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Europe is coming to terms with energy, climate policies

29 September 2014

Of course Europe cannot solve the world’s climate problem on its own. But it can deliver the stable framework conditions for a new wave of energy investments, including a strengthened ETS and ambitious targets for renewable energy and energy efficiency, writes Hans-Joachim Reck, CEO of the German Association of Local Utilities (VKU), for

In May 2011, two months after the nuclear disaster in Fukushima, Germany decided to end the use of nuclear power by 2022 and to target an 80% share of renewable energy by 2050.

That meant a paradigm shift in post-war economic policy. A vast majority of citizens supported the so-called “Energiewende”, the turnaround of the energy system. This was mainly due to two reasons: first, the use of nuclear power has been highly criticised as potentially dangerous by many during the last few decades and second, people attach more and more importance to climate change mitigation policies. However, the German “Energiewende” proved to be a courageous political undertaking because the decision was taken quite ad hoc and without the involvement of the other EU Member States.

For the European Internal Energy market this also meant a major shift. Several actors argued that such a drastic decision may not be taken by a single EU Member State but that the other Member States – especially those neighboring Germany – should have been involved in the decision. Thus, it became very obvious that Europe had already made important progress on its way to a European Internal Energy market, although there is still a long way to go.

Concerning the German national level unfortunately, necessary legislative adjustments to the political framework were neglected. This led to distortions in the energy market putting huge financial burdens on energy companies, consumers and on the economy in general.

Paradoxically, it also resulted in a rise of greenhouse gas (GHG) emissions in the energy sector, which contradicts both national and European energy and climate targets, even though the amount of heavily subsidised renewable energy is constantly rising. This is due to an unfavorable interaction of German renewable energy policy, the current design of the European emission trading system and the relatively low prices for coal.

While at the moment emission-intensive coal plants produce great parts of electricity in Germany, many newly built gas power plants – those which are mentioned in the latest report of the International Panel on Climate Change (IPCC) as an important bridging technology – are being disconnected from the grid, because they are a loss-making business.

Only some years ago, German politicians had encouraged the operators to build those plants. So they did, trusting that the political framework would adapt to the new targets and that it would incentivise the innovations needed. Why shouldn’t they? In an energy system which relies to a great extent on renewable energy, flexible and efficient plants are urgently needed when the sun is not shining and the wind is not blowing.

But it turned out that investors could not rely on the political framework to change accordingly. They now have to deal with large-scale stranded investments, while operators of ecologically inefficient carbon intensive plants earn money. Just between 2010 and 2013 the degree of capacity utilisation of local utilities’ gas power plants in Germany dropped around 30%.

How this situation can be changed is now being discussed intensively. An energy system that is increasingly based on renewable energies does still need flexible and secure capacities in case the sun does not shine or the wind does not blow. Flexible conventional utilities, like for example modern gas power plants, can immediately react to the volatility of the renewables energies, guaranteeing a sufficient power supply at any time.

We need a mechanism that remunerates those plants for the provision of this service. Of course such actions have to be discussed in the context of the internal energy market. However, as has been shown above the European internal energy market is unfortunately not yet reality. Therefore some member states do currently discuss the implementation of capacity mechanisms or have already done so.

Stranded ETS

This is only one of the challenges we are facing at the moment. The other one is the stranded EU Emissions Trading System (ETS). Improving climate protection is one of the most important challenges facing society as a whole.
What we need is a clear and reliable set of rules to strengthen the EU ETS, the most powerful instrument we have, the largest carbon trading system in the world with connections to other national carbon markets. This is not only of highest relevance for national and European carbon markets, but also for further agreements in international climate change policy.

In this respect the proposed Market Stability Reserve is an interesting proposal which should be elaborated on further. However, it does not spare to ultimately take at least two billion certificates out of the market permanently.

We are facing negotiations for the follow-up agreement to the Kyoto Protocol, this year in Lima, next year in Paris. The latest IPCC report clearly states why international action is urgently needed. If we want to limit global temperature rise to 2 degrees, we have to limit the GHG concentration in the atmosphere at about 450 parts per million (ppm) in the long-run. But if we go further down the road, as we do right now with similar growth of economy and population, we might face concentrations of up to 720 ppm leading to temperature rises up to 4 degrees or more.

Of course Europe cannot solve the problem alone. There need to be others sustainably supporting the attempt. Energy and heat production has a 25% share of global GHG emissions and are the most important drivers of climate change – with upward tendency, as it has been responsible for 47% of the increase of global GHG between 2000 and 2010.

That means political action should focus on that sector. The IPCC reminded us, that immediate international action is necessary to keep mitigation costs as low as possible. If we only start in 2030, costs will double compared to a quick start now. Globally, too many coal-fired plants are being planned and built right now. Once they run, we will face lock-in situations causing inertia with regards to the switch from fossil fuel based energy systems to those relying on renewable energy.

It is important for the upcoming international climate negotiations that Europe sends out strong signals, takes its responsibility seriously and commits itself firmly to climate action. Other states, especially those that have not had similar economic growth in the past decades (and which have not contributed accordingly to climate change) expect us rightly to do so. Only in an atmosphere in which there is trust that all agents commit to the targets, the necessary outcomes can be achieved. Therefore the EU Heads of States and Governments are called to commonly decide about concrete goals in their next summit taking place the 23rd and 24th of October 2014.

It is now up to the European Union to deliver stable and reliable conditions for the 2030 policy framework for climate and energy, which sets the scene for the next decade. The out-gone European Parliament proposed binding targets for 2030: a 40% reduction in GHG emissions and an energy system which at least is based to 30% on renewable energy sources. Furthermore there was a majority supporting the goal of raising the energy efficiency to 40% up to 2030.

However, we will have to wait what the in-coming European Commission proposes in terms of legal proposals and how the new European Parliament will position itself.

Concerning the EU Member states it became apparent that there are differing perceptions of the benefits and costs of new targets. It will be challenging to bring them together as their energy mix is increasingly different.

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