7 years of EU energy and climate policy: “Age of reason or of divorce?”
2007-2014 / 7 years of EU energy and climate policy: “Age of reason or of divorce?” Beijing Centre for Energy & Environmental Policy Research - CAS 22 September 2014 Jean-Michel Glachant Loyola de Palacio Professor in European Energy Policy Director Florence School of Regulation European University Institute, Florence, Italy
7 years of EU energy & climate policy leading to? Divorce or reason?
1. 1996-2009: How EU got its common energy policy (building open European energy market… +pushing RES +pricing CO2)? ~1 EU Internal market / ~2 EU internal grid / ~3 EU RES push + EU CO2 pricing
2. 2009-2014: Growing tensions between EU power market building, RES pushing & C02 pricing… ~1 Internal market / ~2 EU grid / ~3 EU RES & CO2
3. 2014-2019: and so what? Do we move ahead or divorce our policies? Where’s reason? ~1 EU Commission / ~2 EU power industry / ~3 EU power grids
EU policyWhat’s? (1.1)Internal Power Market Building
•First and foremost (EU very First Basic Policy: Internal Market)
¤ Not because it is logical or astute to support an EU energy policy on a Market basis – but because EU Commission’s strong & legitimate there: Internal Market’s its “raison d’être” (Single Act + Treaty)
¤ 1st EU Energy Package 1996 gave us: “Free Entry in Generation” - “B2B Consumer eligibility” – “Free movement of energy goods at internal borders”
¤ 2nd Package 2003 added: cross-border operation transparent & market friendly; Indep. Nat. regulators supporting market building; but cannot get harmonized “wholesale pricing” & “sequence of markets” (Day-Ahead to real time); however brings universal retail market eligibility
¤ 3d Package 2009 also: unable to add full harmonization of “market design & operation rules” >> but did set up a process to produce it with new EU Bodies: **ACER to “EU” the NRAs (*ENTSO-E to “EU” the Nat. grid managers)
EU policy What’s? (1.2) EU Grids
•Second level to Open EU Market: EU Grids opening + rules harmonizing
¤ because no power market at all can work if Grids aren’t market friendly: access rights; capacity allocation; congestion management; energy balancing // + Market cannot work efficiently if Grid rules not harmonized
¤ 1st Package 1996: – “Third Party Access to Grids” - “Access to all borders” – SOs managing the grids – 1st unbundling (accounting + Published rules)
¤ 2nd Package 2003 did add: Nat. regulators duties for opening markets and grids; Regulated access to grids; cross-border grid operation transparent & market friendly, open congestion mechanisms, open grid capacity allocation
¤ 3d Package 2009 unable to add full EU harmonization of “market design & grid operation rules” >> but did set up a process to produce it with new Bodies: *ENTSO-E for EU TSOs grid codes &EU grid planning (**ACER for “EU” NRAs); plus “full unbundling”
¤ 3d Package didn’t try to EU harmonization of grid tariffs making; of grid country investment & data methodology; did miss all Distribution grids issue
2004-2009 EU starts “common energy policy” going beyond market building: Out of the blue? Yes! (1.3)
Unprevisible & unforeseen: “EU common energy policy” not discussed or foreseen in anyway in November 2004… &… entirely “packaged” (negotiated, drafted & voted) in 2009!
•Game Changer 1 in 2005
Hampton Court Council Tony Blair: long life EU internal Security of Supply): where to get energy elsewhere inside the EU in a national crisis?
•Game Changer 2 in 2007
Lisbon treaty- Berlin Council Angela Merkel: long life EU energy sustainability 20-20-20 in 2020): common target RES + GHG
•Game Changer 3 in 2006 + 2009
Russia - Ukraine: EU needs Emergency plans + energy security regulation 2010 & new EU infrastructure package 2011-13
EU ener. policy What’s EU CO2 pricing then? (1.4)
•C02 Pricing also external to Energy Internal Market & EU energy grids
¤ it came because EU Commission *due responsibility with environment & pollution notably when “EU global” (a “common” policy incl. hunting migrant birds or sea fisheries) and **EU commitment taken in Kyoto Protocol (coming into force in 2005 – ending 2012) is a “common” policy
¤ We got a policy split: – EU (via EU Commission) commits vis-a- vis rest of the world for a global GHG emission target
-EU “Member States” share between them “EU common target” through an intra-EU “burden sharing agreement “
- EU Commission & Member Sates share among them the practicalities of implementation and monitoring (register of 11 000 facilities, of emissions and of allowances) till 2013 – hence more centralized till 2020
¤ EU amount of emissions> Member States allocate allowances >> you can use & buy/sell in EU single carbon market (EU Emission Trading Scheme)
¤ Internal energy market involved only indirectly: facilities + carbon price
EU ener. policy What’s EU RES push about? (1.5)
Also external to Internal Market and EU grids (= EU RES push Berlin 20-20-20)
¤ because RES are *subsidy pushed (not market pulled through energy market or carbon price: with “Feed-In Tariffs”) and **country managed (no EU wide system of RES push rules -except value of binding countries’ RES targets)
¤ EU got a policy split: – RES split as “green part” (out of market price & trade order, “own special circuit”) & as ”energy flow” (into Market &power system) -RES energy circulates through grids to directly feed the demand (Priority Dispatch while being variable and not controlable) >> very strong interactions between RES, power system and grids operation
- NonRES energy can serve only “residual demand”; only what variable RES cannot feed at each moment > very strong market interactions between RES & nonRES (capacity “adequacy” given by amount of RES)
¤ Small RES > small interactions; Massive RES>> massive interactions
(2) 2009-2014: Growing tensions between internal power market, RES push & Carbon Pricing… What’s happening?
EU “massive” RES push creates most of the tensions happening (visibly -let say- from 2011-12)
•Internal Energy Market having not conceived for massive RES (massive volume and prices effects)
•EU grids not conceived or prepared for massive RES “system effects” across regions and countries
•RES push substituting to Carbon Pricing as a lever for decarbonization
•Sustainability of massive public push to be financed in worse ever EU economic crisis
•Sustainability of industrial strategy destabilized by non-EU big “game changers”
Tensions Where? (2.1) RES push & EU Power Market
•RES already strongly interacting with EU Internal Market:
¤ Volume effect only “residual demand” comes to nonRES generators; eviction effect (2012 Germany - 30TWh due to RES and - 45TWh for economic slowdown; 2014 Q1: record of 24TWh RES = 11 GW “full time”; while nominal capacity PV reaches 36 GW)
¤ Price effect: High cost nonRES generators are not called (“evicted”); only lower cost nonRES Gen. are needed; equilibrium price of energy market falls (2008: 66 Eur/MWh; 2012: 33 Eur; 2014 Q1: 27 Eur)
¤ Of course RES German pricing interacts with neighboring countries: (Thanks to internal EU market coupling) Low energy market prices expand to all “core” EU wholesale market (from UK to Poland; Spain to Sweden)
115 GW of Gas plants at risk of closure, albeit to different extent over 2012-2014 data
Revenues over 2012-2014 enough to cover:
Full Fixed Costs 15 GW
Debt Repayment and Fixed O&M 69 GW
Fixed O&M Only 26 GW
Less than Fixed O&M 19 GW
Source: IHS CERA 2013.
°Revenues include energy as well as ancillary services.
°Data do not consider plants which are combustion turbines, internal combustion engines, must-run plants, or plants smaller than 40MW.
°Full fixed cost set at 110,000 Euro per MW per year.
°Debt to equity ratio of investment assumed to be 70:30.
°Fixed O&M set at 20,000 Euro per MW per year.
Tensions Where? (2.2) RES flows influencing EU Grids
•Massive variable RES injected into grids strongly influence EU system flows
¤ Generation changes its location RES generate where resource is; wind is not “gas-like” located >> new graphs of flows into the grids and of congestion (grid capacity availability)
¤ Generation changes its grid level: Wind more on regional grids that national ones; PV on local distribution grids >> new capacity investment; measurement & flow control; coordination, performance & revenue issues
¤ Generation changes its pattern: both Wind & PV outpout varies according to renewable resource variations; flows changing more with shorter predictability; more balancing needs
¤ All this also modify “flow influences” among EU countries >>coordination?
Significant investments needed for power network:
IEA: > 40% of existing network to be refurbished by 2035
TYNDP 2012: €104 billion over next 10 years for new projects (80% for RES integration)
UK: new off-shore grid same order of magnitude that existing on-shore one
Tensions Where? (2.3) RES push to be financed
•Massive RES regime has several piles of expenses to be financed
¤ Support schemes end up with significant amount (Germany power price at 33 Eur MWh & RES support at 64 Eur; Yearly total > 20 bn); while tariff deficits already big (Spain x10’ bn) or significant (France x1’bn). UK calls for LT nuclear at 110 EUR MWh.
“Energy based” subsidy to RES is anti-redistributive (taps lower income).
+ Germany protects 2 100 companies & lowers bills for 5 EUR bn in 2014.
¤ Grid reinforcements: Germany adds “grid obligation” to connect RES; many countries apply “shallow costs” to RES;
¤ System balancing: RES intermittency calls for demanding “system balancing” actions by grid operators
¤ All these costs adding up with limited budgeting & control
Tensions Where? (Cted) CO2 price vs RES costs of decarbonization
•All RES regimes end up with an “avoided CO2” (implicit) price which does not match with EU ETS C02 price
[EUI data: Claudio Marcantonini]
¤ Germany “avoided CO2 Price” Year 2010
Wind 60 Eur / CO2 Ton (1 MWh Wind actually displaced 0.7 CO2 ton)
Solar 600 Eur/ CO2 ton
¤ Italy “avoided CO2 Price” Year 2010
Wind 180 Eur / CO2 Ton (1 MWh Wind displaced 0.4 CO2 ton)
Solar 900 Eur/ CO2 ton
¤ Spain “avoided CO2 Price” Year 2012
Wind 85 Eur / CO2 Ton
Solar 350 Eur/ CO2 ton
¤ EU ETS Price of carbon Year 2010: 10 to 12 EUR / Year 2013: 3 to 5 EUR
Tensions Where? (2.4) new & unexpected external “game changers”
•RES “Green Equipment Boom for EU” being questioned
¤ EU RES size and cumulated experience advantage is diminishing.
EU RES installed based still near to “world 50%” but Asia by far first RES investor today and years to come
¤ World “top ten manufacturers” for wind and PV going upside down with strong Asian entries
¤ Chinese other successes in “Low Carbon” equipment manufacturing:
°Nuclear (AP 1000 with Westinghouse; EPR with EDF >> Contract in UK);
°Grid equipment (as State Grid China in Portugal’s Grid etc.)
Tensions (Cted) unexpected external “game changers”
•RES as “Only significant Greener” – Highly questioned in the US by gas substituting to coal on a market base… while in EU (very low CO2 price + high gas price) do not make it against coal…
¤ Gas “cleaning” the energy mix? by replacing coal (x 2 times more polluting with > 0.8 ton CO2 MWh). In USA GHG emissions at their lowest since… 1994.
¤ In EU however coal ousts gas: German coal near to record 50% elec generation in year 2013; GHG emissions Up; and total emissions (> 750 Mt) 2 times France and > 3 times Spain
¤ Why so much coal? German wholesale price 36Eur in 2013
Total cost Coal gen. 55Eur (Only coal + CO2 = 28Eur)
Total cost Gas gen. 70Eur (Only gas + CO2 = 51Eur)
¤ For gas to come back against coal: x2 price of coal or /2 price of gas; or x8 2013 price of C02 – not for very soon…
(3) and so what fro 2014-2019? Do we move ahead or divorce our policies? Where’s reason in the EU?
2014 year of questioning and redefinition by excellence in the EU:
It started in November 2013 and will rebound after entry in office of new EU Commission (in November 2014) and before Paris Climate Conference (November 2015)
Let’s look closer at:
•“Old EU Commission” Novelties (from Winter 2013 to Summer 2014)
•EU Power Utilities (Generators & Suppliers) Novelties (Manifesto 2014)
•EU Power Grid Operators Vision (TY N DP 2014)
(3.1) Reason to go ahead or to divorce? “Old EU Commission” novelties
June 2012: make your choice - November 2013: issued RES guide lines – January 2014: “game over” for Berlin 20-20-20 policy - Competitiveness & cutting energy costs “back to top”
•June 2012 - Options for RES policy post 2020 / S2: “Only Carbon Price” is risky and unfavorable to technology innovation / S3: “National RES targets” risk EU fragmentation and high unit costs but favors decentralization & distributed Gen. /S4 “EU RES target and harmonized frame” favor costs reduction, cross-border investments, large scale innovation but with grid & system costs
•November 2013 - Guide lines for RES support till 2020 / Only small units & less mature RES (as off-shore wind & bio-mass) keep FiT /// big units of “more deployed RES” (ex: On-Shore Wind; PV 1MW) get only FiP & Tgy neutral auction
•January 2014 - Framework post 2020 / favors binding M.S GHG targets + EU broad RES target & “appropriate EU governance for M.S action plans”
(3.2) Where’s Reason in the EU? EU Power Utilities
At least 3 noticeable preferences for “post-2020” (= Horizon 2030) in Eurelectric Manifesto February 2014
•Single binding target being GHG emissions (– 40% in 2030); carbon pricing market as most cost-effective instrument for decarbonisation
•Concentrate all “state aid” (public funding) on RD&D and increase spending on technology demonstration (= no funding of technology deployment anymore)
•Build EU long term power generation “investment adequacy” on new market for “Capacity remuneration mechanism” coordinated at Regional Level: a public authority of the Grid calls for “Capacity offers” and makes this paid by a levy on consumers >> “Market for Capacity” added to “Market for Energy”
(3.3) Where’s Reason in the EU?Power Grid Operators
At least 2 visible differences (ENTSO-E TYNDP2014 & Florence Forum May)
•1/ Vis-à-vis Eurelectric: NO to this “Capacity Mechanism”
Grid Operators do not have to collect money to finance capacity of generators (in distress or not)> Only sound mechanism is paying for “system flexibility services” being actually delivered to & measured by Grid Operators
•2/ Vis-à-vis EU Commission:
OK OK Commission has two “Top Down” vision(s) being
> The “Green Revolution” (still ambitious EU RES targets)
>> “The Money –still- rules” (non ambitious RES frame like “EU Utilities”)
But Grid Operators also have two “Bottom Up” vision(s) being
> The “Slow Progress” (Members States do not follow Commission at all)
>> “Green Transition” (States do it only at country level not with Commission)
To conclude: more reason… to divorce?
1/ Existing EU policy (since 2009) not born as a “Single Grand Programme” but successive EU policy opportunities crossing internal market building
2/ Berlin 20-20-20 put into EU internal market was mainly “Dash for RES”
3/ RES pushed from outside internal market but strongly interact with. EU “reference” market design has been conceived to help a CCGT fleet spreading same gas fuel costs all over EU. It ends up with 10’s CCGT GWs being financially stressed. And whole EU power system security also stressed.
4/ RES support is mainly Nat. schemes fragmenting the EU investment and operation landscape while overpassing average “EU willingness to pay” .
5/ Commission did try to escape any new post-2020 “RES burden sharing” leading to veto or riot - while getting a unified EU open space for RES future
6/ EU Utilities to escape “technology picking” for new energy fringe (by MS or Commission) while getting strong ETS & capacity mechanism pricing
7/ Grid Ops try to avoid building White Grid Elephants while delivering more EU system security
8/ Coming the new EU Commission? I don’t know. Germany knows better…
Thank you for your attention
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