Chris Boothby, Eurelectric, Belgium
Climate change and its impacts have emerged as the most serious environmental challenge of our time and it is clear that the way the world produces and uses energy will be a crucial factor in keeping the global temperature rise to 2 à‚ºC above pre-industrial levels by drastically reducing emissions of greenhouse gases (GHGs).
The recent international climate summit in Copenhagen, Denmark, left much work to be done to attain this goal but did manage to forge a joint view of the objective, the timescale for action and on the need to move soon towards a more substantive agreement on action.
The European Union (EU) has consistently taken the political lead on the international climate change front. Likewise, European electricity companies have clearly recognized their responsibilities as major emitters of carbon dioxide (CO2) and have taken steps during the last 12 months to lead the way towards a low-carbon economy and society.
Third Energy Package: A Work in Progress
The EU’s third energy market package is made up of five pieces of legislation designed to enhance competition in the EU internal market and provide a framework to strengthen regional cooperation between the nationally-based transmission system operators (TSOs), with the creation of a European network of TSOs (ENTSO-E), national regulators ” setting up an agency for the Co-operation of Energy Regulators (ACER) to oversee and drive forward cross-border regulatory cooperation ” and member state governments.
However, it remains to be seen how the new system will work in practice and much remains to be done to ensure proper implementation of the on-paper requirements. Eurelectric argues that these should be underpinned by a solid EU target model and that a roadmap for action needs to be drawn up and agreed. The third package is not a finished article, but remains a work in progress.
Within regional markets, day-ahead and cross-border intraday markets must be integrated in order to support the massive development of renewable energy sources (RES) called for by the energy-climate package.
There is also still a clear lack of physical interconnection and harmonized rules. Drivers from both the EU level and governments are needed to overcome the hurdles. Given the vast differences among the seven overlapping European regional electricity markets, the European Commission, ENTSO-E and ACER will need to work together to establish binding common rules for the development of compatible regional markets that can eventually be merged into a pan-European market. It is vital that market stakeholders be involved early and extensively in this process.
|Figure 1: Annual additional cost of reaching the EU’s 2020 renewables target – RES only, not conventional generation|
Equally important are the provisions on retail markets, including the customer’s right to switch supplier without charge within three weeks. Moreover, a functioning retail electricity market underpinned by a functioning wholesale market, unfortunately still lacking in many member states, remains a necessary precondition to providing the electricity consumer with a high level of informed choice and simple processes.
Energy-Climate Package: Let the Markets Work
The four legislative acts comprising the energy-climate package set out multiple goals: cutting carbon emissions by 20 per cent, reducing overall energy consumption by 20 per cent and meeting 20 per cent of our energy needs from renewable sources ” all to be reached by 2020.
These policy requirements will have a huge impact on the future shape of Europe’s electricity industry and the design of the market. The challenge is now to implement a consistent and market-based policy framework that ensures that the GHG and RES targets can be met at an affordable cost.
A key issue is how governments will approach their individual national RES targets, when we are all supposed to be working to create a single European market in electricity. Eurelectric’s figures show that allowing free cross-border trade in power from RES could bring estimated savings of some €17 billion ($24 billion) per year by 2020 versus the cost of achieving targets with purely national schemes.
It is therefore absolutely essential to make maximum use of the ‘flexibility mechanisms’ provided by the Directive, which allow member states to work together to meet their targets ” setting up joint RES power projects and/or joint RES certificate schemes. The Commission and member state authorities should therefore ensure that the way the new Directive is implemented will assist those wishing to establish joint certificate schemes. As some 30 different support schemes currently exist across the EU, the basic goal should be their harmonization, with a view to maximizing flexibility and trading that will significantly reduce the costs of reaching the target.
In addition, TSOs will have to make huge investments in the European grid system if they are to ensure sufficient connection and cross-border capacity to integrate the new volumes of electricity from RES. This must be a key element of the European ten-year network planning exercise, to be regularly undertaken by the grid operators’ body ENTSO-E.
Emissions Trading: Harmonized Auctioning Vital
While it is regrettable that the new Directive governing the Emissions Trading Scheme (ETS) did not, because of its various exceptions and exemptions, succeed in creating a proper level playing field between all sectors, it does provide some welcome planning visibility for investment in low-carbon technologies to 2020 and beyond. Here again, the Commission, which is tasked to draw up regulation on auctioning the carbon emissions allowances, must work with member state authorities to ensure harmonized rules for auctioning the allowances after 2013.
By far the best approach would be to set up one clearing platform for the whole of Europe as soon as possible. It is important that auctions take place no later than 2011 as electricity companies will already be contracting for power for 2013 and beyond. Early auctions are essential to enable electricity companies to hedge their forward power contracts, mitigate price risk and thus avoid sudden electricity price increases.
Eurelectric also believes that EU member states should allow industry the full use of credits under the Kyoto Protocol’s Joint Implementation and Clean Development Mechanism provisions as a way of both smoothing the transition to low-carbon technology and stimulating the development of an international market in carbon.
Carbon capture and storage (CCS) is seen as a vital element for reducing power sector GHG emissions while maintaining a secure energy supply. The CCS Directive provides a comprehensive legal basis for safe storage of CO2 in underground formations, plus principles for access to transport pipelines. It also sets out capture-readiness provisions for new combustion plants above the size of 300 MW.
The package also provides for CCS and ‘innovative RES’ demonstration projects to be financed from the sale of 300 million carbon allowances from the ETS New Entrants Reserve (NER300 fund). To ensure European added value, the demonstration programme must draw on EU synergies under the coordination of the Commission. While innovative RES technologies certainly deserve demonstration funding, Eurelectric argues that CCS should get the lion’s share of the NER300 fund because currently no major comparable national funding mechanisms exist for CCS as is the case for RES. Eurelectic welcomes the recent decision by the EU Committee, which means CCS demo is likely to receive adequate funding.
Beyond 2020: Challenges on the Mid-Century Horizon
The 4th Assessment Report of the International Panel on Climate Change (IPCC) indicated that in order to stabilize atmospheric CO2 emissions within a threshold of 440 ppm, global emissions would have to fall by 50 per cent on current levels and that OECD countries would have to reduce their emissions by 60-80 per cent by 2050.
This implies that the OECD power sector would have to be virtually carbon-free by 2050. Given the extremely long-lived assets and capital investment programmes on a very long timescale, which characterize the electricity industry, the 2050 horizon is certainly a more appropriate timeframe for strategic planning towards our carbon-neutral future than the arbitrary 2020 deadline set by the EU legislation.
|Figure 2: Power Choices scenario: Breakdown of both total power generation and RES power generation|
Recognizing their responsibilities, chief executives of power companies representing over 70 per cent of total EU electricity production signed up to a declaration in March 2009, making a commitment to achieve a carbon-neutral power sector by mid-century.
In line with this ambitious goal, Eurelectric embarked on a study entitled ‘Power Choices: Pathways to Carbon-Neutral Electricity in Europe by 2050’, which examines how the vision can be made a reality. Setting a domestic reduction goal for the whole economy of 75 per cent ” mid-way on the IPCC’s 60-80 per cent scale (equivalent to 80-95 per cent when offsets are included) ” the Power Choices study looks into the technological developments, investments and regulatory framework that will be needed in the coming decades, and assesses the policy options.
The study uses the PRIMES energy model developed and run by a team at Athens Technical University, which is also used by the Commission for its energy scenario work. For this project, the model was updated with macroeconomic and power sector data and assumptions. VGB PowerTech, a European technical association for power and heat generation, provided plant investment and generation data for the modelling.
The study develops two main scenarios for the EU-27 countries during the 1990-2050 period. The ‘Baseline’ scenario assumes all existing energy policies are followed: current EU targest for reducing CO2 emissions and promoting RES are pursued beyond 2020 but not reset; nuclear phase-out remains in place in those countries envisaging such a move; and electricity does not become a major fuel in the road transport sector.
|Figure 3: Comparison of CO2 emissions (mt) from thermal power plants in both scenarios|
The ‘Power Choices’ scenario aims for an optimal portfolio of power generation based on an integrated energy market. The model calculates the market optimum, based on technology assumptions made by the industry. The scenario assumes that: climate action becomes a priority and the EU attains a domestic target of cutting 75 per cent of its CO2 emissions from the whole economy versus 1990 levels; electricity becomes a major transport fuel as plug-in hybrid and electric cars are rolled out; all power generation options remain available, although nuclear energy is phased out in those countries that have announced a phase-out; no binding RES targets are set after 2020 and support mechanisms are gradually phased out between 2020-2030; energy efficiency is pushed by specific policies and standards on the demand-side during the entire projection period, which will result in lower energy demand; the price of CO2, i.e. carbon value, applies uniformly to all economic sectors, which means that all emitting sectors will have to pay for their emissions; after 2020, an international carbon market defines the price of CO2, which is the only driver for deployment of low-carbon technologies; and CCS is commercially available from 2025.
Power Choices sees electricity claim a greater share of total energy consumption as the energy efficiency drive squeezes out less efficient vectors. Most notably, there is a massive penetration of electric vehicles and other electrical applications.
However, due to the optimization of the energy system total EU power generation reaches a level that is not much greater than under the Baseline scenario, rising by around 50 per cent from some 3100 TWh in 2005 to around 4800 TWh in 2050.
The optimal generation portfolio developed under the Power Choices scenario sees RES power increase dramatically, reaching almost 1800 TWh in 2050 and becoming ” despite a phase-out of national subsidy schemes by 2030 ” the largest source of total EU power generation at 38 per cent.
Among RES technologies, wind power takes the lead with onshore wind providing 32 per cent of the RES contribution and offshore 24 per cent. Hydropower remains stable throughout the period, accounting for 20 per cent of the RES total. Biomass fired electricity also sees a substantial increase, although in relative terms its share of RES power slightly decreases, while solar power also enters the picture.
|Figure 4: Fall in final energy demand (mtoe) to 2050|
Nuclear power reaches almost 1300 TWh under Power Choices, with new capacity installed as of 2025, accounting for 27 per cent of total net power generation in 2050.
Electricity from solid fuels increases slightly, from 850 TWh in 2005 to 870 TWh in 2050, especially from 2025 because of the deployment of CCS. Gas fired power reaches its peak in 2040, followed by a slight decline as gas and carbon prices rise and CCS becomes necessary for gas fired plants, stabilizing at 750 TWh in 2050, representing 16 per cent of total EU electricity. In this scenario, oil fired plants have only a marginal role, with production slowly falling to just one per cent of total production by 2050.
Carbon Neutrality Attainable
With this power mix, the electricity industry achieves major reductions in CO2 emissions, brought about by energy efficiency and deployment of new renewables, new nuclear power plants and CCS techniques. While policy action under Baseline reduces sector CO2 emissions by 66 per cent, it still means 492 million tonnes (mt) of CO2 are emitted in 2050. Power Choices in contrast sees carbon emissions plummet by 90 per cent versus the 2005 level, in 2050. It is noteworthy that the major CO2 cuts occur between 2025 to 2040. This means that the current EU 2020 deadline is not coherent with the critical timelines for deployment of vital technology.
Power Choices brings us close to carbon-free electricity. To achieve credible carbon neutrality it is essential to calculate sector emissions in a transparent manner, reduce emissions to the fullest extent feasible within the sector, then offset residual emissions through actions to reduce GHGs elsewhere such that net carbon emissions are equivalent to zero.
The Power Choices scenario also shows primary energy consumption falling from 1795 million tonnes of oil equivalent (mtoe) to 1402 mtoe by 2050, a reduction of 22 per cent on Baseline.
The major part of this reduction is accounted for by a lower demand in the transport and residential sectors. A significant role is also played by improved building insulation, plus efficiency advances in existing electrical applications. Moreover, electricity in industrial processes contributes in decoupling economic growth from energy consumption and related carbon emissions.
The reduction in primary energy demand translates to an even steeper decrease in final energy consumption, a saving of 30 per cent on Baseline. A significant part of the reduction is delivered through a shift towards electric end-use applications and a consequent increase in the proportion of electricity in end-use ” up from 20 per cent to 45.5 per cent by 2050.
The sharp reduction in the end-use of gas and oil ” down to 36 per cent under Power Choices ” helps to bring about a major reduction in import dependency. A reduction of 40 per cent in net energy imports compared to the Baseline is seen. Power Choices sees overall energy cost in the economy, though initially rising from 11 per cent to 12 per cent per cent of gross domestic product (GDP) as one-off energy efficiency investments are made, falling back to below nine per cent of GDP by 2050.
The study shows the positive outcomes for economy, society and the environment ” achieving a low-carbon future at reasonable cost to the economy and without jeopardizing energy supply security ” which result from making the correct power choices on both supply and demand-side of the energy equation. Accordingly, the EU and national policymakers need to take strong and immediate political action in order to create the framework for making those choices.
The policymakers must support the carbon market so as to deliver the EU CO2 cap at least cost, ensure that all sectors internalize the cost of their GHG emissions, and ” since the global challenge of climate change requires a global solution ” continue to work for an international agreement on climate change. However, while an efficient carbon market will be a vital element in the framework, it will not be sufficient to ensure the right choices are made.
All low-carbon power technologies will need to be in the mix. Policymakers must therefore enable the use by the market of all low-carbon technology options ” RES, CCS, new nuclear and ‘smart’ networks. If the necessary capacity is to be constructed, they must also encourage public support for modern energy infrastructure and CO2 storage sites, and take action to streamline their licensing procedures.
However energy efficiency will be the major driver for the carbon-neutral Europe of tomorrow, indicated by the study. A paradigm shift is needed on the demand-side, away from direct use of fossil fuels towards energy efficient electric systems and technologies, including electric road vehicles. Public authorities must therefore play their role, by adopting standards and incentives to encourage consumers to choose energy efficient technologies in their domestic appliances, heating and cooling and road transport, and electro-technologies in industrial processes.
The power industry has shown the way, and will continue to play its part towards a low-carbon society. But if we are to succeed in achieving this shift to a climate-friendly future, then everyone must work together ” industry, policymakers, customers and stakeholders ” within Europe and beyond.