POWER January 2012 - 37

2012 INDUSTRY FORECAST
half of the year. Stock price volatility and debt
concerns also contributed to deal slowdown in
the third quarter and we believe many in-process
and contemplated deals are being deferred
until the capital markets settle down. "
It's also possible that business fission may
replace corporate fusion in the days ahead.
Following a trend evident in the oil business,
Dynegy last August split asunder, spinning
off separate coal-fired and gas-fired businesses
from the Houston-based merchant generating
company. The move came during a nasty
battle over the company's future between
two groups of corporate raiders: Blackstone
Group and legendary investor Carl Icahn and
Seneca Capital. According to an analysis in
the Wall Street Journal, the idea was to protect
the company's hard assets as the raiders
battled over the corporate entity, with Icahn
and Seneca ultimately emerging victorious,
although owing substantial debt.
Then, in early November, after another set of
complex transactions involving the debt of the
coal-generating spinoff, Dynegy filed for bankruptcy
protection. In the latest ploy, said the
newspaper, " Dynegy is trying to force its unsecured
creditors to play let's-make-a-deal. And if
the creditors don't play ball they will be buying a
showdown with Dynegy, Icahn and Seneca with
about $4 billion on the line. " The Journal's account
concluded that Dynegy's structural game
was complex and convoluted enough to make
Rube Goldberg proud.
The European Outlook
In Europe, too, money was tight in 2011, as it
promises to be in 2012. Previous budget crises
in Spain and Ireland were bad enough, but now
dire economic conditions in Greece and Italy
threaten the very stability of the euro and the 17
nations that use it as their currency. Prospects
in many of the other 10 European Union (EU)
member states are not great either.
So money to invest in new power plants
and grid upgrades is hard to find, yet a great
deal of capacity needs to be added soon. The
UK, for instance, will by 2018 have lost 6
GW of aging nuclear capacity and 11 GW of
old coal and oil plants that must close under
EU anti-pollution rules because they do not
have flue gas desulfurization equipment. By
2022, Germany will have shut all 17 of the
nuclear plants that historically provided nearly
one-quarter of that country's energy.
The European Commission is sticking doggedly
to its plan to fill the gap with renewables:
The target for 2020 remains 20% emissions reductions,
20% renewables, and 20% energy savings.
However, many commentators believe that
the lack of firm lower-level policies has helped
to create an investment climate in which not
even gas-fired plants can be built fast enough, let
alone clean coal, new nuclear, wind, or solar. As
January 2012 | POWER
the European Climate Foundation environmental
think tank said recently, " institutional investors
are not part of the climate conversation. "
Steve Holliday, CEO of British grid operator
National Grid, warned last year that
consumption patterns would have to change
drastically by 2020 or 2030 as the share of
renewables increases. He may have been
talking about relatively painless demand
management via a smart grid, but his comments
have been widely taken to mean that
the UK will face blackouts.
Coming to Grips with European
Energy Policies
Europe's proposed decarbonization is " the most
massive energy program ever proposed anywhere
in the world outside wartime conditions, "
consultant Andrew MacKillop wrote recently in
European Energy Review. Mandatory carbon
trading has not significantly reduced emissions,
he added, and energy market liberalization has
not brought the hoped-for benefits.
Michel Cruciani of the Centre of Geopolitics
of Energy and Raw Materials at Paris-Dauphine
University, agrees. He claims in a study
published in November 2011 by the Institut
Français des Relations Internationales that liberalization
has done little to lower European
energy costs. In fact, he suggested, the process
may have increased costs by creating regulatory
uncertainty.
In 2010, the UK market regulator Ofgem
said: " There is an increasing consensus that
leaving the present system of market arrangements
and other incentives unchanged is not an
option. " The British government got the message,
because in July 2011 it unveiled proposals
to reform the country's energy market and so
make available the £200 billion ($317 billion)
the UK needs to invest in the next 10 to 15 years,
with nuclear and offshore wind as the priorities.
Key to the UK proposal are a carbon price
floor; long-term contracts for low-carbon electricity;
an emissions standard of 450 g CO2
/
kWh to permit gas-fired generation but disallow
coal without carbon capture and sequestration
(CCS); and a " capacity mechanism, " including
demand response, to ensure adequate future
electricity supplies. In November, however,
several UK power executives said the proposals
were unclear and that the carbon price floor
would not work.
Wanted: One Voice for Europe
The EU too has decided it needs a stronger
energy policy. Beyond its ambitious environmental
targets, the EU does not control the
generating mix within each member state, but
it is often criticized for not " speaking with
one voice " on international energy deals-
notably, bilateral deals between Russia and
individual EU members.
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In September 2011, the commission said it
wanted to monitor all energy deals between
EU governments and third countries, with a
long-term aim of negotiating energy deals on
behalf of the EU. " When you see that some
60% of natural gas is imported from third
countries and as far as oil is concerned 80%
. . . it's perfectly clear that the success of any
energy policy depends on a successful EU
common external energy policy, " said EU
Energy Commissioner Günther Oettinger.
The EU also seems to be following the UK's
lead in specific measures to kick-start new power
plant construction. According to David Buchan
of the Oxford Institute for Energy Studies,
the Commission's new proposals on permitting
and financing acknowledge that " market forces
by themselves will not lay the foundations of
low-carbon energy on time. "
Under the new rules proposed last October-though
they are a long way from being
accepted by EU governments-national
planning authorities would have to process
applications for European " projects of common
interest " in less than three years (half
the current average time) and give increased
weight to the climate-change benefits of infrastructure
such as pylons (transmission
towers) and wind turbines. The Commission
also proposes to use EU money to leverage
private-sector finance for infrastructure projects,
such as through insurance via project
bonds from the European Investment Bank.
European CCS Plans Collapse
Some coal-burning nations, including the UK
and Poland, will be hit hard by the EU's 2015
closure deadline for power plants unwilling
to invest in modern SOx
, NOx, and particulate
emissions controls. Germany, meanwhile,
relies heavily on coal and so might logically
choose this fuel to replace the nuclear capacity
it is closing.
Yet in carbon-conscious Europe, significant
new coal capacity seems unlikely, even if it were
to include CCS. In May 2011, news agency Reuters
listed 15 proposed coal projects in Germany
that are facing significant public opposition. In
Scotland, a record 20,000 people have attacked
a plan by Peel Energy to build a 1.8-GW coal
plant with biomass cofiring at Hunterston.
Short-term CCS plans in Europe are
now looking as unpromising as they are in
the U.S.-notwithstanding a proposal for a
Europe-wide pipeline network, 22,000 kilometers
long and costing €50 billion, to carry
1.2 billion tons/year of CO2
by 2050.
Hunterston is one of the UK's few remaining
CCS prospects, because its demonstrationscale
CCS system-initially covering 20% of
the plant's output-would be funded by the
European Investment Bank. All hopes of a CCS
demonstrator funded by the UK government, on
37
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POWER January 2012

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