EU power utility boss: ‘Coal is finished, the hard question now is gas’

Apart from Poland, there are no plans to build new coal-fired power plants in Europe, says Francesco Starace. The hard question today is instead who will build a new gas power plant. “And many companies are not doing that either,” he told EURACTIV in an interview.

Francesco Starace is CEO of Enel, the Italian power utility. Since June, he has also been president of Eurelectric, the trade association representing the electricity industry at European level.

He spoke to EURACTIV’s energy and environment editor, Frédéric Simon.

INTERVIEW HIGHLIGHTS:

• Renewables are “clear winner of the cost per kilowatt hour battle”
• Carbon neutrality in power sector achievable “certainly earlier than 2050”
• After coal, gas also is being phased out
• E.ON split was “a bet”, companies should focus on “useful part” of their legacy assets
• EU’s EPS 550 rule is “the wrong battle”, won’t drive investments
• P2P “important” but only a small part of the value chain

***

You took over the presidency of Eurelectric in June, warning that “time is our most aggressive competitor”. Why is this the case?

I think the industry has lost some time in trying to resist what happened in technology, in denying what happened in the environment, so we had to catch up. We now see it clearly, we have a complete understanding of the challenges but we have to make up for the time that we lost.

Today you can use electricity for things that weren’t possible ten years ago – for cooking, heating and transportation. So when we decarbonise electricity, we really decarbonise twice because we reach out to other parts of society. The electrification process is a very powerful way of recovering the lost time.

The European electricity sector made a commitment in 2009 to become entirely carbon neutral by 2050. Are you on track to meeting that goal?

We are not on track because of the time lost. But I think it is still possible to get there. It is even probably possible to get there a little earlier. The question is how. And by the way, getting there will be less expensive than thought and we will make more money out of it than was conceivable before.

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Which are the areas that are on track and which are those where things could go faster?

Progress was faster and deeper than expected in renewables, which are now competitive. Today, they are clearly the winner of the cost per kilowatt hour battle. So that went a lot better than people thought.

Another area is electric mobility. Electric cars are going to become common earlier than we all think. They are going to change mobility in big cities and between cities in many ways. And Europe is better placed than any other region of the world because we have a high population density, a relatively mild climate and a well-built network. So the conditions for deployment are good.

And another thing that developed much better is the speed at which digital technology enables interfaces with customers, and digitise our networks. I think the digital transformation of the networks will surprise Europeans.

And areas where progress was not as fast?

I think CCS has not been successful. It doesn’t work, let’s call it what it is – it is simply too expensive, too cumbersome, the technology didn’t fly. To some extent, solar thermal technology didn’t develop the way people hoped. And you can also say that, in general, the debate over the single European market design for energy – that is taking longer than it should.

It’s actually being discussed right now by EU legislators. Is the proposal good enough in your view?

Let’s say it’s ok. So let’s try to wrap it up now instead of trying to change it for the better. But let’s not think that this will be the end of it, we have to make further progress to have a larger, more unified and comprehensive market design across Europe. I think that’s really key. And, by the way, it doesn’t cost money.

It may not cost money but it is highly risky and disruptive for markets which have been largely protected from competition.

Yes, it’s something that needs to be addressed. But at the end of the day, technology will find a way around it. There is no market design that can protect an obsolete installation or technology that doesn’t work. it’s not by a market design trick that we can protect an obsolete technology.

What we absolutely need in order to get a renewable transformation of the existing power generation fleet is long-term price signals for investors. It is clear today that in many European countries, merchant renewable generation is possible. But because merchant risk has caused so much damage to industry in the past years, people are sceptical and delay investment.

If we don’t fix that problem and have a longer-term contractual relationship between buyers and sellers, the investments will slowly dry out. And then we will face a situation where all investments have to be made in one day. So I think long-term price signals are the key missing point today across Europe.

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It will soon be ten years since Eurelectric made its carbon-neutrality pledge. Since then, technologies have matured, like solar and wind power, which are considerably cheaper. Is it time now to revise this pledge and aim for carbon neutrality at an earlier date?

I think yes. If long-term pricing signals are in place, then you would have the tool. Just look at the list of thermal power installations across Europe. If you take the date of birth of each installation and calculate how many years of residual life they have, you will see that if we substitute those with renewables, we can get to carbon neutrality earlier.

By 2040 for example?

I don’t know but certainly earlier than 2050.

There is always the big question of nuclear. Would such a scenario assume a constant share or a phase-out of nuclear?

I don’t know. Nuclear is a world of its own in many ways. There is a lot of R&D in new generation nuclear plants which pose no threat in terms of proliferation and have different fuel cycles behind them, different sizes – so a completely different animal.

So I think we will probably see a rebirth of nuclear generation on the one hand. And on the other hand, an extension of the lifetime of nuclear plants in France that will probably project the nuclear fleet longer than originally planned.

…until it is eventually abandoned in favour of renewables?

Eventually, nuclear might be substituted with other technologies. But you can say that between now and 2040, the bulk of nuclear installations in Europe will probably still be there. It will be interesting to see what happens in the UK with the Hinkley Point project.

Eurelectric made a commitment in April this year to stop building new coal-fired power plants across Europe as of 2020. However, Greek and Polish members did not sign that commitment. Do you hope to convince them during your mandate?

To be frank, I think they are already convinced. The Polish energy minister recently said that after the completion of three large coal-fired plants, new investments in coal will be stopped. In Greece, the Prime Minister made a statement recently about the gradual reduction in the production and burning of lignite coal. I don’t think anyone with some business sense would invest in coal generation anymore. When you’ve scored already, you don’t need to put the ball back in the court.

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So why did they not sign?

Greece didn’t sign up probably because they couldn’t find internal consensus. But they will phase out coal anyway, regardless if they sign or not.

Poland is different, they have a deep relationship with coal. And I think they may have just finished building their last coal plant. And even if the Polish build a last one, so be it. It doesn’t really mean that much. Ask any company around Europe if they are planning to build a new coal plant. They will all say no. New coal is finished.

The issue today is who will build a new gas power plant. That is the hard question now. And if you ask that question, many companies will say they’re not doing that either. So when are we going to discuss no more gas power plants being built in Europe – that is going to be interesting.

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Do you see this discussion – a moratorium on new gas plants – picking up in the industry?

It’s intrinsically picking up because of the discussion over the European Commission’s EPS 550g proposal. Using these nitty-gritty thresholds is a very European way of discussing big things.

We’ll come back to that. Talking about the energy transition, companies like E.ON have chosen to manage this process by splitting their assets between the “old” legacy assets and the “new” types of business, like renewables and demand-side management. E.ON’s argument at the time was that the move liberates them from “continually having to make compromises”. Do you see this as the way forward to manage the energy transition?

I think the industry is undergoing tremendous change, across the whole value chain. This transition is not driven by the industry, it is being driven by technology, which is evolving beyond our control. There was a moment, maybe 20 years ago, when we could direct things. Not anymore today.

So to take a chunk of the value chain and declare it’s not working is either an act of faith or a bet. To break up the value chain today is a huge risk. You may be trying to simplify your life. But if you have an argument in the company and decide to split to avoid that argument, it’s like giving up. The industry can choose the two models. Some companies decided to split and others decided to keep the value chain.

If you keep the value chain, you have to clearly manage the conflict and solve it. And recognise that there is some value in the legacy power plants provided that we are crystal clear: 1. No more new plants, don’t try to grow that business; 2. Run them as long as they are efficient and best in class in terms of emissions, otherwise 3. Shut them down, dismantle, clean up.

This is what we did in Italy. We took a hard look at the plants we had. And out of the 46 we had in Italy, 23 are being closed down. This is 13,000 MW, or one and-a-half times the capacity of Greece shut down.

So if you do that, then you focus on the useful part of your legacy which is still needed to keep the lights on. It’s a big challenge but it can be done. And I think Eurelectric as a whole needs to understand that the value chain is big. And we shouldn’t be afraid or ashamed of a part of it, we should be managing it. It is our responsibility.

In Italy, Enel drew a line in the sand with its legacy assets. In a way, this is what the European Commission is trying to do with its EPS 550 proposal to prohibit state subsidies for power plants emitting more than 550g of CO2 per kilowatt hour. Eurelectric has argued against this proposal which seems at odds with your ambition to speed up the decarbonisation of the electricity sector. Why do you oppose this proposal?

I’ll tell you, frankly: I think this is not the right discussion. Is anybody planning to build new coal plants? No, except maybe in Poland.

But this proposal is more about gas than coal, according to your own study…

First of all, it is not mine, nor Eurelectric’s. It’s an independent study made by an independent consultant for Eurelectric.

So let’s talk about what the industry wants to do. We can shut down over the years the existing coal and gas plants that don’t qualify with the EPS 550 rule. But companies in Europe basing their decision on EPS 550, how can they be sure that this threshold will not be lowered to maybe 350? Is there anybody in Europe that can make a business decision based on this? I don’t think so.

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The study does agree though with the principle of phasing out some gas plants, warning there could be a lock-in effect otherwise. So where do you draw the line?

It’s very simple: Take a decision based on economics, not based on 552g or 459g, which is a number that may look ok today but won’t be anymore two years from now when a new cap may be decided, say for instance, of no more than 353 hours per year.

Taking a long-term view on prices in Europe, what choice do we have today? If I know I can have renewables that are competitive with gas, why should I kid myself believing my decision to build a gas plant is sound because there is a 550 benchmark somebody has thought of five or 10 years ago? That’s the danger. First, it defies the purpose – it just comes out of nowhere. If you want to kill coal, it’s already being phased out, and you cannot kill it twice.

This is more about killing gas than coal, apparently, or at least parts of it…

Gas also is being phased out, just like coal. It’s still needed for 20 years to run the system. But this 550 cap won’t change anything. It’s the wrong target, the wrong battle. This 550 cap is a classic micro-debate that everybody gets excited about. But it’s a risk the industry will not take. No one will build another 10,000 MW plant because of the 550 rule. This will not happen.

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So if I understand correctly, what you’re saying is that the EPS 550 debate doesn’t need to happen if the price of carbon is high enough?

Yes, if we had a fully functioning ETS, this would be a completely mute debate.

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Turning to another topic, one of the objectives mentioned in the Eurelectric manifesto for 2017-2019 is to engage with other industrial sectors like automotive, construction and ICT. What are your main objectives for each of those sectors?

Let’s start with automotive. The value chain of electro-mobility will be shaped by customers on one end and industry on the other. Customers, we don’t know yet what they will like, it’s something new for them.

Regarding industry, our job is to provide the minimum infrastructure needed to normalise the lives of Europeans who will buy an electric car and venture out of the cities. And that means the distribution part – the charging stations, the way they are located, the way they work, the way they are connected to one another or are interchangeable. So that’s the part of the job where we should rush.

Then if you look further out, when millions of electric cars will be on the road, the distribution networks currently in place is capable of dealing with that, provided that we digitise them quickly. And they will also be able to provide flexibility services once they are intelligent enough. So that’s the part of the value chain that we have to focus on – the distribution end.

Studies show that demand for electricity will grow tremendously as a result of electro-mobility. But frankly, we have such a slack in generation that it won’t be an issue for many years.

And what MEP Claude Turmes says is true: We have to quickly decarbonise electricity so that the argument of the internal combustion engine becomes obsolete. As soon as electric cars are no longer driven by coal-based electricity but renewables, this argument doesn’t hold. So, on cars, the first step for us is infrastructure, infrastructure, infrastructure.

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On buildings, it’s clear today that heat pumps, induction ovens, etc. allow electricity to get into parts of our house where we had gas before. And gas means CO2 and particulate matter emissions in cities. So the more we electrify homes, the less CO2 you emit at local level in big cities. And there again there’s electricity distribution, and standards for new buildings and retrofitting incentives for existing installations. And this is where the Clean Energy Package can work.

And then ICT comes on top to manage the whole thing.

Non-digitised networks can do the job in the beginning but after that it becomes difficult. So you have to digitise it eventually.

With digitalisation, things like peer-to-peer energy transactions are set to become increasingly commonplace. Do you see P2P as a threat or as an opportunity?

I think P2P is going to happen. Probably there is a little bit of a hype. Energy is like the air we breathe. Is there P2P air? No. Energy is the same. Technically, it is something possible but I don’t think people will get into it so much because it’s not as fun as you might think. As always, it could be a threat if industry doesn’t get it. But it could also be another source of value creation if the industry gets into it.

P2P could also be highly disruptive.

You know, everything that has to do with mass consumer behaviour tends to become a little different once it reaches commercial scale. So I’m not sure it will become a big hit. But just in case we should be ready. And if it happens, is it going to change that much? Or is it just going to change the retail end? Because at the end you still need to keep the lights on. The overall balance will be the same, it’s just the way in which retail commercial transactions will be treated. So it doesn’t change things completely.

So you see this as marginal?

I think it is important. But again, where is its place in the value chain? Is it eating the whole value chain or just a small part of it?

Another area which creates a bit of hype these days is energy storage and batteries, which are often cited as an area with high growth potential. How do you see that developing considering demand-side management, which is being rolled out simultaneously, might make them unnecessary?

Batteries are getting cheaper and performing better year after year. So they will become a pervasive part of electrical systems at all levels. In this room today, there are at least 5 transformers that we use to recharge our mobile phones with. Batteries will give the system flexibility at all levels.

But there won’t be a battery business case for the electricity industry. If you look at electricity companies today, there is no transformer division. But batteries will indeed enable a lot of additional value-creating services – demand-side management, and distributed generation for example. And that will create pockets of value creation for the electricity sector one batteries with the right characteristics are available at the right price. So that is something the industry understands.

Batteries will also help solve this impossible equation: We want to live in cities. We want to live an unobstructed life. We don’t want to see power plants and sub-stations. We don’t want to add power lines. So demand-side management and batteries can give us some breathing space because of this impossible pressure on big cities.

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