December 19, 2017 - End of year special
ENERGY WATCH by Karel Beckman
For a kinder, simpler Energy Union
December 19, 2017
Why the climate and energy policies of both the EU and the Member States may be getting it wrong. Some end-of-year reflections by your weekly Energy Watcher, Karel Beckman
On 14 December, the new Dutch Minister of Economic Affairs, Eric Wiebes, presented the new Dutch cabinet’s climate and energy plans to the Parliament in The Hague.
The four-party coalition government (two Liberal-Democratic and two Christian-Democratic parties) surprised friend and foe in October when it announced very ambitious climate plans. These include a 49% reduction of greenhouse gas emissions in 2030, closure of all five coal-power stations in the Netherlands no later than 2030, a minimum CO2-price, a Climate Law, and only zero-emission vehicles to be sold from 2030 on.
In his first parliamentary appearance, Wiebes for the first time indicated what the costs of this programme will be: €8 to €24 billion per year, equivalent to 1-3% of GDP for 30 years. (See this link in Dutch.)
According to news agency BNR, Frans Rooijers, director of the well-known research institute CE Delft, confirmed that his researchers have come to similar estimates. “Rather closer to €24 billion than to €8 billion”, said Rooijers.
Wiebes said “this doesn’t sound like that much money, but I think it’s quite a lot.” Apparently a lot of people seemed inclined to agree that it’s “not much money”, since his statements got little publicity. It may also be a sign that journalists don’t understand figures anymore. Personally, I think it’s a hell of a lot of money.
But that’s not the main point I want to make.
Here are some questions that occurred to me upon hearing these latest policy announcements from the Dutch government.
- This new ambitious climate policy comes from a country that until recently scored very poorly on renewable energy and climate in Europe (only Malta and Luxemburg did worse). If a new government, which isn’t even “green” or leftist, can make such a radical switch, how do we know what the next government will do? Another radical switch – in a reverse direction?
- Wiebes also said (according to an account in another newspaper) that the costs he mentioned were based on “the most efficient ways” to reach the goals. Earlier the government produced a report showing what these “most efficient ways” They are shown in this table:
The table shows closing the coal power stations and setting up a carbon capture and storage (CCS) programme are the two measures that are expected to do the lion’s share of the climate work. Isn’t this strange – since CCS is after all associated strongly with coal power plants? And how do we know the CCS programme will work?
- Three of the five coal power plants have only been built very recently (see here and here). In fact, they were built with the strong encouragement of the Dutch government, which wanted to help big industrial energy users in the Netherlands, who were complaining about “unfair competition” from their German rivals who profited from cheap German coal power. (I know because I covered the story for a Dutch newspaper I worked for at the time.) Doesn’t this then represent a huge destruction of capital – in particular since right across the border Germany is keeping old coal and lignite power plants open? Or, to put it differently, if Wiebes says this is “the most efficient” way to achieve the targets, has “efficiency” been measured taking into account international options that may be available or only national ones? (We can surmise the answer.)
- Even more fundamentally, can anyone know what the most efficient methods are in a fast-changing environment such as the energy market? Should a government make these choices in the first place?
- Why is there no mention of nuclear power? Is this because nuclear power is too expensive or has this option simply been ignored?
***
The new Dutch policies, laudable though they may seem, show what are perhaps the two major flaws of current energy and climate policy in Europe:
- Choices that are being made at the national level follow from EU-wide policies, but have no necessary relation to choices made in other EU countries.
- The continual changes in national and EU government policies lead to extreme investor uncertainty.
To find evidence of this, we need to look no further than the all-too-familiar example of Germany. As everyone knows, this country decided unilaterally to phase outs its nuclear power and to massively support renewable energy. At the same time, it decided to maintain much of its coal and lignite power capacity.
The result is not just that the German Energiewende has been very costly and has hardly led to any reduction of emissions (although it did help to bring down costs of renewable power), it had other negative effects as well: it led to very low wholesale power prices in North West Europe. This has made it impossible for energy companies to invest in, for example, nuclear power, or in gas-fired power to replace coal power.
The lack of policy coordination in this small corner of the world has led to massive inefficiencies. France and the UK are now investing in new nuclear power plants, which they have to subsidize, while Germany is closing its own plants (how will that improve safety in North West Europe)? The Netherlands is closing its modern, relatively efficient coal power stations, while Germany is keeping its coal power fleet largely intact.
Where is the economic sense in all this?
Wiebes is not the only one who believes climate policy costs “quite a lot of money’. In the UK the costs of climate policy are a hot topic – see the discussion around Hinkley Pont C. In Germany too this is a big issue in the talks that are taking place to form a government. Is it any wonder that countries like Poland think twice before following this example?
***
Many people will say that this proves we need a true EU-wide energy and climate policy. And there is certainly something to be said for that.
In a recent article, independent energy economist Adam Whitmore points out that “the EU could make huge progress in cutting emissions by focusing on a few large power plants”.
He notes that the EU ETS covers over 11,000 installations. “Out of these just 18 lignite and coal power plants, less than 0.2% of total installations, accounted for over 14% of all EUETS emissions in 2016, and 25% of all power sector emissions.”
“Half of these installations”, he adds, “accounting for 57% of emissions from the group, are in Germany.”
Whitmore notes optimistically that “This concentration of emissions creates a huge opportunity. Replacing the generation from these 18 plants with renewables would by itself achieve all of the emissions reductions required for the EUETS in the 2020s even if there were no other reductions in emissions at all. This is in part because emissions will start the 2020s well below the cap. So the EU can meet its 2030 targets just by eliminating emissions from 18 plants, provided only that emissions elsewhere don’t increase from their 2020 level.”
According to Whitmore, “Eliminating these emissions is comparatively straightforward. Renewables are increasingly available at scale and at low cost and over the course of the decade could easily displace this much generation. Even replacing these emissions with generation from gas would reduce emissions by two thirds or more, because current emissions per kWh are so high. And it should not be impossible to redeploy the workers from these plants to do more valuable things like improving insulation in buildings.”
Who can deny Whitmore is right?
The problem of course is that there is no EU-wide energy and climate policy. Even the ETS is not a real European policy, as it’s implemented at member state level. That’s also the reason why the ETS has not delivered: because member states all tried to protect their national industries.
True, the EU has now embarked on an ETS reform process, but one may well ask whether that will lead to a workable European system, or whether it will only serve to stall this part of EU climate policy for another one or two decades.
A major problem with the ETS reform is that it’s so technical and abstruse that only a handful of specialists and lobbyists are able to understand it. There is no wider debate about it in the EU member states or in national parliaments. So what will happen if it leads to undesirable outcomes for industries in some countries? (For a good overview of the EU ETS reform process, see here.)
***
So what about the Clean Energy Package and the Energy Union? Won’t they lead to an integrated EU energy market that will create certainty for investors?
There are several problems with these great projects.
First, why do we need two? You might say that “Energy Union” is the “narrative”, the CEP is the implementation. But that’s not true. The Third State of the Energy Union report, which came out on 27 November, was accompanied by no less than 10 policy documents:
- Third list of Projects of Common Interest
- Infrastructure Communication
- 2017 Energy Efficiency Progress Report
- Report on the functioning of the European carbon market
- Covenant of Mayors in figures: 8 year assessment
- Trends and projections report of the European Environment Agency
- Study on “Residential Prosumers in the European Energy Union”
- Executive summary for Study on “Residential Prosumers in the European Energy Union”
- Factsheets on Study on “Residential Prosumers in the European Energy Union”
- Assessing the progress towards the EU energy efficiency targets using index decomposition analysis
The Clean Energy Package of course was even larger: 4300 pages, over 40 documents.
It may sound trivial for me to mention this, but I don’t think it’s trivial. It shows that EU energy and climate policy has turned into a process exclusively for specialist policymakers, NGO’s and lobbyists. It has zero resonance outside Brussels – despite Maroš Šefčovič “European tours”.
Šefčovič’s latest State of the Energy Union report declares: “Now is the time to mobilise all of society”. True enough – but this is not the way to do it.
Rather than opening up and liberating markets, the Clean Energy Package and the Energy Union, certainly in combination, run the risk of overregulating markets and strangling the spontaneous forces of society that are needed for a genuine energy transformation.
I am not the only one who has noticed this problem. I had an interview earlier this year with Peter Styles, Chairman of the Electricity Committee of the European Federation of Energy Traders (EFET), and a Brussels veteran.
He told me that “regulations governing the EU wholesale electricity market have become so complex that the integration of the market is regressing instead of progressing”. He noted that TSOs (transmission system operators) on average now make less cross-border electricity transmission capacity available on the EU high voltage grid than in the late 1990s – before there had been any legislation forcing integration of national energy markets!
Styles said that “with the advent of the Third Energy Package, which came into force after 2009, the market architecture and governance became overly complex. The EU legislation explicitly excluded renewable electricity generation output from the disciplines of the internal energy market. The EU emissions trading system (ETS) began to fail as a mechanism for pricing carbon emissions. Governments introduced new national measures in the name of security of supply, unchecked by EU oversight.”
He did add that the Clean Energy Package was a worthy attempt to “move the market back in the right direction”.
But I am not so convinced by that. When all is said and done, I fear the outcome may be more complexity and bureaucracy.
***
Let me raise a question at this point that I don’t often hear asked, certainly not in Brussels: does anyone really know what the end goal of the Energy Union is?
Is the EU trying to achieve a single unimpeded internal energy market run solely by EU institutions (regulators, transmission system operators, politicians)?
If so, how would this square with article 194 of the Lisbon Treaty which says that Union policy on energy “shall aim, in a spirit of solidarity between Member States, to ensure the functioning of the energy market, to ensure security of energy supply in the Union, to promote energy efficiency and renewable energy, and to promote the interconnection of energy networks”, but at the same time upholds the right of each Member State “to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply”.
After the Energy Union was launched, in 2014, I talked to a number of energy experts from various EU countries (Poland, Luxembourg, France, Italy and the UK) to find out what they thought of it and what they thought it was intended to accomplish (see this article from February 2015 on Energy Post).
Sami Andoura, at that time a senior research fellow at the strongly pro-EU Jacques Delors Institute (he works for the European Commission today), told me then that it was not clear yet what the Energy Union would look like eventually, but he added that those who had launched the Energy Union “want to make sure that the EU will finally have a real European energy policy.”
According to Andoura, the Energy Union presents a way around article 194. What the Energy Union intends to do, he said, is “creating, in legislation and at the operational level, a real European energy governance.”
He argued that European organisations such as ENTSO-G, ENTSO-E and ACER should get real operational authority. “Where we should be going is that European organisations are able to direct energy flows. First at a regional level, later for the whole EU.”
This arrangement “should be laid down in a regulatory framework, in hard rules, not in visions or communications. We need a technical approach involving all stakeholders.” Member States’ fights over their national choices for their own “energy mix” might then become “irrelevant”, says Andoura. “The system will be optimised at the European level.”
It seems, to say the least, a rather optimistic Another expert, Stephen Tindale, at the time with the pro-European British think tank Centre for European Reform, dismissed the idea. “There is no chance we will have a European energy policy”, he said. “In an ideal world we would have it. But the differences between the Member States are too large, for example in renewables or nuclear power.”
I fear Tindale may be right.
Both the Energy Union and the Clean Energy Package promote improved “energy governance”, i.e. more EU control over the energy market. But the way that has been translated now is into a requirement of member states to submit “national climate and energy plans”.
According to the Third State of the Energy Union report, “the timely submissions of integrated national climate and energy plans” is a “key milestone for the post-2020-period”.
“Early submission”, it says, “is crucial to generate investor confidence and certainty for the period after 2020”.
Investor confidence, based on national climate and energy plans? I would not bet the bank on it.
***
And think about this (it’s an observation also made by Jean-Arnold Vinois in this great interview he had with our EU correspondent Sonja van Renssen back in February 2015): there is no Department of Energy in Brussels. There is nothing comparable to the U.S. Energy Department and its Energy Information Administration (EIA).
How can the EU make energy policy when it does not even have its own energy agency?
Right now, the EU commits to targets – for renewable energy, emissions and energy efficiency. It also engages in some projects – e.g. the projects of common interest, the recent plan for a battery alliance – and sponsors some energy research (through Horizon 2020). What it does not have, however, is independent knowledge and information to back up its policies.
So we have goals – but how do we know how best to reach them? How do we know they can be reached in the first place?
Some people say all we need is renewables, in combination with demand response and smart grids. Gas they consider at most a bridge fuel. Nuclear? Not needed at all.
But as far as I can tell, there is no one who really knows whether this is true. The EU lacks any authority in this regard. So countries all pursue their own policies. They set up their own capacity mechanisms, for example, like Spain and Italy, for fear that the growth of renewables will destroy baseload power and undermine security of supply. Which the EU is now trying to harmonize, through the Clean Energy Package, but it is uncertain with what result. Member States won’t be inclined to listen if the EU does not speak with authority.
***
As I wrote above, some EU countries go for nuclear power, others don’t.
I had the pleasure of visiting the EPZ nuclear power plant at Borssele in the Dutch province of Zeeland last week (on 15 December), with a small group of journalists. EPZ is the only nuclear power reactor in the Netherlands (apart from a medical research reactor at Petten). It is scheduled to stay in operation until 2033, by which time it will have produced power for 60 years!
However, according to financial director Bram-Paul Jobse, there would be no problem running the reactor for another 20 years after that.
More importantly, he said, there was room at the Borssele site to build two more reactors if necessary. The plans for this were already drawn up. The only problem is that no one could build a new nuclear power plant in the current market, said Jobse – not without government subsidies.
He showed us why with this chart (apologies for the Dutch):
Translation:
“Kostenverhoudingen energiebronnen” = cost ratio’s energy sources (i.e. the figures are ratio’s, not kWh prices)
Kerncentrale = nuclear reactor
Kolencentrale = coal power station
Gascentrale = gas fired power station
Wind turbine = wind turbine
Zonnecellen = solar panels
Verlies = loss
Overheidssubsidie = government subsidy
Winst = profit
Huidige verkoopprijs = wholesale market price
What this shows, in other words, is that as a result of government support of solar and wind, nuclear power in the Netherlands is operating at a loss.
Jobse also contrasted the operational and financial performance of the Borssele nuclear power station with the 700 MW Borssele wind power farm, which will be built by Dong Energy (it has the same name because it will be built offshore the town of Borssele).
Vermogen = capacity
Draaiuren = operational hours
Vollasturen per jaar = fully operational hours per year
Opwek per jaar = generation per year
Aantal huishoudens = number of households
Kosten = costs
Aansluiting = connection (costs)
Subsidie = subsidy
Arbeidsplaatsen tijdens bedrijf = jobs during operations
Einde levensduur = end of lifetime
Benodigde back up bij gebrek aan wind = required backup when there is no wind
I can’t vouch for these numbers – I don’t know exactly what assumptions went into them – but the message is clear: the costs of Dutch climate policy could be much lower than what Mr Wiebes estimates – if more nuclear power were used instead of offshore wind.
Now wouldn’t be nice if there was an EU Energy Agency that we could ask for a considered opinion?
***
If there are huge inefficiencies in all member states pursuing their own policies – and at the same time it is unlikely that a genuine internal EU energy market will emerge any time soon (if ever) – what then can we do except muddle on – and accept the uncertainties that go with that?
Perhaps there is nothing else to do, although this does seem unsatisfactory. I have no ready-made solutions to offer. Just some thoughts.
The prkerogatives of nation-states are fiercely defended at this moment in Europe, but perhaps that shows their weakness rather than their strength? Nations, say many trend watchers, will be replaced by networks.
That may seem like good news for “Brussels”, but it’s not really – not when you realize that networks are even more decentralized than nation states – and far removed from the bureaucratic wrangling going on in the EU capital.
Somehow, the EU will have to forge a connection with the citizen, communal and business networks of the future. Could that mean trying to enable them – rather than producing policy documents and directives?