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The last dash for gas?
Large-scale investment is required in new generation capacity to meet growing demand across Europe, expected to rise from around 800Gigawatts (GW) to more than 1,000GW in 2030. With more than half of Europe's existing capacity needing replacement over the next two decades, the IEA (International Energy Agency) estimates that US$1 trillion will be needed to rebuild, replace and add to the current fleet of power stations over the same time period to fund the building of c600GW of generation capacity.
3i believes that this need for more power is leading to a new "dash for gas," similar to that witnessed in the UK in the 1980s and 1990s, when deregulation, combined with the availability of North Sea gas and technological developments, led to rapid growth of the sector then overcapacity. This led to a dramatic fall in the wholesale price of electricity which, in turn, reduced investment in new, cleaner capacity.
This time however, 3i believes it is different. This time, legislation is forcing replacement of old coal and nuclear plants as Europe embraces "cleaner" generation technologies and replaces a nuclear fleet nearing the end of its lifecycle. In the medium term only gas fired generation can fill this gap and 3i therefore thinks that the "dash" will not end in the bust that followed the last boom but will reduce to a steady run.
3i anticipates gas will account for a third of EU energy capacity by 2030, up from 20% today. This short-term reliance on gas is unlikely to change in the longer term unless there are significant changes in the relative attractiveness of the power mix. This will potentially be driven by a number of factors including a major change in gas generation economics, the rapid development of nuclear capacity, improved economics and scalability for renewable technologies and a significant reduction in coal generation emissions through carbon capture.
3i is committed to the power generation sector and to backing companies that will play important roles in delivering the generation mix of the future from both conventional and renewable sources. It has invested more than ¤450m in seven companies within the gas and power sub-sector of the energy industry over the past two years.
"Despite its many issues, the reality is that gas is the only option to fill our power requirements in the short term, and will be for the foreseeable future. However, environmental reasons and supply security mean that few people see gas as the ideal long-term solution for Europe's power needs," explained Mark Kerr, Director with 3i's oil, gas and power team, based in Aberdeen. "At the moment, competition is increasing for gas supplies throughout the gas generation equipment supply chain, creating opportunities for innovative and ambitious developers as well as supply chain companies.
"Its clear that significant government policy or macroeconomic changes are required to meet Europe's power demands. European states must build a diversified energy portfolio, utilising gas, clean coal, nuclear and renewable technologies. Renewables will have an increasingly important role to play, but we have to be realistic about the extent to which they will fill the gap, replace fossil fuel or nuclear-based generation.
"The urgent need to create this diversified portfolio will require a concerted effort on the part of governments, utilities and investors to make sure that this current European "dash for gas" is the last."
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