EU energy-climate policy: Joined-up thinking, please

Chris Boothby, EURELECTRIC, Belgium

The process of adopting two new major energy packages, plus the other relevant legislation gives national and EU policymakers a unique opportunity to put in place a more coherent approach to a wide range of vital energy issues. Weaving all these strands together to create the right energy-environment policy will not be easy, but is essential, says EURELECTRIC.

Chris Boothby is head of communication at EURELECTRIC
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Europe’s electricity companies are clear about their basic mission: to provide a secure, competitively-priced supply of electricity to customers large and small. This primary goal of powering industry and business and ‘keeping the lights on’ has been joined in recent years by a second, global challenge: climate change.

The European power industry is firmly committed to playing its part in reducing emissions of greenhouse gases (GHGs). European electricity is currently 45 per cent carbon dioxide-free and the industry is committed to moving to a very low- or zero-carbon fuel mix by mid-century.

A raft of legislation in the pipeline

Meanwhile, European Union (EU) leaders agreed last year on a broad energy-climate policy approach known as ’20-20-20′ à‚— cutting emissions of GHGs by 20 per cent, boosting the share of renewable energy in total EU consumption to 20 per cent, and increasing overall energy efficiency by 20 per cent, all by the year 2020.

These targets certainly have the virtue of a heroic simplicity and strong media impact but the legislators in the European Parliament and Council of Ministers now scrutinising a package of specific legislation – including an updated directive governing the EU Emissions Trading System (ETS), a revised directive on incentivizing renewable energy sources (RES) and a directive enabling future deployment of carbon capture and storage (CCS) proposed by the European Commission to put the policy into action à‚— must make sure the final outcome is workable for electricity companies and their customers.

Also on the legislators’ table is a recent Commission proposal to update the Integrated Pollution Prevention and Control (IPPC) Directive, which proposes to beef up restrictions on the operation of power plants according to their profile on pollutant emissions, notably sulphur dioxide (SO2), nitrogen oxides (NOx) and particles.

To complicate matters further, the ministers and MEPs are working to finalize by early 2009 a major new raft of rules on the electricity and gas markets, designed to reinforce the 1996 and 2003 legislative ‘packages’ that ended the national monopoly approach to energy provision and brought market discipline and competition to the sector.

All these various energy policy strands must be woven together if new legislation is to achieve its stated aims. We believe the best way to deliver simultaneously on supply-security and climate change objectives at optimal cost is to develop an effective integrated electricity market across Europe. The specific legislation now being framed must be made to work with, not against, the grain of the European market we are striving to develop.

A competitive, integrated markET

EURELECTRIC, the power industry association, is contributing to ongoing efforts at all levels to drive forward supra-national, regional integration of electricity markets as an interim step towards a pan-European market. Key practical steps here include optimizing allocation of interconnection capacity by implementing market based mechanisms à‚— where possible implicit auctions à‚— coupling markets on different time horizons (futures, day-ahead, intraday) and developing secondary markets where players can sell unused transmission capacity. We also need a regional model for cooperation between transmission system operators. The legislators must keep market-integration issues firmly in their sights as they negotiate their way through the various directives and regulations in the two new packages.

The need for a supra-national approach to grids

A key issue in the third liberalization package is the way electricity transmission is organized. Providing the right incentives to transmission operators to invest in infrastructure, especially interconnection, and ensuring a proper framework for regulatory coherence by equipping the new European Regulators’ Agency with appropriate powers to drive forward regional coordination will be more important to the success of market integration, liquidity and competition than the precise way transmission operations are separated or ‘unbundled’ from the other segments of the electricity value chain. It is vital that transmission network investment and operations can be planned at supra-national level.

Efficient grid development will also be vital if the extra RES-power targeted in the energy-climate proposals is to be integrated into Europe’s electricity system. However, the Commission’s original proposal for total separation à‚— ‘ownership unbundling’ in EU jargon – focuses on competition on a country-basis. We do not see how it will contribute to the much-needed supra-national integration.

EURELECTRIC believes the quickest way to foster market integration is to set up Regional Independent Operators to manage transmission and plan investment. National authorities must also play their role by speeding up authorization procedures for new infrastructure as many key projects are blocked in the permitting process.

Massive investment required

Europe’s electricity companies will have to spend around a trillion euros by 2030 to replace aging plant, develop the networks, comply with tightening environmental strictures and meet rising demand for power. They urgently need a clear picture of their obligations and opportunities in the carbon-constrained world and in the light of other relevant environmental law such as the IPPC Directive.

EURELECTRIC’s recent ‘Role of Electricity’ project shows how a broad power generation mix, comprising RES, nuclear power and clean fossil fuel technologies, including CCS, coupled with ‘intelligent electrification’ in certain sectors, can deliver deep emissions cuts at reasonable cost, reduce dependence on imported hydrocarbons and promote supply security. This two-sided effort, exploiting synergies between a low-carbon power mix and greater energy efficiency on the demand side à‚— such as a broad roll-out of plug-in electric vehicles in the transport sector and heat pumps for spatial heating and cooling in buildings, currently two under-exploited areas as regards energy efficiency and GHG emissions reductions à‚— can drive the de-carbonization of the entire economy.

Carbon capture & storage will have to fit into a portfolio of cost-effective measures for reducing greenhouse gas emissions
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We therefore urge national policymakers implementing the Strategic Energy Technology (SET) Plan, drawn up by the EC as part of its energy-climate package and endorsed in March by energy ministers, to take on board these findings of the ‘Role of Electricity’ project. Deployment of energy technologies required to meet the various energy policy challenges should be market-led, but we do also need to see better coordination between EU and member states on basic research, technical development and demonstration so as to ensure EU-wide consistency and identify synergies between the local efforts being made.

Promoting an energy efficiency culture

The third plank of the 20-20-20 policy, energy efficiency is a vital element and a comprehensive approach is required. We need to engender an energy-savings culture across Europe and the world.

‘Smart’ metering, which will provide customers with accurate data on their power consumption, is one innovation that will promote efficient use of electricity and encourage customer involvement in achieving energy efficiency aims. Many electricity companies are launching practical schemes to help their customers focus on energy efficiency. EURELECTRIC’s ‘Energy Wisdom Programme’ boasts 250 projects reported by more than a dozen electricity companies over 15 years that have resulted in savings of 300 million tons of CO2 emissions.

Recently, EURELECTRIC joined forces with European lighting manufacturers and the retailers’ association to promote efficient lighting. Lighting accounts for almost 20 per cent of EU power consumption and available figures show that if each of Europe’s 160 million households replaces one incandescent 60 W bulb with an energy-saving compact 11 W fluorescent lamp and operates it for three hours per day, this will save 7800 million kWh of electricity, accounting for two per cent of total power consumed by lighting in Europe per annum and well over the total yearly output of one power plant. This would imply a reduction of some 4.6 million tonnes of CO2 emissions.

Voluntary initiatives of this kind by industry and commerce have the potential to drive massive energy savings and CO2 emissions reductions. The policymakers should back such moves to inform the customer and help to create a broad framework for energy-efficient thinking.

Technology development Driven by market mechanisms

Free markets will deliver resources and drive investment in the most cost effective manner and the legislators should approach their work with a market-driven mindset. EURELECTRIC believes that market-based mechanisms provide the best means of delivering on environmental targets and that in particular a robust price for carbon emissions, provided by a global carbon market, must in the longer term be the driver for deployment of low-carbon technologies. We therefore have mixed feelings about the energy-climate ‘package’ as proposed by the Commission.

Efficient grid development will be vital if renewables are to be integrated into Europe’s electricity system
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The proposals for revising the EU ETS provide our industry with a horizon for investment planning through to 2020 and beyond, and we accept the logic that from 2013 auctioning should be the main method of allocating emissions allowances. The policymakers must however also rapidly give us clarity on the ways and means of auctioning, including scheduling and quantities.

Electricity companies will also have to bridge the gap until low-carbon technologies such as CCS become economically available post-2020. We believe that our companies, obliged to purchase ETS allowances at auction, will need increased access to the international flexible instruments à‚— Clean Development Mechanism and Joint Implementation, set up under the Kyoto Protocol, which provide credits for verified carbon-reduction projects, and to similar systems now being set up à‚— if they are to meet reduction targets at reasonable cost. The proposed restrictions on use of these instruments risk creating real difficulties for many electricity companies, with consequent threat to supply security.

Pollution directive must serve to optimize investment

This threat could be further exacerbated if the EC’s separate IPPC proposals to update the existing directive – which has been in full force only since October last year – and recast several related pieces of legislation, are adopted as currently framed, forcing many plants to close or curtail operations. The recently published EURELECTRIC ‘Environmental Statistics Report’ shows the electricity industry is already on a trajectory of emissions reduction as a result of significant investments to ensure compliance with the current legislative environment and in response to related proposals – ETS, RES plus a revision of the National Emissions Ceilings for pollutant emissions now under discussion.

If electricity companies are to invest with confidence in extremely long-lived infrastructure, the IPPC Directive must be framed so as to play its part in optimizing the timing of these investments and avoid premature closing of power plants prior to anticipated ‘clean capacity’ coming on stream.

Fossil fuel plants, such as this coal fired power station, will continue to meet a high proportion of Europe’s electricity needs for some time to come
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The electricity industry recently called on the EU legislators to delay the implementation date from 2016 to 2020 and also to reject the Commission’s idea of using the emission values set out in the EU ‘Best Available Techniques (BAT) Reference’ (BREFs) guidance documents as legally binding emissions target values. Such application is contrary to the context in which the BREFs were drawn up and the BATs embody what are basically ‘best ever’ performance rather than realistic, ‘best available’ technique standards. If the Commission wishes to draw up mandatory guidance on emissions limits, it should set in motion a transparent procedure in which industry experts are fully consulted and the variety of operational regimes and plant designs can be fully taken into account.

Maximizing efficiency of emissions trading

EURELECTRIC supports the provision in the draft ETS Directive that all electricity production be treated equally, an approach which maximizes environmental and economic efficiency of the trading scheme, and we oppose any emissions allocation methodology that discriminates against the electricity sector. We recognize policymakers’ concerns that some industrial sectors exposed to international competition may require a degree of relief until an international climate regime is established, but feel strongly that any free allocation should be based on transparent criteria, carefully examined and time-limited.

Realizing the potential of ccs

We welcome the proposals to create a framework for CCS. Fossil fuels currently meet a high proportion of Europe’s electricity needs and will continue to do so in the foreseeable future. In this context, CCS has great potential in tackling climate change while maintaining the competitiveness of the economy and energy supply security. However, the technology is not yet commercially available and will require further research and demonstration before it can be rolled out on the necessary scale. The power sector is ready to make substantial investments here, provided the right regulatory framework is in place and specific incentives provided for an interim period to compensate for first-mover risks in the demonstration phase.

Once demonstrated, CCS will have to fit into a portfolio of cost–effective measures for reducing GHG emissions. To avoid incurring unnecessary costs CCS can only be deployed when it becomes commercially viable, i.e. when costs have fallen and the electricity market price, incorporating a carbon price, is sufficiently high. EURELECTRIC therefore supports the Commission’s proposal à‚— contrary to views expressed by the European Parliament draftsman à‚— not to set a mandatory deadline for use of CCS on power plants. Mandatory requirements are unnecessary, given the overall emissions cap, and would run counter to the principle of the ETS, that companies should be able to choose the least-cost abatement option, minimizing overall economic impact.

RES proposals may fragment the market

Our biggest disappointment, however, is that the proposals for revising the 2001 Renewables Directive would, far from promoting market-integration, see 27 different national approaches to promoting RES cemented into place. As a 20 per cent broad energy target translates into 35 per cent of total EU electricity demand, perpetuating the national approach threatens, in a worst case scenario, to cordon off well over a third of the developing European electricity market into regulated, non-market enclosures.

The Commission’s calculations indicate that action to cut GHG emissions by 20 per cent, in line with the agreed target, will already mean RES taking a 17 per cent of total European electricity. It is therefore questionable whether we need specific RES targets, especially if they threaten to undermine efforts in other policy areas to drive forward energy market development.

EURELECTRIC has repeatedly called for more EU-level harmonization to bring RES into the electricity market. Facilitating trade in Guarantees of Origin (GOs) would help to bridge this gap, bringing greater market logic to RES and helping countries to meet their challenging RES targets in a cost-effective way. The EC’s figures suggest that addressing the EU target of a 20 per cent share for RES without the use of flexible tools such as GO trading would cost an additional €8 billion ($12 billion) per annum by 2020. We also question whether the foreseen restrictions on GO-trading comply with EU Treaty provisions on free movement of goods and services. Such restrictions should be removed.

A golden opportunity

The process of adopting the two new major energy packages, plus the other relevant legislation gives the national and EU policymakers a unique opportunity to put in place a more coherent approach to all these vital energy issues. The legislators have a golden opportunity for joined-up policymaking, based on a commitment to developing a functioning, competitive European market while addressing the global energy-environment challenges.

Weaving all these strands together to make a coherent whole will not be easy, but Europe’s electricity companies, and their customers in industry, commerce and the home, are counting on the ministers and the MEPs to get the ambitious new EU energy-environment policy right. Europe simply cannot afford not to.

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