Decarbonization is essential to guarantee the long-term sustainability of Europe’s economy and electricity sector, argues Hans ten Berge

COP21 is a signal to invest in low-carbon generation

Credit: NASA

The European power sector believes that the most effective way forward in the transition towards a low-carbon economy is through a clear, predictable carbon price signal that will allow industry to invest in an efficient and sustainable manner.

This will require that full consistency and coherence between the elements and targets of the EU’s 2030 climate and energy framework is ensured, as well as the development of an adequate governance framework which enables the achievement of these objectives.

This calls for an EU decarbonization framework that recognizes the role of decarbonized electricity as an essential vector for achieving a carbon-neutral and energy efficient economy in the EU.

Decarbonization is essential to guarantee the long-term sustainability of the global economy. As a global leader in decarbonization, the European power sector is committed to decarbonizing power supply by 2050, and we are already taking important action.

In 2014, 56 per cent of electricity in the EU came from low carbon sources. In the same year, the share of renewables in the power mix became the largest source of low carbon electricity in the EU, comprising 28 per cent of total power generation.

As stated recently by the International Energy Agency, the power sector is a global leader in decarbonization. Renewable energy has increased much faster in the power sector than in heating and cooling. Electricity is on track to becoming a carbon neutral energy carrier and, if used widely to replace fossil fuels in transport and heating, electrification can lead to more energy efficiency and reductions in greenhouse gas emissions.

The agreement reached in December at the COP21 United Nations Climate Change Conference in Paris should lead to an ambitious and rules-based climate change regime, which paves the way for a stable and predictable framework for policy and action. EURELECTRIC is happy that the Paris Agreement provides a clear and unequivocal signal to government and investors to invest in low-carbon technology in line with the long-term decarbonization objectives.

The European power sector believes that “decarbonization should take place in a cost-efficient manner and two elements are crucial in this respect: a well-functioning electricity market and a robust EU Emissions Trading System (ETS). Only the combination of an effectively reformed EU ETS and an improved EU electricity market design can lead to proper price signals from the relevant markets to drive investments into low carbon technologies.

In this context, the European power sector believes that the EU ETS should be the main driver for renewables investments in the electricity sector. Strengthening the EU ETS is a no-regret option. The EU ETS, which is an established, technology-neutral, Europe-wide instrument, can also bring an increasingly EU-wide approach to low carbon technologies development and investment.

The European Commission’s proposal to revise the EU ETS Directive puts the EU on course to take important steps on the path towards cost-effectively decarbonizing the European economy. However, the success of the reformed EU ETS will depend on ensuring full consistency and coherence between the various elements and targets of the 2030 Climate and Energy Framework, as well as developing an adequate governance framework which enables the achievement of these objectives.

European policies and implementing instruments must therefore be designed in a way that does not undermine the overall economic efficiency and environmental effectiveness of the EU ETS. Coherent and integrated policy instruments based on a well-functioning EU ETS will be crucial to achieve the EU’s greenhouse gas (GHG) emissions reduction targets on a level playing field and in the most cost-effective way.

Electrifying the EU economy

To date, the European electricity industry has delivered the bulk of GHG emission reductions on the path to a low‐carbon European economy, with these reductions coming primarily from the supply side. Looking forward, we see the electrification of the demand side sectors of the economy, which do not fall under the EU ETS, as being crucial on the path to decarbonization.

The upcoming revision of the Effort Sharing Decision, the EU’s Heating and Cooling Strategy, as well as its efforts to decarbonize the transport sector provide an excellent opportunity to enhance the role of decarbonized electricity in achieving the EU’s decarbonization agenda. The key role of electricity in the decarbonization of the European economy, the recognition of the synergies in the energy transport and heating systems – many of which will be unlocked through a smarter electricity system – and the central role to be played by customers are all advancements that we support and encourage.

The European power sector sees that further electrification of the non-ETS sectors (such as transport, heating and cooling) provides a technically and economically effective way to further enhance the contribution of renewables to the EU’s decarbonization objectives. As electricity becomes increasingly low carbon, replacing fossil fuel-based systems with electric technologies linked to storage will provide a promising pathway to decarbonize these sectors.

The EU’s Heating and Cooling Strategy, as well as its efforts to decarbonize the transport sector, must recognize that as the electricity sector’s greenhouse gas emissions are strongly decreasing, electricity should play a key role in decarbonizing these sectors and will bring other important benefits, such as improvements in air quality, especially in cities. It is also important to provide consumers with choice, affordability, security and quality of services through markets, and to recognize the fact that a ‘one size fits all’ approach cannot work. The solutions must therefore allow the necessary freedom to Member States to assess their national and local challenges and opportunities.

A new market design

If Member States choose to maintain support for mature technologies after 2020, it should be done in the most cost-efficient and market-based way to maximize market integration and minimize distortions. Beyond research, demonstration and early deployment, policy measures should not seek to promote specific technologies or projects, but rather support renewables development in the most cost-efficient way. When deciding to support certain volumes, it is important to take into consideration system costs as well as the evolution of demand for electricity to avoid further energy oversupply.

Further alignment of support schemes’ key characteristics through common EU rules should take place. Partial opening across borders and regional support programmes also increase cost-efficiency. Member States should address the barriers to regional support (taxes, levies, permitting etc) and take into account the future electricity demand when deciding on the geographical scope of schemes. Experience shows that it is challenging to find the political will to establish common schemes, and that their execution involves challenges as well.

As further development of flexible resources is a necessity, we need to accelerate the integration and efficiency of short-term markets. A future-proof market design should facilitate the integration of increased shares of renewables and, at the same time, ensure a high level of security of supply. We must ensure the full integration of day-ahead, intraday and balancing markets, implement shorter gate closure to effectively make the market fit for renewables and ensure that wholesale prices adequately reflect scarcity situations.

The Energy Union should also provide the necessary foundations to develop cost-effective interconnection capacity and to optimize the use of existing capacity with a view to enabling the single electricity market, the market integration of renewables and to enhance security of supply.

EURELECTRIC believes that well-designed capacity markets can contribute to ensuring the required level of security of supply. Regional adequacy assessments must be developed and should be taken into account when introducing market-based capacity mechanisms. These mechanisms should be open to generation, storage and demand response, and should have a regional perspective to ensure security of supply in a cost-efficient way, for instance through effective cross-border participation.

Policymakers should bear in mind the important objective of reducing state-imposed, unrelated policy add-ons on electricity customers. We believe that this will be an opportunity to explore ways of making support for energy-related policies less distortive and burdensome on the power bill. The Energy Union should enable a cost-efficient and market-based energy transition, while ensuring that energy costs for European customers remain affordable. Two elements will be absolutely crucial in this respect: a well-functioning electricity market, as well as a robust and well-functioning EU ETS system.

The power sector is undergoing a complex and long-term transformation: accelerated technological change, shifting consumer preferences, the application of ICT technology to link power generation and demand, as well as the evolving EU climate and energy policy agenda. These provide unprecedented challenges but also important opportunities for the sector. In the midst of this energy transition, Europe needs to ensure secure, sustainable, affordable and competitive energy for all its citizens and businesses.

The Energy Union project, based on its five mutually supportive dimensions (energy security, solidarity and trust; the internal energy market; energy efficiency as a contribution to the moderation of energy demand; decarbonization of the economy; and research, innovation and competitiveness) is intended to address these challenges. EU institutions and Member States should work together to ensure that collective and national measures lead to the development of a decarbonized and fully competitive single market in energy.

Immediate action

The European power sector believes that a number of policy areas call for immediate action in the context of the Energy Union project at the EU, regional and national levels. There is significant added value in regional and EU-wide co-operation regarding market integration, renewables and security of supply, which EU Member States should recognize in their efforts to achieve the Energy Union. The Energy Union process should ensure that benefits of co-ordination and opportunities for co-operation on renewables should be identified, and drive co-operation on security of supply.

The real challenge is to implement a market design that underpins the low carbon transition of power systems. The new market design, including a reformed and strengthened EU ETS, must deliver security of supply in a cost-efficient way and provide a solid basis for sustainable investment in low carbon technologies.

An effectively reformed EU ETS, a truly internal energy market in which renewables are fully integrated, and an improved EU electricity market design can deliver decarbonization in a cost-effective manner.

Hans ten Berge is Secretary-General of EURELECTRIC.