The EU’s plans to revolutionise its energy system need to overcome major hurdles, write David Buchan and Malcolm Keay
The European Commission needs its Energy Union plans to work to raise the share of renewables in Europe (Image by European Parliament)
Six months after the Paris Agreement was drafted and the administrative capacity and political will of some of the major players to fulfil their commitments is being called into question.
For instance, the US has the capacity, but in the event that Donald Trump wins the presidency, the willingness to deliver carbon cutting policies may be lacking. India may have neither the capacity nor the will to seriously curb its emissions, while China has considerable capacity and will but, as by far the biggest carbon emitter, it faces a huge task.
By contrast, the European Union (EU) has already shown capacity and will by being the only major bloc to sign up to the Kyoto Protocol and to meet its emission reduction targets under the protocol. Moreover, the EU’s new project to form its 28 member states into a low-carbon ‘energy union’ might seem to cement Europe’s position as the most dependable of partners in the fight against climate change.
It is highly probable that the EU will be able to meet its headline climate commitment at Paris of achieving a 40% reduction (below 1990 levels) in emissions by 2030.
The EU has already virtually met its 2020 goal of a 20% cut, largely due to slow economic growth, a trend that does not look like changing. In addition, some EU emitters, such as Germany and the UK, have national legislation on emission reduction that is more ambitious than EU targets, even though there may be some backsliding.
However, as we point out in a new book, Europe’s Long Energy Journey: Towards an Energy Union?, there are design flaws in the Energy Union project that will limit its achievements.
Some of the flaws relate to the EU’s unique structure and currently difficult internal politics, but other flaws carry lessons for other countries seeking to follow the EU in marrying the subsidisation of renewable energy with the operation of a normal energy market.
In terms of the politics, the European Commission’s Energy Union project is as much about preventing the bloc’s 28 governments from sliding further backwards into national mechanisms and instruments and from retreating from collective EU climate goals, as it is about forward leaps in the Europeanisation of energy policy.
This is evident from the provisions for governance, or lack of it. After 2020, the current system of individual (and therefore enforceable) renewable targets for EU states will be replaced by a collective (and therefore unenforceable on any particular state) renewable target for the whole EU.
This is a step backward but a sensible step backward, in the view of the UK and some east European countries which successfully lobbied to have the flexibility to pursue low carbon energy by other means (even though the low carbon alternative of nuclear power is, if anything, more expensive than renewables).
But it is clearly not a step towards the sort of central coordination usually associated with the idea of ‘union’. The result could be not much more binding on EU states than the Intended Nationally Determined Contributions (INDCs) that are the building blocks of the Paris agreement.
It is the vague nature of these INDCs that may have been key to getting a global consensus, but for the EU it would be an institutional retreat.
So there seems to be some weakening of the political will of some EU states in the fight against climate change, at least as pursued primarily by developing renewables.
At the same time, there are doubts about Europe’s capacity or capability to achieve radical emission reductions over the longer term, because this depends on the EU having the right policy instruments – that are not clear.
In particular, the EU – meaning in this case, its executive body, the European Commission – has no power to harmonise the different national renewable energy subsidy programmes so as to prevent them distorting the internal energy market.
The Commission’s legal authority to control national state aids to industry is a blunt instrument, which can be used in a negative sense to block or modify individual state aid programmes but not positively to create a harmonised subsidy system EU-wide.
EU governments have resisted any such harmonisation, and on their side they have the EU treaty, which upholds member states’ sovereign right to decide their own energy mix.
A further problem is that, even if EU renewable subsidies were harmonised, they would still disrupt the energy market, because they inject a form of energy that does not respond to or reflect normal energy market price signals.
Despite static or falling electricity demand in Europe, subsidies keep pumping more renewable energy on to the European grid, which is killing the commercial prospects of conventional generation that is still needed as intermittent back-up when wind and solar generation drops off.
The official line in the EU is that these subsidies are only temporary and will be phased out as renewables achieve grid parity and become competitive with fossil fuels.
In fact, as we argue in our book, Europe has no clear exit strategy from renewable subsidies.
Until reasonably cheap large scale electricity storage is developed – renewables will always tend to cut their commercial throat because of the way they flood on to the grid and depress the wholesale price, which only rises in the absence of renewables.
In other words, there is no exit strategy for wind and solar to cover their capital costs from the market alone.
There is a market-friendly instrument that could, in theory, promote low-carbon energy in a way that not only does not distort the market but which is also neutral between all technologies – and this is the EU Emissions Trading Scheme (ETS).
But it is worth pointing out, especially as China eyes a national carbon trading scheme following its pilot emission trading schemes, that in practice Europe’s ETS does not incentivise low-carbon investment at the moment because the ETS price is too low.
More to the point, even if the ETS carbon price rises, it never will provide sufficient incentive because as the product of market forces it will always lack the predictability and stability to underpin long term investment.
In short, it is not ‘bankable’. We suggest a better alternative would be for the EU to create a carbon intensity standard (so many grams of carbon per kilowatt hour) which power generators would have to meet, either by reducing their own carbon intensity or by buying tradable carbon intensity reduction certificates.
Europe’s Energy Union plan is useful in trying to provide new political impetus to reforms in several dimensions of energy policy, including the somewhat neglected areas of energy research and development, and of energy security.
But Europe’s partners should be aware of the plan’s limitations, particularly in integrating renewables into the traditional energy market, and take heed when drawing up their own plans.