Europe Needs Major Energy Investment but Lacks a Workable Policy Framework – IHS Report

European utilities need to invest around one trillion euros by 2020 in new infrastructure to ensure the region’s energy supplies as ageing power plants close and gas imports rise, according to a new report from IHS (NYSE:IHS), a leading global source of information and analytics.

The study highlights that the investment climate has deteriorated markedly over the last year as a number of countries faced a double-dip recession and the financial strength of utilities has weakened dramatically due to higher debt levels and weaker credit ratings.

“Europe’s energy sector faces a large and pressing investment challenge,” says Michael Stoppard, chief researcher – global gas at IHS and co-author of the report “The Energy Investment Imperative: Toward a Competitive and Consistent Policy Framework.”

“Today the required investment is lacking. However, because of the long lead time to develop energy assets, it is imperative that the right investment framework be put in place as soon as possible to ensure long-term stability of Europe’s energy system.”

The investment through 2020 equates to around 750 billion euros for power generation, 90 billion euros in transmission lines and around 150 billion to expand gas supply and build new pipelines to cope with rising imports as Europe’s domestic output declines.

Europe is due to close around a quarter of its fossil fuel power generation capacity by 2023 to meet tighter environmental rules while the rapidly expanding renewables sector needs back-up supply and better grid interconnection, the report notes.

The challenging investment environment means that new approaches to corporate and project finance will be needed to attract institutional investors, and regulators will need to take major steps to reduce uncertainty for these investors.

“The current market structure is unlikely to attract the necessary risk-bearing investment,” says Fabien Roques, head of European Power Research and the second co-author of the report. “Premiums to cover significant regulatory and market risks threaten to drive up the costs of capital in an already capital-intensive industry..

“National reforms to implement capacity mechanisms risk undermining progress so far with market integration at the European level. Unless the investment framework is fixed urgently, Europe will fail to deliver on its low carbon agenda,” Roques concludes.

The report “The Energy Investment Imperative: Toward a Competitive and Consistent Policy Framework”is part of an ongoing energy dialogue with the European Union and will be formally presented at a reception in Brussels on 25 February attended by Phillip Lowe, who heads DG Energy.

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For a copy of the report or to attend the reception, email Margaret-Anne Orgill at margaret-anne.orgill@ihs.com

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