The EU should define how much gas it wants by when, and recognise that Nord Stream 2 can provide additional security of supply, argues Klaus Schäfer, the incoming CEO of E.ON spin-off Uniper in this exclusive interview with Energy Post. Schäfer, who is currently Board member of the E.ON Group, says Europe is further away than ever from a single market for electricity and calls on policymakers to recognise that security of supply has a cost. He backs a reformed carbon market, but expresses doubts over the future of carbon capture and storage (CCS).
“The EU has to be clear about how much gas it wants to see in Europe by when, without conditioning this on how renewables and efficiency targets play out,” says Klaus Schäfer, future CEO of E.ON’s spin off company Uniper. “Security of supply requires security of demand.” Uniper doesn’t officially start operations until 2016, but in an exclusive interview with Energy Post, its incoming CEO reveals what the company is about and its main priorities going forward.
Schäfer is an E.ON man. He has been with the company for 19 years, moving between financial and CEO roles. He headed up several of E.ON’s large divisions – the Italian business, E.ON Ruhrgas and the trading unit – before becoming CFO of the whole group. Now he’s back to being CEO. He will lead Uniper, whose creation E.ON announced just over a year ago. Uniper will focus on what in E.ON today is up- and mid-stream business. In practice, that means mainly conventional power generation (including hydro) and global commodities trading (including the up- and mid-stream gas business).
Nord Stream 2 is a €10-billion project and will also contribute significantly to security of supply. It’s not a question of displacing one route with another. It’s about creating additional infrastructure for additional demand.
For Schäfer, these are system-relevant businesses. Whilst the new E.ON focuses on the decentralised, smaller scale, customer-centric world of energy, Uniper will focus on the big assets and global dimension. Its innovations will be in the realm of power-to-gas, large-scale batteries and system flexibility, and taking LNG to the transport market, for example. As large assets, German nuclear will remain with E.ON, based on the rationale that if it must retain liability – as per a draft German law – it makes sense to retain control of them too.
One of Uniper’s core themes will be security of supply. As well as calling for a target for gas, Schäfer warns the EU to stay out of Nord Stream 2, which would provide a new route for gas from Russia. “Any new infrastructure provides security of supply,” he insists, dispelling worries that it could increase EU dependence on Russian gas or harm Ukraine. Schäfer is critical of progress on a single European market for electricity: “I see a lot of talk but very little action. At some point Member States have to decide whether they want a single market.” He believes the future of conventional power lies in delivering energy security and system stability, paid for either through a new market design or contracts. A reformed EU Emission Trading Scheme (ETS) is needed to bolster gas in the energy mix, says Schäfer, though he shies away from calling for tougher greenhouse gas emission reduction targets. He does not see a future for the large-scale application of carbon capture and storage (CCS) for gas.
The name “Uniper” incidentally, was proposed by a current E.ON employee. Some say it comes from the phrase “unique performance”, explains Schäfer; others that it is a combination of “unity” and “ampere”.
Q: What are the most important energy issues for Uniper in Europe?
A: There are two big topics. On the one hand, it is the role of conventional generation in the European energy system, and the fact that in the power system we’re moving towards less of an Energy Union and more towards national markets.
On the other hand, there are challenges on the gas side. We need a more integrated European market and further imports because of a decline in indigenous supply. There is the question of where those will come from and our role in that. We’re active in LNG, the Caspian Sea and Russia. With a huge European portfolio in gas, we’re highly interested in that topic.
Q: How do you see the role of conventional generation going forward?
A: I believe that conventional generation will increasingly become the guarantor of security of supply and stability in the energy system. More and more plants will move out of the traditional wholesale market into markets where they either relate to specific customers – in other words, they become contracted assets – and/or serve the system.
In future, I think the wholesale market will increasingly compensate for short-term dispatching but not for the longer term presence of a plant on the market. If you go back 20-25 years, you find that separation – people paid separately for load and capacity. I think we’re simply moving back to that.
Q: So most of a plant’s revenue will come not from the wholesale market, but from long-term contracts with specific customers?
A: The future customer for a conventional plant is a grid operator or large industrial, for example. The market will be more decentralised and especially large loads will require that they make sure there is adequate capacity. This could be guaranteed through contracting or market design.
Europe will pay for security of supply in the form of LNG terminals, pipelines and interconnectors. Would all these projects make sense if anyone believed that in ten years time there wouldn’t be any gas demand in Europe?
Some European markets have decided to guarantee the availability of capacity through a [dedicated] system – e.g. the UK and France – while others, such as Germany, are essentially leaving it to the wholesale market. Given that I believe few people will trust the wholesale market to deliver, some forms of contracting will be needed.
If none of this is there, then conventional plants will have to leave the market. I can’t see anyone investing in a new plant which is solely compensated by the wholesale market.
Q: Some experts predict an end to baseload by 2030. What’s your view on that?
A: The classic separation of the market into baseload, mid-merit and peaking [plants] has already evaporated. A lot of baseload has become mid-merit. Look at how nuclear is dispatched in Europe today: it provides a lot of flexibility, especially to compensate for intermittent generation.
Meanwhile, traditional mid-merit plants have become peaking plants. And peaking plants have no peak left. The peak has shifted. Traditional peaking products targeted midday during the working week. Today we see a lot of peak hours in the night. Not peak demand, but peak residual demand after renewables production. That’s what counts for the market these days.
Q: How do you see the future of gas vs. coal?
A: I do not believe that anyone will invest in a new coal plant in Europe going forward. A lot of existing coal plants will be closed. The few that remain will be modern plants that compete with other conventional plants in the system.
It then becomes a question of the CO2 market. That is the driver of switching [from coal to gas]. We see a lot more gas in the UK because of its CO2 price floor. I believe that with a stronger EU ETS – and higher CO2 prices – we will see more use of gas plants.
Q: What kind of EU ETS reform do you support?
A: For me, the right way to incentivise emission reductions is a market and the EU ETS is the right market. But many have interfered in it. If you define supply and demand as the right basis and then come up with other legislation which influences that, for example a renewables target – however laudable – then that changes the forecasts and set-up of the ETS and renders it useless.
Q: Should the EU cancel some of the large surplus of carbon allowances currently in the ETS?
A: We need to reduce supply because we cannot change demand [through the ETS]. The MSR [market stability reserve] is a step in the right direction, but still a shortfall to what is needed.
Q: Do you support an emission reduction target of more than 40% for 2030?
A: Yes, E.ON has always supported an ambitious CO2 reduction target and we will continue to advocate this. But with a 40% target, we need to take into account the issues of affordability and security of supply. The system needs to work. While I like a good target, I also think it should be achievable as efficiently as possible.
Q: Do you see a more meaningful CO2 price as good for economic growth and jobs?
A: The discussion should be about what to do with the proceeds of selling CO2 allowances. If governments use these funds to foster innovation, for example, that’s positive. If they use it to pay higher pensions, that will not lead to economic growth.
Q: In the EU ETS a lot of allowances are also given away for free to compensate industries at risk of carbon leakage. What’s your view on that?
A: Industries that are in completely global competition should be burdened with what is justifiable on a global scale. There is no point in forcing them out of the EU. Then we would have lost twice: we don’t get the proceeds [from them as customers] and we may even raise global emissions.
Q: What are your expectations for COP21 in Paris? Are you optimistic?
A: I would like to be optimistic. I’ve seen it fail too often. And yet every time I am hopeful. The signals we see now, from the US and China in particular, make me more hopeful than in the past.
Q: What impact could a climate deal in Paris have on EU policy?
A: It may strengthen the case for a more ambitious EU ETS. More global alignment will give that instrument higher validity.
Q: Within Uniper’s portfolio today you’ve got conventional generation, trading, and exploration and production. What are your priorities going forward?
A: In terms of conventional generation, it’s a mix geared towards gas. A European market that pays more attention to gas would fit our portfolio and assets. I believe there is an alignment between what we look at from a business point of view and what the EU could look at from an environmental point of view.
Q: What kind of an electricity market redesign would help your business case?
A: I would love to see a single European market for electricity. A few years ago we were building new plants in Europe and we said it doesn’t matter where we build them because they will supply the same European market. We were highly disappointed.
In the next 15 years, Europe will lose 20% of its gas supply due to declining domestic production. I do not believe that shale gas production in Europe will provide the answer to that
To be honest, I’m not very hopeful that we will see a single European market soon. I see a lot of talk but very little action. The actions I do see are national. Take capacity markets. The three biggest countries – Germany, France and the UK – all have completely different solutions. What does that have to do with a unified market?
At some point Member States have to decide whether they want a single market. If so, they have to hand over competences to the EU. Right now, Brussels does not have the mandate to drive this topic forward.
Q: When Brussels does propose to get more involved, for example in negotiating deals on gas with third parties, Member States don’t like it.
A: Getting involved in private contracts is not something the EU would do in any other industry. Just because you don’t like a contract, doesn’t mean you can suddenly interfere.
If it’s an intergovernmental contract, then it’s a different matter. But suddenly getting involved in LNG contracts or having the idea that Europe should contract certain gas volumes, is not their area of competence. If contracts break the law, then clearly the EU needs to step in, but not just because someone waves the white flag and says I need help.
Q: What happens when a commercial gas project appears to be in conflict with political goals e.g. Nord Stream 2 and the goal of diversifying gas supplies?
A: Any new infrastructure provides additional security of supply. How can a new route increase dependency? We have lots of LNG terminals that are not fully used. They would be if LNG were commercially attractive. But then we would not say we are now dependent on the LNG market. As long as I have enough infrastructure competing for volumes, that’s the best security of supply I can have.
Q: Can security of supply always be left to the market, or may there be a case for policymakers to intervene?
A: We believe that the market is the best instrument to guarantee security of gas supply. However there might be situations where the market can’t cover the full demand, for example if a Europe-wide cold spell coincides with a technical breakdown of important transport facilities. To prevent supply interruptions in cases like this, it makes sense to implement a preferably market-based mandatory flexibility reserve regime which can help restore gas network stability.
CCS for gas in the end, from a price point of view, would be a problem. At big scale it would simply become too expensive
Of course, security of supply has a price and consumers should be prepared to pay appropriately for such a regime, for example for the operation of gas storage and LNG facilities. Right now big companies shoulder the cost. Every year we have to pay for LNG terminal capacity bookings that are not used. And we get no compensation for that. The same is true for gas power plants. If gas prices went up, yes we would attract more LNG, but Europe would actually burn even more coal in its power plants.
Nord Stream 2 is a €10-billion project and will also contribute significantly to security of supply. A significant sum of that will go to European industry. Yes it will create another road to market for Russian gas. I cannot understand at all what the big worry could be.
Q: One concern is that Nord Stream 2 will reduce gas flows through – and transit revenues for – Ukraine.
A: In the next 15 years, Europe will lose 20% of its gas supply due to declining domestic production. I do not believe that shale gas production in Europe will provide the answer to that. This 20% will need to be imported from somewhere else. In addition, I believe we will see growth in gas demand from the generation and transport sectors.
It’s not a question of displacing one route with another. It’s about creating additional infrastructure for additional demand and security of supply as cost efficiently as possible.
Q: So it all comes down to how much gas you believe Europe will need in future. The European Commission is working on an LNG strategy. Does the EU need a gas strategy?
A: It needs a roadmap for gas going forward. The EU has to be clear about how much gas it wants to see in Europe by when, without conditioning this on how renewables and efficiency targets play out. Security of supply requires security of demand. Then companies like ours will invest.
Q: Can you guarantee a certain use of gas in an open market, where it is competing with coal, nuclear, renewables etc?
A: You cannot guarantee it but you can take a stance. As policymakers do on renewables. Europe takes a clear stand on how much renewables it wants to see by when and it is willing to take clear actions to defend that. This is what we need for gas.
Q: So Europe should set a target for gas in its energy mix?
A: Absolutely. Europe will pay for security of supply in the form of LNG terminals, pipelines and interconnectors. Would all these projects make sense if anyone believed that in ten years time there wouldn’t be any gas demand in Europe? Europe needs to convince sellers that it is a trustworthy buyer. You cannot build up a gas foreign policy strategy and incentivise lots of infrastructure, if at the same time you’re squeezing out gas.
Q: Does gas have a long-term future in Europe without carbon capture and storage (CCS)?
A: CCS for gas in the end, from a price point of view, would be a problem. At big scale it would simply become too expensive.
Q: Can Europe reach its 80-95% emission reduction goal in 2050 without CCS for gas?
A: We’re in 2015 now. Personally I am not worrying too much about 2050. Of course, we need to keep an eye on this ambitious target, but not so many of the decisions a company makes today really relate to this timeframe. I’d rather focus on what needs to be done out to 2030. Then, en route, we can adjust.