Europe’s energy triangle: an interview with Gérard Mestrallet

Photo Gérard Mestrallet / Chairman and Chief Executive Officer, GDF SUEZ / April 5th, 2012

The European energy equation is defined by three constraints: security of supply, fighting against climate change, competitiveness. It is complicated with the German choice on nuclear power, the arrival of shale gas, the rise of renewable energy, the impact of large emerging countries on the energy markets. What does it change for Europe and its industrial heavyweights?

ParisTech Review – The European Union is sometimes pointed out for lacking a strong energy policy. Needless to say that with giant energy companies such as GDF SUEZ, it can sometimes be difficult to make plans for a policy, since these big groups often ride on their own.

Gérard Mestrallet: Absolutely not. It’s better to have powerful groups to lead European policies. It’s not at all contradictory. The energy policy doesn’t go against energy companies. Countries lacking big energy firms are unable to build strong policies. This being said, as far as the European policy is concerned, I do not regard it as completely appropriate. Any energy policy is a 3-sided triangle: security of supplies, fight against the climate change and competitiveness. Brussels focused much on the defense of the environment and neglected security (a little) and competitiveness (a lot). It’s good to be the world leader in terms of renewable energy, but only if you drag in the others with you. Today, Europe is leading alone, without any real influence. However, Europe is competing economically with the rest of the world. It needs a competitive energy, while renewable energies need subsidies. It’s the CEO of a world leading renewable energy firm who’s speaking. We are leaders of hydro and wind energy in France, Italy and Belgium. Part of our group’s growth is based on renewable energies –only part of it. The GDF SUEZ triangle is better balanced than Europe’s triangle.

You describe very well the EU as being confused about their future energetic needs. But one thing is certain, you will benefit from this period of doubt, simply because you are able to guarantee both the stability and flexibility of the electric production through one of the key solutions to the problem: gas energy.

Indeed, I believe that natural gas will play an increasing role in the energy balance during the next thirty years. Besides, according to the different scenarios of the International Energy Agency, the proportion for gas in 2030 will be the same, whatever the hypothesis concerning renewable energies. That certainly proves that gas is going to play a major role in the future. GDF SUEZ controls the whole gas chain, from production to distribution, and is particularly well positioned to meet with this increasing demand.

The only point is that Europe must import its gas. Resolving the crisis by increasing gas importations, wouldn’t this lead to some kind of Pyrrhic victory?

It’s true that Europe will decrease its production of conventional gas – leaving out shale gas. Importations will rise increasingly. That’s no big deal. It’s already the case for oil, since always. Let’s not mix up supply security and energetic independence. These are two very different issues. Nuclear power, for instance, makes us at 100% dependent, since we don’t have any uranium. Security is guaranteed by a wide variety of uranium supplying countries and by the signature of long-term contracts. France imports almost the totality of its gas and its supply security has always been covered. Look at China. In its twelfth plan, it decided to develop natural gas. Unless very important shale gas deposits are found, they will only be able to find half of it and will need to import the other half. The Chinese are the world’s biggest producers and also one of the biggest consumers. They are very much concerned about their independence. Their security will come from the possibility to be delivered with liquid natural gas from any country in the world. LNG will play a key role in security, while shipments through pipelines from A to B will inevitably induce consuming country B’s dependence towards shipping country A.

In Europe, “A” often stands for Russia.

If we take a look at our long-term supplier portfolio, we will see that Russia represents 16% of our gas importations, Norway 24%, and Algeria 14%. Not to mention the Netherlands, the UK, Egypt, Nigeria or Yemen. It’s a varied portfolio and therefore, very reliable. Another example is Chile: they imported all their gas from Argentina. The day Argentina decided to keep the gas for its own, we offered them to construct a methane terminal on the Pacific and regain a greater energetic security.

GDF SUEZ is very close to Russia. Does this proximity represent any risks?

For over 35 years, we have had an excellent relationship with Russia. They’re a good partner. Russia needs to sell its gas. Russia need Europe and is a reliable partner. The only interruption occurred with their conflict with Ukraine. Ukraine wanted to deprive Europe of gas, not Russia. Gazprom suffered heavy losses of benefits. We are partners of the Nord Stream pipeline that links Germany to Russia and strengthens Europe’s energetic security. A second pipeline will be operational by autumn of 2012.

For obvious reasons, your Russian partner is against the exploration of shale gas in Europe. Do you have another opinion on this matter?

Russia dreamed of exporting gas towards the US. With shale gas, the Americans no longer need to import gas. It’s a profound disappointment for the Russians. They would feel even more deeply disappointed if Europe followed the same path. Nobody really measures the full potential of shale gas on our continent. It would be theoretically considerable in France, perhaps ten times the potential of the Lacq deposit, and in Poland. We won’t know any more until we explore further on. Let’s avoid emotional reactions and adopt a scientific approach. Is there or not gas trapped within France’s underground rock formations? Cannot it be extracted under ecologically acceptable conditions? If the answer is yes, let’s do this under State control. It’s for the State to decide. In a country that lacks oil and coal and where gas needs rise steadily, it would be a pity to discard shale gas without at least studying the possibility to reduce our energy bill.

A report from the Cour des Comptes (France’s Court of Audit) on nuclear cost opened a controversy about the real cost of nuclear electricity and fueled the debate between GDF SUEZ and EDF.

The Cour des Comptes showed that there are several methods of calculating cost prices, with a range comprised between 32 and 49 euro per MWh. The public opinion only remembered the highest figure. A 49 euro price doesn’t correspond to the current cost price of EDF. The Cour des Comptes, as the Commission for Energy Regulation, agreed on a price of 33 euro per MWh. This number was confirmed by the President while recently visiting the Fessenheim nuclear facility. GDF SUEZ, with a total of seven power plants in Belgium, offers a cost price of 28 or 29 euro. If you take in account that our Belgian facilities have an availability rate of 90%, higher than the French power plants, our calculations give us figures around 33 euro per MWh. EDF is aware of these figures and we of theirs, since we team on several facilities.

The reports showed that France wasn’t really capable of a nuclear renaissance – which means, investing in new plants – because of its financial cost. Is the nuclear era in France starting to wane?

It’s difficult to make projects for new power plants in our country. GDF SUEZ offered, for instance to develop an EPR reactor and an Atmea in the Rhone valley. We’re still waiting… As for prolonging the life-span of existing facilities, that’s a question we’ll have to face seriously, when the time comes. Let me remind that in all countries where this prolongation was decided, Germany, Holland, Belgium, compensation by the nuclear operators was granted to the State and to the collectivity. That’s understandable given the fact that the investment was particularly profitable. To give an example, on the three oldest power plants – which represent 2000 MWh and will be 40 year old in 2015 – one billion euro must be invested (stress tests included) to pursue with their maintenance and operating costs. That’s 500 million euro for each 1000 MW to go on with operating them. It’s legitimate to think that these resources can and must be shared with the collectivity. Only in France have I heard that prolongation implies raising prices. It should be the exact opposite: prolongation should give the right to a free cash flow.

This recurring debate is somewhat shaded by the uncertainty on the real cost, in the future, of dismantling these facilities. Nobody really knows.

On this subject, extremely precise studies have been made. The fund level for dismantlement isn’t decided by the operators but by the nuclear authorities. Besides, a power plant meant to operate 40 years is supposed to fund the total amount necessary for dismantlement before that deadline. If you prolong this of ten or twenty years, you give the operators 10 or 20 years more for funding.

Germany will quit nuclear power. How will the German and thus, the European economy manage without?

That’s the Germans’ own decision. Nobody can decide for their energy mix. But they could have at least consulted the neighboring countries. As a matter of fact, energetic solidarity is already a reality between several European countries. In case of a great cold snap in France, because of the preeminence of electric heating, the electric consumption goes through the roof. In Germany, where heating habits are different, it’s the gas consumption that increases. Frequently, Germany, Belgium and the UK deliver electricity to France in case of great cold. But Germany took its decision without consulting us, without heeding the consequences of its decision on the international European electricity flows.

Fundamentally, how to you read the German decision?

In Germany as in the rest of Europe, there’s this idea that everything can be done with renewable energy. And that the nec plus ultra would be an energetic system relying entirely on renewable energies. However, that’s simply not possible now and nothing indicates that it will be possible in 2030 or even in 2050. For a simple technical reason: we don’t know how to stock electricity. Solar and wind energy are genetically intermittent, therefore you can’t rely on them by building an energetic system if you can’t stock electricity. Consequently, if nuclear energy shrinks in the European energy mix – which is inevitable – we won’t be able to replace them with renewable energy. We will have to install gas facilities that will provide the flexibility that renewable energy lacks. That’s why I believe Germany is on the wrong path. Happily, there are other currents of thought in Germany, although discrete, that say the energetic equation is impossible: they will have to develop gas and eventually coal.

If Berlin continues on this path, will Europe enter in a cycle of frequent blackouts?

It’s clear that the new German policy increases the risk for system failures. We already had a preview in 2009, when the high-power line in Hamburg was cut to let pass a ship. The electricity was sent through other heavily loaded lines, because the wind generators were running at full load. The power failure propagated through North and West of France, who had to quickly and massively unload its power lines. This crisis happened before even the end of German nuclear power plants. The risk of failure increases, that’s undeniable. Although, with the economic crisis, decreasing demand has bought us some time.

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