Europe's Energy Security at Risk

Cuts and delays to investment in Europe's energy infrastructure caused by the financial crisis and the recession will weaken future energy security and undermine the fight against climate change, a leading consultancy has warned.

Projects including new wind farms, gas pipelines and electricity cables are already being put off or are likely to be deferred.

Capgemini, the French consultancy, argues that the European Union needs to invest about ?1,000bn ($1,250bn) between now and 2030 to meet energy demand and hit targets for cutting greenhouse gas emissions, but in the downturn it will be harder to finance that investment, and harder for companies to make the case that it is needed.

Colette Lewiner of Capgemini said: "Everybody says the utility sector will not be impacted by the crisis, but it's not true."

Capgemini calculates that investment in Europe's energy infrastructure rose by 32 per cent last year to ?70bn, but Ms Lewiner said that she expected investment plans would be cut back.

Leading European energy companies, including Eon of Germany, Iberdrola of Spain and Centrica of the UK, have already said that they are reviewing at least part of, or even all, their investment programmes.

The credit markets are not closed to utilities: several large European companies, including EDF and GDF Suez of France, Eon and Iberdrola have launched successful bond issues in the past few weeks. However, the cost of their borrowing has risen sharply.

The recession will also cut expectations of future energy use. Production cuts announced by companies such as BASF, the world's biggest chemicals group, will mean lower demand for electricity and gas.

Smaller companies have been even worse hit. Shares in Theolia slumped last week after the French wind company abandoned its targets for output and earnings growth.

Shares in utilities, generally seen as stable defensive investments in troubled times, have been falling sharply. Over the past year, Eon is down 49 per cent and EDF 53 per cent, both underperforming their national market indices.

The falling oil price, which last week went below $50 per barrel for US crude, barely a third of its peak of more than $147 in July, has also hit investors' perceptions of energy suppliers, because the European prices of gas and - to a lesser extent - electricity are tied to oil.

Ms Lewiner said that when the recovery came and energy demand picked up, the shortfall in investment would lead to renewed problems of tight supply because of shortages of capacity in areas such as electricity generation and gas import facilities.

Lueder Schumacher of Dresdner Kleinwort agreed, warning that the slowdown in infrastructure spending was likely to last longer than the recession. "Reduced investments will only help to make the problem worse when the economy rebounds," he said.

Author: Jo Amey