There was a collective sigh of relief at the end of last year when the European Union legislators finally agreed on an energy-climate package. Although the package contains a far-reaching set of legislative measures, Eurelectric, an association that represents the electricity industry at the European level, argues it does not go far enough.

John Scowcroft and Juho Lipponen, Eurelectric

European Union (EU) delegates arrived in Poznan in December for the 14th Conference of the Parties (COP14) to the United Nations Climate Change convention with their credibility on the line. After repeatedly urging other countries – both the developed and the rapidly developing economies – to commit to serious action to reduce the emissions of greenhouse gases (GHG) linked to harmful climate change, they had for several weeks shown an inability to put their own house in order by agreeing a substantial raft of EU legislation in the energy and climate sphere.

John Scowcroft, Head of Environment, Eurelectric
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That the EU government heads meeting in Brussels on 11-12 December were able to forge agreement on the sensitive issues that had threatened to derail the energy-climate package, and thus stay on course for a final accord with the European Parliament, did much to restore that credibility.

Juho Lipponen, Head of Energy Policy, Eurelectric
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Parliament’s ratification of the package on 17 December means that the EU has succeeded in adopting a far-reaching set of legislative measures – governing GHG reductions, updating the Emissions Trading Scheme (ETS), revising the Directive on Renewable Energy Sources (RES) and setting out a framework for deployment of carbon capture and storage (CCS) – which enable it to lay claim to leadership of the international climate action process.

Global challenge, global solution

Electricity will have a major role to play in achieving the carbon reductions needed to keep global warming within a 2 °C rise, above which serious geo-social effects have been predicted. A decarbonized power supply delivered through a properly functioning competitive energy market will be a key part of the solution to the great energy-climate challenges facing the world.

However, the EU cannot go it alone on climate change. Eurelectric has consistently called on world leaders to forge a credible international agreement to succeed the one agreed in Kyoto in 1997. Global challenges require global solutions. COP14 left most of the ‘heavy lifting’ for the crucial COP15 session so much needs to be done before the delegates assemble again in Copenhagen in December.

Meeting in October in Atlanta, USA, some 30 electricity CEOs from the EU, USA, Canada, Japan and Australia declared in a statement their conviction that “electricity can be the solution to climate change”; “new technology, with an adequate transition period, can accommodate the objective of stabilizing carbon emissions from all sources”; and “with aggressive application of technology, carbon emissions reductions of 60-80 per cent can be achieved by 2050.” Recognizing that a global approach is needed, the CEOs set up an International Electricity Partnership to work with policymakers and stakeholders worldwide on a roadmap designed to drive forward development and deployment of commercial technologies that will reduce carbon emissions.

EU needs broad policy mix

Within the EU, the need to replace the power generation fleet by 2030 offers a unique opportunity to get on the path to a carbon-neutral electricity system.

Eurelectric’s Role of Electricity project, completed in 2007, shows how the triple energy-climate challenge – ensuring secure energy supply, fostering sustainability and promoting economic competitiveness – can be met through a broad energy mix deploying all low-carbon technology options, combined with key synergies on the demand side. This will require an enabling legislative framework and clear market signals, especially from the carbon market.

Transmission and distribution grids will also need to be expanded, and in many cases redesigned in order to accommodate large quantities of new types of power generation for which the systems were not designed. Smart, interactive grids also have a major role to play in improving energy efficiency.

Improving overall energy efficiency is an important – and often rather neglected – objective in addressing climate concerns. Energy efficiency offers a cost effective, short-term way to achieve lower carbon intensity at an acceptable cost to society.

Replacing less energy efficient or more carbon-intensive processes by decarbonized power, on the principle ‘less electricity where possible, more electricity where necessary’, will foster energy efficiency on the demand side. More efficient lighting, electric heat pumps for spatial heating/cooling and electric or plug-in hybrid road vehicles are all examples of such synergies.

All-electric or hybrid plug-in cars will not only improve overall efficiency but also help reduce oil dependence and make a contribution to grid balancing. Several European electricity groups are now working on integrating electric vehicles into the grid system.

Improving energy efficiency in these major demand-side areas will, above all, require consumer education, better building and efficiency standards and supportive regulation.

A low-carbon Europe by 2050

The Role of Electricity project was already underway before some of the important political decisions were taken and we have now decided to update it, taking a longer term view beyond 2030. The influential Stern Report, which came out shortly after the publication of the Role of Electricity report, indicated that, to meet the 60-80 per cent emission reductions necessary to stabilize atmospheric carbon dioxide (CO2) emissions at 440 parts per million, the OECD power sector would have to be virtually carbon free by 2050.

The Role of Electricity project showed that under the most favourable scenario, meeting a 50 per cent reduction within the 27 EU member states, the European power sector’s carbon intensity would reduce from the current 0.45 tonnes CO2/MWh to 0.10 tonnes CO2/MWh (Figure 1).

Figure 1: With a 50 per cent cut, the EU’s power sector’s carbon intensity would reduce to 0.10 tonnes CO2 per MWh
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The objective of the new ‘2050’ study will be to develop a roadmap charting the optimal course to enable the power sector to become carbon-free, i.e. to reduce the 0.10 t CO2/MWh to as near zero as practicable, by mid-century.

The scope of the roadmap will not be limited to the generation side of the business. All options for a low-carbon energy system – energy efficiency solutions, as well as the deployment of renewable energy, nuclear power and fossil fuels with clean technologies including CCS – will be addressed on a timeline, identifying milestones that take account of the cost of technology development, the evolution of CO2 prices, timing the delivery of new power generation capacity and retirement dates for the existing generation fleet, infrastructure development, plus measures to reduce energy consumption and to increase efficiency in electricity generation, transmission and distribution.

The transition between the current situation and a progressively decarbonized future will require a well-timed and optimized investment programme to cope with the closure and replacement of a considerable amount of capacity, while ensuring the all important security of supply. The objective of the project will be to deliver an investment roadmap decade by decade, showing the associated total costs of attaining a low-carbon power system. We will also seek to identify policy shortcomings and other barriers and to make recommendations.

New EU energy-climate package falls short

The European power industry welcomes the fact that the EU legislators have now agreed a package that will remove some of the uncertainties in the energy-climate sphere, allowing companies to plan their strategies, investments and activities. However the package has a number of shortcomings that will make it difficult to drive forward the technological progress needed at reasonable cost.

The new Renewable Energy Directive sets a framework for development of RES solutions in Europe to 2020, based on the binding 20 per cent target for the EU as a whole, translated into national binding targets, mandating each member state to reach its target in the way it deems best.

However, the binding national targets are calculated according to GDP rather than identified technical potential to expand renewable energy, and, paradoxically, the Directive does not allow free trading of power generated from renewable energy sources, as would seem logical given the GDP-based approach, but assumes that each member state will produce the majority of its targeted renewable energy on its own territory.

The Directive does provide some limited flexibility through ‘co-operation mechanisms’, including the option of setting up joint projects between member states, but this is to be entirely government led and no provision is made for a proper trade mechanism that would foster a more cost effective approach to meeting the targets.

RES trading should be maximized

In 2008, Eurelectric commissioned an analysis of the cost of reaching the EU renewable energy target through different forms of renewable energy source support mechanisms. The study, carried out by Pöyry Energy Consulting, evaluated the cost-differential between purely nationally based support schemes and more flexible approaches right through to allowing full RES trading across the EU.

It found that the cost of reaching the 2020 EU Renewables target, based on the defined national targets, would be considerably lower – a massive €17bn ($22bn) would be saved in the year 2020 – if, instead of purely nationally based support schemes, full renewable energy trading were allowed.

In fact much of the cost savings could be achieved by allowing quite limited levels of trading. A scenario in which 80 per cent of the renewable energy target is achieved by domestic action and only 20 per cent through trading would achieve a high proportion of the potential cost savings. This is because for a number of countries trading would allow the cost of the last increment of the most expensive domestic renewable energy production to be offset by importing cheaper renewable energy from elsewhere.

Figure 2 shows the marginal cost of renewable electricity towards reaching the national target for various member states under three scenarios – full trading, limited trading and domestic schemes only. It can be seen that a domestic-action-only scenario will lead to extremely high costs for six to seven countries, while limited trading would reduce cost to a more reasonable level for four countries – Romania, Italy, Malta and the UK.

Figure 2: Marginal cost of RES-electricity towards reaching EU 2020 target under different trading scenarios
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It is true that several member states will be able to fulfil a significant part of their target domestically but for many, the last 20-50 per cent of the action would prove very expensive. In fact, the study indicates that several EU countries – notably those that have been allocated high targets because of their above-average GDP but have little domestic renewable energy production, as is the case for Belgium and the Netherlands – may find it almost impossible to reach the target without imports.

One of the study’s key conclusions is that given the likelihood of very high costs without RES trading in place, the new Directive should include a review clause mandating the European Commission to evaluate the cost-effectiveness of the renewable energy policies within the early years. The EU lawmakers have in fact written in a review clause for 2014.

In the meantime, however, it is vital that member states make full use of the cooperation mechanisms provided and also clarify as soon as possible an early role for companies. Commercial enterprises have a significantly better track record than government ministries in trading activities.

ETS: vital to have a level playing field

The ETS Directive also falls short on some important aspects. Eurelectric strongly supports the ETS as an instrument that puts a price on carbon, which should be reflected through the value chain of sectors concerned, and we accept the logic that auctioning should be the main method of allocating emission allowances from 2013, provided it is applied to all countries and sectors.

We are therefore extremely concerned about the compromises agreed by legislators to insulate several industrial sectors from the impact of the carbon price signal, and thus from the incentive to reduce emissions. This will place a greater burden on the power sector, inevitably leading to substantial increases in electricity prices for all our customers – beyond those associated with the tightening emissions cap that is the foundation of the EU policy – who will essentially be paying for the decarbonization, not just of electricity, but of several energy-intensive sectors as well.

These compromises to the principle of ETS will tend to reduce cost effectiveness and may lead to overall problems in the provision of a secure electricity supply to industry, commerce and households.

A key issue for the electricity industry is the scale and timing of the investments companies will need to make in order to move to a decarbonized production-fleet by 2050. The commercial availability for the deployment of major low-carbon technologies will not come much before 2020. Therefore the reduction target under the EU ETS – plus the impact of more stringent emissions limits being proposed under the current revision of the Integrated Pollution Prevention and Control (IPPC) Directive – means that the sector may well face a plant availability crunch in the middle of the next decade.

This could pose significant risks to supply security and a concomitant move to invest in gas plant, as being the only serious short-term solution. This in turn brings a double risk of locking carbon emitting plant into the system for several decades and increasing Europe’s dependence on external sources of fossil fuels.

International credits for a cost-effective transition

One solution to this would be to allow the electricity sector greater access to international offset credits – from Joint Implementation and Clean Development Mechanism projects – under the Kyoto Protocol. The electricity industry is committed to moving to a low-carbon system and we do not view international credits as a way to avoid making necessary emissions reductions. However, use of these credits would provide a useful short-term measure to enable the industry to move cost effectively to a low-carbon system by allowing companies to keep existing plant operating until such time as new, low or zero-carbon plant is available for large-scale deployment. Unfortunately, the newly revised Directive will not make available a sufficient amount of these offset credits to enable a significant contribution to solving the problem.

CCS will also have an essential role to play in decarbonizing power. We are glad that the CCS Directive sets the necessary legal framework for geological storage of CO2 and that the legislators agreed to earmark up to 300 million ETS allowances to finance a 12-plant demonstration programme, with a view to scaling up available technologies and ensuring that commercial plant become available around 2025.

We have estimated the demonstration programme – excluding power plant investment – would cost up to €9 billion, and we welcome the framework as a means to share first-mover risks between industry and government. It is now imperative that the practicalities be sorted out in the coming months, so that first projects can kick off this year.

Back on the international front, negotiators arriving at COP15 next December will have the task of working out a solid framework agreement that will avoid a damaging hiatus between the end of the current commitments under the Kyoto Protocol and the start of a new period in 2013, and give business the confidence to start planning major investments, which will put our economies on the path to decarbonization.

Many issues remain to be resolved – what level of action developing countries are prepared to take; technology transfer; reform of the Clean Development Mechanism; land use and avoided deforestation.

The EU has taken an important step with its energy-climate package and is now likely to be joined by the United States under its new administration, but the next 12 months will be crucial in the effort to move beyond Kyoto. Meanwhile the European electricity industry will be working on all fronts – through technology, development, investment and consultations on implementing the various new legislative frameworks – to drive forward the decarbonization of our society.