Commission calls for liberalised energy market and 2030 targets for emissions reduction

 European Energy Commissioner Günther Oettinger

The European Commission has called for continent-wide 2030 goals for carbon emission reduction to be set as soon as possible in order to promote investment.

Any agreed milestones “should enable renewable energy producers to be increasingly competitive players in the (liberalised) European energy market," a statement said. The document examines four different possible scenarios.

To reach the current 2020 targets, of 20% of electricity supplied from renewable sources, Member States have rapidly to implement their national plans and double investment in renewable energy to €70bn. However, the lack of certainty on the direction of future policies beyond 2020 is perceived to be hindering this process.

The statement proposes that renewable energy such as solar and wind power should be generated wherever they are cheapest on the continent, but that no overarching European goal should be set for the amount to be generated. Instead, goals for renewable energy, energy efficiency and greenhouse gas emissions would be set at a national level. This would mean that the main instrument for cutting carbon emissions and encourage investment in renewables would be the EU Emissions Trading Scheme (ETS).

Subsidies for renewable energy would be gradually withdrawn as they become cost-competitive with other sources of electricity and heat. Support schemes should also be consistent across Europe, to avoid unnecessary barriers.

"We should continue to develop renewable energy and promote innovative solutions. We have to do it in a cost-efficient way," said Energy Commissioner Günther Oettinger.

The Commission repeated its backing for an integrated market and a pan-European grid that would connect to large solar and wind farms in Northern Africa. Morocco already has an aim of generating 40% of its electricity from solar by 2020. The Commission foresees an increased use of the cooperation mechanisms contained in the Renewable Energy Directive, which allow Member States to achieve their national binding targets by trading renewable energy between them.

Greater cooperation is particularly called for in the Mediterranean. "An integrated regional market in the Maghreb would facilitate large-scale investments in the region and enable Europe to import renewable electricity," the statement says.

Oettinger wants agreement on a new policy regime before he leaves post along with the rest of the Commission officials in 2014. “Without a suitable framework (after 2020) renewable energy growth will slump,” he warned.

Liberal Democrat MEP Graham Watson supported the call for a single, liberalised energy market and consistency across Europe. "More trading of renewable electricity within the EU is exactly what we need,” he said. “We all need to be importing and exporting our renewables. The sun is always shining and wind always blowing somewhere in Europe, and a single market for renewables will make the green energy switch work."

But he cautioned that this would not happen without investment in new high-voltage direct current grid infrastructure, and the budget for this is currently under threat. "The next EU budget is due to put €9bn towards cross-border energy links, but that money is being squeezed," he said.

The Commission's energy infrastructure package estimated that about €100bn is needed for new electricity transmission lines alone. The creation of the single market, the introduction of new technologies, market players and ancillary service providers, all depend on the construction of new infrastructure and the implementation of the smart grid.

Hans ten Berge, the secretary general of Eurelectric, the association representing Europe’s electricity industry, reacted to the statement by calling for “a level playing field for mature RES and other generation technologies", and consistent policies to be applied under the EU ETS. "With technologies like onshore wind and solar PV reaching maturity, Europe must integrate renewable energy into the market," he said.

However, many in the industry think that there should be a binding target for renewables for 2030 just as there has been for 2020, because without it there would be no guarantee of realising the aims of the overarching EU 2050 carbon reduction target of 80-95% and the EU Energy Roadmap 2050.

The Coalition of progressive European energy companies, which represents SSE, Eneco, DONG Energy, EWE, Acciona, Sorgenia, PPC, EDP Renewables and Stadtwerke, said this “is needed to bridge the policy gap between 2020 and 2050 and to allow the renewables industry to mature and to reach cost competitiveness."

"European Ministers must turn this message into action and back a renewable energy target for 2030, as supported by the Strategy's Impact Assessment", added Stephane Bourgeois, Head of Regulatory Affairs of the European Wind Energy Association (EWEA). "A legally binding renewable energy target for 2030 is crucial if we want to foster Europe's leadership in wind energy, and in particular offshore wind".

Agreement also came from Lübbeke, Senior Renewable Energy Policy Officer at the World Wildlife Fund, who argued that it would "keep Europe at the forefront of innovation, aiding economic recovery by boosting jobs and help to cut the hundreds of billions of euros Europe pays every year for important coal, oil and gas".

The Commission is to shortly produce proposals to further develop the EU's sustainability framework and the most appropriate use of bioenergy after 2020, and guidance on best practices and experience gained on support schemes to encourage greater predictability, cost-effectiveness, avoid over compensation.

“Perfect storm" has arrived for efforts to reduce carbon emissions

Efforts to reduce carbon emissions in the UK and across Europe are facing a combination of factors strongly hindering investment in low carbon power generation and energy efficiency and promoting the burning of coal.

Now who do you believe? Today, one British tabloid newspaper is reporting that the construction of gas power plants is “twice government predictions", while another is reporting the exact opposite.

The Guardian reports Friends of the Earth analysis of the latest Government figures, from October, saying that while about 5GW of new gas-fired power generation will be needed to supply the UK in the coming decades, “power stations with more than 3GW of capacity are already now under construction and nearly 10GW of plants have received planning permission. In addition, nearly 10GW of capacity is in the earlier stages of planning".

Meanwhile, the Financial Times is warning that with 11GW of mainly coal-fired generation due to close by 2015 under the EU’s Large Combustion Plant Directive, we are burning more coal because it is currently cheaper than gas.

What is the truth?

Actually, both, at different time scales. Either way, however, it's not good news for the climate.

Coal is too cheap

Gas is today trading at just over 58p per therm, yielding baseload power for delivery today from gas generation of ￡45.20 per megawatt-hour. This does not leave much room for profit when electricity is trading at 45.50 ￡/MWh, and this is why coal generation is now favoured over gas.

The FT says “coal plants have been pumping at more than 75 per cent capacity, compared with 25 per cent a year ago".

This is a continuation of the trend of burning more coal over the last two years which is helping to push up the U.K.'s carbon emissions.

Partly as a result of increased demand, UK Coal moved from an interim loss of ￡93.2 million to a profit of ￡22.1 million in the six months to last June, following losses totalling ￡270 million over the previous three years. (However, this has not stopped it from announcing plans today to close the U.K.'s biggest coal mine, Daw Hill, near Coventry, by early 2014 when current seams are exhausted.)

The demand is driving strong imports of U.S. and Colombian coal into Europe, and prices have fallen to just over $100 (￡64) a tonne.

This figure is wildly different from that predicted by the government just six months ago: $124 (￡80).

(In fact, the price of coal wasn't even the price that DECC's report said it was at the time it was published; yet these now wildly inaccurate figures are those on which the Government bases its energy policy.)

The low price for coal is also partly the reason why Drax announced last month that it was scrapping plans for a new biomass power station, calling for more support for biomass generation from the Renewables Obligation to counter an increase in its fuel costs; although it put these fuel costs at just ￡33.3 per megawatt-hour, significantly less than that for gas.

Too many carbon credits

None of this is helping the UK, or Europe, meet its greenhouse gas emission targets.

The problem is that with coal prices low, a recession on, and an over-abundance of EU Emissions Allowances resulting in a low price of carbon, there is insufficient disincentive to burn coal, let alone gas, and consequently even less incentive to build renewable energy generation, nuclear power stations or develop carbon capture and storage.

Hence the need for DECC's
announcement this week of a ￡20 million competition to develop Carbon Capture and Storage technology, in the hope that it will reduce the price of this still unproven technology.

This combination of factors is the perfect storm for attempts to reduce carbon emissions this decade.

Carbon prices fell by over half during 2011 and are now still trading for under €8.

Despite rumblings from Brussels, the Commission is dragging its feet on moves to set aside allowances in order to restrict demand and stimulate the price.

Instead, it seems to be hoping that by the end of the year, when airlines begin being required to purchase carbon-emission allowances as part of their role in the Emissions Trading Scheme, this will stimulate a price rise. But that is still nine months away.

According to carbon market analyst Steven Knell, from IHS CERA, the ETS in no longer the main policy tool for reducing emissions ″because the supply and price of allowances are fixed and predetermined. The market is poorly equipped to deal with disruptions in demand levels," he says.

“This, plus the financial crisis, the consequent fall in emissions, and the fragile nature of the recovery, added to recent price decline due to the expectation that policy risks will deprive the market of demand, mean that action to fix the problem is urgently required".

The oversupply means that only 6.8% of all EUAs are trading; a poor proportion. This amounts to 550 million tonnes, which is equivalent to all the emissions of the non-power generation industry members of the market in Europe, i.e., the high energy users like steel and concrete; or, to put it another way, all of the U.K.'s allowances.

“This yields a long position and indicates what the price will be like in 2020: that it will not change sufficiently to stimulate the demand required for investment in energy efficiency and renewable energy lesser-known carbon capture and storage or nuclear power," says Knell.

The supply of carbon-emission allowances needs to decline more aggressively and prices need to be higher.

The policy overlap in Europe needs addressing, he says. “The latest agreements give the possibility to set aside some EU Allowances to promote energy efficiency in the draft of the Energy Efficiency Directive, but the amount set aside would need to be substantial," he says.

“Strong medicine is needed."

“Strong medicine is needed," concludes Knell. He points to an increase in European ambition for emission reduction cuts from 20% to 30% by 2020, which, he says is achievable due to the recession's effects.

However, Poland has just vetoed this target at last Friday's meeting of environment ministers because of its own addiction to coal-fired electricity generation. This vote is not binding on a Commission decision however, and it remains to be seen what will happen.

In the meantime, only two strategies are available to individual governments, because they can't control the price of oil, and these are to tax carbon and support the carbon price.

Therefore, any measure that favours the energy-intensive industries by reducing the impact of carbon-penalising policies in next week's Budget from the Chancellor, George Osborne, will send precisely the wrong signals to the market.

The setting of the carbon price floor, and reform of the energy market are urgently required to favour carbon-reduction investment and weather this storm.

But contrary to the impression given by the Financial Times article, whatever happens the lights will stay on in Britain, because of the number of gas-fired power stations that have received planning permission; they may not be built just yet, but they will be built when coal and nuclear generation comes off-line in the future, to meet any demand not met by offshore wind.

But whether it's coal or gas, it locks in more UK carbon emissions than desirable for the next 20 or so years. Chancellor: are you paying attention?

Emission allowance auction to be held as price crashes

The second auction in Phase II of the European Union's Emissions Trading System will be held on behalf of the government on 24th March.

But the scheme has come under attack again, as the owners of registered installations - large energy generators, cement manufacturers, chemical plants and the like - have been selling off credits which they are not using on account of the recession - to the tune of 75 to 150 million euros a day - to raise funds to balance their books.

Big polluters must purchase allowances corresponding to the tonnes of carbon they expect to emit. 7% of the UK's allowance cap is auctioned - about 86 million allowances over Phase II.

West European iron and steel output is expected to fall by at least 14% this year compared to 2008, and EU cement production by 20-25%, meaning there will be a surplus of carbon allowances of 66 million tons for those two sectors alone. This is worth about 750 million euros. But the sell-off is causing a glut and a price collapse - by up to a third in January. Analysts said it could drop as low as 5 euros from a peak of 31 euros last summer.

"This was not designed as a scheme to give corporates cheap short-term funding options in a credit crunch meltdown," said Mark Lewis, Deutsche Bank carbon analyst. "But that appears to be what's happening."

A low price undermines incentives for companies to cut emissions. "It demonstrates that the targets after 2012 (to 2020) are too lax, especially in combination with a large use of carbon offsets," said Cambridge University's Karsten Neuhoff. But Barbara Helfferich, EU Commission environment spokeswoman brushed off criticism, saying "If those companies were smart they would take those profits and invest them in greener technology". But will they?

The allowances are one of the worst investments so far in 2009, falling more than almost any other energy commodity or index of global stocks. Only the energy guzzlers have benefited - so it looks as if this auction won't raise nearly as much cash for the government as the first one.

This is yet another reason why the ETS needs a complete overhaul - it is just not fit for purpose.