Large-scale investment in new generation capacity is needed to meet growing gas demand across Europe and to replace obsolete capacity, which needs to rise from around 800 GW today to more than 1,000 GW in 2030. However, Europe faces a number of major challenges:
• Much of Europe’s gas, coal, and nuclear generation capacity is due to reach end of life in the next 10 to 20 years. The International Energy Agency (IEA) estimates that less than 300 GW of the 784 GW capacity operational in 2004 will still be functional in 2030;
• European environmental legislation such as the Large Combustion Plant Directive will accelerate the reduction of existing generating capacity; and
• Power demand is rising in Europe at around 1.15% per year, while there is little sign that efficiency measures are having any impact on emissions. The IEA estimates carbon dioxide emissions from the Organisation for Economic Cooperation & Development’s member countries will increase by 2.5 billion metric tons (a doubling of per-capita emissions) between 2004 and 2030.

With more than half of Europe’s existing capacity needing replacement over the next two decades, the IEA estimates that US $1 trillion will be needed to rebuild or replace and add to the current fleet of power stations.

Gas-fired power generation is experiencing significant growth across Europe, accounting for more than half of new capacity. Gas is expected to account for a third of capacity in the European Union by 2030, up from 20% today.

The need for more power is leading to a new “dash for gas,” similar to one previously witnessed in the UK in the 1980s and 1990s. Then, deregulation combined with strong availability of North Sea gas and technological developments led to overcapacity and a dramatic fall in the wholesale price of gas, which reduced investment in new, cleaner capacity. Even though gas-fired generation has numerous issues (i.e., rising engineering, procurement, and commissioning, or EPC, prices and security of supply), it will still make up the core of supply for some years to come as it is much more environmentally friendly than coal, more economic and scaleable then renewables, and can be implemented much faster than nuclear energy.

Reliance on gas is unlikely to change in the short to medium term unless there is:
• A major change in gas generation economics;
• Rapid development of nuclear capacity;
• Improvement in economics and scalability for renewable technologies; and
• A significant reduction in coal generation emissions through a major technological breakthrough in carbon capture and storage to create “cleaner” coal.

All of these measures, however, pose a range of challenges that developers, investors, and policymakers must overcome. Even with strong investment to develop programs for alternative sources of energy across Europe, the requirement for further gas-fired generation will mean the current “dash for gas” will likely continue after the current “sprint,” hopefully at a more measured pace.

However, it will come at a cost:
• EPC prices, which have risen 50% in the past 12 months because of a sudden increase in demand, will further drive up project costs;
• An EPC supply chain under pressure will lead to delays in projects. In the February 2008 Power Capital Costs Index, IHS and Cambridge Energy Research Associates said lead times for engineered equipment had increased by 50% in the past six months;
• As there is traditionally a lag before higher EPC costs feed into electricity prices, rising EPC prices have yet to be fully factored in and will result in sustained higher power prices.

In the long term it is vital that renewables contribute a greater share of the energy mix. However, if generating power from renewable sources is to be anything more than the box ticking exercise it currently is for many of Europe’s utilities, it needs to be economic. Onshore wind and solar power are already on the verge of competing with fossil fuels without subsidy, but offshore wind or tidal power projects face significant technological challenges that are only just beginning to be addressed. Commercial adoption is more than a decade away.

Significant government policy or macroeconomic changes are required to meet Europe’s power demands. European states must build a diversified energy portfolio using gas, clean coal, nuclear, and renewable technologies. This will require a concerted effort on the part of governments, utilities, and investors to make sure that this European “dash for gas” is the last.