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

Whom am I? A French professor?

I was also a French boy born in a

b…..ry

Also the father of a kid working in

B…..g

www.florence-school.eu

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

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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)

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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

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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

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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

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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 11


(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

Plus:

• 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”

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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)

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www.florence-school.eu 14

CERA

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.

Notes:

°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?

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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

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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)


¤ Spain “avoided CO2 Price” Year 2012

Wind 85 Eur / CO2 Ton


¤ EU ETS Price of carbon Year 2010: 10 to 12 EUR / Year 2013: 3 to 5 EUR

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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:

°Hydro turbines;

°Nuclear (AP 1000 with Westinghouse; EPR with EDF >> Contract in UK);

°Grid equipment (as State Grid China in Portugal’s Grid etc.)

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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…

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(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)

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(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”

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(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”

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(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)

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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…

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Thank you for your attention Email contact: [email protected] Follow me on Twitter: @JMGlachant Read the Journal I am chief-editor of: EEEP “Economics of Energy and Environmental Policy”

My web site: http://www.florence-school.eu

mailto:[email protected]



7 years of EU energy and climate policy: “Age of reason or of divorce?”

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