February 17, 2017
A fossil fuel subsidy (I)
February 17, 2017
No less than 54 GW of backup power capacity did the UK transmission system operator (TSO), National Grid, auction in the first week of February to be provided (i.e. to be on standby) for 2017/18. That’s almost as much as the total power generation capacity of the country.
Does the UK really need that much backup capacity? One can imagine that policymakers feel they have to be 200% certain that the lights won’t go out at any time. Renewable energy, as everyone knows, cannot always be relied on. So the reflex to make extra sure that there is enough backup capacity available is understandable.
Nevertheless, according to independent energy expert Gerard Wynn, it is misguided. In fact, he notes, the electricity market already has a number of ways to make sure the system remains in balance. He argues that future measures should be built on those instruments. Capacity markets if they are used at all should only be used as a last resort. They are very costly after all: currently around 1 billion pounds a year, to be paid by the UK ratepayer.
In an article for his blog Energy and Carbon, republished on Energy Post, Wynn explains the (complex) mechanisms by which the (UK) electricity market ensures on a daily basis that the systems keeps functioning. For example, there is the balancing market, operated at National Grid, which can offer quite lucrative awards for companies supplying short-term reserves. The difference with the balancing market and the capacity market is that in the first case costs are passed on to market participants rather than ratepayers.
Actually, the UK is planning to implement certain reforms (increasing the rewards for market players offering short-term reserves) that will further improve the system. This raises the question, writes Wynn, of why regulator Ofgem cannot introduce more ambitious actions sooner (including expanding international interconnections) “and find other alternatives to the present capacity market giveaway to existing gas, coal and nuclear”.
Whatever you think about Wynn’s critique, one thing seems clear: if we are serious about the low-carbon transition we cannot continue to maintain 1 billion pound a year capacity markets.
Full article: Can UK power market reform replace the capacity market?
A fossil fuel subsidy (II)
February 17, 2017
A subsidy for fossil fuels of a wholly different order than any capacity market scheme relates to what is known among researchers as the social cost of carbon (SCC).
This is not some concept dreamed up by environmentalist NGO’s, nor is it simply an academic concept. It has real consequences for energy policy, especially in the US and Canada, where it is used in setting policies such as fuel economy standards. Or used to have real consequences – since it is possible that the new Trump administration may get rid all of such policies.
The reasoning behind the SCC is simple: carbon emissions are causing climate change, and this leads to financial damage for people all over the world. This mechanism as such is hardly in doubt. The question then is who does how much damage? How can you calculate this?
Researchers agree that there is no way to establish this with any kind of certainty. There will always be difference of opinion on what the effects of climate change are and how they should be measured. To take just one example: the discount rate used in calculations has a great impact on the results, but the level of the discount rate is in the end a subjective matter.
However, researchers also agree that the SCC is not zero. It is real. Currently, as this explanatory article on the website of Carbon Brief explains, there are three models in use by researchers – called DICE, FUND and PAGE – that yield different outcomes for the current SCC.
Based on a ruling from the US Court of Appeals, the Obama administration saw a chance to adopt the SCC as a tool for policymaking. Obama had no other options: unlike the EU or the UK, the US has no emission targets nor a carbon price to base policy on.
Currently, the US government makes policy based on the assumption that each ton of CO2 costs $39. According to Carbon Brief, the SCC is a factor in 69 final “rules” (i.e. regulations) and a further 80 proposed rules, including energy-saving programs, forest conservation, fuel-economy standards, and emissions performance standards, including the Clean Power Plan that Trump has said he wants to ditch.
Note that $39 per ton is much higher than the current carbon price of €5/ton in the EU Emission Trading System (ETS), although of course the two prices are applied in very different ways. The EU ETS price is paid for by industry and power producers who emit carbon. That is not the case in the US.
In an article published on our sister website The Energy Collective, and republished on Energy Post, Amir Jina of the Energy Policy Institute at the University of Chicago, takes the SCC price of $39 ton to calculate the “subsidy” that he argues is paid to the fossil fuel industry in the US. Since the US emitted 5.4 billion tons of CO2 in 2015, with a cost of $36 per ton (this was the number in 2016), the fossil fuel sector is subsidized with over $200 billion a year, argues Jina.
And he may have a point at that.
EU-28 greenhouse gas emissions (in CO2-equivalents) were 4.4 billion tons in 2014, by the way. This is not all due to the fossil fuel sector – but much of it is.
EU Energy Union: no deliveries, just takeaways
February 17, 2017
Assuming that we still have an EU a year from now – and that is not necessarily guaranteed, at least not in the form as we know it now – where will we be with EU energy policy?
You have no doubt picked up bits and pieces of the European Commission’s latest proposals on the Energy Union, made in its “Winter Package” last year – and you can be sure that we will continue to report on those as they make their way through the Brussels institutions – but to get a good overview of where we stand at the moment, a good place to go is a new paper written by Severin Fischer of the Center for Security Studies (CSS) at ETH Zurich.
Fischer lucidly explains five important aspects of the Commission’s proposals and evaluates their merits and chances of being adopted.
In a nutshell:
If accepted by Council and Parliament, the governance regulation proposed by the Commission would, for the first time, “organize the interaction between national policies and the overall EU strategy”, writes Fischer. That is to say: up to now, EU energy policy has always been a prerogative of the EU member states, but this regulation attempts to change that. Well, up to a point: it “would oblige member states to draft integrated energy and climate plans in which they describe their present and future action on a wide range of different themes, covering all topics of the “Energy Union”. These plans would then be consulted with neighbouring states and finally checked by the Commission, which would be asked to give advice and recommendations. During this process, the Commission hopes to prevent the creation of gaps between EU level objectives and member state actions.”
So it would still be hardly an “Energy Union”. Under a realistic scenario, writes Fischer, “member states will just see this as a formalized exercise and keep following what their domestic stakeholders and electorates are asking for, since sanctions or infringements are not foreseen.”
Here too very little can be seen in the way of a unified policy, notes Fischer “’The idea of creating a common rulebook on how to design renewable support policies has been deleted”, he notes, although the Commission does want to impose some conditions on Member States in this sphere, such as not allowing them change renewable support policies retroactively.
Another interesting aspect of the proposals: “If the EU is not on track to achieve its collective 27% goal for 2030 or even fall back behind their 2020 status, member states can choose between different instruments to compensate, one of them being the support for a EU financing instrument for renewables. If it is on track, the EU has little to say. Looking at the proposal in that way, member state failure could in the end create the first real EU renewables support scheme.”
Consumers: the Commission’s new target group
The Commission has obviously decided to put “consumers at the centre” in order to win political support for its project, writes Fischer. Indeed, according to Fischer, the Commission is “desperately searching for political support for its Energy Union plans”.
But he does not think the Commission will be very successful in this attempt. EU member states will not want Brussels to butt in on their dealing with small-scale producers, communities, corporations and consumers, Fischer believes.
Europeanisation below the surface
In the present political environment, the Commission did not even attempt to present “a great shift of competencies from the capitals towards Brussels”, notes Fischer. But it does attempt to “delegate powers to new institutions that do not yet follow Brussels’ orders, but might do so one day.”
One example is the proposed “Regional Operational Centers (ROCs), which should be set up by national transmission system operators (TSOs) and perform a whole set of new tasks, such as coordinated capacity calculation, security analysis and crisis simulations. ROCs would also be able to adopt decisions directed at national TSOs, interfering in the relationship between national regulators and national TSOs.”
Finally, Fischer is not too optimistic about any quick progress on the Energy Union files: “Finding an agreement on all different dossiers, including the proposals on climate policy presented earlier in 2016, will strongly depend on actors’ ability to create cross-sectoral package deals and identify ways of dealing with disagreement. During the big election year 2017 in the Netherlands, Italy, France and Germany and the beginning of Brexit negotiations, it is hard to imagine how progress could be fast.”
Full article: Energy Union, delivery pending
The first shall be the last
February 17, 2017
Foreign policy is a subject we regularly pay attention to on Energy Post, because it can have a large impact on energy markets. Indeed, in many cases foreign policy is about energy markets.
Personally, I think one of the most fascinating aspects of energy is that it is affected by so many different factors, from technological breakthroughs to OPEC deals, climate agreements, wars, energy policies, environmental regulations, and multiple social and economic developments. If you focus on only one aspect, you run the risk of missing out on crucial developments that may take you by surprise. This is the reason why we at Energy Post cover the whole energy picture, not just one part of it.
One of the best sources for foreign policy analysis is the website of Tomdispatch.com, a project of the Nation Institute in the US. This is a publication that specialises in well-written essays by leading authors and scholars with a critical view of US foreign policy. They tend to be critical of both conservative and liberal-progressive policies and ideas, on the basis of arguments that are often ignored in the mainstream media. Thus they often provide fresh perspectives on global issues that you can’t find anywhere else. This is why we often republish their pieces – after all, there is no reason to publish stuff that you can read everywhere.
This week we have two timely pieces for you, both, as you can imagine, on the implications of the foreign policies (or policy intentions) of the new US administration (and mind you, the authors at TomDispatch have followed president Obama’s policies just as critically over the years).
One is from foreign policy specialist Rajan Menon of the University of Columbia who explains how the brewing conflict around the South China Sea, with its large oil and gas resources, could easily turn into a catastrophic war between the US and China.
In case you are wondering what is behind the conflicting territorial claims on the South China Sea, you need to look no further: Menon explains it very clearly. His point is not that China’s claims are in any ways justified. They are not. Rather, his point is that the US can do very little to stop China by military means, unless it wants to risk a war far from its own borders. As Menon puts it, “Although there certainly is a debate about the legal validity and historical accuracy of China’s territorial claims, given the increasingly acrimonious relationship between Washington and Beijing the more strategically salient point may be that these territories, thousands of miles from the U.S. mainland, mean so much more to China than they do to the United States.”
The question is, though, will this stop Donald Trump? Or will the new US president feel he can’t afford to lose face if a conflict erupts – just as the Chinese leadership may feel they can’t afford to back down, given strong nationalist feeling in China? That could set the world up for a catastrophic confrontation.
Of course Trump could have chosen (could still choose) a different way of dealing with threats such as these – by forging alliances with other nations, thus stopping Chinese expansion in the South China Sea through a concerted diplomatic effort. But getting friendly with other countries is exactly what the Trump administration is not doing, writes energy and foreign relations expert Michael Klare.
According to Klare, by letting his foreign policy be governed by a simplistic, one-dimensional “America First” principle, Trump is achieving the exact opposite of what he intends. His way of putting America First, is enabling China and Russia to position themselves as the paramount nations on the world stage. For example, by killing the Trans-Pacific Partnership, he is chasing Japan, Australia and nations in South East Asia into the welcoming arms of China. And by killing Obama’s climate policy, he is giving China the lead in climate diplomacy as well as renewable energy markets which are guaranteed to deliver millions of jobs in the future.
Nothing here to really make you laugh, but there doesn’t seem to be too much to laugh about anyway in the world today.