Power Sector Laments Europe’s Uncertain Future Energy Policy

Energy policy in the European Union (EU) is in upheaval as concerns mount over the impact of energy costs on the competitiveness of the power industry. Over April and May, the EU voted on but failed to pass several crucial climate measures, from setting a renewables target for 2030 to boosting the carbon price of its floundering Emissions Trading System (ETS). Industry groups have said the policy uncertainty could prove expensive.

On May 22, EU leaders held the first of a special series of thematic discussions on economic sectorial and structural issues, but ensuing draft conclusions from that debate on how to limit the impact of energy costs seem to prioritize industrial competitiveness over climate change, calling on member states to ensure “competitive” energy prices and a diversification of energy supply. The conclusions also reportedly pledge to review the causes of Europe’s soaring energy prices by the end of the year. Separately, the European Commission in May reportedly drew up a draft action plan asking member states to consider removing or temporarily freezing taxes, including renewable and network levies, on energy-intensive industry for a period of two years.

Just a day before that summit (May 21), the European Parliament failed to set a renewables target for 2030 in the 40% to 45% range, approving instead a nonbinding resolution that says the EU should try to achieve a share of renewables in the overall energy mix of more than 30%. The bloc currently has three 2020 climate targets: an improvement of 20% on the continent’s carbon dioxide emissions, a 20% share of renewables, and a 20% improvement in energy efficiency.

And in April, by a 334–315 vote, European Parliament members rejected a proposed reform to reverse the sinking price of carbon and subsequent glut of permits in the ETS carbon trading program, Europe’s flagship climate policy that has seen a turnover that reached €90 billion in 2010. The proposed reform, also known as “backloading,” would have withheld 900 million carbon allowances and steepened an annual decline in allowance numbers to shore up carbon values. “We believe that backloading is now politically dead and it is very unlikely that any political intervention in the scheme will be agreed during the third phase [2013–2020],” said Stig Schjølset, head of EU Carbon Analysis at Thomson Reuters Point Carbon. “We do not envisage prices rising much above the current €3 mark and they may well drop lower at least until the end of the third phase. The focus will now shift towards structural, more long-term oriented measures but certainly this vote makes the EU ETS irrelevant as an emissions reduction tool for many years to come,” he said.

The events have prompted Europe’s electricity industry association EURELECTRIC, an entity whose members represent the power sector in 32 European countries, to decry current EU climate and energy policies as a source of “confusion, not clarity. Today’s policy framework is half European, yet still half national; half market-based, but also half command-and-control; and seems to be only half committed to the ETS,” says a May letter to EU heads of state from EURELECTRIC president and CEO of ENEL, Fulvio Conti.

Conti called on leaders to put an end to investor uncertainty and “urgently agree on a coherent top-down package of proposals which establish an ambitious, firm, long-term, economy-wide greenhouse gas reduction target for 2030 up to 2050, in line with the European Council goal.” It is imperative, he said, that the body work out the “regulatory disorder” not just to avoid windfall taxes and retroactive changes, but also to give investors a foundation through long-term policy. Without early investment signals, Europe could face a “lost decade” of climate and energy policy inaction between 2020 and 2030, and this would require a costly sprint to decarbonize in the last two decades before 2050, the group said, citing a report titled “Power Choices Reloaded” that it published in mid-May.

Among “serious” measures that should be tackled is an improved market design, including a European coordinated approach to capacity mechanisms in which “all assets contributing to the security of supply” are “fairly remunerated,” Conti and the heads of Gasterra, GDF Suez, Iberdrola, Eni, RWE, E.ON, and Gasnatural Fenosa urged in a separate release. Also required is a “more sustainable approach” to the promotion of renewables “so as to reduce costs to citizens and favour a greater convergence between member states.”

Siemens Energy, too, has voiced concerns about European energy policy direction. A study that the global power equipment and services company is conducting along with the Technical University of Munich to ascertain the utilization rate of resources of energy systems worldwide and how reliable that supply is suggests that billions are being wasted every year as a result of inefficiencies in worldwide systems and markets—and particularly in Europe’s. For example, “[i]f [renewables] installations were built at the sites in Europe that offer the highest power yields, some €45 billion of investment in renewables could be saved by 2030,” Siemens concludes (Figure 1).

1. More efficiently siting renewables. A study by Siemens Energy analyzing power-producing systems across Europe identifies considerable potential for optimization and concludes that if renewables installations were built at sites in Europe that offer the highest power yields (as shown in this image, which includes associated extension of the power grid), nearly €45 billion of investment could be saved by 2030. Several hurdles would need to be overcome, however, including implementation of a European Union–wide integrated electricity market. Courtesy: Siemens

But such a feat would require, among many other complex needs, a strongly centralized structure that could necessitate a single integrated energy market for Europe. In preparation for a presentation of the findings of Siemens’ study, and to offer possible solutions to future energy challenges at the World Energy Congress in South Korea this October, Michael Süß, CEO of Siemens’ Energy sector, has been engaging in a series of six roundtables with industry, policy-makers, and experts. The takeaway from the very first one in Brussels this May: Creating one European market is indeed an idealistic experiment, and its foremost challenge will lie in harmonizing 27 diverse European energy landscapes and creating political consensus among member states on how to proceed.

In another related development, ambitions to import solar power generated from North Africa to Europe, as initially proposed by the Desertec Industrial Initiative (Dii), have deflated. In late May, Dii CEO Paul van Son told EU media portal Euractiv.com that the initiative had abandoned “one-dimensional” thinking about the €400 billion plan to source 15% of Europe’s renewable power from the Maghreb by 2015. Dii is instead looking at a business model that creates integrated renewables markets.

Susanne Nies, head of Energy Policy and Generation at industry association EURELECTRIC, put it into better perspective. “Firstly, at a very basic level, we are still missing lines and capacities for export. Building these is technically difficult because of the deep waters in the Mediterranean,” she said. Beyond the link between North America and Europe, consideration should be given to how some countries, such as Spain, are already struggling with excess renewables capacity, and to cross-border interconnection lines, which are also congested.

“Secondly, it is difficult to argue that the EU needs the additional [renewable energy supply] capacity,” she pointed out. Renewables in Europe are already competing to replace existing conventional plants, and importing more renewable power would require “solving plenty of system issues,” a move that could require “giving time to the technical, economic, and regulatory framework to adjust.”

Finally, North Africa’s own power consumption is slated to grow tremendously, and it already exceeds demand, she said. “It would be a big mistake for Africa to neglect its own, indigenous power generation and risk its own security of supply for the sake of satisfying the demand of Europe.”

The 56-member Dii continues to have supporters—including RWE, E.ON, Deutsche Bank, ABB, and the German reinsurer Munich RE—even though it saw the high-profile withdrawal of Siemens and Bosch, and Spain’s reluctance to engage in deals given its current austerity measures.

Sonal Patel is POWER’s senior writer.