January 20, 2017
BRUSSELS INSIDER #1 by Sonja van Renssen
EU energy market may be hit hard by May’s hard Brexit
January 20, 2017
It suddenly looks like the UK may not stay in the EU’s Emission Trading System (ETS) and internal energy market after all. In her speech at Lancaster House on Tuesday, 17 January, UK Prime Minister Theresa May crystallised the “hard Brexit” path that the UK has started down.
Among other things, she said:
“Not partial membership of the European Union, associate membership of the European Union, anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries.”
“We will take back control of our laws and bring to an end the jurisdiction of the European Court of Justice in Britain.”
“What I am proposing cannot mean membership of the Single Market.”
Stakeholders in the energy sector told Energy Post that the messages were not a surprise, but some found them worrying nonetheless. “This is taking us into dangerous territory,” said Jonathan Gaventa, Director at think tank E3G. There is plenty of appetite from different players in both the EU and UK side to continue working together, he said, but “cooperation on climate and energy needs political space”.
“Energy” actually only gets two mentions in May’s speech: under point 10, on “the best place for science and innovation”, she welcomes continued collaboration with European partners including on “clean energy”. Second, at the end, she highlights the UK as a crucial export market, also for Europe’s energy sector. “Climate” isn’t mentioned at all.
“If the UK is out of the single market, then the question arises about what rules govern gas and electricity flows between the UK and the EU from the spring of 2019,” Simon Virley, Partner and Head of Power and Utilities at KPMG UK, told Energy Post. “This is one of many practical questions that will need answering sooner rather than later.”
“One of the key issues is electricity trading and interconnectors,” agreed Antony Froggatt, an Associate Member of the Energy Policy Group at Exeter University and a Senior Research Fellow at Chatham House in the UK. “If the UK keeps its legislation in tune with that of the EU, then it can maintain market coupling and operate in the most efficient way possible.”
How likely is a pragmatic way forward? Gaventa says that one of the biggest barriers he sees to any form of the UK’s continued participation in the internal energy market – or the EU ETS for that matter – is its rejection of the jurisdiction of the European Court of Justice (ECJ). “For markets to succeed, you need independent adjudication,” he points out.
There will have to be a debate about a dispute resolution mechanism – and we all remember how easy those are to negotiate from the free trade agreement negotiations with the US (TTIP) and Canada (CETA).
A second problem is that the UK may be unwilling to sign up to EU ETS and internal energy market rules if it no longer has a say in their development. Froggatt sees opportunities however in May’s words about keeping parts of a Customs Union with the EU. “It’s about specific deals to be part of certain areas,” he explains. “The energy sector and especially electricity should be looked at separately.”
Legal opinion is divided on whether leaving the EU also means that the UK has to leave the Euratom Treaty, but Froggatt expects the UK to do so.
On the climate front, experts say that it can no longer be assumed that the UK will stay part of the EU’s overall emission reduction goals (e.g. a 40% emission cut by 2030). In a new blog post this week, researchers at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics say that without the UK, other Member States will have to pick up the slack or the EU will miss its 2030 target.
Remember that the UK is the EU’s second largest emitter after Germany. The Grantham Institute researchers calculate that without it, the EU-27 would need to increase their emission reduction efforts by an extra 4.5% or 138 MtCO2e. That’s the equivalent of Austria and Ireland’s combined emissions in 2014. And that, as the EU loses one of its strongest climate action advocates.
So far, EU lawmakers in Brussels say there has been no slow-down in negotiating a reform of the EU ETS and a new “Effort Sharing Regulation” that sets national non-ETS targets for Member States. Together, these two laws underpin the 40% climate target for 2030. The UK is still part of the negotiation. Will there be some language about how to readjust targets if a Member State leaves?
In the meantime, energy market players are likely to face increased uncertainty and risk. In very practical terms, electricity interconnectors may face fresh delays due to the political uncertainty. Moreover, the business case for individual projects – and their ability to attract EU funding – may change if the UK is no longer part of a pan-European cost-benefit assessment.
Another challenge for the EU going forward will be how to keep clean energy investment figures up. According to Bloomberg New Energy Finance, the UK has been the largest clean energy investor in the EU three years in a row now.
There may also be a new emphasis in the Energy Union discussion, on cooperation principles and trade rules with third countries on its borders. A neighbourhood approach already exists in the form of the Central East South Europe Gas Connectivity (CESEC) group for example, which combines EU and Energy Community members.
Indeed, Froggatt sees an interesting opportunity in the Energy Community. “As the UK leaves, there is an opportunity to act with others on the borders in a coordinated way.” The UK could join – and reinvigorate – the Energy Community, he suggests. “That could enhance the Energy Union.” It would mean that the UK has to comply with certain parts of the EU energy acqui however – state aid guidelines, for example? – which it may be wary of.
In practice, much of the legislation underpinning the European Energy Union, notably the Commission’s “winter package” on electricity market design, will be negotiated alongside Brexit. Whether energy and climate decisions can stay out of the political fray remains to be seen.
BRUSSELS INSIDER #2 by Sonja van Renssen
SolarPower Europe pursues fight to ease imports from China
January 20, 2017
Perhaps counter-intuitively, many in the European solar industry want the European Commission to end a minimum import price (MIP), and anti-dumping and anti-subsidy measures on cells and modules from China.
The Commission has no such plans. Just before Christmas, on 21 December, it recommended extending these measures, which date back to 2013, for another two years. Now Member States need to approve this recommendation for it to become law.
National officials responsible for trade defence are meeting in Brussels on 26 January, and it is then that they are likely to discuss and vote on the new regulation.
Four countries – Estonia, the Netherlands, Denmark and Sweden – wrote to the Commission before Christmas saying they reject the measures’ continuation. They are part of a larger group of about ten countries that typically favour free trade. A slightly larger group tends to support protective measures.
In practice, it is quite hard for a Commission proposal to be rejected once it gets to this stage: countries representing 65% of the EU population would have to vote against it (abstentions count as approvals). Nevertheless, if 15 Member States vote against, this triggers an appeal.
This is what SolarPower Europe has set its sights on. The trade association, which represents players across Europe along all parts of the solar value chain (and has Chinese members, it has to be said), has been fighting tooth and nail for some time now to end the punitive measures.
The essence of its argument is in a letter sent by over 400 companies from across the EU-28 to European Trade Commissioner Cecilia Malmstrom last October, asking her to end the measures “immediately”. They put it bluntly: “The trade measures add to the cost of solar and are contributing to slowing down its deployment.”
Module costs make up about half the total cost of a solar project. The trade measures add “100,000s Euros” of cost to installations in the region of 10 MW and “around 1000 Euros” to household installations. This is all the more problematic with the switch from feed-in tariffs to competitive price-driven tenders for renewables support, mandated by the EU’s 2014 state aid guidelines for energy and environment.
In turns out that many companies in the European solar business rely on Chinese cells and modules. “EU producers cannot fulfil EU demand,” explains James Watson, CEO of SolarPower Europe to Energy Post. With module prices high, the manufacturers of other solar products, such as inverters and steel mounting frames, are being required to drop their prices instead, putting manufacturing jobs at risk.
And all this while module production in Europe has continued to decline, argues SolarPower Europe. “After five years, we have seen no increase in production capacity and no increase in jobs,” says Watson. “These are not the measures that should be used. Rather we would suggest that an industrial strategy should be brought forward.”
He welcomes the mention of a “clean energy industrial forum” in the Commission’s “winter package” of new energy proposals last November as a step in this direction. “You cannot rely on trade measures to drive investments,” he says.
These are the arguments that SolarPower Europe put in a submission to the Commission on 9 January. It made its case at a Hearing with DG Trade on 17 January. But the Commission still intends to extend the measures by two years, the trade association told Energy Post this week. Hence it is taking the fight to the Member State level.
Countries such as Greece, Hungary, Bulgaria, Romania and the Czech Republic are “very seriously” considering voting against the Commission’s proposal “out of interest for their steel, inverters and electronics industries”. They are not part of the group that usually favours free trade. If Member States do trigger an appeal next week Thursday, it would be a first in this kind of case.
And it would not make everyone happy. About 30 European solar manufacturers, including Germany’s SolarWorld, have come together in an alternative trade association, ProSun, to defend the trade measures. Last December, they issued a press release to “applaud” the Commission’s decision to extend them as “an important step to ensure recovery of the EU solar industry”.
The cost of solar installations is at an all-time low, they say, and if EU demand is not increasing “it is because it is mainly restricted e.g. by low public tender volumes and fees for solar self-consumption”.
BRUSSELS INSIDER #3 by Sonja van Renssen
Lower cost of capital alone won’t do it for renewables
January 20, 2017
There is a strong correlation between the cost of capital of renewable energy projects and successful deployment: a study by German think tank Agora Energiewende in 2015 showed that the levelised cost of electricity of PV could double or quadruple if the weighted average cost of capital (WACC) for the projects increased from 5% to 10%.
In a new report issued on 10 January however, consultancy Ecofys warns that although lower costs of capital “are necessary to bring down deployment costs… they are not sufficient for allowing business cases as such”. Countries can only benefit from a lower cost of capital “if adequate policies are in place”.
The so-called “Pricetag” project, coordinated by Ecofys and funded by the European Climate Foundation, studied the cost of capital for ground-based PV and onshore wind projects in Southeast Europe, that is to say Bulgaria, Croatia, Greece, Hungary, Romania and Slovakia.
It’s a follow-up to the landmark Diacore project of nearly a year ago, which was the first ever study of the cost of capital for renewables across the entire EU-28. It found that this cost varied hugely and that the design and reliability of renewable support schemes was the single biggest factor (after country risk) driving up the cost of capital.
The new report demonstrates that driving down this cost cannot take the place of a supportive policy framework. In other words, a de-risking instrument such as that proposed by the European Commission in its new renewable energy directive can help, but not take the place of national support schemes and other enabling policies.
In the new study, the researchers present several important findings:
- They show that although the cost of capital generally decreased from 2014-16 – thanks to the policies of the European and national central banks – it did so relatively less for renewables. In other words, renewables tend to be pricier than other investments, for example in infrastructure.
- In all of Southeast Europe, the cost of capital remains “well above” that found in the best performing Member States such as Germany. The authors warn that the absence of national renewable energy targets for 2030 could increase the risk of a two-speed Europe.
- The researchers discovered that a lower cost of capital did not necessarily translate into new deployment. There was no onshore wind development in Slovakia, Hungary and Bulgaria for example, and only “tiny” development in Romania. The authors attribute this to the “lack of an effective support scheme” in these markets.
Greece was the notable exception. It added more onshore wind capacity than any other country – thanks to a consistent, long-term support scheme, the researchers suggest. It did this despite a “staggering” cost of capital of 10.5-13.7%. Of course reducing this would reduce the level of support needed.
“De-risking can be a catalyst,” said project coordinator David de Jager from Ecofys in an interview. “[But] if you do not take deployment [policies] seriously, de-risking will not do the job.”
It’s basically a virtuous circle that goes both ways. Its impact can be enormous: the Pricetag study puts the levelised cost of electricity of PV in Greece at €120/MWh, while the first German PV auction open to Danish bidders late last year was won with €54/MWh. “That’s not because Denmark has more sun,” says de Jager.