Energy Policy
Cleaning up
Europe’s
Energy Market
Integrating 27 national energy systems into a single market
is a Herculean task. Among the challenges facing the European
Commission’s Director General for Energy Philip Lowe are
contentious policy on renewables, decarbonization, and obsolete infrastructure. Ed Targett joined him for a day in Brussels.
Text: Ed Targett
Photos: Claudius Schulze
Energy independent:
EC Director General for
Energy Philip Lowe
leads by example,
cycling across Brussels
to his workplace at the
Energy Directorate.
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47
Energy Policy
P
“European
countries
must reduce
their dependence on
fossil fuels.”
Philip Lowe
48 Living Energy · No. 8 | July 2013
hilip Lowe is an experienced
long-distance runner who has
completed numerous marathons. That impressive stamina could
come in handy. The European Council
has fired the starting gun for major
energy market reform, setting a
deadline of 2014 for completion of an
internal energy market.
Reaching the finishing line at that
pace would be impressive. But the establishment of an Electricity Coordination Group – with a mandate including security of supply,
generation adequacy, and grid stability – as well as a flurry of communications from the European Commission
on the internal energy market signal
that the race is well under way.
Major changes are pending, and
Lowe is bullish on both their necessity and the direction they should take:
“If European countries want to meet
their climate change targets, preserve
their security of supply, and also make
sure their businesses get competitive
energy, then they’ve got to do something about their increasing dependence on expensive fossil fuels.”
These words are disarmingly
straightforward. But their implementation is not. Lowe admits that the
tasks ahead are daunting: unbundling network operators, dealing with
highly divergent degrees of energy
market development, and covering
onerous capital costs for infrastructure modernization.
Overstretched Grids
Integration of renewable energy is
one of the challenges. Just four years
ago, wind and solar power capacity
worldwide stood at around 136 gigawatts − enough to power 80 million
households. By the end of last year,
global capacity stood at 300 gigawatts
and rising, with Germany alone having installed more than 8,885 megawatts of wind energy since 2007.
The investment in such variable generation has stretched power grids to
their limits, including in Germany’s
neighbors Poland and the Czech Republic, which have been hit hard by
unplanned loop flows resulting from
wind-drive surges across the border.
Merely upgrading Germany’s system
to address capacity and technical
shortfalls will cost at least €32 billion
(US$42 billion), according to the
country’s four grid operators. In
Lowe’s words, this is “a network industry with heavy capital costs.” It is
also a new paradigm for operators
looking at near-zero marginal costs.
The answer, he insists, is not heavyhanded regulation of outcomes, but
rather greater flexibility, including in
demand-side management: “As you
can imagine, as a former Director
General of Competition, I am not particularly keen on trying to regulate
outcomes; you should be trying to
create processes that lead the market
in the right way to a certain result.”
Lowe suggests the answer lies in facilitating new interconnection capacity
to support market integration and
increase security of supply, allowing
local peaks in demand and variable
wind generation to be managed
across a wider area. The notion of an
“open, interconnected, integrated
market” is one to which he returns
repeatedly.
No 20/20 Foresight
The architecture for this vision is
largely already in place, but with uncertainty continuing over CO2 emissions reduction targets beyond the
“20/20” goal (reducing CO2 emissions
by 20 percent from 1990 levels, raising the share of renewables in energy
use to 20 percent, and improving
efficiency by 20 percent), is it enough
to simply break down market barriers, or is a national support framework needed? Lowe sighs.
“We’re in an intermediate stage; this
means governments are having to
reintervene in one of the areas we
wanted them to pull back from.
Ready for business: at a meeting with Attaché Lina Christensen of the Danish Embassy.
The question is, what framework for
national support of these projects on
renewables is appropriate and also
provides sufficient predictability
beyond simply the level of subsidy?
We need to ensure predictability for
investors in a manner that doesn’t
simply rely on national support but
is as market oriented as possible,”
Lowe says.
“Now I think that a lot of people in
2008 believed that could be done simply by having an emissions trading
system with a high carbon price −
something that I think is a necessary,
if not perhaps sufficient solution.
Certainly, an effective emissions trading scheme is a necessary condition,
but that can probably only be achieved
by making clear to everyone what the
long-term objective is in terms of CO2
emission reduction targets beyond
2030.”
“ Investment intentions
will be shaped by CO2
emission targets.”
Philip Lowe
Cheap Fuels Jinx
Carbon Targets
The latter may be slower to come than
many would like. Lowe’s counterpart
at the Directorate-General for Climate
Action, Jos Delbeke, has stated that
clarity on post-2030 targets may not
be reached until 2016. Lowe admits
it is frustrating, but backs recent reform proposals for carbon trading:
“Ultimately, investment intentions
will be strongly influenced by the
targets for CO2 emission reductions.
For the moment, the carbon price is
very low, which is why some ‘backloading’ (or delay in the issuing) of
certificates could help to raise it a bit
and create new incentives for the use
of lower-carbon technologies.
“In Europe at the moment, the electricity price is being driven by coal
because of a very significant development in world markets: US-produced
gas is now very cheap. Gas is being
u
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49
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Energy Policy
into force, so some of the old coalfired capacity will go, and we’ll start
using more gas in the system here.”
Regulation or Market Forces?
Living Energy’s Ed Targett met Philip Lowe in his Brussels office.
“Markets won’t work
without a minimum of
regulation forcing
them towards desired
outcomes.”
Philip Lowe
used for electricity production in the
USA, which has reduced the price of
coal that is no longer required in the
US economy and is being exported
to the EU.
“Emissions are rising in the EU and
falling in the USA due to the substitution of coal by gas. That could change
as legislation on the use of polluting,
large combustion installations comes
50 Living Energy · No. 8 | July 2013
So what of target support schemes for
individual technologies? Lowe is cautious in responding: “I think in purely
competitive terms, the idea of allowing markets and electricity generators
to determine which technology they
use must be intellectually the most
attractive proposition.”
Yet is this “intellectually attractive”
proposition compatible with ambitious decarbonization targets, not to
mention his earlier strong words on
reducing fossil fuel dependence?
Lowe admits the debate has been a
difficult one. “Markets won’t work
unless you have a minimal degree of
regulation to force them towards the
outcomes that society wants.
“If you intervene, it must be in a way
that is necessary to achieve the correction of the market, proportionate
in terms of the means provided, and
limited: When do you expect to have
accomplished this change in the market? Those three principles are legally
enshrined, both in state aid controls
and in the public service obligations.
There is a clear obligation for the
Commission to make sure that the
interventions of governments in markets are integrated and interconnected, do not distort competition, and
lead to the best use of the allocation
of resources.”
Wake-up Call:
Germany’s Nuclear Phaseout
The unilateral move by Germany to
mothball its nuclear plants was a
wake-up call on the growing necessity for integration, he suggests – not
least for Germany itself: “Germany,
when it embarked on the change of
policy, hadn’t really consulted anyone! Now they are very much in favor
of doing something together. Germany was a net exporter of electricity
until the nuclear shutdown: Within
three weeks, it became in principle
a net importer. Then the situation
settled down, and in the cold spell of
early 2012, Germany again became
a net exporter,” says Lowe, adding:
“It just proves again that if you look
at electricity flows nowadays, across
Europe, it’s a bit artificial to talk
about a national market. Electricity is
flowing everywhere.”
Isn’t the fact that member states take
such different approaches to meeting
their energy needs a major obstacle
for the internal market? Lowe doesn’t
think so: “This leads to quite a diversified source of energy in Europe.
People aren’t too worried precisely
where the electrons come from when
they’re traded; they do worry about a
nuclear plant near to them or a wind
turbine near to them. So the diversity
of positions is probably quite a good
thing, as it has resulted in a diversity
of power sources.”
Our time is up, and Lowe is due at another appointment – for which he will
demonstrate his own energy independence and pedal across Brussels
on a bicycle locked outside the Energy Directorate’s austere offices – but
picking up a helmet from his office
desk, he has one final point to make.
“In the area of energy, there is more
and more to do together. You would
be wrong to ignore what your neighbors are doing in energy, because
energy depends so much on physical
connections. And in energy, the more
you do together in a network, the
more likely it is that it will be cheaper
and that it will be stable.
“There are already signs that things
are becoming much more interconnected and integrated: In electricity,
17 out of the 27 national markets are
already coupled together; and in gas,
since the crisis of 2009 and the one
before that of 2006, there has been a
lot of investment in interconnection.
While consumers can’t get necessarily cheaper energy, in a world where
the demand for energy is growing
exponentially in Asia and elsewhere,
nevertheless, by creating a very open,
interconnected, and integrated market, we can try and keep the level of
prices as low as possible and we can
make sure the lights stay on.” p
Ed Targett is a freelance journalist based in
England. His news reports have been published
and broadcast in a number of media outlets,
including the BBC, the Daily Mail, South Korea’s
Yonhap News Agency, Yahoo! Asia, and others.
EU Energy Roadmap 2050
The EU, a political union of 27 states with a population of over 500 million,
has set itself ambitious targets in energy policy that come under the
responsibility of the European Commission’s Directorate-General for
Energy:
Reducing Greenhouse Gas Emissions
to 80–95% below 1990 levels by 2050
The Commission’s “Energy Roadmap 2050” (launched December 15, 2011)
lays down steps towards that goal while ensuring:
• Sustainability
• Energy security
• Competitiveness
roadmap2050.eu
The Roadmap outlines the following possible paths towards realizing
these energy goals:
High Energy Efficiency
Policy imposes stricter regulations, e.g., for appliances and new buildings;
making existing buildings more efficient; energy savings obligations for
utilities.
Decrease in energy demand of 41% by 2050 compared
to 2005–2006 peaks
Diversified Supply Technologies
No technology preference; free market for energy sources without
support measures.
Decarbonization through carbon pricing, assuming public acceptance
of nuclear energy and carbon capture and storage (CCS)
High Share of Renewable Sources
Strong support for renewables.
Very high share of RES: 75% of gross final energy consumption
and 97% of electricity consumption by 2050
Delayed CCS
Similar to “Diversified Supply” scenario, but assuming
that CCS is delayed.
Higher shares of nuclear, decarbonization driven by carbon prices
rather than technology push
Low Nuclear
Similar to “Diversified Supply” scenario, but assuming no new nuclear
(besides reactors now under construction).
Higher penetration of CCS (around 32% in power generation)
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