2007-2014/ 7 years of EU energy & climate policy:"Age of reason or of divorce?"

2007-2014 / 7 years of EU energy
and climate policy:
“Age of reason or of divorce?”
Jean-Michel Glachant
Director Florence School of Regulation
European University Institute, Florence, Italy

www.florence-school.eu
7 years of EU energy & climate policy
leading to? Divorce or reason?
1. 2004-2009: EU got an energy policy (based on internal
market… with a climate change pillar) ~1 Internal market
/ ~2 EU grid / ~3 EU RES
2. 2009-2014: Unfortunately derailing… ~1 Internal market /
~2 EU grid / ~3 EU RES
3. 2014-2020: and so what? Do we move (“reason”) or
divorce? ~1 EU Commission / ~2 EU power industry / ~3 EU
power grids
5

(1) 2004-2009 EU got an energy policy
What was it about?
Previsibility (foreseeability) very low: “EU energy policy” was not foreseen in
2004; & already “packaged” in 2009
• Game Changer 1 (2005 Hampton Court Council Tony Blair: long life EU
internal Security of Supply)
• Game Changer 2 (2007 -Lisbon treaty- Berlin Council Angela Merkel: long
life EU energy sustainability 20-20-20 in 2020)
• Game Changer 3 (2006 & 2009 Russia - Ukraine: long life Emergency
plans + security regulation 2010 & infrastructure package 2011-13)
6

EU energy policy What’s about? (1.1) Internal Market
• First and foremost (Internal Market)
¤ Not because it is logical or astute to support an EU energy policy – but
because EU Commission strong & legitimate there: Internal Market “raison
d’etre” (Single Act + Treaty)
¤ We got: “Free Entry in Generation” - “B2B Consumer eligibility” – “Free
movement of goods at borders”
¤ Second Package added: full retail eligibility; transparent & market friendly
cross-border operation; regulators supporting market building; but cannot
get open wholesale pricing & sequence of markets (Day-Ahead to real time)
¤ Third Package unable to add full EU harmonization of “market design &
operation rules” >> but did set up a process to produce it with new Bodies:
*ENTSO-E to “EU” the TSOs; **ACER to “EU” the NRAs
7

EU energy policy What’s about? (1.2) EU Grid
• Second to Internal Market (EU Grids)
¤ because no power market at all can work if Grids aren’t market friendly
¤ We got: – “Third Party Access to Grids” - “Including all borders”
¤ Second Package did add: Regulated access to grids; regulators duties for
markets and grids; transparent & market friendly cross-border grid operation,
congestion mechanisms, grid capacity allocation
¤ Third Package unable to add full EU harmonization of “market design & grid
operation rules” >> but did set up a process to produce it with new Bodies:
*ENTSO-E for EU TSOs grid codes &EU grid planning; **ACER for “EU” NRAs
¤ Third Package didn’t try to EU harmonization of grid tariffs making; of grid
country investment & data methodology; did miss all Distribution grids issue
8

EU energy policy What’s about? (1.3) EU RES
• Only third and external to Internal Market and EU grids (EU RES)
¤ because RES are *subsidy pushed (not market pulled –energy market or
carbon price) and **country regulated (no EU wide system of RES push rules -
except definition of countries quotas)
¤ We got a split: – RES split between “green part” (out of market price &
trade order, in “own special circuit”) &”energy flow” (into Market & system)
-RES energy flows circulate through grids to directly enter
the demand (while being variable and not dispatchable) >> very strong
interactions between RES, power system and grids operation
- NonRES can serve only “residual demand”; only what
variable RES cannot feed at each moment > very strong market interactions
between RES & nonRES (capacity “adequacy” given by amount of RES)
¤ Small RES > small interactions; Massive RES>> massive interactions
9

(2) 2009-2014: Unfortunately it’s derailing…
What’s happening?
EU RES policy
• inserted in Internal Market not conceived for massive RES;
• injected in EU grids not conceived for massive RES;
• A massive public push to be financed in worse ever EU economic crisis;
• An industrial strategy destabilized by non-EU big “game changers”
10

Derailing What? (2.1) insertion into Internal Market
• RES already inserted in Internal Market and strongly interact with
¤ Volume effect only “residual demand” comes to nonRES generators;
eviction effect (2012 Germany - 30TWh due to RES and - 45TWh for economic
slowdown; 2014 Q1: record of 24TWh RES = 11 GW “full time”; while nominal
capacity PV reaches 36 GW)
¤ Price effect: High cost nonRES generators are not called (“evicted”); only
lower cost nonRES Gen. are needed; equilibrium price of energy market falls
(2008: 66 Eur/MWh; 2012: 33 Eur; 2014 Q1: 27 Eur)
¤ Of course RES German pricing interacts with neighboring countries:
(Thanks to internal EU market coupling) Low energy market prices expand to
all “core” EU wholesale market
11

www.florence-school.eu 12
CERA
115 GW of Gas plants at risk of closure, albeit to different
extent over 2012-2014 data
Revenues over 2012-2014 enough to cover:
Full Fixed Costs 15 GW
Debt Repayment and Fixed O&M 69 GW
Fixed O&M Only 26 GW
Less than Fixed O&M 19 GW
Source: IHS CERA 2013.
Notes:
°Revenues include energy as well as ancillary services.
°Data do not consider plants which are combustion turbines, internal
combustion engines, must-run plants, or plants smaller than 40MW.
°Full fixed cost set at 110,000 Euro per MW per year.
°Debt to equity ratio of investment assumed to be 70:30.
°Fixed O&M set at 20,000 Euro per MW per year.

Derailing What? (2.2) RES insertion into EU Grids
• RES already injected into EU grids and strongly interact with system flows
¤ Generation changes its location RES generate where resource is; wind is
not “gas-like” located >> new graphs of flows into the grids and of congestion
(grid capacity availability)
¤ Generation changes its grid level: Wind more on regional grids that
national ones; PV on local distribution grids >> new capacity investment;
measurement & flow control; grid performance & revenue regulation issues
¤ Generation changes its pattern: both Wind & PV outpout varies according
to renewable resource variations; flows changing more with shorter
predictability; more balancing needs
¤ All these also modify flow influences among EU countries
15

Significant investments needed for
power network:
IEA: > 40% of existing network to be
refurbished by 2035
TYNDP 2012: €104 billion over next
10 years for new projects (80% for
RES integration)
UK: new off-shore grid same order of
magnitude that existing on-shore one

Derailing What? (2.3) RES to be financed
• High RES regime has several piles of expenses to be financed
¤ Support schemes end up with significant amount (Germany power price at
33 Eur MWh & support at 64 Eur; Yearly total > 20 bn); while tariff deficits
already big (Spain x10’ bn) or significant (France x1’bn). UK calls for LT nuclear
at 110 EUR MWh.
“Energy base” financing of RES is anti-redistributive (taps lower income).
Even Germany protects 2 100 companies &lowers bills for 5 EUR bn in 2014.
¤ Grid reinforcements: many countries apply “shallow costs” to RES;
Germany adds “grid obligation” to connect RES
¤ System balancing: RES intermittency calls for demanding system balancing
actions
¤ All these costs adding up with limited budgeting & control
17

Derailing What? (2.3) RES to be financed
• All RES regimes nevertheless end up with an (implicit) CO2 price
[EUI data: Claudio Marcantonini]
¤ Germany Year 2010
Wind 60 Eur / CO2 Ton (1 MWh Wind actually displaced 0.7 CO2 ton)
Solar 600 Eur/ CO2 ton
¤ Italy Year 2010
Wind 180 Eur / CO2 Ton (1 MWh Wind displaced 0.4 CO2 ton)
¤ Spain Year 2012
Wind 85 Eur / CO2 Ton
18

Derailing What? (2.4.1) significant external “game
changers”
• RES “Green Revolution Boom for EU” being questioned
¤ EU RES size and cumulated experience advantage is diminishing. EU RES
installed based still near to world 50% but Asia by far first RES investor today
and years to come
¤ World “top ten manufacturers” for wind and PV going upside down
¤ Chinese other noticeable power equipment manufacturing entries:
°already seen with hydro turbines;
°and nuclear (AP 1000 with Westinghouse; EPR with EDF);
°appearing with grid equipment (Grid State China in Portugal etc.)
19

Derailing What? (2.4.2) significant external “game
changers”
• RES “Only significant Greener” being questioned in the US by gas
substituting to coal on a market base… while EU very low CO2 price + high
gas price do not make it against coal…
¤ Gas “cleaning” the energy mix? by replacing coal (x 2 times more polluting
with > 0.8 ton CO2 MWh). In USA GHG emissions at their lowest since… 1994.
¤ In EU however coal ousts gas: German coal near to record 50% elec
generation in year 2013; GHG emissions Up; and total emissions (> 750 Mt) 2
times France and > 3 times Spain
¤ Why so much coal? German wholesale price 36Eur in 2013
Total cost Coal gen. 55Eur (Only coal + CO2 = 28Eur)
Total cost Gas gen. 70Eur (Only gas +CO2 = 51Eur)
¤ For gas to come back against coal: x2 price of coal or /2 price of gas; or x8
2013 price of C02 – not for very soon…
20

(3) 2014-2020 And so what? To reason or to divorce?
2014 year of questioning and redefinition by excellence. It started in
November 2013 and might end (or not) between entry of new Commission
(end of 2014) and World Paris Summit (end of 2015)
• Commission Novelties (from November 2013 to April 2014)
• EU Power Industry Novelties (2014)
• EU Power TSOs Vision ( TYNDP 2014)
21

(3.1) To reason or to divorce? Commission novelties
June 2012: make your choice - November 2013: some guide lines – January
2014: Berlin 20-20-20 “game over”. Competitiveness & costs back to top
• June 2012 - Options for RES policy post 2020 / S2: Only Carbon Price is
risky and unfavorable to technology innovation / S3: National RES targets
risk EU fragmentation and high unit costs but favors decentralization &
distributed Gen. /S4 EU RES target and harmonized frame favor costs
reduction, cross-border investments, large scale innovation but with grid
& system costs
• November 2013 - Guide lines for RES support till 2020 / Only small units &
less mature RES (as off-shore & bio-mass) keep FiT / big unit more
deployed RES only FiP & Tgy neutral auction (ex: On-Shore >> PV 1MW)
• January 2014 - Framework post 2020 / favors MS GHG targets + EU RES
target & “appropriate EU governance for MS action plans”
22

(3.2) Reason or divorce? Eurelectric’s differences
At least 3 noticeable differences (Eurelectric Manifesto February 2014)
• Single target being GHG emission (– 40%); carbon market as most cost-
effective instrument for decarbonisation
• Concentrate all state aid on RD&D and increase spending on technology
demonstration
• Build long term generation investment adequacy on market based
“Capacity remuneration mechanism” coordinated at Regional Level
23

(3.3) Reason or divorce? ENTSO-E’s differences
At least 2 visible differences (ENTSO-E TYNDP2014 & Florence Forum May)
• 1/ Vis-à-vis Eurelectric:
NO to that type of “Capacity Mechanism” <TSOs do not have to
collect money to finance generators (in distress or not)> Only sound
mechanism is for “flexibility services” delivery measured to TSOs
• 2/ Vis-à-vis Commission:
OK OK Commission has “Top Down” vision(s) being
“Green Revolution” (still ambitious Commission RES target?) or
“The Money –still- rules” (a bit more relax Eurelectric?)
But TSOs also have “Bottom Up” vision(s) being
“Slow Progress” (Members States do not follow Commission at all) or
“Green Transition” (Member States do it only at country level)
24

To conclude: more reason than divorce?
1/ Existing EU energy policy (since 2009) not born as a “Grand Programme”
but several EU policy opportunities crossing internal energy market building
2/ The Berlin 20-20-20 targets push into internal market resulted mainly in a
“Dash for RES”
3/ RES pushed from outside internal market but strongly interact with. EU
“reference” market design has been conceived to help a CCGT fleet spreading
same generation costs all over EU. It ends up with 10’s CCGT GW being
financially stressed. And EU power system security at risk.
4/ RES schemes are mainly MS schemes fragmenting the EU investment and
operation landscape while overpassing average “EU willingness to pay” .
5/ Commission tries to escape any new “post 2020 RES burden sharing”
leading to veto or riot - while getting an EU open space for RES future
6/ Eurelectric to escape “technology picking” for new fringe by MS or
Commission while getting strong ETS & capacity mechanism pricing support
7/ ENTSO-E tries to avoid building White elephants while delivering more EU
system security
28

Thank you for your attention
Email contact: jean-michel.glachant@eui.eu
Follow me on Twitter: @JMGlachant
Read the Journal I am chief-editor of: EEEP
“Economics of Energy and Environmental Policy”
My web site: http://www.florence-school.eu

2007-2014/ 7 years of EU energy & climate policy:"Age of reason or of divorce?"

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2007-2014/ 7 years of EU energy & climate policy:"Age of reason or of divorce?"