asadding insult to injury.

The population has come to acceptthat subsidies to support a transition tosustainable power account for significantportions of their energy bills. Andbusinesses are accustomed to paying upto twice what their overseas rivals do forpower, particularly in the wake of the US’sshale gas revolution.

But, as Germany embarks on itsbiggest infrastructure project sincebuilding the autobahn system, the burdencan seem at times too much. The countryis constructing a new power grid totransport renewable energy from where itis produced to where it is needed.

When a reporter from Die Zeit, aGerman newspaper, followed theproposed route of one 80m-wide, 720km-long line of pylons, she met an abundanceof residents fighting the plans.

Individuals’ complaints are beingreflected in policy across Europe.Investment in renewable energyproduction fell significantly in developedcountries in 2012 and 2013 – from 2011highs – as governments reassessedincentive programmes that had poweredmuch of the investment of the pastdecade. But if Europe appears to bebackpedalling, that is in part because theEU believes it is on track to hit its 2020goal of 20 per cent of demand beingcovered by renewables. Member statesare now discussing 2030 goals.

The consultancy KPMG also notessigns that renewables investment isgrowing again in Europe. That is in partthanks to institutional investors, whobelieve they can make a profit buying“green” bonds in, for example, France andthe UK.

While years of subsidies have helpedmake Germany a leader in the renewablesfield, the challenge is now infrastructure,since the best places to harness theenergy are rarely where it is used.

And, if one concern has to do withcreating one kind of energyinfrastructure, another centres on

dismantling a different type. After the2011 decision by Angela Merkel’sgovernment to scrap nuclear power,Germany’s utilities are facing bills of €1bnand more to dismantle their power plants.

The three biggest companies haveproposed that the government take onresponsibility – financial and logistical –and Eon has filed a suit over the matter.

“Several questions need resolving,”says Michael Salcher, KPMG’s head ofenergy and natural resources.

“First, should these companies begetting cash, and how much; and second,what does the utility look like afterremoving such activities? Is it stilleconomically viable?”

This comes at a time, moreover, whenutilities across Europe are struggling withrecord low margins as wholesale energyprices fall – thanks to renewables.

“Many energy utilities have been badlyaffected by the continuing slump inprofits in the area of conventional power-generation,” says Norbert Schwieters,global energy leader at PwC. He adds:“Many power plants cannot be operatedprofitably, and these plants’ plannedclosures in turn threaten the sustainablesecurity of supply in the electricity sector.“The aim must be to create incentives to

keep back-up capacity available withoutcreating a new subsidy regime.”

Yet there is general political agreementthat incentives must be offered to utilitiesrunning coal plants, for example, sincethese need to remain in operation asfallback, or baseline, sources of powerwhen renewables cannot meet demand.

Mr Salcher points out that it makeslittle sense to look at any one Europeancountry in isolation. Nuclear, for example,may continue to play a role in the Germanenergy landscape, because the countrywill probably continue to buy power fromFrance, Austria and the Czech Republic,all of which have nuclear power plants.

In the end, argues Mr Salcher, the keyto achieving renewable goals maydepend as much on smart meters, flexibleoperations and other innovations inhomes, offices and factories, as it does onbig infrastructure projects.Rose Jacobs

Norbert Schwieters

‘Many energyutilities have beenbadly affected bythe continuingslump in profits’

Shift to renewablesOld infrastructureneeds dismantling,while distributiongrids must be built

Combined forces: an ExxonMobil cogeneration facility in Antwerp — Bloomberg

4 FINANCIAL TIMES Thursday 23 October 2014

European Energy

Arrive in the Greenland capital ofNuuk and there is a palpable optimismin the air. The country is on the cusp ofa resource boom that will transform itseconomic fortunes and underwrite fullindependence from the old colonialpower, Denmark.

But spend time talking through theinconvenient details with politicians,business leaders and seismologists, andharsher truths begin to collide with thevaulting ambitions.

The resource potential is real. Themelting polar ice has set off a scramblefor the resources locked beneath. TheUS government estimates the Arcticmay hold some 13 per cent of theworld’s undiscovered oil and 30 percent of its gas. By Washington’sestimation, the thawing ice will alsobegin to make accessible “vastquantities of mineral resources,including rare earths, emeralds, ironore and nickel”.

Greenland, a territory four times thesize of France and home to apopulation of only 56,000, expects asizeable share of the bounty. “Climatechange,” the country’s former economyminister, Vitus Qujaukitsoq, has beenheard to remark, “is the newopportunity for Greenland . . . I guesswe are in the business of nation-building.”

The discovery of iron ore, zinc, goldand rare earth deposits has attractedprospectors and mining companiesfrom around the world. China, thebiggest consumer of such resources, istaking a close political and economicinterest, offering to provide the labourfor an iron ore development proposedby London Mining.

Oil majors – ConocoPhillips,Chevron, Exxon Mobil, Royal DutchShell, Statoil and Cairn Energy amongthem – have been mapping the icywaters beyond Greenland’s western

coast for decades. Last year, thegovernment in Nuuk awarded the firstlicences for exploration andexploitation in the eastern coastalwaters of the Greenland Sea. BP wasamong the winning bidders. A fewyears ago, the US Geological Survey putthe Greenland Sea in the top five forpotential of 25 designated oil and gasprovinces in the Arctic region.

Look forward 20, 30 or 40 years andit is hard to imagine that suchresources will not be exploited. Globalwarming is reshaping the world’sphysical contours; and relentlessdemand for raw materials and energyfrom the emerging middle classes inthe rising economies of Asia, Africa andLatin America is making the case forfrontier developments.

Arctic temperatures have been risingtwice as fast as those further south andthe polar region has lost up to three-quarters of its sea ice. According to theArctic strategy published last year bythe US, the warming is “unlikeanything previously recorded. Thereduction in sea ice has beendramatic, abrupt and unrelenting.”

If the long-term outlook looks morethan promising, however, Greenland’sjourney from eager anticipation torealisation of such resources may beanything but smooth. The obstacles arephysical, political and environmental.

The ice may be melting fast, butGreenland’s Arctic waters remain someof the most hostile and inaccessibleanywhere.

The country is geographicallyisolated and lacks both the physicaland human infrastructure to supportrapid development. Some 80 per centof the landmass is covered in thick ice.Nuuk is home to only 16,000 people,and the two next largest towns,Sisimiut and Ilulssat, to 5,000 each.There are no roads connecting thescattered communities, and a singleship serves the settlements on the

western side of the island. People andfreight mostly travel by air, often inbrutal conditions.

The recent collapse of the governingcoalition led by Aleqa Hammond spokeof Greenland’s political immaturity.The proximate cause was an allegedscandal over expenses but, in spite ofher boisterous Inuit nationalism andfeisty political style, Ms Hammondlacked a sure touch in steering thecoalition.

Nuuk secured full home rule,including control of natural resources,in 2009, leaving Copenhagen in chargeof security and foreign affairs. MsHammond, elected in 2013 on a pro-independence platform, saw this as aspringboard, both for acceleratedexploitation of mineral deposits andfor further decisive steps towards fullindependence.

Unable to make a living from fishing,hunting and tourism, however,Greenland continues to depend onCopenhagen to fund a large slice of thenational budget. Levels of educationalattainment are low and much of thepublic administration is in the hands ofDanish-trained civil servants.

Ms Hammond, who faces defeat inthe forthcoming general election,struggled to come up with a frameworkfor mineral and energy exploitationthat at once promised sufficient taxrevenues, provided the incentivesdemanded by international companiesand met the demands from the nativeInuit population for environmentalprotection.

Smart politicians in Nuuk see thepotentially dangerous paradox. Thepast few years have witnessed aflowering of native identity across theArctic, not least among Greenland’snative Inuit. The hope is that theywill now be empowered by theprosperity that flows from resourceriches.

The risk, though, is that very processof oil, gas and minerals exploitationwill sweep away the lifestyles andtraditions of indigenous populations inwhat has been called the great coldrush.

Doubtless there is a balance to befound. But, for all their ambitions,Greenlanders are not there yet.

The great ‘cold rush’ may bringprosperity – but at what price?

Supply and demand

Gas consumptionPetajoules*, 2012

Per cent ofgas supplied

by Russia

R U S S I A

TURKEY

FINLAND

LATVIA

ESTONIA

LITHUANIA

NordStream

South Stream

Trans-AnatolianPipeline(TAP)

Nabucco-Westpipeline

TAP

South Stream

SouthStream

European gas pipelines

Major gas pipeline(selected)

Pipelines underconstructionor planned(selected)

Countriestotally dependanton Russian gas

0 500 1000 1500 2000 2500 3000

GermanyUK

ItalyFranceTurkey

NetherlandsSpain

BelgiumPoland

RomaniaHungary

AustriaCzech Republic

NorwaySlovakia

IrelandPortugal

GreeceDenmark

FinlandLithuania

BulgariaCroatiaSerbiaLatvia

LuxembourgSwedenSloveniaEstonia

390

241559

6000

1880988909100

550

100100

830

46100

240

42100

Supplied by Russia

Sources: ENTSOG; GIE; Eurogas; BP; Eurostat * 1015 joules

From the windswept polders ofSchleswig-Holstein, where fields aredotted with wind turbines and farmers’barns covered with solar panels, to theenergy-hungry businesses of theRuhrgebiet, Germany’s ambitious planto transform its power supply is chang-ingthe lookof thecountry.

Europe’s biggest economy is switch-ing from nuclear power and fossil fuelsto renewables, with the goal of deriving80 per cent of electricity from cleansourcesbythemiddleof thiscentury.

It is a revolution that is being subsi-dised by electricity users, who pay someof the highest prices in Europe becauseof renewables surcharges on their bills.Those subsidies have driven a boom inclean energy, which reached 24 per centof Germany’s gross electricity produc-tion lastyear.

For some, it has brought opportuni-ties. Jobs and investment in the manu-facture of wind turbines have grown inrecent years, while German villageshave derived extra income by feedingpower from their solar and wind powergeneration intotheelectricitygrid.

For others it has brought pain. Com-panies that once made vast profits fromgenerating electricity have seen thoseearnings squeezed, as energy from windand solar is granted favourable access tothepowergrid.

German manufacturers complainabout the cost of subsidies. The chemi-cals group BASF plans to shift the bulkof its investment outside Europe, partlybecauseofhigherenergycosts.

“It isn’t in question that man-madeCO2 is responsible for climate change,”says Heribert Hauck, general managerfor energy at Trimet Aluminium, one ofGermany’s biggest electricity consum-ers. “But we observe at the same timethat it makes no sense if we lose an armand a leg as a one-man show here in Ger-many and the rest of the world doesn’tfollowus.”

The original goal of Germany’s energytransition – protecting the environment– is increasinglyatrisk.Until thenuclearswitch-off, Germany was steadily

cutting carbon dioxide emissions. SinceFukushima, when Angela Merkelannounced an accelerated exit fromnuclear power, the use of coal to providebaseload electricity has edged up. Coaland lignite accounted for 45.5 per centof gross electricity production in 2013,upfromabout43percent in2011.

CO2 emissions have now been slashedby about 24 per cent on 1990 levels,according to government estimatespublished in March. But Germany’s offi-cial goal is a 40 per cent cut on 1990, tobeachievedbytheendof thisdecade.

Meanwhile, the solar panel industryhas largely collapsed in the face of Chi-nesecompetition.

Employment in the photovoltaic sec-tor in Germany fell from more than100,000 jobs in 2012 to 56,000 last year,as a string of businesses filed for bank-ruptcy. Germans sometimes joke that

theirEnergiewende–as thetransitiontorenewables is called – is a subsidy fromGerman bill payers to Chinese manufac-turers.

Insteadofbeingatemplate fortherestof the world, Germany is now increas-inglysingledoutasanemblemof folly.

Inrecentmonths, thegovernmenthasmapped out a course correction for theEnergiewende. A return to nuclearenergy appears to be off the agenda, butministers want to curb costs by scalingback subsidies for renewables. Legisla-tion agreed this year puts upper limitsonnewinstallationsofcleanenergy.

Feed-in tariffs paid to renewablepower generators will be cut to an aver-age across all technologies of €0.12/kWhby2015,downfromacurrentaver-ageof€0.17/kWh.

In a speech trailing the reforms at thestart of this year, the economy ministerSigmar Gabriel declared: “We havereached the limit of what we can ask ofoureconomy.”

Clean sources provea costly exerciseGermany

Businesses and consumersare paying a high price,reports Jeevan Vasagar

F or President Vladimir Putin,Russia’s oil and gas sectors areparamount politically as wellas economically, as guarantorsof the security and stability of

thecountry.While much has been said about

Europe’s dependence on Russian energyresources, Russia depends on the reve-nues it receives fromthecontinent.

“We need Russian gas; they need theeuros,” says Thierry Bros, a Paris-basedgas analyst for Société Générale. “It hasalwaysbeenabout interdependence.”

Oil and gas make up more than 50 percent of the Russian government’s totalrevenue, with most of it coming fromEurope, making it unrealistic that Rus-sia will totally cut off gas supplies to thecontinent.

Any decision by the world’s biggestgas exporter to halt supplies would notonly cause problems for customers, butalso leave a massive hole in Russia’sbudget.

But the latestdevelopmentsechosim-ilar disputes in 2006 and 2009 when gasflows to Europe were reduced duringfreezing weather. Russia cut off deliver-ies passing through Ukrainian pipelinesover claims the country was siphoningoff gas, a charge it denied. Energy mar-ket watchers fear a repeat, with suppliestoUkrainealreadyshutoff.

Ilya Zaslavsky, a Russia and Eurasiaprogramme fellow at think-tankChatham House, says Mr Putin is againusing energy resources as a political toolthat could work to the detriment of Rus-sia’s aims. State-owned Gazprom, whichlargely supplies the continent, wouldtake the biggest hit. “In the short term,Russia might be winning; but, in thelong term it is losing from decisionstakenbytheKremlin,”hesays.

On the technical side, analysts say,pulling back the extraction volumes atGazprom’s mega-fields in Siberia on abig scale would be difficult, while flaringoff such large amounts of gas – for whichRussia has already been much criticised– is impossible todosafely.

Financially, for each month of a

shutdown, Gazprom – which controlsthe Unified Gas Supply System (UGSS) –would lose up to €4.5bn of revenues,according to the Institute of Energy Eco-nomicsat theUniversityofCologne.

This is equal to an almost 4 percent-age point decrease in the company’sannual revenues a month. “This wouldsignificantly affect Gazprom’s profita-bility, and reduce the company’s abilityto contribute to the Russian statebudget,”saytheauthorsof thereport.

This is problematic as the company,which is heavily indebted, would havetrouble servicing its liabilities if exportsdriedup.

Gazpromdeclinedtocomment.Other gas companies, such as Russia’s

Novatek, and oil companies that pro-duce associated petroleum gas (APG),would also be affected. “There would bea gas glut, [as] the competition to sellinside the country would becomefierce,”saysMrZaslavsky.

Oil companies may also see harsheroil taxation if revenues fromgas fall sub-stantially, as the Russian governmenttries to compensate for the budgetshortfall. This may lead to slower oilproductionthanexpected.

All of this comes as Russian energy

market watchers say competition forGazprom is only going to get stiffer overtime, as Europe seeks to fast-trackdomestic energy initiatives such asrenewables and shale in a shift awayfromfossil fuels in itsenergymix.

“Gazprom has to fight for marketshare, as oil and gas exports to Europemake up such a huge part of its budget,”says Emily Stromquist, analyst atEurasia Group. “There is a bit of bufferspace where they can come down onprice and remain competitive, but it’sstill unclear as to how much they candoso.”

Gazprom requires tens of billions ofdollars of investment annually to main-tain output levels, while developingfields in the Arctic, building pipelines inthe Pacific and the Baltic, as well as con-structingapipelinenetworktoChina.

“The much higher production andtransport costs from these remoteregions need to be priced into the long-term gas contracts with Europe,” saysFrank Umbach, of the European Centrefor Energy and Resource Security atKing’s College, London. He believesGazprom’s preferred pricing method,based on long-term, oil-indexed con-tracts, is already in serious trouble from

cheaperprices fromothergassources.The US shale gas revolution and

attempts to replicate this model acrossEurope, China and other parts of theworldcouldaddfurtherpressure.

From 2017-18, Australia, which isreplacing Qatar as the world’s biggestLNG exporter, will only increase compe-titionwithRussia.

Russia also has interests in the con-struction of the $40bn South Streamunderseagas linkwithEurope.

In the long run, President Putin hopestoweanGazpromoff its relianceonsalesto Europe by cultivating China as a newcustomer for natural gas. In May, at theheight of the Ukraine crisis, a deal wasagreed with Beijing to supply $400bn ofgasovercomingdecades.

It will take at least five years to build anew pipeline for the shipments. Andwhile Russia’s attention has shifted east,gas infrastructure to date has all beenbuilt to cater to European needs, a leg-acyof theSovietera.

Analysts say it will take at least a dec-ade to see a real shift towards China.Even so, with more than 85 per cent ofRussian gas in western Siberia, geo-graphically it does not make sense tosevertieswithEurope infavourofAsia.

Pipeline politics flow both waysAnalysis PresidentPutin faces a dilemma:his country would bebadly hurt by turningoff supplies to Europe,writes Anjli Raval

Power play: President Vladimir Putin signs the first segment of pipeline that will take Russian gas to China – Ria Novosti/Reuters

Corrective actionSigmar Gabriel,economy minister,says: ‘We havereached the limit ofwhat we can ask ofour economy’

The story in fullThe push to develop cleanersources is proving costly, withconsumers paying a high price

ft.com/reports

OPINION

PhilipStephens

Hostile watersBarriers toexploitation ofthe country’sresources are notjust physical butpolitical

Thursday 23 October 2014 FINANCIAL TIMES 5

ContributorsAnjli RavalOil and gas correspondent

Henry FoyCentral Europe correspondent

Michael KavanaghEnergy correspondent

Adam ThomsonParis correspondent

Philip StephensChief political commentator

Christian OliverEU correspondent

Jeevan VasagarBerlin correspondent

Rose JacobsDavid CrouchFreelance journalists

Aban ContractorCommissioning editorSteven BirdDesignerAndy MearsPicture editor

For advertising contact Liam Sweeney,on +44 (0)20 7873 4148 orliam.sweeney@ft.com address,or your usual FT representative.

Laszlo Varro, head of the Interna-tional Energy Agency’s gas, coal andpower division, says: “Over the past fiveyears therehasbeenrealprogressontheinfrastructureandregulatorysides,par-ticularly in terms of increasing gas stor-age capacity and the construction ofpipeline interconnectors to redirect gasflowsacross thecontinent.

“But the European energy networkdoes not have physical resilience to asustained disruption to Russian gas sup-plies. There is no way to cope if there is acompleteshutdown.”

Mr Varro says that to make a real dentin the continent’s reliance on Russianenergy sources would take the best partof a decade, hundreds of billions of dol-larsandalotofpoliticalwill.

Improving domestic supplies of gas,suchas fromNorwayortheUK, isonthecards, but reserves are depleting whileEurope’s fledgling shale gas industry hasfacedpopularprotests.

Gas from further afield, such as northAfrica, the eastern Mediterranean, theCaspian and central Asia, Iran and Iraqhave been considered, but each has itsproblems and will be a longer-term stra-tegic focus. Bringing non-Russian gas toEurope will need infrastructureimprovements and favourable regula-tions, and will only bear fruit from 2025,analystssay.

Although Europe could boost lique-fied natural gas (LNG) imports, infra-structure improvements are necessaryfirst. Prices are far higher than pipelinegas, as the continent competes withAsian consumers, such as Japan, whoseneeds have increased following the fall-out from the Fukushima nuclear powerplantdisaster.

Following in the footsteps of Lithua-nia, Poland – one of the most hawkishEuropean states towards Russia’sactions in Ukraine – is racing to com-plete construction of an LNG terminal

continued from page 1

on the Baltic coast, which should beginimportswithin12months.

At full capacity it couldhalve Poland’sreliance on Russian gas, from 66 percent of today’s needs. But, even as therushtothefinishgatherspace, thecoun-try is importing coal from Russia to feedits power plants – an example of howdeep energy relationships with RussiaacrossEuroperun.

The option of generating electricityfrom coal, instead of gas, has become anattractive economic proposition inEurope thanks to a falling global coalprice, but it clashes with the EU’s long-held goals to cut greenhouse gas emis-sions. And coal-fired power stations arerunningatcapacity.

Further, Europe is divided on nuclearpolicy. While the UK is pushing for newplants, countries such as Germany andBelgium are moving away from nuclearintheirenergymix.

Implementing policies to reduceenergy demand could be effective inthe long term, as could acceleratingthe deployment of renewable energy

technologies, which has stumbled inrecent years due to the financial crisis,the impacts of the US shale boom andlowcarbontradingprices.

The renewable energy lobby has beena vocal supporter of the EU’s 2030climate change targets, arguing forthem to be even more stringent. Butexperts wonder if governments havethestomachtocommit theconsiderablesums of time and money necessaryto bring alternatives to market,and question whether that wouldbe sufficient to offset existing gassupplies.

Renewables accounted for 11 per centof the EU’s gross energy consumption in2012, with a 20 per cent target set for2020. Biomass and renewable wastes,derived from plants or animals,accounted for the bulk of that, contrib-uting7.3percent.

Bioenergy’s cost per kilowatt-hourcould be almost halved over the nextdecade, the consultancy McKinseywrote inarecentreport,makingthecostof electricity generation from the fuelclosetothatofcoal.

Although steps have been taken toimprove the resilience of the EU’senergy regime, they have had varyingdegrees of success. Some energy marketwatchers question if the most recentpushis too little too late.

“Europe has sleepwalked into a deepdependency on Vladimir Putin’s gas,”saysGalLuft, co-directorof the Institutefor the Analysis of Global Security, aWashington-based think-tank focusedonenergysecurity.

“Europe needs to be much moreintrospective about its energy responsi-bilities for the future. For years, it hasturned its back on all other forms ofenergy in pursuit of its environmentalpolicies: coal, nuclear, shale, and nowwe hear it has problems with Russia.When you throw energy security underthebus, this iswhathappens.”

EU seeks alternative suppliers

European Energy

Old and new generators in Germany

More energy, cheaper energy. From reli-able sources. And cleaner, too, if possi-ble. Questions about how to achievethese ambitions dominate Europe’senergydebate.

But in a month when the Nobel phys-ics prize was awarded for developing anenergy-saving light source, more peopleare asking whether less energy couldalsobeasolution.

The business of Jean-Pascal Tricoire,chairman and chief executive of Schnei-der Electric, is based on providinganswers. The French specialist inenergy management for industry hasgrown rapidly in recent years, becomingone of Europe’s largest engineeringgroupsbymarketvalue.

“What strikes me is that, when youspeak about energy, everyone talksabout generation. There are scientificand ideological debates about energysources,”saysMrTricoire.

“So saving energy is not often thoughtof. It’s not political, not big projects, notglamorous, but it reduces costs forindustry and contributes greatly to solv-ingtheclimateequation.”

It could be as simple as throwing aswitch, he says. A school, for example, istypically occupied only 50 per cent of the time, so technology that turns offlights and heating can save half itsenergyuse.

“Our experience shows the return oninvestment is less than three years,while the IEA [International EnergyAgency] says two years,” Mr Tricoiresays.“This isactiveenergyefficiency.”

Mr Tricoire is at pains to stress that heis not talking about insulation, or “pas-sive efficiency”, but using the internet ofthings to make buildings more efficient,the capacity to connect every energyconsuming element in the building to itsusersusingsimpleprinciples.

“The mindset of regulators and politi-cians is geared towards refurbishing anold building, insulating it. But it hasvery long paybacks, and forces thebuilding to close for months. With newtechnologies, however, you can do itquickly,andthepaybackcomessoon.”

Once you can imagine a Europe mademore efficient in this way, it becomespossible to connect it to the generatorsand avoid the huge peaks and troughs ofconsumption that make the electricalgrid inefficient.

In many countries, the grid is used atless than 50 per cent of capacity formore than 50 per cent of the time. “It’sdesigned for peaks, but rarely used forthem,”saysMrTricoire.

“So instead of building a new powerstation you redo the process. It’s a dou-ble win – you don’t invest billions in anew power plant, and you make savings[onenergyuse].”

Schneider is experimenting with thisapproach in Japan in the wake of theFukushima nuclear disaster. When peo-ple come home in the winter and gener-ate peak demand, they are paid by utili-ties to lower their energy use. “Itchanges the business model. The utilitybecomes an arranger of savings, ratherthanagenerator.”

Mr Tricoire brings a global approachto the energy business, having lived inGermany, Italy, China, South Africa andthe US. In 2011, he relocated to HongKong, starting a trend of French corpo-rate leaders responding to their busi-nessesbecomingmore international.

Chief executive since 2006, he hascontinued a transformation at Schnei-der away from electrical equipment andtowardsenergymanagement.

Europe is poor in natural energyresources, making it strategically vul-nerable. But at the same time it has a“tremendous advantage” over the US,argues Mr Tricoire, because it alreadyconsumes lessenergyperunitofGDP.

“European industry is not bad inenergy. With companies such as Sie-mens and ABB, we have flagships in theworldofenergy,”hesays.

“Because Europe has suffered from ashortage of energy, we have developedthetechnologytomakebetteruseof it.”

Simple solutions leadto a greener futureSchneider Electric

Saving energy cuts costs forindustry and helps solve theclimate change equation,says David Crouch

V attenfall, Sweden’s state-owned energy giant, iscaught between a rock andseveralhardplaces.

Energy is plentiful anddemand sluggish, so prices are at recordlows. But the company’s 16 large andprofitable coal-fired power stations inGermany are under attack over carbondioxideemissions.

Its nuclear programme is also indoubt. Only a week into his job, MagnusHall, Vattenfall’s new chief executive,faced calls to resign after he criticisedSweden’s incoming leftwing govern-ment for saying expansion plans for coalandnuclearshouldbeputonhold.

Meanwhile, a political row continuesover losses following Vattenfall’s pur-chase of Nuon, a Dutch utility, five yearsago.

“Looking at the coming five years, wewillcontinuetoseeaverytoughmarket,for us and other [utilities], meaning ofcourse a strong focus on efficiency isgoing to continue,” says Tomas Björns-son,Vattenfall’sheadofstrategy.

The company is slashing costs, aimingby the end of the year to achieve a 25 percent reduction compared with the costbase of 2010. Its current five-year capi-tal expenditure plan is down by nearlyhalf.

It has shrunk its balance sheet by exit-ing “non-core” markets in Poland, Fin-land and Belgium. Mr Björnsson is clearabout the company’s attitude to thisdrastic programme of consolidation,saying:“Noregrets.”

Vattenfall’s value has halved in recentyears, according to estimates bySwedbank, from at most SEK400bn(€43.92bn) to about SEK200bncurrently.

Each unhappy utility company inEurope is unhappy in its own way, butthey are also all alike. “The traditionalconcept and business model of thelarger utilities is in danger right now,”says Thomas Kaestner, head of powerand utilities at consultancy EY. There-fore their main focus “is to shrink,divest, cut costs, stabilise the company,notputall theireggs inonebasket”.

A feature of the energy sector is itspoliticisation and the high degree ofstate intervention.

Under Germany’s Energiewende, orenergytransition, for example,Europe’slargest economy is planning to phaseout nuclear power altogether by 2022and generate 60 per cent of its electric-ity from renewables by 2035. Mr Kaest-ner compares the effort required toeffect this change to that of reunifyingEastandWestGermanyafter1989.

Frequent changes to energy law makeit enormously difficult for utilities to becertain about the framework they haveto work with, despite the long invest-ment cycles associated with energy. Inconsequence, from being a sector seenas somewhat static, it is now in a state offlux.

“That’s a paradigm shift. Historically,energy assets didn’t change much,” saysMatthias Lang, energy and utilitiesexpert at international law firm Bird &Bird. “Now it’s a constantly moving tar-get . . . I am not aware of another indus-try that is under such state pressure tomoveandbereshaped.”

At times, Mr Lang says, politicaldemands are in danger of clashing withthe laws of physics. “We have an almostmagic belief in engineers, but it can turninto a minefield when there is a discon-nectwithpolitics.”

Apart from retrenchment, are thereany other ways forward from this diffi-cult situationforutilities?

Johannes Teyssen, chief executive ofEon, Germany’s biggest utility by mar-ket value, has urged Berlin to follow theexample of the UK and introduce a“capacity market” that offers electricitygenerators predictable revenue inexchange for ensuring security of sup-ply. Utilities have also been successful inlobbying to reduce subsidies for renew-able energy. But both approachesamount to moving the goalposts ratherthangenuine innovation.

As profits have slumped in its homemarket, Eon has also looked for growthabroad, moving into Brazil and Turkeyand considering India. But first-half fig-ures for 2014 revealed that the com-pany’s earnings outside the EU had

fallen by more than a quarter. Mr Kaest-ner points to Eon’s more successfulacquisition of generating capacity inRussia eight years ago, where it hadalready built up close co-operation withtopfigures inRussia’senergymarket.

Possible new business models in thesector include flexible energy consump-tion, when utilities become experts inenergy conservation and storage, ratherthan generation. But the experience ofdisruption and change itself could alsopoint tonewdirections.

One of the core competencies ofenergy companies is how to deal withregulatory changes, Mr Lang argues. “Itis quite amazing how many of the bigenergy companies have been able toadjust when you look at the enormousregulatory change and state interven-tion intotheirbusiness.”

Search for newbusiness modelsas losses mountUtilities Political uncertainty creates problems forcompanies such as Vattenfall, writes David Crouch

Under pressure: Vattenfall’s heat and power station in Berlin – Fabrizio Bensch/Reuters

6 FINANCIAL TIMES Thursday 23 October 2014