Friday, July 3, 2009

Africa begins turning Europe Green

I have been waiting for this:

Twenty blue chip German companies are pooling their resources with the aim of harnessing solar power in the deserts of north Africa and transporting the clean electricity to Europe.

The businesses, which include some of the biggest names in European energy, finance and manufacturing, will form a consortium next month. If successful, the highly ambitious plan could see Europe fuelled by solar energy within a decade (link to news story).

This is an important project that may turn out with similar risks as buying gas from Russia, it may reduce Europe's security of supply rather than boost it. And in some ways importing primary electricity from so far away may threaten the ability for Europe to handle its peak load.

I don't want to be a party crasher on this, and I'm not even going to talk about the technical requirements for the project, but my assessment comes out of my research into Europe's energy security of supply. But I hope I'm wrong here, or at least there are ways to mitigate the risks involved.

The main risk that is inherit in this project is the production and transfer of electricity from outside the EU and through some politically or potentially politically unstable countries. It is reported that Morocco, Libya and Algeria will be used as production sites. First, will the electricity go around through the planned North Africa/Mediterranean electricity grid or will it go under the Mediterranean? Now what is interesting the consortium is being lead by Munich Re, a reinsurer. Therefore, you would think that the risk premium attached to this project would be low - or at least it is certainly being taken into account in the price of €400 billion. And interestingly enough, the company says it is taking this step because of the mounting cost of global warming. Therefore you have the convergence of two risk premiums coming together, with the distant energy source having a lower rating. This may become a case of low risk premiums being priced into the price of electricity UNTIL the electricity is turned off, then it increases. Think oil and gas -oil the risk premium fluctuates daily, while gas only changes when it is turned off.

The projection of the project is that this can provide 15% of Europe's electricity requirements. This is certainly a sizable amount, but what must be asked is what percentage will need to be kept in reserve in case some or all of this electricity is turned off? Just as gas storage is seen as a way to buffer against supply disruptions, so to does electricity that is being used daily from North Africa need to have some type of reserve requirement.

This very project of importing solar electricity from North Africa is actually part of a question I'm currently asking people for a project. Most have said, yes it would be a good thing to bring more green energy into the electricity mix, but most have express reservation based on the security of supply. They equate it to importing gas from Russia. It should work great when it does work, but prepare for those rainy days which even the Sahara receives.