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Utility CEO warns regulators risk ruining 'incentive to invest' in energy grid

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New power lines are still "the most important and cheapest way to integrate more renewables," according to Elia's CEO.
Source: TransnetBW

The CEO of one of Europe's largest energy networks is warning that the sector might lose its luster to large infrastructure investors if regulators continue to tighten equity returns, risking to damage a key pillar of the energy transition just as Europe's efforts to decarbonize gather serious momentum.

Energy regulators from Germany to Spain to the U.K. are tightening investment returns just as the buildout of renewables and increasing power demand from electric vehicles are driving the need for more grid investment, said Chris Peeters, CEO of Elia System Operator SA.

"Regulators need to understand where the tipping point is," Peeters said in an interview on the sidelines of the BNEF Summit in London on Oct. 21. "There will be sufficient funds as long as regulators will ensure that there is an incentive to invest."

Elia, which runs the high-voltage grid in Belgium and also operates part of the German transmission network as majority owner of 50Hertz Transmission GmbH, raised €434.8 million through a capital increase in June, including from new investors.

Although demand for the issuance demonstrates that "there's not a problem to find capital in the market," Peeters warned that the sector was headed in a dangerous direction. "If you would have further pressure on the return on equity, then it can become a different game," he said.

If countries want to reach their green energy targets while electrifying sectors like transport and heating, putting new steel in the ground will continue to be necessary, the CEO added.

Elia and the German subsidiary of Dutch TenneT Holding BV are planning to build one of several 2-GW power lines to increase north-south connection capacity in Germany, for example, where overproduction from wind farms in the north and high demand from industrial centers in the south is leading to congestion and unwanted loop flows through neighboring countries.

"There is still an important need for new infrastructure and whatever we still can build, we should build," Peeters said. "It's still the most important and cheapest way to integrate more renewables into the grid."

Elia is also making incremental upgrades on existing power lines, for example by ramping up their voltage and installing phase shifters, and turning to digital technology to optimize how power is dispatched.

As public acceptance for new transmission lines further erodes and new renewables capacity increasingly comes from large-scale offshore wind farms, the CEO also sees the need for a European-wide offshore transmission network. That would not only integrate those new assets more efficiently, but also reduce congestion on the existing national grids.

Belgium alone is planning to install another 1.7 GW of new offshore wind farms to take its capacity to 4 GW by 2026. Neighbors like the U.K., Germany and the Netherlands, early-movers on offshore wind, all plan to keep building in the North Sea as well, while France is on track to install its first large-scale project in 2022.

"The only way to do this in an effective way, and at the size that we're talking about, is actually when you have a grid in the North Sea," Peeters said. "If you have to connect [the wind farms] one by one, it will be extremely expensive."

In July, TenneT and several Danish grid companies already unveiled a proposal to build a series of infrastructure hubs across the North Sea to allow for the installation of more than 160 GW of offshore wind capacity, up from around 13 GW installed today.

Peeters also said that there is a clear rationale to build additional interconnectors between individual countries — even to the U.K., where four planned cables are currently on hold as regulators in France and Norway reassess the investment case in light of the ongoing uncertainty around Brexit.

Although some analysts think this has already made the projects less likely to proceed, Peeters said the different power mixes in neighboring countries and weather-dependent renewable generation will still offer a market to trade off price differentials in the future.

The U.K. has 5 GW of interconnection, including the 1-GW Nemo Link to Belgium, which Elia commissioned together with National Grid PLC earlier this year.

"Your [investment] case is robust long-term — but of course, if you want to have your case, you need as well to survive the first five to 10 years. And they look uncertain at this point of time," he said.

"Overall, you should still see that current capacity can at least double, if not triple," before building more connections to the U.K. becomes uneconomic, he added.