‘If Europe does not get its energy policy right, THE economy as A whole suffers’

NASA
Europe’s energy supplies must remain affordable, competitive and secure
Credit: NASA

While an intelligent transformation of the energy system is desirable – if not vital – it must ensure that European power supplies remain affordable, competitive and secure, writes Eurelectric’s Secretary-General Hans ten Berge

The transition to a decarbonized economy requires dramatic changes to Europe’s electricity system: from a world of large-scale generation to one in which power generation is becoming more decentralized, greener – but also more dependent on the availability of sufficient wind and sun.

This change requires massive investment: €1 trillion by 2020 according to the International Energy Agency. Yet the transition is not happening smoothly. While wholesale prices have stabilized, prices for households and for small and medium-sized businesses are skyrocketing. The value of our companies is deteriorating, political and regulatory uncertainty is high and security of supply is at stake. Action is needed, and it is needed now.

The European power sector, as represented by Eurelectric, says ‘yes’ to an intelligent transformation of the energy system: one that makes it cleaner, smarter and more sustainable. But in the interest of our customers and the European economy as a whole, European energy supplies must also remain affordable, competitive and secure.

The new energy system should be implemented at the lowest possible cost. New legislation should demonstrate that it does not unnecessarily increase the financial burden for European customers. It is thus vital that all policy proposals are subject to a rigourous cost-impact analysis, including how any impact flows through to the customer bill.

This is particularly important as the EU prepares its energy and climate policy framework for 2030, which will replace the framework in place until 2020. If there is one lesson we can draw from today’s framework, it is that having too many policy instruments in place greatly increases the risk of unanticipated interactions between them.

Renewables growth, which today is often driven by costly and market-distortive national support schemes at the expense of the more cost-efficient EU-wide Emissions Trading Scheme (EU-ETS), is a case in point. The result is that targets are met – Europe is broadly on track to meeting both its emissions reduction and renewables targets – but in a much more costly way than need be the case.

Before looking ahead to the changes needed for the EU’s 2030 policies, however, it might be useful to take a step back and assess where we are in Europe today. Each year Eurelectric publishes Power Statistics and Trends, a collection of data on power generation and electricity sector trends provided by its members. Power Statistics and Trends 2013 showcases the most significant developments in the period 2010-12 and provides an outlook of major trends up to 2030. The full report also includes data from 1980, 1990 and 2000, enabling a view of the electricity sector’s evolution over three decades.

Findings from the 2013 edition highlight several trends in Europe for 2012. They include stagnating electricity demand, stationary CO2 emissions and a shift among fossil fuels from gas-fired towards coal-fired power generation. The data also show that the generation mix in Europe is changing: in 2012 fossil fuel-fired generation for the first time accounted for less than half of total EU-27 generation. But the expansion of renewables is going hand in hand with an expansion of coal-fired generation, undermining the progress that Europe has made towards decarbonization.

Total generation in the EU-27 increased marginally in 2012, after a remarkable decrease of 5 per cent in 2011. The increase was largely based on continued renewables growth. In fact, fossil fuel-fired generation decreased by 4 per cent and.

Natural gas-fired power generation accounted for the lion’s share of the reduction, decreasing by 23 per cent (165 TWh).The significant drop in the use of gas occurred mostly to the benefit of coal. While overall generation by conventional technologies decreased, coal-fired generation increased by 13 per cent (70 TWh).

Meanwhile, the share of renewables continued to increase: generation from renewable resources grew by 7 per cent compared to 2011.

Nevertheless, the expansion of renewables in Europe slowed in 2012, following changes to government support schemes in several European countries: in 2012, renewable capacity expanded by only 11 per cent, compared to 15 per cent in 2011. Renewable energy sources generated 22.3 per cent of EU electricity in 2012. By 2020 they are predicted to be the second largest component of the EU energy mix, accounting for 34 per cent of total generation.

Last year will also be remembered as the year during which affordability and competitiveness were propelled to the fore of the energy policy debate. Surging bills, electricity price freezes or price brakes have become common vocabulary in the repertoire of policymakers, industry representatives and citizens alike. With household bills on the rise, public opinion often assumes that Europe’s utility companies must be overcharging their customers.

For the first time, the report therefore contains an analysis of retail electricity prices in Europe, based on data from the Commission’s statistics office Eurostat. The data show that, contrary to popular perception, electricity companies are not the prime culprits for rising household bills. Instead, the analysis highlights that taxes and levies increasingly weigh on power bills, growing faster than any other price component. Price components stemming from taxes and levies have grown three times faster than others, and now account for more than a quarter of the average household bill.

Moreover, while the EU-28 average increase stood at 29 per cent, some Member States actually experienced significantly larger rises of the tax component. Among those, the biggest increase was recorded in Latvia (394 per cent), followed by Portugal (108 per cent), Greece and Estonia (both at 82 per cent), Romania (80 per cent), and Spain (74 per cent).

Energy is a major EU economic policy. It fuels growth in living standards and is the backbone of a healthy economy. If Europe does not get its energy policy right, ultimately the economy as a whole suffers. Policymakers must therefore take particular care to avoid policy-induced inefficiencies and market distortions that unnecessarily push up the costs of providing electricity and raise the bills for Europe’s customers. In doing so, they will allow customers to regain trust in the energy sector and play their part in tomorrow’s new energy world.

Eurelectric therefore earlier this year released a ‘manifesto’ setting out the major political issues on which the electricity industry would like to see progress within the next 12 months. Adopted by the Eurelectric Board of Directors on behalf of the electricity industry in 31 European countries and presented to EU energy commissioner Gàƒ¼nther Oettinger in February, the manifesto draws on lessons learnt from the current policy framework. It calls on national and European policymakers to adopt a more coherent and European approach to energy and climate policies, so as to reduce those policies’ costs while increasing their impact.

Titled Manifesto for a balanced, more efficient European energy policy, the document lists a series of actions that policymakers should take to deliver “power for a competitive Europe”. Crucially, European and national policymakers should take measures that would “re-orient energy policy towards cost-efficiency and competitiveness”. Suggested measures are grouped under three themes: delivering cost-efficient, competitive energy for Europe’s businesses and customers; securing supply through competitiveness and innovation; and reducing environmental and climate impact.

In particular, the manifesto calls on policymakers to:

1. Pursue decarbonization: opt for a minimum 40 per cent greenhouse gas reduction target by 2030 and reform the ETS by increasing the annual linear reduction factor before 2020:

  • Adopt an economy-wide, binding 2030 greenhouse gas reduction target of at least 40 per cent compared to 1990;
  • Strengthen the EU-ETS: increase the annual linear reduction factor in the region of 2.3 per cent before 2020, and make the EU-ETS auctioning more robust;
  • Extend the ETS to other CO2-emitting sectors of the economy after 2020;
  • Promote the use of electricity in transport, heating and cooling, e.g., by reviewing the conversion factor used in the Energy Efficiency Directive, which today penalizes the use of low-carbon electricity compared to other energy sources.
Gàƒ¼nther Oettinger
European energy commissioner Gàƒ¼nther Oettinger received Eurelectric’s manifesto this year
Credit: EU

2. Revisit our market environment: restrict market intervention to limit uncontrolled costs and threats for security of supply:

  • All generators, including low-carbon generators, should sell their production to the market and carry out the same obligations. Support should be progressively phased out moving towards 2020 and beyond, respecting existing contracts;
  • Generation adequacy should be assessed at least at a regional level to avoid major market distortions. Capacity remuneration mechanisms, where implemented, need above all meaningful regional/EU co-ordination, and should be market-based, technology neutral and non-discriminatory;
  • The process of market integration needs a rebirth: implementing the existing legislation and all related technical rules is urgently needed;
  • Promoting competitive and flexible markets will allow CCGTs to act more flexibly and help ensure the smooth integration of renewable energy into the electricity system;
  • Enabling framework conditions and adequate infrastructure need to be put in place to safeguard security of low-carbon supplies. Markets might need some adjustments, above all with a focus on the longer term. It is necessary to promote cross-border trade, increasing interconnections where required.

3. Empower our customers and keep bills in check:

  • Customers’ bills should be kept in check through effective wholesale competition, efficient and innovative grid tariffs and appropriate taxation rules. Bills should be transparent, with a breakdown of cost components, including those derived from renewables support schemes;
  • Customers deserve to reap the rewards that come from taking an active part in the electricity market. To this end, regulatory distortions such as regulated prices should be removed;
  • All new legislative initiatives should be accompanied by a clear analysis of the cost impact for each category of electricity customers;
  • Modernize Europe’s electricity networks. They are the backbone of the electricity system, playing a vital role in delivering electricity to customers. The increasing share of variable renewable energy sources requires tariffs that are cost-reflective, essentially capacity-based and possibly peak time differentiated, to ensure the system’s continued stability, security and reliability.

In all three areas, co-ordinated Europe-wide effort is key. National regulatory initiatives without consideration of their impact on other Member States cannot remain the rule. Only a true European approach can ensure renewed investment in the future – to the benefit of European businesses and households alike.

With this in mind, Eurelectric has been keenly following the debate on the shape of the Europe’s future energy and climate policy. Luckily, the proposals on the table today seem to be going in the right direction.

First proposals published by the European Commission in January included a binding 2030 greenhouse gas reduction target of 40 per cent, with a resulting renewables target of 27 per cent.

Importantly, both proposed targets were EU-wide, allowing them to be met through a stronger ETS rather than through a continuation of costly national subsidy schemes. It would therefore seem that the Commission has finally recognized the interactions between different targets and instruments and decided to reduce complexity and ensure greater cost-effectiveness through more European and market-driven approaches, most notably the ETS.

Dreamstime
Generation from renewable resources grew by 7 per cent in 2012
Credit: Dreamstime

While heads of state and government shied away from confirming any numbers at their European Council meeting in March, the meeting conclusions affirmed that the EU target for greenhouse gas emission reductions would be fully in line with the agreed objective for 2050.

Moreover, the target should “confirm the EU’s role globally” ahead of the international climate negotiations in Paris next year, and should be agreed “no later than October 2014”. This process to agreement will include a stock-taking at the June meeting of the European Council, ahead of the UN Climate Summit in September 2014.

How can we ensure that the energy transition is a success? How do we ensure that it does not cost more than necessary? Eurelectric’s Manifesto presents part of the answer.

Regular dialogue with policymakers will be needed to ensure that its conclusions are implemented, in the interest of industry, policymakers and – crucially – customers.

Eurelectric’s report Power Statistics and Trends 2013 is available for download at www.eurelectric.org/PowerStats2013

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