Are emissions targets curbing the power sector’s contribution to economic recovery in Europe?

euros

In the first of a new feature series, PEi poses a ‘big issue’ question to players in the international power sector.

This month we ask if, in these times of economic austerity, the drive to cut emissions is preventing the power industry from making a stronger contribution to Europe’s economic revival.


Giles Dickson, vice president Environmental Policies & Global Advocacy, Alstom

The link between emissions reduction policies and current levels of economic activity in Europe is hard to define.

The former are driving significant adjustments in capacity: both from the LCPD/IED-driven reductions in SOx and NOx emissions; and from the reductions in CO2 emissions driven by the ETS and the renewables targets. But it’s not obvious that these capacity adjustments are holding back economic activity. Reserve margins remain reasonably healthy, in large part because of the economic slowdown. And there is arguably over-capacity in those countries where growth is weakest.

nuclear

Looking ahead, there are significant uncertainties. What will be the impact on German industry’s energy prices from the closure of nuclear plants? How long will Poland be able to sustain its economic growth on the back of unabated coal plants? Will the European economies be able to deliver the huge investments needed not just in low-emission generation capacity but the ancillary infrastructure needed to support it: grid upgrades and expansion; electricity storage capacity; enhanced demand response; and low-load back-up capacity. At the same time, there are ways capacity adjustments brought on by emissions reduction will benefit economic activity:

  • Investment in emissions reduction generates economic activity, whether it’s new low-carbon (RES, CCS, nuclear) or lower carbon (gas) generation capacity – or the upgrading of existing plants. The engineering and construction of the relevant plants and their ongoing operation and maintenance will in themselves generate significant jobs and growth. As will the investments in grid upgrade needed to integrate renewables. And there are longer-term economic benefits for Europe in the development of technology in these areas that can be exported globally.
  • The upgrading of existing plants to reduce emissions makes them more energy efficient, which reduces unit costs of electricity generated, which is good for the economy.
  • Investment in renewables improves Europe’s energy security and reduces its exposure to fluctuating fossil fuel prices. That’s good for economic stability, inflation and growth. And if increased costs short-term drive energy savings and greater efficiency, then that in itself is good for the economy.

Catherine Banet, associate lawyer, Simonsen Advokatfirma

Cutting emissions will not hamper but stimulate economic recovery in Europe if, and only if, Europe has a coherent and integrated industrial and climate policy. This requires ensuring a level-playing field within the European power sector and giving priority to structural reforms.

Planning these reforms and balancing the costs are key elements. At an international level, it may require designing tools enabling more integration of externalities when foreign competitors have less integrated policies, while respecting the rules of the WTO and continuing the work within the UNFCCC.


Jill Duggan, director of Policy, Doosan Power Systems

Europe has some of the most demanding carbon reduction targets in the world and in difficult economic times it is natural to wonder whether these hamper the recovery. Surely, it could be argued, this is putting extra cost onto businesses at a time when they need it least.

But Europe also has a need to replace and increase its generation capacity. A low carbon world requires more electricity, not less, and the UK, like many parts of the world, is losing around 20 per cent of its existing capacity over the next 10 years as old coal and nuclear generators are decommissioned. This requires investment, and if the UK is to meet its carbon reduction targets, new power plant should be capable of being carbon free by the 2030s.

The transition to a decarbonised power sector offers opportunities to develop skills and experience in new nuclear, CCS, offshore wind, sustainable biomass and other technologies that will contribute to a decarbonised economy.

Without targets in place, there will be little investment and therefore fewer jobs created and the development of these technologies will take place elsewhere in the world. There will be an incentive for a dash for unabated gas, which will make the future transition to low carbon more difficult and costly.

Investing in decarbonisation of the UK power sector now offers an opportunity, in these difficult times, to build up these skills and experience at a lower cost than will be available to us in the future. But it is important that the government creates the environment in which companies can take advantage of the very real advantages that the UK has in this area.


Jonathan Robinson, senior energy consultant, Frost & Sullivan

I don’t believe so, no. The largest investments for emission reduction technology were for flue gas desulphurisation (FGD) systems and the vast majority of these occurred prior to the recession or at least were almost completed when the downturn started.

Selective catalytic reduction, which is mandated by the Industrial Emissions Directive, is approximately 20–35 per cent of the cost of FGD and utilities have had plenty of time to plan when and whether they fit this technology.

The closure of nuclear power plants in Germany (which cost RWE and E.ON a substantial amount in lost revenues) has had far more of an impact, as has the high oil price, which has increased wholesale gas prices.

The biggest barrier to economic recovery in Europe is the weak economic performance of many Member States. If confidence returns, Europe has plenty of spare capacity that it can bring on line to provide extra power; there are a number of gas fired plants that are running below the ideal operational capacity.


Dr Tim Fox, head of Energy and Environment, Institution of Mechanical Engineers

It’s a difficult conundrum. If you imagine a world in which we had no understanding of climate change and had no sense of a need to do anything about it, then obviously the way in which we would have moved forward from this point would have been very different. You could say that it would be an easier, less complex situation and companies would have started making investments on the basis of pure market opportunity, because we have a power generation fleet of which 25 per cent is about to come off line and there is a clear commercial opportunity to replace it.

coal plant

But a hiatus has been created by the need to invest to secure power supply to the customer versus the need to satisfy our low carbon aspirations. It is quite clear that if we didn’t have those low carbon aspirations we would be moving forward by now, so in that respect it is a brake on progress. But on the other hand, it’s a valid brake because this country has shown leadership in a low carbon agenda globally and it needs to be balanced some way in difficult times.

“In essence the government is between a rock and a hard place. The UK Climate Change Act 2008 does not put an obligation on industry to create commercial markets for low-carbon technologies, it puts a legal obligation on successive UK governments to create frameworks, regulatory environments and mechanisms to ensure that those markets emerge. It is what drives the setting of decarbonisation targets, such as an 80 per cent reduction by 2050, but if markets and industry don’t deliver there is no penalty.

So the government needs to do what it is obliged to do and create the frameworks and environments that make it sufficiently attractive for industry to deliver, a task made more difficult for them in the absence of a robust, tenable and realistic international carbon price, or repeal the act. Both are very painful to do, the latter on political grounds, the former for economic reasons with the country in recession.”


Darren Walsh and Ian Wood, partners, DLA Piper

The drive for power plants to cut emissions is a function of the emission reduction targets in the Kyoto Protocol. Within Europe, the UK is leading the way with the planned introduction of the Emission Performance Standard, limiting the amount of emissions new fossil fuel generators can emit. This will stop any new coal fired power stations without proven CCS technology. In addition to EPS, European countries have or will introduce other measures to encourage decarbonisation of the power sector, by encouraging cleaner and greener forms of generation.

These measures will dramatically restrict investment in new fossil generation. According to the World Energy Council, fossil fuels account for more than 80 per cent of global primary energy. Limiting investment in such infrastructure projects will likely impact on economic recovery in Europe. However, we will see development and investment in new technologies, such as CCS, flue gas desulphurisation and selective catalytic reduction, together with the utilisation of alternate fuel sources such as biomass, contributing to economic recovery.

New technology comes at a cost, which absent subsidies (illegal as state aid but possibly permissible as “incentives”) ultimately trickle down to the consumer, limiting consumer spending in other areas, affecting economic recovery in other ways. However, as the turbulent UK nuclear new build sector serves to demonstrate, there are factors outside of carbon emission reductions that play in investment decisions and thus it is almost impossible to know just how much limited capital investment in power generation across Europe will affect economic recovery.

What is clear, however, is that reduced investment in new generating capacity will affect Europe’s ability to trade long term as we face the spectre of power outages and a lack of security of supply, with greater dependency of non-European Union gas supplies.