February 27, 2018
BRUSSELS INSIDER #1 by Sonja van Renssen
Industry 2030: how the EU plans to industrialise clean tech
February 27, 2018
New and old industries in Europe are fighting for political – and financial – favour as Brussels sits down to work out a new industrial policy strategy for 2030. At the EU’s annual “Industry Days” last week, three CEOs from the world of clean tech set out their ambitious plans for battery “gigafactories”, renewables representatives called for an EU industrial policy for their sector, and Brussels hinted at trade measures to protect Europe’s “green” competitive edge. At the same time, traditional manufacturers emphasised the vital role that they can play in a low-carbon society: “The chemical factory is the only sensible battery of the future.” Sonja van Renssen reports on the cutting edge of EU industrial policy.
Three years after President Juncker’s statement – “I want Europe to become the world number one in renewables”- the reality is not that bright. Green MEP Claude Turmes neatly summed up the challenge in a blogpost published on 23 February: “EU investments in renewables are stagnating (half of EU Member States did not invest a single Euro in wind last year!), solar PV panel production has largely moved to China, and in the streets of Brussels the only 100% full electric taxis are Chinese or American!”
The post was published to coincide with the first public meeting of a new “Clean Energy Industrial Forum” at the EU’s annual “Industry Days”. The latter’s purpose is to update stakeholders on EU industrial policy. It is especially relevant this year because the European Commission issued a new Industrial Policy Strategy last September. This is supposed to “help our industries stay or become the world leader in innovation, digitisation and decarbonisation”, said Juncker at the time. A High-Level Industrial Roundtable met for the first time on 23 February.
The good news is that the share of manufacturing output in the EU’s GDP is on the rise again for the first time since 2009. The decreasing trend of employment in industry has also been reversed. Orgalime, the European Engineering Industries Association, expects “a real economic recovery for our sector”. But although it welcomes the new Industrial Policy Strategy – the Commission’s first comprehensive return to the subject since January 2014 – Orgalime see it primarily as “a stock-taking exercise”. “We lack a real long-term vision.”
Fact is, the Commission has repeatedly tried – and failed – to craft a European industrial policy. As for energy, different Member States have different industrial mixes and different priorities. Moreover they want to protect their own. Yet circumstances are changing. Increasing competition from juggernauts such as China and big new ambitions in the world of clean tech – see our battery “gigafactories” story last week – are pushing European governments to work together, to pool resources for investment.
Taking on Tesla
On Friday 23 February, the CEOs of three companies at the heart of three flagship battery production projects for Europe took to the floor of the Clean Energy Industrial Forum to outline their plans.
It was not the “comprehensive roadmap” for the new EU Battery Alliance heralded by Šefčovič – that is being finalised for mid-March – but it gave an idea of what the companies want to do. And what they expect from policymakers. In short, they say they will need public money, lots of it, to have a shot at building battery factories big enough to rival Tesla’s 35GWh Gigafactory in the Nevada Desert. The focus is on (advanced) lithium ion batteries.
First up was Peter Carlsson, CEO of Northvolt, who said his company will start building Europe’s very first gigafactory, a 19 km2, €100 million (for starters) facility, in the north of Sweden this Spring. He hopes to be operational early next year. Carlsson emphasised that there is no time to lose: there is already a shortage of batteries in Europe and raw materials prices are going “through the roof” (partly speculation, partly demand), while from 2019 to 2023 all car companies will be creating an electric portfolio. The ex-Tesla executive wants to build a 32GWh factory to rival that of his former employer.
Up next was Holger Gritzka, CEO of TerraE, a German consortium founded in May 2017 with the backing of companies such as Siemens, ThyssenKrupp and Umicore. This is an 18-month, €12 million project that aims to develop first a 1.5GWh and then a 6GWh module that should form the basis for a 34GWh factory in 2028. It is looking for a new production technology and new materials with higher energy density. It secured a €5.5 million grant from the German government in December.
Finally, Ghislain Lescuyer, CEO of Saft, a wholly-owned subsidiary of Total, announced plans for “new generations of batteries focused on advanced high density Li-ion and solid-state technology”. The 100-year-old firm, one of Europe’s few homegrown industrial battery makers, is teaming up with Siemens, Solvay and Manz. Ghislain explained that solid state batteries would be safer, reduce dependence on critical raw materials and deliver better performance at lower cost per kWh. He suggested an initial investment of €700 million for a first production facility.
Ghislain expects 70% of battery demand in 2025 to come from electric vehicles – and half of that from Asia. He acknowledged stiff competition: “In China, already 20-30 players are building GWhs of production capacity.”
Unlocking the billions
European Commission Vice President Maroš Šefčovič, host of the Clean Energy Industrial Forum, remains optimistic. He noted that the Juncker Plan (an economic stimulus plan for Europe) has mobilised €260 billion in the last three years. So it is possible, he argued, to raise the €10-€20 billion needed for 10-20 battery gigafactories by 2025. The market is so huge – €250 billion, he emphasised – that the investment is worth it.
Where all the money will come from however, remains unclear. In the run-up to last week’s Forum, Šefčovič pointed to Horizon 2020 (the EU’s flagship R&D programme) and state aid for Important Projects of Common European Interest (IPCEIs) as two critical sources of funds. The European Investment Bank (EIB) is another. It has already made a €52.5 million loan to Northvolt, is in talks with TerraE and will probably start talks with Saft, EIB Vice President Andrew McDowell said at the Forum. He noted that the bank spent €100 billion, or a quarter of its total financing, on climate action from 2015-20. Moreover, it has a €300 million “venture debt” facility to finance higher risk, pre-commercial projects.
But McDowell also pointed out that Sefcovic’s €20 billion estimate does not include the cost of more renewables, grid expansion, recharging infrastructure, battery recycling etc. The total investment required will be “several times that”. And that’s too much for the EIB alone, he emphasised. It will require a “partnership” between the Commission, EIB, Member States and the private sector. “Our role is not to replace private sector finance but to unlock it,” he reminded those present.
The EU has several other tricks up its sleeve to cocoon its new battery business. Ghislain suggested that all of the following need attention: import duties, public procurement, environmental standards – battery carbon content, for example – labour ethics and a skilled work force. Šefčovič repeated his belief that: “We have to think in our European way. We should go for a green label for our batteries.” He suggested that to protect its competitive edge, Europe would “have to deal with the WTO”.
“If we want to drive innovation, we have to insist on reciprocity, high environmental standards, a proper carbon footprint,” the Vice President said. In other words, it sounds like Europe might look to slap an eco-tax on battery imports that do not meet its sustainability standards. This would be a way of nudging European carmakers to buy European batteries, rather than cheaper Asian imports.
Learning from solar PV
There are parallels to – and lessons from – the solar PV industry. One of the speakers at the Forum mentioned a need to avoid batteries going the way of PV, where Europe seemingly created a market then lost it to China. But SolarPower Europe CEO James Watson challenged this: Europe is still leading in segments of the solar market, he said, despite “no industrial plan”. SolarPower Europe had dreamed of a Clean Energy Industrial Forum for two years, he said, before it was launched in January. “Solar needs an industrial policy.”
Europe “missed a trick” on getting supply side production jobs, Watson said. Today however, modules represent just 15% of the overall value of solar PV and three-quarters of the jobs are downstream. Europe has leaders in this part of the value chain and they need access to competitive panels. Watson: “Import tariffs on panels have not helped module manufacturers grow in Europe.” His priority is to secure a 35% renewable energy target for the EU for 2030. (Or 34% – there is increasing talk of this in Brussels after the International Renewable Energy Agency (IRENA) concluded in a new study that this would be cost-effective.)
The need for a “vigorous” home market is one of five points also highlighted by Green MEP Turmes in his blogpost on making Europe a “global green technology leader”. But Turmes takes a different line on trade, calling for an end to a “naive free trade agenda” in favour of “active and selective commercial agreements and public procurement agreements driven by green and social criteria”. This sounds more like the direction that Šefčovič is thinking in.
An industrial-energy policy
In the meantime, traditional industries are also emphasising their commitments to decarbonisation and value in a low-carbon economy (see workshops organised by the steel and chemicals sectors at the EU’s Industry Days, for example).
“The chemical factory is the only sensible battery of the future,” said Marco Mensink, Director General of the European Chemical Industry Council (CEFIC) in an interview with Energy Post. “Energy-intensive industries need to be put at the centre of the Energy Union debate. If everything is electrified, we will need other forms of storage [than lithium ion batteries], namely power-to-liquid, power-to-fuel and so on. We might need an EU hydrogen directive.”
Energy-intensive industries could directly procure renewable power through corporate power purchase agreements (PPAs) and use it to produce “green” hydrogen and other fuels. These could then double up as valuable feedstocks and a buffer in the energy system.
“A vision on storage is not enough,” cautions Mensink however. “If multiple sectors would electrify at the same time and need to remain competitive, we also need a much wider view on where these electrons will come from. Energy policy and energy-intensive industry policy need to merge.”
At a session called “Digital meets Energy Union meets Circular Economy”, engineering body Orgalime looked at how these different strands of EU policy can better be brought together into a single, coherent European industrial policy. It was a good debate that moved well past generalities to get into the specifics of smart buildings, manufacturing and appliances. The Commission will have to do the same if it wants to reindustrialise Europe.
BRUSSELS INSIDER #2 by Sonja van Renssen
MEPs propose a “green” EU electricity market design that sets up clash with Member States
February 27, 2018
On 21 February, the European Parliament voted for a new power market design for 2030 that rewards renewables, punishes coal and sets up a clash with the Council of Ministers. Some of the big fights ahead will be over emission limits for capacity mechanisms, priority dispatch and balancing responsibilities for renewables, self-consumption and consumer rights. Another fight will be over the balance of power in a new, pan-European entity for distribution system operators (DSOs). Meanwhile, MEPs and ministers face the wrath of TSOs with their proposal for at least 75% of the capacity on cross-border lines to be reserved for the market from 2025.
The reactions of renewables groups, consumer organisations and NGOs said it all: the European Parliament’s power market design vote on 21 February was a victory for green energy. MEPs in the Parliament’s industry, energy and research (ITRE) committee voted on four legislative proposals that together make up the market design part of the European Commission’s Clean Energy Package, presented on 30 November 2016.
Almost all of the reaction was reserved for two of the four files voted: a revised electricity regulation and a revised electricity directive to govern the European wholesale and retail power markets respectively. (The other two files give new tasks and responsibilities to the Agency for the Cooperation of Energy Regulators (ACER) and address short-term risk preparedness in the electricity sector.)
ITRE MEPs gave their colleague in charge of the two main files, Latvian MEP Arturs Krišjānis Kariņš, a member of the Parliament’s largest centre-right EPP group, a direct mandate to begin negotiations with the Council of Ministers. These are expected to start under the Bulgarian EU presidency – there were reports of March and May – but will not be concluded until Autumn at the earliest. The “trilogue” talks will bring together MEPs, Member States and the Commission.
“Double standards” for capacity mechanisms
Many campaigners singled out for approval the Parliament’s decision to back the Commission’s last-minute proposal for a 550gCO2/kWh emissions standard for capacity mechanisms. This is intended to exclude coal plants from public support. Both institutions suggest it should be introduced for new plants as soon the new electricity regulation takes effect (end 2018 at the earliest) and five years later for existing plants (ca. 2023). The Council (i.e. the Member States), in contrast, wants to postpone both dates to 2025 and 2030 respectively.
Perhaps the single most controversial thing the Parliament has done however, is to introduce a distinction between different kinds of capacity mechanisms. Specifically, it proposes to exempt strategic reserves from the 550gCO2/kWh standard. Instead, they would face a 200kgCO2/KW annual limit. Since this is in KW not kWh, it would permit even the dirtiest plants to run, provided they did so only a few hours – some 500 hours for lignite and 600 hours for hard coal, estimates one expert.
The Polish Electricity Association (PKEE) promptly accused MEPs of introducing “double standards”. In a press release, it said it could not understand “why the the more market-oriented and technologically-neutral measures like capacity markets would be bound by more rigid changes”. It is true that the Commission in the past has favoured capacity markets over strategic reserves.
The PKEE also lamented ITRE’s proposal to limit capacity mechanisms to five years and capacity contracts to one year. Just two weeks ago the Commission approved market-wide capacity mechanisms in Poland and Italy that plan to run for ten years and offer contracts of up to 15 years for new capacity. At the time, the Commission warned that all state aid schemes would have to be amended in line with the new electricity regulation however.
Meanwhile, Ralf Wezel, Secretary General for EUGINE, whose members make engine power plants and their components, warned that both Parliament and Council had left a dangerous void by not specifying “how to calculate the CO2 limit values”.
“On capacity mechanisms, the European Parliament stopped halfway. It strengthened conditions for the use of capacity mechanisms, including by giving priority to less distortive strategic reserves, but forgot to specify how to calculate the CO2 limit values”, said Wezel. “To avoid legal uncertainty and inconsistencies, a calculation methodology must urgently be defined by the trilogue negotiators.”
The real issue is that depending on how the calculation for the 550gCO2/kWh is done, open cycle gas plants may be in or out, Energy Post understands. Several gas advocates have warned that the 550gCO2/KWh threshold could shut down open cycle gas plants, although it is exactly these highly flexible units that could be useful in a renewables-dominated market. Wezel explains that since the calculation is based on efficiency, smaller, more flexible (=less efficient) gas plants are at risk of being disadvantaged.
Two more particular problems are cogeneration and biogas: if the usual electrical efficiency is used as a basis for the calculation, cogeneration will lose out because its heat production is not taken into account. Biogas plants have the problem that their CO2 output is quite high, even if they are considered carbon neutral.
Meanwhile, renewables groups welcomed the Parliament’s decision to back the Commission on continuing priority dispatch for all existing and small new renewables installations (<500kW) – counter to the Council, which wants to leave that decision to Member States.
Both Parliament and Council suggest that Member States may impose balancing responsibilities on renewables providers however, leading SolarPower Europe to warn on 21 February that “while today’s vote has gone a long way in safeguarding small-scale installations, the legislation on balancing responsibilities remains too weak and could inflict serious burdens on consumers”.
SolarPower Europe and others have been running a “Small is Beautiful” campaign to maintain the special privileges that decentralised energy providers currently enjoy in the power market.
WindEurope welcomed the continuation of priority dispatch for existing wind farms and “better curtailment rules” to replace it for new assets. “In case of grid congestion, renewables will be curtailed last and properly compensated for it,” it said in a press release. “But we are a bit worried about the new rules on balancing. It’s unclear what compensation will need to be paid to TSOs.”
Other stakeholders welcomed the Parliament’s move towards “liberalised, much more short-term, dynamic and flexible electricity markets”, in the words of Wezel. Monique Goyens, Director General of the European Consumer Organisation (BEUC) said: “Consumers can expect a brighter future if these proposals make it into EU law.” Molly Walsh from Friends of the Earth Europe agreed that MEPs’ vote would help the community power movement “fulfil its potential”. The Council, in contrast, has taken a much more cautious approach to innovative consumer business models.
The only dissent last week appeared to come from Dirk Vansintjan, President of REScoop.eu, the European Federation of renewable energy cooperatives. He said MEPs had paid “little attention” to the “fundamental market rules” that will determine how citizens and communities can participate in the market. This is probably a reference to the planned introduction of balancing responsibilities.
Boost for small DSOs
The Parliament also courted controversy with its bid to shift the balance of power in a new entity that will represent European Distribution System Operators (DSOs) towards smaller DSOs. EDSO for Smart Grids, representing most of the large DSOs, warned that “by opting for an unbalanced representation in the body’s Board of Directors, MEPs have chosen an approach that will make future work in the Entity much more difficult”.
Basically, EDSO for Smart Grids believes that they are best suited to run the new entity. But now MEPs are proposing to assign one third of votes in the Board to small DSOs with <100,000 grid users. EDSO for Smart Grids calls it “not only gravely disproportionate but a political rather than a practical choice”. The reality is that large DSOs will be expected to provide all the resources to run the new entity, it says.
75% cross-border trade goal
Finally, in a decision that didn’t appear in any of the press releases, MEPs decided to back a proposal made by Member States to ensure that 75% of the capacity on cross-border transmission lines is available to the market from 2025. The proposal “would likely delay any decision on splitting Germany’s national bidding zone” and give it time to build its North-South power lines, reported Platts Power in Europe.
Neither MEPs nor Member States are ready to give the Commission the power to decide on bidding zones unilaterally, as it proposed in its original market design proposals in November 2016. Only if the 75% target were not met, could the Commission order a split of bidding zones.
ENTSO-E, the European Network of Transmission System Operators for Electricity, rejects the proposal. It warned in the run-up to the vote that it would require TSOs to employ “significantly more” redispatching and “drive the markets and the physical reality of the power system further apart”.
Overall, Kariņš has taken a very pro-market approach, including support for a phase-out of regulated prices. This is backed by the likes of Eurelectric, WindEurope, the Association of European Energy Exchanges (Europex) and the European Federation of Energy Traders (EFET). Council is reluctant to even consider this. The clash between Parliament and Council will be one between a Brussels-based body with a European vision and individual Member States that have to apply the new rules and regulations to their very different markets.