The best of times, the worst of times – A Tale of two Reports

Two recent reports tell a similar tale:  The power sector is changing the world, but not enough to keep the world unchanged.

Two recent reports tell a similar tale: The power sector is changing the world, but not enough to keep the world unchanged.

The two most authoritative accounts of the global power markets, including the role of renewables, were recently published: World Energy Outlook 2014 from the International Energy Agency (IEA) and REthinking Energy from the International Renewable Energy Agency (IRENA).

 

 

Both flagship reports describe two completely different worlds: that of the global power market today and that of the global power market of tomorrow.

The two reports tell a similar tale. The power sector is changing the world, but not enough to keep the world unchanged.

The studies confirm that we have enough economically viable technology, and still enough time, to solve some of the world’s most serious problems. However, time is running out if we continue our subsidised self-destruction for much longer, while denying 1.3 billion of our fellow citizens access to electricity and 2.7 billion people access to clean cooking equipment.

We have the means and solutions to act but we fail to apply them. Therefore, the next generation may look back on 2014 and conclude that it was the best of times, it was the worst of times.

For electricity, times are good and will become better, the reports agree. It is the fastest growing energy source and it will continue to be for the coming decades. The future looks particularly good for renewables, not least for PV and wind power. Fossil fuel-based electricity peaked in 2013 and will continue its decline.

“The power sector is undergoing one of the most profound transformations since its birth in the late 19th century,” according to IEA’s World Energy Outlook.

“Renewables are expected to go from strength to strength, and it is incredible that we can now see a point where they become the world’s number one source of electricity generation,” IEA executive director Maria van der Hoeven says.

“It is no longer a matter of whether but of when a systematic switch to renewable energy takes place,” IRENA director general, Adnan Amin, writes in his foreword to IRENA’s REthinking Energy.

Total investment in (non-large hydro) renewable electricity has increased from $55bn in 2004 to $214bn in 2013. PV made up 24% of total global investments in new capacity, hydro accounted for 20% and wind power 15%. 19% of investments went to coal and 12% to gas last year, according to World Energy Outlook. Around 70% of global investments went to non-hydro renewables in the OECD. In the non-OECD countries, the share was 27%.

Wind turbine costs are down 30% since 2008 and onshore wind electricity cost has fallen by 18% since 2009, “making it the cheapest source of new electricity in a wide and growing range of markets,” according to REthinking Energy, which concludes that “renewable energy is often competitive with fossil fuel power at utility scale, and is generally cheaper in decentralised settings”.

While the recent performance of renewable electricity is remarkable, power generation as a whole has not become cleaner. Today, electricity accounts for more than 40% of man-made CO2 emissions. REthinking Energy points out that the average emissions intensity has only been marginally improved in the past 20 years – from 586 g/kWh in 1990 to 565 g/kWh in 2010.

This will change, but not enough unless we act. Emission intensity reaches 498 g/kWh by 2030 if current policies and plans are carried out – a reduction of 12% compared to now, says IRENA.

However, a doubling of the share of renewables compared to today, coupled with energy efficiency measures, could reduce intensity by 40% to 349 g/kWh in 2030, enough to avert disastrous climate change. More importantly, “the good news is that the technology is sufficiently mature, and the economics sufficiently favourable, that the solution is entirely within countries’ grasp,” according to REthinking Energy.

The world already produced twice as much renewable electricity (4,808 TWh) as nuclear power (2,461 TWh) in 2012. Looking ahead, renewable electricity production triples between now and 2040, increasing more than coal and gas combined.

Renewable energy capacity additions exceed those of fossil fuel and nuclear, combined – both in terms of net and gross additions. Already this year, the world will produce more renewable power than gas-generated electricity and by the 2035 renewables will replace coal as the world’s largest power source, says the IEA.

A staggering $12 trillion will be invested in new power plants between 2014 and 2040. Renewables will account for $7.4 trillion (61%), $3.2 trillion will be invested in fossil fuel and $1.5 trillion in nuclear power plants. The dominance of renewables is quite remarkable, given that this is a ‘business-as-usual’ scenario.

While renewables in general, and PV and wind power in particular, are clearly now established and have bright futures, the same cannot be said about the condition of our globe and many of its inhabitants, unless progress is accelerated soon.

Even with the projected dramatic changes, the transformation of our rigid energy system is simply happening too slowly, IRENA’s analysis shows.

Enforcing current national plans only result in an increase in the share of renewable energy from 18% in 2010 to 21% in 2030. A doubling to 36% (including 44% renewable electricity) is needed to keep global warming below 2 degree Celsius. “While impressive, business-as-usual renewables expansion will deliver neither the economic nor environmental outcomes needed for sustainable development,” says IRENA.

Despite improved carbon intensities, actual emissions from the power sector will be 16% higher in 2040 than today and total emissions will increase by 20%, consistent with a global temperature rise of 3.6 °C, according to the World Energy Outlook.

Cumulatively, we have emitted about 500 Gt of carbon. If we want to stay on the good side of 2°C, we cannot emit more than another 1,000 Gt from 2014 and onwards. On current trends, the world will exceed that budget in 2040, according to the World Energy Outlook.

The dramatic changes we will see in the world’s power markets will not be enough to keep climate change under control, to avoid massive degradation of the Earth’s environment or to meet the world’s development and energy access goals.

The two reports tell a tale of a strange species. We know that CO2 is bad for our planet, our environment and our health, and we choose to subsidise its use. We know that we can provide access to basic electricity and clean cooking for all and thereby save millions of lives annually by investing an average of  $60bn per year. We choose not to, and spend $550bn on subsidising fossil fuels instead – each year.

We have discovered a great natural product – hydrocarbons – which we will need forever to produce essential high value-added products such as detergents, fertilizers, medicines, paints, plastics, synthetic fibres, and rubber.

Still, we choose to waste them in inefficient power plants that make two thirds of their energy content vanish into thin, but gradually warmer, air. And we choose to waste most of those scarce hydrocarbons in combustion engines that only return a fraction of their energy content in the form of usable energy, despite having developed, decades ago, electric engines that are 2-3 times more efficient.

Charles Dickens wrote his opening sentence to A Tale of Two Cities in 1859:

It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light it was the season of Darkness; it was the spring of hope, it was the winter of despair; we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

Judge for yourself, to which extent these words apply to our world of 2014.

 

The article was published by Recharge News on 1 December 2014.

 

 

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EU’s Energy Policy: confusion is now complete

The current commission has concluded that FITs for renewables must be banned from 2017 because they distort competition. On the other hand, it has concluded that FITs for nuclear can continue until 2058 because they do not distort competition.

The current commission has concluded that feed-in tariffs (FITs) for renewables must be banned from 2017 because they distort competition. On the other hand, it has concluded that FITs for nuclear can continue until 2058 because they do not distort competition.

Before his nomination, European Commission (EC) president-elect Jean-Claude Juncker said he wanted “to reform and reorganise Europe’s energy policy into a new European Energy Union”. He added: “I am neither in favour of nuclear, nor in favour of fracking, because I think it leads to environmental problems we cannot afford. That is the wrong way”. Moreover, “I want the EU to become the world number one in renewables.”

If these are his priorities for a future EU energy policy, he cannot be satisfied by recent decisions made by the institution he is taking over. In the past year, the current college of commissioners have made unilateral competition policy decisions that seem incompatible with Juncker’s energy objectives. Not since the 1997 EC White Paper on renewable energy has political uncertainty been greater.

Wednesday, 8 October was a remarkable day in Brussels. In the morning, outgoing competition commissioner Joaquín Almunia announced that the Hinkley Point nuclear power station, planned by EDF in the UK, would cost £24.5bn ($39bn) to build €8bn more than the French company had been communicating until then. The total cost, Almunia said, would be 34 bn, or 10.6m per MW.

He added that the £17.6bn feed-in tariff (FIT) that the UK is planning to pay EDF, and the government’s credit guarantee, could not be considered incompatible with EU state aid rules and would not distort competition; and this ruling would not “put any kind of obstacle to the Energy Union project”.

On the same day, the person selected by Juncker to lead that Energy Union, Bratušek from Slovenia, was rejected by the European Parliament in a 112-13 vote. In an extraordinarily bad performance during her earlier nomination hearing, Bratušek had been unable to shed any light on the Energy Union and what she would actually do as EC vice-president in charge of the policy. Thus, it remains an open question what exactly the Energy Union is and how the Hinkley Point subsidy will not be an obstacle to achieving it.

Four commissioners, including Connie Hedegaard (climate action) and Janez Potočnik (environment), reportedly voted against the decision to allow the £17.6bn subsidy, and the Austrian government has threatened legal action against the EC ruling.

Earlier this year, Almunia’s own staff had questioned the level of the FIT, the need for indexation and the credit guarantee. These “have the potential to distort competition and affect trade between member states”, they wrote. The EC also pointed out that the lack of a tender for Hinkley Point could “lead to violation of Article 8 of the Electricity Directive”.

Remarkably, all these concerns had vanished when Almunia presented his decision on 8 October. Even more remarkably, he insisted that an inflation-adjusted FIT for 35 years that starts at £92.50/MWh and reaches £279 in 2058 would not in itself make Hinkley Point commercially viable. For anyone to undertake the project, the FIT would have to be combined with: a credit guarantee; compensation for curtailment; protection from any increase in insurance costs; and compensation for shutdown caused by future political decisions.

Almunia also insisted – and this must come as a surprise to onshore wind developers – that no renewables technology would be competitive under similar conditions: “In all cases, from all perspectives, the support for renewables is higher than for this case.”

That is an astonishing statement, given that from 2017, UK onshore wind will receive an FIT of 90/MWh, which is not gradually adjusted for inflation and which lacks the additional compensation features for Hinkley Point.

Perhaps the oddest statement made on 8 October came from the UK Department of Energy and Climate Change, which said the contract would be offered to EDF only if the government considers it to be “value for money and in line with our policy of not giving support to new nuclear unless similar support is also made available more widely to other types of generation”.

What completes the confusion is that only three months ago, Almunia issued measures banning member states from introducing the same kinds of FITs for renewables after 2017. Those measures also demand that new renewables projects must be subject to tenders, and signal that subsidies to “grid-competitive renewables” would be phased out after 2020.

The current commission has concluded that FITs for renewables must be banned from 2017 because they distort competition. On the other hand, it has concluded that FITs for nuclear can continue until 2058 because they do not distort competition. It will take some effort from Almunia’s successor as competition commissioner, Denmark’s Margrethe Vestager, to explain that logic. She is from a country that pays onshore wind a non-adjusted FIT of 78/MWh (£50/MWh) for ten years.

The outgoing commission keeps insisting that all its efforts on energy and climate policy are intended to ensure investor confidence, stability, predictability and a common energy market. Never has Europe seemed so far from those objectives.

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EU 2030 triple-target “could save 21 billion”

merkel_gabrielGermany, Denmark and Portugal renewed calls for the EU to adopt binding 2030 targets for renewables, energy efficiency and greenhouse gas (GHG) reductions at a crucial Heads of State meeting next week as a new study claimed an ambitious triple-goal approach could save up to €21 bn ($26.6 bn).

The three nations revealed their positions at an event yesterday in Brussels hosted by the German Federal Ministry for Economic Affairs and Energy.

Their call came as two new studies confirm that a triple-target approach will lead to significant cost savings, compared to a single GHG target, because focused measures for efficiency and renewables will reduce uncertainty for investors – which in turn reduces the cost of capital and thereby overall system cost.

One report from Germany’s Fraunhofer research institute, released at the event, concludes that the economic impact of adding a 30% share of renewables and efficiency results in total system cost savings of up to €21bn ($26.6bn), compared to a single GHG reduction target, in which renewables would only reach 27%.

Moreover “a renewable energy target of 30% does not lead to higher average electricity generation costs,” according to the report, because the dedicated targets “reduce risk premiums, financing costs and support costs”.

A second report presented by Pantelis Capros from E3Mlab in Greece arrives at a similar conclusion, using the European Commission’s PRIMES energy model.

“By setting a reliable framework, the overall financing costs can be significantly reduced. Therefore overall energy system costs of achieving the additional targets are lower compared to a scenario without specific targets”.

The German and Danish positions are identical. Both governments call for a 40% reduction in domestic GHG emissions; a binding 30% target for renewable energy; and 30% efficiency.

Portugal’s ambition level for renewables is significantly higher. It wants a binding 40% renewables target and an additional target to increase the level of grid interconnection between the 28 member states. “Only with binding targets can we get the results,” secretary of state Paulo Lemos said yesterday in Brussels.

“With binding targets, industry can perform. Portugal’s investments in renewable energy have paid off in the form of reduced [energy] imports. That has a big impact on Portugal’s balance of payments.”

“We need investor certainty. If we act hesitantly, the risk premiums will go up and the cost for consumers and industry will go up,” director of the Danish Energy Authority, Morten Bæk, added.

“Europe needs to invest billions in energy and power plant. Renewable energy and efficiency are the lowest cost options and they offer the highest returns,” said Rainer Baake, state secretary at Germany’s Ministry for Economic Affairs and Energy.

“It is not an issue of technology. We have the technologies and we have sufficient solar and wind resources to power, even a large industrial economy such as the German. It is not an issue of cost, either.

“Gas cost more or less the same as PV and wind. And looking at the UK’s Hinkley decision, I think the cost of nuclear energy in the UK will be 50% to 100% higher than renewables in Germany. ”

Baake added: “I don’t know how many nuclear reactors they will build in the UK before the consumers starts complaining about cost. Germany wants competitive electricity prices and it is a question of the right market design.

“That is why we have an interest in organising things in the best way with our European neighbours and partners. For that we need long-term targets.”

While Germany’s minister for Economic Affairs and Energy, Sigmar Gabriel, has already supported the 30% renewable energy target, Chancellor Angela Merkel has not yet thrown her weight behind the 30% renewables target.

Sources tell Recharge that her cabinet is reluctant to put their boss in a situation where she could potentially lose face.

However, the Chancellor’s full support would be needed for Europe to adopt a 30% renewables target.

A draft version of the Council Conclusions dated 13 October, includes a target for renewables of “at least 27%” and an indicative efficiency target of 30%.

 

Published in Recharge, 15 October 2014

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Not too fast, Germany…

Even the German government proved unable to keep up with the rapid cost reductions and the resulting exponential growth in PV installations in recent years.

Even the German government proved unable to keep up with the rapid cost reductions and the resulting exponential growth in PV installations in recent years.

A new, revised German renewables support framework will just have taken effect when the wind energy sector gathers at the Wind Energy Hamburg expo later this month. Once again, the German government has adjusted its main renewable energy policy instrument – the EEG; once again support has been reduced; and once again, surprisingly, the market seems to have received the policy changes with muted satisfaction, despite the simultaneous introduction of a 2,500 MW cap on annual onshore wind installations and dramatically reduced targets for offshore wind energy.

For the past 15 years the same story has been repeated in Germany: the Government signals changes; the industry expresses wild disagreement and concern; and when the dust settles, everybody seems reasonably satisfied. That is a remarkable policy achievement, considering what goes on in wind energy policy in other corners of the world these years.

Germany was never the most exciting wind turbine market. Since 1999, a reasonably safe bet to make was that ‘Germany will install 2,000 MW of wind capacity next year’. Annual installations have kept within a band of 1,500 MW and 3,200 MW (last year) without any dramatic ups, downs, booms or busts for the past 15 years.

German land-owners, manufacturers and turbine owners have made decent returns on their investments in the German market over the past 15 years. Some have even made very decent returns, if they managed to invest during the narrow window after technology cost had come down and before the feed-in tariff was adjusted. But few in Germany have made exorbitant profits from their wind energy investments, compared to the risk they undertook. Changing governments have been excellent at maintaining coherence between the level of the feed-in tariff and the cost of producing wind power in Germany.

The most recent incarnation of the German feed-in tariff bears little resemblance to the first one (the Stromeinspeisungsgesetz) introduced in 1990 – the year of German reunification – and to the first version of the EEG that replaced the Stromeinspeisungsgesetz in 2000. Despite the relatively frequent changes to the system, Germany has managed to maintain investor confidence and minimise the perceived political risks. This has kept financing cost relatively low and avoided the devastating effects of the boom-bust cycles that have characterised many markets in the past. No other market in the world has displayed such stability. Perhaps one reason for the success is that development did not happen too fast.

Denmark increased its share of wind energy from 1.9% to 8.7% of electricity consumption during the 1990s while Germany modestly went from zero to 1% by 1999. But while Germany comfortably installed its average 2,000 MW per year in the first decade of the century, Denmark went from a peak of 637 MW in 2000 to practically nothing in the five-year period 2004 to 2008.

In Spain, wind energy met 23.2% of total demand in the first half of 2014, beating all other technologies, but in terms of new installations, Spain is entering into a gloomy period that could be as long as the Danish one from a decade ago. According to Spanish Wind Energy Association AEE, the country installed only one 80 kW turbine on commercial terms in the first half of the year.

Naturally, these country examples do not compare one-to-one. In Denmark the rapid built-up was caused by falling technology cost and a feed-in tariff that was too slow to react, combined with a shift in government. In Spain, the wind energy boom coincided with a massive built-out of gas power plants just prior to the decline in energy demand, caused by the economic downturn, which eventually killed both markets. The United States is another curious case: It has had the same, almost unchanged federal policy in place since 1992 – the 2.3 UScents/kWh Production Tax Credit (PTC). Here the problem has not been policy changes but the US Congress’ inability to extend the measure in good time before it expired.

What makes Germany different? How has the country been able to maintain stability for 15 years? Well, the Spanish and the Danes might suggest that we should wait until Germany reaches a quarter of its power from wind energy before applauding it. They would have a point. However, a recent analysis by the German Association of Energy and Water Industries (BDEW) estimates that Germany reached 28.5% renewable electricity consumption in the first half of 2014, of which more than 18% was variable renewables (11.6% wind energy and 6.8% PV).

Over a long period of time, Germany has been better than any other country at adjusting what is inherently a relatively inflexible support mechanism to changed circumstances in the marketplace. Nevertheless, even the German government proved unable to keep up with the rapid cost reductions and the resulting exponential growth in PV installations in recent years. The country added 7.5 GW of solar power annually in the three-year period from 2010 to 2012.

In a recent study, Fraunhofer ISI estimates that realized onshore wind energy profits in Germany were €750 million in 2012. Realized PV profits were almost three times higher at €2.7 billion, although almost twice as much wind power was produced compared to PV. Consequently, the 1 August revision of the EEG contained steep cuts to the PV sector. Allowing excess profits over a short period of time, prevents many future investors from making decent returns for a long period of time and does nothing good to any sector’s long-term prosperity.

Had the German government lost its touch of keeping technology cost in reasonable sync with remuneration? Probably not, but the changes in conditions simply came to fast and at too large a scale for timely intervention, which inherently is the challenge of the feed-in tariff model.

The great thing about feed-in tariffs is that they are predicable and lowers the cost of capital and thereby the cost to consumers of developing a cleaner and smarter energy system based on capital-intensive renewables. The problem with them is that the political risk inherent in the system adds a premium and that cost can spiral out of control in the well-intended efforts of avoiding retroactive measures at (almost) all cost, as Germany has insisted.

Germany’s energy transition – the Energiewende – is the most ambitious attempt of any large industrialised nation to replace nuclear energy completely, and fossil fuels more gradually, with renewables and efficiency. Shifting German governments have, time and time again, insisted on maintaining a low political risk-premium through a coherent and consistent policy approach. The problem facing Germany going forward is that factors out of the government’s control are increasingly affecting the perceived risk of investing in German renewables, including the effects of EU regulation on the EEG.

Another external factor is that political risk is on the rise in many markets these years and that the risks spill over into other markets. It is not that long ago that the political risk-premium of investing in Spanish renewables was at a similar low level to that of Germany. If Spain could change overnight, many investors worry, what prevents Germany from doing the same? Therefore, the German government can no longer automatically assume that political risk can be contained as long as it continues its consistent approach to policy.

 

There must be a smart way to square the future renewable energy policy circle. If there is, my bet is that Germany will be the first to propose it.

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28 shades of black

Any nation can run the renewables support system it wants - as long as it is an auction.

Any nation can run the renewables support system it wants – as long as it is an auction.

“Any customer can have a car painted any colour he wants, so long as it is black,” Henry Ford, founder of the Ford Motor Company, said in 1909, referring to his Model T. The EU seems to be adopting a similar approach to renewable-energy support mechanisms in its member states.

All focus in the Brussels renewables community is on whether the October summit of the 28 European heads of government will adopt a 2030 EU target for renewables, and if so, whether this target will be 27% or 30%. But more complicated – and less transparent – issues have arisen, which might have escaped the attention of Europe’s leaders.

The majority of EU governments want national control over the choice of support mechanisms to promote renewables within their borders. In reality, that control has slipped through their fingers even before the issue has been debated. From 2017, with some exceptions, only national support mechanisms based on competitive tenders will be approved by the European Commission (EC), according to new Environmental and Energy State Aid guidelines issued on 9 April this year.

To adapt Ford’s words, the commission’s new state aid principle seems to be: “Any country can run the renewable-energy support mechanism it wants, so long as it is an auction”.

So why, if the EC’s decision is final and binding — a decision taken, by the way, without going through the Ordinary Legislative Procedure of the EU — does this matter? Because the state aid guidelines expire in 2020, and EU leaders can influence what comes afterwards with the decisions they are about to make on the 2030 framework.

The Gordian knot for the renewables sector is that, although most EU leaders want national control over their support mechanisms, very few of them want national targets for renewables to be established by EU legislation, as was the case in the existing 2020 directive.

But as things stand after the EC’s intervention in April, national control over the type of renewables support can be achieved after 2020 only if the overall binding EU renewables target (whatever it turns out to be) is broken down into 28 national targets. In effect, EU competition rules can crack down on national mechanisms with greater ease if no national targets are in place. Therefore, the words of the many member states insisting on control over their regulatory framework have little meaning unless they are combined with a call for national targets.

The heads of government must be made aware of this before their October summit, if they are to make an informed choice about their continent’s energy future. Unfortunately, they are unlikely to be told by their energy ministers, since they were not consulted on the recent changes in state aid rules. It is a competition and treaty issue.

The EC deserves full credit for having initiated the 2030 climate and energy debate in good time before the 2020 legislative framework runs out. It has done so in recognition of the fact that long-term regulatory stability and predictability is critical for investor confidence and cost-effective energy investments. In this light, it is difficult to accept that a decision by the same commission’s competition branch now casts serious doubt, not only on the post-2020 regulatory frameworks in Europe, but on all existing renewables frameworks in every EU country, between now and 2020.

It took the EC’s Directorate-General for Energy more than ten years to conclude that fixed-premium mechanisms were likely to be the most effective and efficient instrument, if designed right. It should not be too much to ask that the Commission now makes clear to member states and other stakeholders why tenders are suddenly the best way of reaching Europe’s mandatory renewables targets.

At the same time, the commission should put its cards on the table if it believes that the time is ripe for an EU-wide harmonised support mechanism, or if it believes that such a mechanism is the only thing compatible with the union’s competition rules. It would serve the EC well to propose a European solution upfront, rather than telling countries what not to do while creating a de-facto harmonisation through competition policy decrees.

Henry Ford’s customers were eventually given a real choice. The same courtesy should be extended to the 28 EU leaders and their co-legislators in the European Parliament when it comes to energy. And it should consider that the vast majority of the 500 million consumers they represent prefer green over black.

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Moving closer to an EU energy union

New Commission president: “Energy efficiency and renewables are of paramount importance. (...) I am neither in favour of nuclear, nor in favour of fracking, because I think it leads to environmental problems we cannot afford. That is the wrong way.”

European Commission presidential candidate: “Energy efficiency and renewables are of paramount importance. (…) I am neither in favour of nuclear, nor in favour of fracking, because I think it leads to environmental problems we cannot afford. That is the wrong way.”

“People only accept change in necessity and see necessity only in crisis.” These were the words of Jean Monnet, chief architect of European integration. Thirty-five years after his death, this guiding principle still applies to European policymaking.

In the light of May’s parliamentary elections, which sent a record number of Eurosceptic politicians to Brussels, it can be debated whether the European people yet see the necessity of change in the form of ever closer integration.

Nevertheless, their elected representatives in the European Council certainly seem to move faster towards common European solutions when a crisis is knocking on the door.

This was true for the establishment of the European Coal and Steel Community in 1951; it was true with the eurozone banking union; and it was true when 28 heads of government unanimously agreed on the 2020 climate and energy targets, after Russian-Ukrainian disputes disrupted gas supplies to European consumers in 2006.

That is why Europe is now, at the peak of the Ukrainian crisis, closer than ever before to building a true energy union. In EU political terms, a union means that certain areas of energy policy would be made subject to qualified majority voting in the council. Today, decisions on energy require the unanimous consent of all member states.

The Ukraine crisis is the reason that such unlikely partners as Polish Prime Minister Donald Tusk and the Green Group in parliament have both made proposals. Tusk initiated the debate, calling for an energy union in a column in the Financial Times on 21 April. On 8 May, the European Greens called for states to “agree on a common set of policies on energy”.

Unsurprisingly, agreement between them ends there. The Greens want a policy based on energy efficiency and renewables, suggesting 2030 targets for greenhouse gas reductions of 60%, energy savings of 40%, and 45% renewables.

Tusk proposes focusing on gas supplies and creating a common purchasing agency for natural gas, modelled on the Euratom Supply Agency for nuclear fuels. He emphasises that his proposal has nothing to do with climate or environmental policies: “Sometimes, people put this Polish alternative forward as an alternative to climate protection policy or environmental policy, but that’s not at all the case,” he told a conference on energy security in May. “What I have been telling you about here is not in any way related to climate protection or environmental protection policy.”

Tusk believes that the issue of energy security should be kept separate from the debate on a 2030 climate and energy package. Judging by the comments from energy ministers meeting in Luxembourg on 13 June, he does not have much support for that.

Meanwhile, the battle over the successor to European Commission (EC) president José Manuel Barroso is intensifying. The front runner, former Luxembourg prime minister Jean-Claude Juncker, is being publicly challenged by British prime minister David Cameron, who does not want to see this personification of an ever closer union appointed EU chief executive.

Juncker does not have an extensive track record in energy policy, although he too expressed the need for a “real European energy union” during the first in a series of “presidential debates” leading up to the parliamentary elections.

Should Juncker be selected (in the EU system, presidents are not elected) renewables proponents will keep reminding him of the other words he spoke that day: “I am neither in favour of nuclear, nor in favour of fracking, because I think it leads to environmental problems we cannot afford. That is the wrong way.” He also said: “Energy efficiency and renewables are of paramount importance.”

Cameron’s attack may partly be motivated by something Juncker said in a frank moment after the introduction of the euro: “We decide on something, leave it lying around and wait and see what happens. If no-one kicks up a fuss, because most people don’t understand what has been decided, we continue step by step until there is no turning back.”

That is almost an echo of another Jean Monnet principle: “Europe’s nations should be guided towards the superstate without their people understanding what is happening. This can be accomplished by successive steps, each disguised as having an economic purpose, but which will eventually and irreversibly lead to federation.”

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European Court of Justice rules against free trade in renewable energy.

trade barrierThe European Court of Justice (ECJ) today confirmed that EU states are not obliged to make national renewable energy support schemes available to production abroad – a judgment with big implications for the region’s renewable energy sectors.

The ECJ’s ruling goes against the advice of advocate-general Yves Bot who in a January 2014 proposal for opinion,  advised the court to make Article 3,3 of the 2009 Renewables Directive invalid because it restricts the free trade of goods in the EU’s internal market. Article 3,3 explicitly gives the Member States “the right to decide (…) to which extent they support energy from renewable sources which is produced in a different Member State.”

Had the ECJ followed the advice of its Advocate-General, which it usually does, the implications would have been immense for producers of renewable energy in the 28 member states of the EU, who would have been allowed to shop around for the best support mechanism. It would also dramatically have changed national governments’ approaches to renewable energy legislation, as they would likely fear the spiralling cost of having to finance renewables expansion from all over Europe.

After today’s ruling, however, national governments have the ECJ’s assurance that they do not risk having to pay for renewables development abroad unless they explicitly agree otherwise with other member states – as is the case between Sweden and Norway.

For renewables developers, the judgement prevents them from benefiting from the highest payment in the short term. However, they also avoid the policy uncertainties and changes to support frameworks that would most likely have followed an opening up of all national mechanisms.

The judgement – which specifically related to the sale of power by wind producer Ålands Vindkraft from a Finnish island to Sweden – states that national mechanisms do constitute an impediment to the free movement of goods in the Internal Market, specifically to imports of electricity. However, it is the ECJ’s view that the Directive’s objective of promoting renewables justifies the trade barrier.

 

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More balance needed

power-lines-and-steamin-001At noon on 11 May, nearly 75% of Germany’s electricity supply was supplied by renewables – 67% came from PV and wind power alone. More impressively, in the first quarter of 2014, 27% (40.2 TWh) of the electricity supply came from renewables in Europe’s largest economy. 

Impressive as these figures are, they are not world records. Denmark, admittedly a far smaller economy, produced 33.2% of its electricity from wind power alone in 2013. Wind power met 54.8% of demand in December and during one hour on 1 December 2014, wind power’s share of demand was 135.8%, according to Energinet.dk.

2013 became the first year in which wind power was the largest contributor to electricity demand in Spain (21.1%), marginally beating nuclear power (21%), according to grid operator Red Eléctrica. Renewables as a whole, contributed 42.4% to Spain’s power demand last year – an increase of more than 10 percentage points compared to 2012, which came at the expense of coal (down 27%) and gas (down 34%). Wind power now meets 8% of EU electricity demand and 4.1% of demand in the United States. The switch away from fossil fuels and nuclear power is certainly accelerating these years.

Over the last 20 years, opponents of renewables have used three main arguments against deploying renewable energy technologies: they are too small to matter; they are unreliable; and they are too expensive. The cost argument against renewables is rapidly being eroded as both PV and onshore wind is becoming fully competitive with fossil fuels and far cheaper than nuclear energy.

Nobody can credibly argue that renewable energy is small scale when they supply more than a quarter of the electricity in the world’s fourth largest economy (Germany). It is also difficult to argue that (variable) renewables will cause blackouts when the Danish power system can absorb 136% of total demand for electricity.

It is not a big technical challenge to manage annual shares of 5-10% variable renewable electricity, as pointed out by the International Energy Agency (IEA) in a February 2014 report on the subject. The report went on to conclude that annual shares of 25-40% variable renewables can be achieved with current levels of system flexibility and that this share can increase to 50% in flexible systems such as the Danish, if a small amount of curtailment is accepted during extreme variability events.

While the record-breaking numbers undeniably show that it is indeed possible to manage a power system with very high shares of variable renewable electricity, we are approaching the point where variable renewables are beginning to absorb most of the existing power system flexibility in some markets. In a recent analysis, system operator Energinet.dk expects wind power to meet 58 per cent of Denmark’s power demand in 2020 – six years from now. Germany’s goal is for renewable electricity to provide 80 per cent of demand in 2050.

We must take the warnings on grid reliability and system integration seriously. We must acknowledge that the first 25% is technically much simpler to reach than the next 25%. And we must recognise that additional power system flexibility is needed much sooner than most of us expect.

At EU level, the renewables sector – and European decision makers – have a tendency to expect that the integration challenge can be solved with a European Supergrid, consisting of large HVDC transmission power lines. However, more than 80 per cent of all renewable energy installations in Europe are connected to the distribution grid, as EDSO for Smart Grids, the association of European Distribution System Operators, points out. About a quarter of the electricity must come from non-large hydro renewables by 2020 for the EU to meet its existing binding 2020 targets – more than twice as much as today.

Let us build all the cross-border transmission lines we can gain public acceptance for, but the electricity still needs to get to the consumer. As 70% of the power is consumed by residential and small commercial and industrial users, the biggest challenge for the renewables sector to address is the integration of technologies in new and actively managed local grids.

The PV sector is currently most active on this front, because it is directly engaging in the market for rooftop solar panels. As wind turbines grew bigger over the past 25 years, the sector increasingly distanced itself from the end user – technically and commercially. But even the electricity from a 500 MW offshore wind farm that is fed into a fat HVDC transmission cable will end up in a distribution grid, which must become more actively managed to cope with the immediate future’s increase in variable renewables.

It is not a question of supergrids versus smart grids. We desperately need both. However, too little attention is given to demand response and storage solutions at the distribution level. The latest evidences came with the European Commission’s draft State Aid guidelines and the unsuitable Connecting Europe Facility eligibility criteria, which make distribution level finance close to impossible.

It is in the interest of all renewable energy industries and designers of energy policy to address all potential future bottlenecks on the long road from power plant to end user. If we are to meet current ambitions and continue to break records, we cannot blindly add generating capacity and raw copper to the system, without providing more intelligent, IT-based demand response and storage solutions to the distribution level.

80 per cent of the renewable capacity is installed at distribution level and most of the consumers are connected at the distribution level. Still, at European level, 90 per cent – at least – of the attention is on the transmission system. More balance is needed.

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EU policymaking by diktat

It was not a pretty democratic process when Mr. Putin was elected, but at least there was a process. Who elected you, Mr. Barroso?

It was not a pretty democratic process when Mr. Putin was elected, but at least there was a process. Who elected you, Mr. Barroso?

Let’s say you want to end most of the renewable energy subsidies in Europe and dramatically change the rest. Let’s say that you want to do it fast. Let’s say you want to make it legally binding. Let’s say that you do not want too much publicity. And let’s say that you want to do it without having to ask any elected representative of the people that your action will affect.

It sounds like an impossible task – at least if you are in an area of the world with a minimum level of democracy. In the United States, the process is called an Executive Order and is issued by a directly elected President. In Europe, the process is called Revision of State Aid Guidelines for Environmental Protection and Energy and is issued by a European Commission, elected by – nobody.

On 22 January, the European Commission issued its package of energy and climate documents that in themselves have no effect on legislation, except for a legislative proposal relating to the EU Emissions Trading Scheme (ETS). In the days leading up to the publication, the media had been filled with headlines about the position of the EU countries, industries and speculation about renewable energy, CO2 and efficiency targets for the period after 2020. All major media outlets were in place that day in the Commission headquarters in Brussels and filed front-page stories about the likely direction of Europe’s energy and climate future.

Less than three months later, on 9 April, Competition Commissioner, Joaquín Almunia, in an almost empty Commission press room, published a set of new Guidelines, which effectively give Member States the choice between two forms of support for renewable energy: set up a market for trade in green certificates without technology differentiation or promote renewable energy through auctions. By handing the task of ending European feed-in tariffs and premiums to the competition branch of the Executive, negotiations were kept behind closed doors, without much scrutiny from the press and without any scrutiny of member states, the European Parliament or any other democratically elected institution.

With the guidelines, which take effect on 1 July this year, the Commission has singlehandedly ended a 15-year old debate over which is the most effective and cost-efficient way for Member States to support renewable energy in Europe. According to the State Aid Guidelines, the most cost effective ways are green certificates and tenders. This is a view that is not documented in any of the many communications, reports and analysis issued by the Commission’s energy services over the past 15 years. The energy services of the Commission has gradually been moving towards favouring feed-in premiums over the past years.

Ten economics professors warned the Commission that the changes would danger short-term efficiency and increase the cost of financing. “They advantage incumbents, create barriers to new entrants, and raise the cost of meeting the renewable targets,” the professors wrote to Energy Commissioner Günther Oettinger and Competition Commissioner Joaquín Almunia on 24 March. Similar concerns were raised by European governments in letters to the Commission, including from Sweden, which runs exactly such a technology neutral certificate system that the Commission seems to favour with its guidelines.

“One important point we would like to emphasise is the need to preserve the principle of each Member State’s right to design its own energy and environmental policy. It must continue to be possible for Member States to choose their preferred aid instrument, as long as the overall framework is respected,” the Swedish Energy Ministry wrote on 14 February. Many other countries made similar remarks, regarding Member State control. The Commission largely ignored them.

With the new Guidelines the European Commission is going against the explicit wish of Member States for flexibility; it is violating the 2009 EU Renewables Directive which explicitly allow feed-in tariffs, premiums and other systems a Member State may chose. The Commission undermines both primary and secondary EU law and the countries’ right to decide their own approach to meeting the binding national 2020 targets for renewables. It is even in direct conflict with the EU Treaty’s Article 194, which effectively gives each Member State a veto over EU energy policy. It goes against its own Communication from 2013 on Delivering the internal electricity market and making the most of public intervention and all the talk from Commissioners Barroso, Oettinger and Hedegaard about the importance of national control over renewables, delivered to the international press on 22 January.

Europe certainly needs a discussion on the future framework for supporting renewables. It also needs to discuss whether a single European mechanism would be a good idea. But discussions and decisions must be transparent and follow a normal democratic process. In Europe, Mr. Barosso, that process is called the ordinary legislative procedure. It gives equal legislative powers to the European Parliament and the Member States – it provides no legislative powers to the European Commission.

The European Commission and its President has decided to regulate the energy supply to 500 million Europeans by decree – a process normally used by presidents or monarchs in authoritarian states. So congratulations! You just gave Mr. Putin a great reply for next time EU leaders claim that Gazprom is governed through presidential decrees (which it is). It was not a pretty democratic process when Mr. Putin was elected, but at least there was a process and the people elected him. Who elected you, Mr. Barroso?

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Markets of make-believe

I wonder how much market there will be left on the other side of all the political interventions in the ETS.

I wonder how much market there will be left on the other side of all the political interventions in the ETS.

The EU Heads of State have given themselves about half a year to agree on a EU climate and energy policy framework for 2030. The governments should use some of the time they have granted themselves to provide the public with an answer to a fundamental question: Do you want an internal market for energy or are you happy continuing to pretend that you want it, leaving it to the next government to blame the EU for failing to achieve it?

Meeting in Brussels on 20 March to discuss Ukraine, climate, energy and competitiveness policies, European leaders once again confirmed that completing the internal energy market by 2014 remains a priority. While some progress is being made, a well-functioning European market for energy remains an illusion.

The products operating in the internal energy market are subsidised beyond imagination – directly or indirectly; the down-stream supplies are characterised by cartels, environmental free-riders, political influence and more subsidies; the nature of the infrastructure that carries the products is a natural monopoly, increasingly owned by private companies. Still, everybody insist on calling it a market. It is a market of make-believe, politically designed by make-believers.

Europe has another market that will play an increasingly important role in the European energy markets: the European Emissions Trading Scheme (ETS). Member States, as well as the European Commission, continue to be confused about whether it wants the system to reduce carbon at least cost, or drive investments in clean energy – or do both. Because they have not made that fundamental choice, they are forced to intervene in what was supposed to be a market. The system is so flawed from incoherent compromises and bad initial design that intervention is indeed needed if the system is ever to gain economic relevance beyond accountants, academics and consultants, making almost risk-free profits from the general confusion.

A new Common Agricultural Policy?

It started in the late 1990s with a discussion about whether to allocate allowances for free or make use of auctions – we went for free allocation and, thereby applied a polluter benefits principle in which carbon emitters earned large windfall profits. This design flaw has now largely been addressed.

Europe also had a discussion about whether to dictate prices (a carbon tax) or dictate quantities (a cap-and-trade system) to regulate emissions. We decided on dictating quantities.  When we got the quantity wrong, we considered dictating the price too (floor price). And on 22 January 2014, the European Commission proposed legislation for a “stability reserve” in which we dictate quantities and control prices by managing the supply of allowances in the market.

While the Commission deserves credit for proposing a CO2 target that excludes the use of external credits after 2020 the market starts looking suspiciously like the Common Agricultural Policy or OPEC’s supply interventions in the oil market to control prices. The physical storage requirements are minimal for carbon allowances, so we will not see a return to the “butter mountains” and “wine lakes” of the 1980s, but I wonder how much market there will be left on the other side of all the political interventions in the ETS seven years from now, when the Stability Reserve is planned to be introduced.

There will still be 2 billion excess emissions allowances in 2030, creating a need for intervention unless more effective structural measures are applied to the ETS. Meanwhile the removal of renewable energy subsidies is high on the political agenda while little attention is paid to end fossil fuel and nuclear energy subsidies. “The economic and political consequences of making the wrong choices are potentially enormous,” as Professor Paul Ekins from University College London told the CECILIA 2050 energy policy conference in Brussels in March. We simple cannot spend thirty years getting the markets right.

Two tongues

National governments are praising the virtues of the internal energy market, and the importance of its rapid completion at their meetings in Brussels. Afterwards they go home and undermine the very same market with national energy policies that are incompatible with the internal market and which reach far beyond 2020, in some cases even beyond 2050. The UK is a particularly strange case. Prime minister Cameron vehemently opposes a European approach to renewable energy, arguing that this would be neither cost-effective nor technology neutral. In a letter sent to Commission president Barroso on 4 December last year, he wrote:

“The 2030 climate and energy package provides an opportunity to simplify the existing targets regime from three targets to one. It is essential that we avoid regulation or targets [for renewables and efficiency, ed.] that will force Member States away from their least cost decarbonisation pathway or undermines a level technology playing field.”

At home, his coalition government plans to commit consumers to pay a £17 billion (€21 billion) subsidy, including a 35-year feed-in-tariff for nuclear energy that gradually increases from €111/MWh (£92.50) to reach €340/MWh (£279) in 2058. This can hardly be described as a cost-efficient, technology neutral energy policy option; it is certainly incompatible with a well functioning and undistorted internal market; and it is highly surprising that it comes from a coalition that has signed an unambiguous agreement not to pay subsidies to nuclear energy.

Meanwhile, a debate over feed-in tariffs is raging in Germany. Oddly, the discussion is not about whether or not these are the best way of promoting renewables or whether they are compatible with the internal market – a discussion that would be worthwhile taking soon. The discussion is about whether or not energy-intensive industry should continue to be exempt, at the expense of all other German electricity consumers.

We are coming from a EU energy policy approach where subsidies were provided to develop new renewable energy technologies, justified by the markets’ inability to factor in environmental externalities. Some of those supported technologies – onshore wind and solar PV, in perticular – are now undermining the profitability of fossil fuel operators. European energy policy makers now increasingly respond by seeking to compensate the technologies that are being outcompeted by those who were initially compensated. It is a subsidy spiral without end.

Europe must decide whether it wants a European energy market or continue to allow the gradual renationalisation of energy policy. If it decides to have one, it must stop pretending that we have it all wrapped up in 2014 and start making the necessary decisions to reach the objectives. For the power sector, the starting point is to reduce power sector CO2 emissions by 99% in 2050, as EU Heads of State have already implicitly agreed. The energy and climate policy proposals that are currently on the negotiating table seems far from being able to deliver on that commitment.

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