A recent conference heard that Europe’s current energy policy is “a well-intentioned failure”. Tildy Bayar finds out why
The discussions during a recent European energy summit held in London could potentially be summed up by the titles of several of the presentations: ‘Where have we gone wrong and what should we do now?’, ‘The inconvenient truth of European energy policy’, and ‘The wasteland of European energy policies and regulation’.
Almost all of the day’s speakers from multiple industry segments appeared to agree that Europe’s climate and energy policies are profoundly broken and have – at least so far – failed to achieve their objectives.
And all but one of the speakers at Platts European Power Summit, whatever their perspective, were critical of Europe’s efforts thus far in addressing the challenges of the new energy landscape: the need to deal with the introduction of increasing amounts of renewable energy on Europe’s grids; the need for new utility business models as consumers increasingly become prosumers; the need to support flexible backup power on the way to a low-carbon economy; the need for new grid infrastructure within and between member states; the need to ensure security of supply in the face of geopolitical risk; and the need to set and meet emissions reduction targets nationally and at the European level.
Professor Nick Butler, chairman of the Kings Policy Institute at London’s Kings College, outlined the central objectives of energy policy “in any country, and in the EU: security of supply, competitiveness, and environment [emissions reduction]”.
Given the difficulty of balancing these sometimes conflicting but mutually necessary goals, he said, “the EU is clearly not succeeding on two of them, and is arguably not succeeding on all three”, and he added that Europe’s current energy policy is “a well-intentioned failure”.
A common European energy policy is common sense, he said, but “the real issues that are involved” have not yet been addressed, and in order to do so Europe will need to “change national market rules and move away from existing contracts established in those countries”.
Indeed, he noted that perhaps the “overriding reason why European energy policy is not working is the history – you have too much embedded capital stock, too many established contracts you can’t tear up, and too many national interests because energy is still run by 28 national energy ministries with long histories and particular cultures of their own”.
Thus, Europe’s policymakers “don’t have the degree of freedom you might in a number of other policy areas to start from scratch and to impose a coherent view very quickly.”
Lord Mogg, of the Council of European Energy Regulators (CEER) and the Agency for the Cooperation of Energy Regulators (ACER), noted that Europe is “in a terribly changing and challenging period of time” and that the future can be seen only “through a glass, darkly”. Because of this, he said his agency’s Bridge to 2025 policy document was necessarily formulated to “only look 10 years ahead, and even that is pretty tricky as most investments are far, far longer”.
It is this “broad background of uncertainty that the investment community faces” that “makes our challenges even more difficult”, he said.
The theme of national interests vs Europe-wide co-operation was also picked up on by Gregor Pett, director of market operations for E.ON Global Commodities SE, who said he would argue that “national interests should play less of a role because they’re getting in the way of achieving targets” and that there “should be more international co-operation”.
Regarding the aims of EU energy policy, he said current emissions regulations “do not create a sustainable framework to drive investments in low-carbon technologies” and, while “the Emissions Trading System (ETS) is a good goal, we all agreed to it, we know we need to go there,” its future is unclear and “current prices will never foster innovation” in the technology needed to move emissions reduction forward. Neither, apparently, will support for renewables, which he labelled inefficient and said has failed to create a better marketplace.
Louis Borgo, senior banker for power and energy with the European Bank for Reconstruction and Development, noted that political will is “a key government element if we’re going to make any progress in the sector at all”. Individual countries, he said, “can put forward ‘wish lists’ based in a past that’s long-gone, and that can create a drag on the market”.
Following the money
A panel discussion on where the ‘smart’ investment euro is going at the moment again produced largely pessimistic views. Advanced Power’s chairman Martin Giesen perhaps summed up the general mood, saying: “The really smart money doesn’t go to Europe at the moment.”
According to Borgo, Eastern Europe “has not been terribly attractive in recent years post-financial crisis”, with private sector involvement mainly restricted to renewables and supported by the need to meet EU targets.
However, in some countries such as Bulgaria and Romania, “it turns out they allowed in too much renewable energy and it was too good a [subsidy] regime in the end”. Both countries then introduced retroactive changes to the support schemes, “which resulted in a lot of people losing money, and some projects went under”.
The smart investor, Borgo said, “should avoid getting into markets that haven’t been thought through well in terms of how much [renewable energy] they want to allow in first-, second- and third-wave situations”. A country introducing renewables “should do it in a first wave that’s a smaller chunk,” he explained. “Then they can get used to it, and the second wave will compete harder and be cheaper.”
Ashley Thomas, utilities analyst with Société Générale, also pointed to overenthusiastic initial support, this time in reference to the UK. He said he supports the UK’s Contracts for Difference (CfD) scheme but is “critical of the government’s execution”. In the long term, he said, the CfD “is a good mechanism, but the failure with the execution is that they’ve allocated over 60 per cent of the funding budget to the initial scheme, which wasn’t competitive and didn’t necessarily produce value for money. It seems to have enhanced competition and produced reductions in strike prices, but that was an error with the overall execution,” he concluded.
Moderator Stephen Woodhouse of Poyry echoed the theme that formulating policy in an environment of uncertainty is difficult, but that policy must nevertheless be formulated as Europe’s low-carbon goals won’t wait. “Whatever we dictate now on CO2 policy probably won’t be appropriate in 15-20 years, but we need something now for investors,” he said. “We also need contractual and financial support for renewables – but the trick is to make it less [market-]distorting and more European”.
Regarding capacity mechanisms as a means to balance the market, Advanced Power’s Giesen said it may be too early to tell how well they work. “For capacity mechanisms to be effective and efficient takes a huge amount of time in developing and putting into place and settling down,” he said. “For the first year you have no idea what it’s going to be – and it isn’t enough for people like ourselves to spend money on development”. However, he noted that “once it’s settled down, it can provide [investors] with something very useful”.
Erich Becker, a partner at Zouk Capital, said his firm is “looking closely” at capacity mechanisms – but “across Europe we’re looking at so many different pricing regimes for the same type of asset that it gets complex and confusing”.
Woodhouse noted that Europe is “launching a sector inquiry on existing capacity mechanisms, trying to rein in the capacity mechanisms that national governments want to implement”, but he warned that “in a world where nations across Europe are taking power back from Brussels, that is not the time for Brussels to overrule national governments on capacity payments they’re telling their population is necessary to keep the lights on”. In the end, he said, “my bet is that what national governments want is what they will get, and Brussels will not be in a position to have a very strong footprint”.
In the end, he asked, “are capacity mechanisms capable of making sure we incentivize the right capacity?”
If it’s broke, try to fix it
ACER’s Lord Mogg indicated that much tinkering is currently underway to Europe’s energy policy in order to make it more fit for purpose. Regulators, he said, are “looking to establish generation adequacy in a more European way” by taking local situations into account. The European Commission is “considering competition aspects”, while regulators are looking into a “new role” for distribution system operators and at “increased smartness” for grids.
He said the Energy Union document “lacks specificity” but is under “active political review”. Under discussion is full implementation of the Third Energy Package; more coordinated approaches to system adequacy and facilitating flexibility; improving co-operation between retail and wholesale market players; and protecting and empowering consumers.
In addition, he said the European Commission has plans to review the Electricity Market Design, focusing on flexibility and capacity mechanisms, while the Gas Security of Supply Regulation “will be revised next year” and the Commission has begun a consultation on its ideas. An Energy Infrastructure Forum will be created later this year, he said, to involve member states, regional co-operation groups and EU institutions in a discussion on future infrastructure projects. And the EC will propose to strengthen the regulator’s role in 2015-16.
A lignite plant in Germany, where, according to Michael Lewis of E.ON, the Energiewende is not working
Most of the other participants, however, seemed to think that more drastic change is needed, and fast. As Butler put it, “overall I’m optimistic – but to be a real optimist you have to accept sometimes that current policy is failing, and you have to draw a line and start again”.
Has Europe failed on renewables?
As Michael Lewis, chief operating officer of assets for E.ON Next Generation, put it, from being “regarded as an expensive toy that only rich countries could afford to invest in”, renewables have evolved to make up over 50 per cent of global power capacity additions in 2014.
And it is not too much of a stretch to say that Europe has pinned its hopes for its future energy security on supporting renewable power development.
In Europe, Lewis said, the right questions have not been asked about the true value of renewable power. While the levelized cost of renewable energy has fallen dramatically in the past five years, and the “enormous growth” triggered by Europe’s renewable energy targets has played a major role in driving innovation, and grid parity with conventional power generation is on the horizon and is already a reality for some technologies such as offshore wind, Lewis said what matters is not how much installed renewable capacity Europe has, but “how much dispatchable technology”. Looking at Germany, he said “some of the Energiewende statistics are really quite eye-opening”.
How not to do it
Indeed, he said the Energiewende is “an example of how not to manage the transition to a more sustainable future”. Because of how fast Germany’s government has pushed the transition, he said, “the more renewables you put on the system, the more you have a diminishing return (without energy storage) because you’re generating when you don’t need it. You can’t just keep adding renewables to the system regardless of the cost.”
Adding too much renewable capacity also creates “an enormous reduction in system security”, he said, with Germany’s grid operators needing to stabilize the grid 1213 times in 2012, as opposed to 51 times in 2005.
Christoph Schöpfer, Trianel’s head of power generation, added that with the costs of the Energiewende paid largely by domestic consumers, customers have “lost trust in the process” and, with subsidies amounting to 20 per cent of domestic energy bills, “at a certain point they could say ‘Stop this process, that’s not ok for me'”.
Meanwhile, said Lewis, “you can’t get enough profit from conventional plants to keep them running”, so power plants such as E.ON’s gas-fired Irsching, with 62 per cent thermal efficiency, “generated 0 MWh last year because it cannot get into the merit order because of overcapacity”. These issues have led to a rise in Germany’s CO2 emissions and “created a massive distortion in the wholesale market,” Lewis said, “so we are not achieving the things we want to achieve.
“The Energiewende is taking things in the wrong direction,” he concluded. And even though “onshore wind is the cheapest source of electricity in the right places, that’s not the solution. The solution is a system-wide approach to deliver the most efficient and effective electricity system, and in Germany we are nowhere near thinking on a system-wide approach”.
Schöpfer agreed, saying that “in Germany it’s going very wrong, and we have no master plan”. On the problem of integrating large amounts of renewable energy into the grid, he said “we are still pushing ahead with investing in renewable energy and hoping somebody will someday find the solution and give us business cases for [energy] storage and smart grids. If you have no business case, you have no investment”. And he stressed that Germany’s stranded assets “are the necessary assets for the flexibility” needed to stabilize the grid, “so we need a solution for that”.
“The Energiewende has hugely distorted the market, or what’s left of it,” Lewis said, “and has created negative effects, including on the balance sheets of utilities and other entities that need to invest in the future”.
Most of the upcoming projects in Germany and the UK are held by big utility companies, he said, but “unfortunately those big utilities no longer have the balance sheets to build those projects (such as the UK’s offshore wind Round 3). If we are to meet future targets, we have to somehow match the capabilities we’ve built up with the finance needed to make it happen, and that means a coherent approach to the market across Europe”.
Smart grids and a European ‘supergrid’ have been mooted as a potential solution, but Antonella Battaglini, executive director of the Renewables Grid Initiative, noted that “opposition to any sort of infrastructure [development] is very, very fierce” and that “it will be important to come up with new narratives to bring people on board”. And the discussion around another potential solution, energy storage, is “a complete mess, even more than smart grids” according to Tomas Visek, a partner at McKinsey & Company.
“There are big questions” around whether Europe can use energy storage to achieve an energy mix that is 80-100 per cent renewable, he said, although the need to integrate growing renewable penetration will “drive a massive increase” in storage demand.
“We foresee a ten-fold increase by 2050 in installed capacity [of storage], so really massive.” However, he added that “unfortunately, I do not see a [storage] technology right now that would be a self-sustained solution for renewables integration to the 80-100 per cent level. The technologies known to me, to be able to handle the seasonal shift of power need, will need backup generation or significant strengthening of the transmission networks.”
And Anthony Price, director of the Electricity Storage Network, noted that “Everyone seems to think storage is a good idea, everyone likes the concept, most people want it – but no one wants to pay for it. Any idea about the grid of the future will have storage included, but none of the processes include getting people to pay for it.” At the moment, he said, “The only people who make money from storage are conference organizers.”
Frauke Thies of the European Photovoltaic Industry Association noted emphatically that renewable penetration “is a fact”, adding that “new solutions lead to new challenges” and that “old approaches will not deliver.” This also applies to energy market design, she said: “Without a particular framework it’s not going to work to invest in variable renewables until and unless we have optimal integration of demand in the system”.
Poyry’s Woodhouse added that “when renewables become such a large part of the market, it’s impossible to ignore the rest of the market”.
All participants seemed to agree that a market redesign, even a radical one, is probably necessary for Europe to move forward. Wojciech Cetnarski, chief executive of Polish wind power investment firm Wento, said that while “generally we tend to think about the business of energy generation as a market sector that should be driven by market forces”, he believes that “it’s extremely difficult to apply market rules” to necessities such as infrastructure development, and that market forces “are not going to work, in my opinion”.
“There is no one magic thing that can solve the problems,” he added. “We have to redesign the system, and governments – including the EU – will have to take the responsibility for that.”
“I also don’t believe the market is the solution for everything,” Schöpfer added, “because there is only a very small market left with subsidies and a regulated system. I don’t know the way,” he concluded. “We are sitting in a car…” “…waiting for a roadmap,” Woodhouse added.
George Grant, director of Watt Power, said: “There is no consensus on the appropriate technology mix. We know where we want to go – we just don’t know how to get there.”
He said that “in a bid to satisfy the energy trilemma, politicians have felt the need to intervene – they can’t resist meddling. Market intervention has destroyed the notion of an electricity wholesale market.
And he added that “without a transparent, credit-worthy wholesale electricity market, the power industry has found itself ambulance-chasing government initiatives and guarantees.”
He wondered: “Can we get away from this ‘nanny state’ and back to power market Nirvana? Perhaps, but it will be a long journey.”