Europe's Power Struggle

 | Jan 30, 2012 | 4:15 PM EST  | Comments
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From renewable energy to nuclear power, Europe is facing difficult choices. Building renewable and nuclear power facilities is expensive, especially when public money is scarce. The conflict is causing confusion over the direction of national energy policies and questions about the sustainability of state subsidies.

It's not just Greece; most of Europe is a mess. Last Friday, Solar Daily reported, "Spain is cutting subsidies for clean energy production, a sector in which it has become a leader in Europe, as part of a wave of crisis spending cuts." These subsidies helped Spain become the largest source of wind energy in Europe, meeting 21% of total demand, ahead of the 19% met by nuclear power. Overall, renewables provided one-third of Spain's power in 2011. Now, Spain faces additional cuts as it aims to stabilize its finances.

Germany is taking a similar path. Germany decided to retire its entire fleet of nuclear power plants; seven are already in cold shutdown and the balance must be shuttered by 2022. This decision stems from Japan's Fukushima Daiichi and it is layered in with the unrelated economic events that are beginning to unravel in Europe.

By eliminating nuclear power as a source of energy, Germany is falling in line with other European nations. Without nuclear power, Germany has reduced its choices to three options: import power from neighboring countries; produce more power from fossil-fired power plants (coal, oil, natural gas); or, starve the nation of electric power. Johannes Teyssen, CEO of energy company E.ON AG, dismisses the first option, "We lack the necessary power lines to transmit electricity from the north. This could lead to massive problems in the grid, even power outages."

Most analysts dismiss the second option of burning proportionally more fossil fuels to power German generators. Europeans believe fossil fuels are a primary source of greenhouse gases and climate change. As such, burning additional fossil fuels is an unacceptable choice for Europe and Germany.

The third option would spell serious trouble for Germany's industrial and commercial sectors. Some amounts of energy efficiency are obtainable in flat and declining economies. However, substantial power reductions are largely unachievable, particularly in expanding economies.

Germany's best option costs nothing. By keeping its nuclear power program intact, the country can easily achieve its environmental and economic goals. Unfortunately, this option is not on the table.

France is also struggling with nuclear power. Faced with an aging fleet and the potential for profitably exporting surplus power to countries like Germany, France needs more nuclear power plants. Unfortunately, France limited its options to one design, the European Pressurized Reactor (EPR).

EPRs are not cheap to build. France's first-of-a-kind EPR is currently under construction in Finland. Their second-of-a-kind is under construction in northern France. Their third and fourth are being built in China. Initial cost estimates were unrealistically estimated to be 3.7 billion euros. Already there have been a number of cost overruns, raising Finland's total cost to approximately 6.4 billion euros and France's to 5.0 billion euros. In all likelihood, additional cost overruns will come about because the most difficult work -- electrical and piping -- has yet to be completed at any construction site.

It's not just economics. Like Germany, France is engaged in a national debate over Fukushima and is seriously considering a nuclear phase out. President Nicolas Sarkozy continues to back nuclear power, but his opponent, Fran├žois Hollande proposed cutting nuclear power by one-third. Nuclear power is front and center in French politics.

Like France and Germany, the Italians are having second thoughts about nuclear power, and are also struggling with renewable energy. Last August, the Italian government proposed a "Robin Hood" tax that would cost utility companies an additional 650 million euros per year.

Challenges are popping up all over Europe and the U.K. It seems that nobody is immune to the growing difficulties to provide environmentally safe, economic and reliable sources of energy and electric power.

Citigroup (C) issued a report entitled, "A Very Hostile Political Environment," that argued, "The capital markets have given the European Utility sector a resounding vote of no confidence. Equity investors are running scared, the sector is the worst performer in Europe since start 2009, and the underperformance is actually getting worse. The debt market is also worried." This was Citigroup's view six months ago.

Investors should reevaluate any positions they may have in Europe's energy sector. In all likelihood, firms such as General Electric (GE), Siemens (SI), ABB, Ltd (ABB) and even First Solar (FSLR), will likely see significant reductions in European orders for equipment and services as each country sorts their energy policy.

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