Thursday, December 22, 2011

The Commission’s energy roadmap is a missed opportunity

by Stephen Tindale

The European Commission recently published its 'Energy Roadmap 2050'. The paper begins by repeating the EU's commitment to reduce greenhouse gas emissions by 80-95 per cent (against 1990 levels) by 2050, and highlights the 2020 greenhouse gas, renewable and energy efficiency targets. It then acknowledges that "there is inadequate direction as to what should follow the 2020 agenda. This creates uncertainty among investors, governments and citizens".

The Commission is right to accept the need to set policies beyond 2020, since energy investments are inherently expensive and long term. But the rest of the paper does not propose a clear direction. It simply outlines seven possible scenarios: a reference scenario; current policy initiatives; and five different scenarios involving decarbonisation. The roadmap ends by acknowledging that "the next step is to define the 2030 policy framework" and promising proposals next year on the internal market, renewable energy and nuclear safety.

This is a missed opportunity. The Commission's role is to make policy proposals and it should have spent 2011 preparing these. It should also have published a list of measures which it considers to be the key priorities for 2012.

The Commission's energy roadmap follows the low-carbon roadmap and a transport roadmap that it published last March. All these roadmaps are descriptions of various possible scenarios. Scenario planning and modeling are important, but it is not clear why the Commission thinks it should do these exercises itself; when it does so, it inevitably has to manage the different views of its own directorates-general, and the member-states, in drafting the text. The International Energy Agency publishes valuable and well-respected roadmaps. The European Climate Foundation has also published an excellent 2050 energy roadmap and 2030 electricity roadmap.

To be fair to the Commission, it did publish one significant energy policy proposal in June, the draft 'energy efficiency directive'. Adopting this should be the top EU energy priority for 2012. If Europe produced and used energy more efficiently, its economic recovery and the climate would benefit. But there is substantial member-state opposition to this Commission proposal – some on grounds of subsidiarity, and some on grounds of cost (though investment in energy efficiency will almost always be cheaper than investment in new energy supply). For example, many energy companies do not support the Commission plan to make combined heat and power mandatory on most new power stations – and energy companies have substantial influence over their host governments.

The second EU energy and climate policy priority for 2012 should be to rescue the Emissions Trading System (ETS). In 2007, so before the recession, allowances were trading at €25/tonne. They are now trading at less than €7, making the ETS irrelevant to investment decisions. All the roadmap's decarbonisation scenarios assume major increases in carbon prices. Many energy companies want the Commission to take steps to push up carbon prices. For example, the EU Corporate Leaders Group on Climate Change, whose members include Shell, Alstom, Philips and Dong Energy, has written to the Commission calling for "decisive action now".

The best way to ensure long-term ETS price stability would be to set a Europe-wide reserve auction price: governments could announce that no allowances would be sold for less than, say, €15/tonne. This could be achieved formally through an EU-wide agreement, or informally by member-states with sufficient numbers of allowances creating a 'coalition of the willing'. Such a coalition would need to include all the big economies which use large quantities of fossil fuels for electricity generation – which means all the large European economies except France.

There would be substantial opposition from Poland and Spain, because of the amount of coal these countries use for power generation, and support from the UK, where the government is already introducing a de facto carbon floor price. The view of the German government is harder to predict. Chancellor Merkel's retreat from nuclear power means that Germany will burn more fossil fuel. But Merkel's CDU is less close to the coal industry than the opposition SPD, and Merkel will be actively seeking green votes in the run up to Germany's 2013 elections.

The EU has already agreed arrangements for how the ETS will operate until 2020, and total numbers of carbon allowances for each year until then, so some policy-makers and businesses are arguing that it would be wrong to intervene in the market. But the number of allowances were set against a 'business as usual' scenario – and business is anything but usual at present. To rescue the ETS from irrelevance, intervention is essential.

The EU has agreed that the total number of allowances will reduce by 1.74 per cent each year. This annual reduction will continue after 2020. Apart from this, nothing has been agreed about how the ETS will operate after 2020.

Caps for the years 2021 to 2030 need to be set soon, and the annual rate of reduction increased above 1.74 per cent. But given the track record of ETS price fluctuations, even a greatly improved ETS is unlikely to provide an adequate post-2020 policy framework to give businesses and investors confidence.

So the third priority for EU climate and energy policy in 2012 should be to set out a strategy for 2020-30. At the press conference launching the Energy Roadmap 2015, energy commissioner Günther Oettinger called for an immediate discussion on targets for renewables by 2030, with a decision in two years' time. Targets are less important than policies, but can play a useful role. The roadmap states, correctly, that the 2020 renewables target has given investors greater confidence.

So the EU should give priority to three steps in 2012: adopting the energy efficiency directive, operating a reserve price for ETS auctions and setting a 2030 renewable energy target. Given the eurozone crisis, there is a danger that climate and energy issues will slip down the EU's agenda. But the Danish government, which holds the EU presidency in the first half of 2012, has made clear its intention to prevent this happening. It believes that strong climate and energy policies will boost 'green growth'.

The Danish climate and energy minister, Martin Lidegaard, has said that "every euro spent on energy efficiency will go to ensuring European jobs. Every euro spent on oil imports will go out of Europe". He has acknowledged that the current ETS price is "not sustainable" but not said what he will do about it.

Denmark has an excellent story to tell on climate and energy policy. Since the late 1970s, in response to the oil shocks of that decade, it has vigorously pursued energy efficiency and renewable energy. Denmark has the lowest energy intensity (energy used per unit of GDP) of any member-state. Over 20 per cent of its electricity comes from wind farms. There is a cross-party consensus on climate and energy issues.

Before she became commissioner for climate action, Connie Hedegaard was Danish minister for climate and energy. So despite the eurozone crisis, the treaty negotiations and the inevitable arguments over the multiannual financial framework, we can expect the Danish presidency to remind EU institutions not to neglect climate and energy policies.

Stephen Tindale is an associate fellow at the Centre for European Reform.


Jorgo said...

good article, Stephen!

Philip Lowe said...

"I am, unusually, not very impressed by your latest article. You have a good point on the ETS system, although fixing the carbon price is only a necessary but not sufficient condition to get to a low carbon economy and a low carbon energy sector. A lot of other things are also needed, including - as you say - maybe more regulation and targets. But there are a number of other things that the Commission did in 2011, alongside the energy efficiency proposals, which are missing in your assessment. These include:

• a major proposal for a regulation on promoting private and public investment in infrastructure networks;

• the Connecting Europe proposal;

• extensive work to get standards for smart grids adopted. If there is any 'no regrets' option in the Roadmap apart from energy efficiency measures, it's modernising and interconnecting grids, whether superhighways or local systems.

• proposals on a stronger external component of energy policy and development of alternative routes and sources of supply;

• the adoption by the EU of the Commission's proposals on nuclear waste and its intiatives on safety stress tests, both of which are very relevant to assessing the most cost-effective pathways to a low-carbon economy and energy sector.

The Commission continues to make extensive efforts to get the Renewables Directive implemented in an intelligent way, notwithstanding the constraints of energy mix choice, particularly in the UK. The energy mix and support for renewables have been heavily protected by national governments as an issue of national competence. The Commission has said it will produce a post-2020 renewables strategy in the first half of 2012, alongside a new paper on completion of the internal market, (following all the work in 2011 on getting the job done by 2014) with specific attention given in both documents to creating a better Europe-wide framework for investment in new generation capacity, for which fixing the carbon price is only part of the answer.

The Roadmap is a lever to bring national and European energy policy decisions closer together. It is pointless for the Commission to come forward with 'concrete proposals' on getting to 2050 before there is consensus on what the pathways to 2050 may look like."

Philip Lowe, Director-General, Energy, European Commission