February 13, 2018
BRUSSELS INSIDER #1 by Sonja van Renssen
EU ties itself into knots with capacity market decisions
February 13, 2018
On 7 February the European Commission approved six new capacity mechanisms in the name of security of supply, insisting that they will not distort the Single Market. Two problems: one, the national decisons come as the EU tries to negotiate Europe-wide power market rules for the next decade. Two, the Commission wants those market rules to exclude coal plants from public support – when it has just authorised Poland to give state aid in the form of capacity payments for the construction of new coal plants. Critics said it was bad news for the Paris Climate Agreement and the internal energy market.
There was no press conference, but the EU’s Commissioner for Competition Margrethe Vestager summed up her latest energy news in a tweet on 7 February: “We don’t want distortion of competition in energy markets, nor black outs if e.g. wind is not blowing. Capacity mechanisms in BE, FR, DE, PL, IT and EL approved today live up to both.”
Climate campaigner Mark Johnston’s response was representative of many: “Blind to climate crisis this is EU justification for 15-yr new-build coal subsidy in Poland. It shows how in wider sense EU’s electricity reforms continue to take us backwards.”
The purpose of capacity mechanisms is to guard against blackouts. They offer capacity providers additional remuneration on top of that from electricity sales, to maintain or invest in new capacity. Since this extra payment could give providers an unfair competitive advantage, it has to be approved under EU state aid rules. In practice, this means Member States’ applications were assessed against the EU’s 2014 energy and environment state aid guidelines, complemented by insights from the Commission’s 2016 state aid sector enquiry into capacity mechanisms.
Most of the reaction has focused on coal in Poland, but the Commission actually approved three types of capacity mechanisms in six different countries last week: two strategic reserves, in Belgium and Germany (the first time it has assessed and approved this kind of capacity mechanism – which it was unenthusiastic about in its sector enquiry interim report), two market-wide capacity mechanisms, in Italy and Poland (a la schemes already approved for the UK in 2014 France in 2016, and Ireland and Northern Ireland in 2017), and two schemes specifically to promote demand response, in France and Greece.
15-year subsidies for Polish coal
The strategic reserves raised few eyebrows. They are time-limited and intended for emergencies only. The German scheme requires grid operators to contract up to 2GW of reserve capacity every two years, from October 2019 to 2025.
The Belgian scheme sets up annual competitive bidding for one-year contracts to help cover demand for five consecutive winters, starting now. Both Belgium and Germany argued that they face supply risks linked in particular to nuclear power – high dependence on an ageing fleet and a phase-out respectively.
The schemes in France and Greece exist to promote a specific type of capacity – demand response – in a deviation from the rule that capacity mechanisms must be technology-neutral. The Commission justifies this on grounds that demand response is an underdeveloped sector that needs stimulation because a) it can react very fast and b) it is more environmentally friendly to reduce consumption than increase generation.
The French scheme creates annual tenders for demand response offers from both industry and households. In Greece, the Commission approved a two-year extension to an existing interruptibility scheme.
By far the most controversial of the Commission’s six decisions however, were the two for market-wide capacity mechanisms in Italy and Poland. Unlike the strategic reserves, these offer extra payment to capacities that are inside, not outside the market. The schemes also run for much longer – ten years in each case – and offer much greater volumes of public support – contracts of up to 15 years for new capacity. The Commission says they are needed because the power markets in these countries provide insufficient incentives for investment.
In other words, the energy-only market is not working. That is hardly news and it is the case in many other countries too. The difference is, Energy Post understands, that Italy and Poland have demonstrated to the Commission a risk of blackouts. Their generation fleets are older and closer to retirement than in a country like Germany, for example, an EU source said.
As a consequence, in Italy, annual auctions will let capacity providers win contracts of up to 15 years for new capacity and three years for existing capacity. In Poland, providers will likewise be able to bid for 15 years of support for new capacity, 5 or 15 years for new or substantially refurbished capacity (the length of the contract will depend on the size of the investment) and one year for existing capacity. What this means in practice, is that ten years from now a new (coal) power plant could still win up to 15 years of public support.
“It is a huge sell-out to the Polish coal industry at the expense of Polish taxpayers and the climate,” said Joanna Flisowska, Coal Policy Coordinator at Climate Action Network (CAN) Europe.
She cited an estimate by Polish think tank WiseEuropa that the scheme could cost Polish taxpayers €6 billion over the next decade. She also argued that the Commission is contradicting itself because in November 2016 it proposed a 550g/kWh emission performance standard for capacity mechanisms precisely to avoid them becoming “a backdoor to subsidise coal-fired power stations in the future”.
MEPs and Member States are currently negotiating a new electricity market regulation – part of the Commission’s Clean Energy Package – which contains that proposal. EU energy ministers adopted a position on it at their 18 December 2017 Council and the European Parliament’s industry and energy committee (ITRE) is due to vote on the regulation on 21 February.
After that, it will move to a plenary vote in March before Parliament and Council sit down to hammer out a deal. It is this awkward timing that led Green MEP Claude Turmes to accuse the Commission of “scandalous interference into an ongoing codecision process”.
In response to these attacks, Commission officials have said repeatedly that all state aid schemes will have to be amended in line with future legislation, including the new electricity regulation and any emission limits it contains.
The Commission also defends its decisions by pointing to the fact that it insists on competitive bidding and that all sorts of capacity must be allowed to compete (including renewables, demand response and imports). In the Polish case, providers of new capacity can also get an extra two years on their contract if they have very low emissions (<450gCO2/kWh). And there are specific rules to facilitate demand response participation.
Not everyone is convinced. UK-based NGO Sandbag argued that capacity markets cannot be physically designed to put demand response, coal and new-build gas on an equal footing because they are simply too different. With a low CO2 price and no coal-phase out in place, the threat of capacity markets funding coal is “huge” in a country like Poland, they warn.
Back in 2016, the Commission found that Member States were setting up capacity mechanisms that were unnecessary, expensive and badly designed. What it is trying to do now is make the best out of a bad job. It has not given up on the internal market, but it accepts that capacity mechanisms will be a part of the energy transition, even though it is clear that they cannot be a substitute for electricity market reform.
As for the Paris Climate Agreement, it is Member States and MEPs who look likely to postpone by five years the Commission’s proposed 550gCO2/kWh emission limit for capacity mechanisms.
BRUSSELS INSIDER #2 by Sonja van Renssen
How air quality concerns increasingly shape Europe’s energy agenda
February 13, 2018
When Bulgaria made air quality one of the environmental priorities for its EU presidency, it effectively committed to changing how people heat their homes. At an EU eco-innovation forum in Sofia, Bulgaria’s environment minister Neno Dimov announced new standards for solid fuels and the stoves that burn them. Other EU countries are also under pressure to improve their air quality – by taking energy measures. Energy Post spoke with Dimov, who is eager to clean up home heating, but defended his country’s challenge to the European Commission’s new air pollution limits for large combustion plants.
The Bulgarian government is going to address the country’s biggest air quality problem, low-quality domestic heating, said Bulgaria’s environment minister Neno Dimov at an EU eco-innovation conference in Sofia on 5 February.
Over half of the Bulgarian population uses solid fuel for heating – think coal, briquettes and wood. This is the primary cause of dust or so-called particulate matter (PM10 and PM2.5) pollution in its cities, for which Bulgaria sets something of a European record. The EU Court of Justice ruled last year that Bulgaria had “systematically and continuously” exceeded limits for PM10 and PM2.5 from 2007 to 2014. Clean air advocates called it a landmark verdict. If Bulgaria does not take action to comply, it could be hauled before the court a second time and fined.
Other countries are also in the hotseat. On 30 January, the European Commission summoned nine member states whose cases are not yet at the EU court to Brussels to scold them for being lax on air quality. It is currently carrying out a regulatory “fitness check” of EU air quality legislation to check whether it needs to be reviewed.
Largest health risk
The fact is that Europe’s air quality has improved over time, but it still mostly falls short of World Health Organisation (WHO) standards. The WHO has named air pollution the single largest environmental health risk for Europeans. Addressing it, means addressing energy policy. “We will not solve the air quality problems if we do not have the right energy policy in Europe,” said Director-General for Environment at the Commission Daniel Calleja Crespo in Sofia.
Dimov is motivated. “I am sure the aim is not to have penalties from Bulgaria, the aim is to achieve results,” he said in an interview on the fringes of the Sofia conference. The minister outlined two short-term measures he says can make a big difference to domestic heating. First and foremost, he wants to introduce quality standards for coal and briquettes – for wood it’s “a bit early” – ahead of next winter. The new standards have already been developed but still need to be written into law. Enforcing them will be the real challenge, he admitted.
Second, the government is in talks with local businesses to bring forward EU eco-design standards for solid fuel boilers and space heaters, perhaps from 2022 to 2020. The government will also work with the police to stamp out the burning of illegal fuels – anything from used car oil to tyres to clothes. When 45 repair garages were checked last month, 17 were not disposing of oil as they should.
The big challenge is implementing all these measures in Europe’s poorest country. “This is a socio-economic problem, not only an environmental problem,” Dimov explained. That said, the new fuel standards will raise the prices of fuel for heating, but only by weight, not for calorific value, he added. So the experts say, at least. Certainly it will need to be explained to people that by buying less fuel, they will not have less heat. Gas-fired central heating is “a logical long term target” but is too complex and expensive to realise quickly. The Bulgarian government has already invested €1 billion in making households more energy efficient.
Under fireFor all its initiative on domestic heating, Bulgaria came under fire from NGOs in January for its decision to join Poland in challenging new air pollution limits for large combustion plants (read: coal) narrowly agreed by Member States last year. The “LCP bref” (Large Combustion Plants Best Available Techniques Reference Document) sets standards for pollutants such as NOx, SOx and mercury that will have to be integrated into plants’ operating permits from around 2021.
Dimov argued that Bulgaria is challenging how the standards were agreed, not their content. “We have some procedural issues that are not particularly related to air pollution. Member states should have the right to discuss and this was given to member states on the day they had to vote. It’s done on such a fast track that we doubt the data, the examination, everything.” He said that in Bulgaria “industry actually has quite a limited impact on the air” and that he was confident of winning derogations for SOx.
The EU’s 21st eco-innovation forum brought together policymakers, business, experts and civil society to discuss how to improve air quality in energy, transport and agriculture. It attracted a record number of delegates (500, more than twice the usual number). Nearly 40 case studies on technological, business or governance innovations were presented by municipalities, companies and other experts from all over Europe.
Energy case studies included: innovative scrubbers, refrigeration systems and stoves; new power supply systems, air quality monitoring concepts and stove policies; awareness-raising “eco-managers”; smart cities; and industrial initiatives in metal manufacturing and flue gas treatment.
Poor air quality causes 400,000 premature deaths a year in Europe. The latest Eurobarometer survey (autumn 2017) shows that it is the second most important environmental issue for Europeans after climate change. In November 2017, the European Commission organised a first-ever European Clean Air Forum in Paris.