Time to reassess the EU’s environment and climate change policies

EU leaders are meeting today in Brussels to discuss the EU’s 2030 energy, environment and climate change framework which will likely involve some new targets for emissions reduction. You can find our full thoughts on the original Commission proposal here – but broadly we think that the more flexible structure is a good approach and that dropping the binding renewables target is the right approach.

To that effect Open Europe today published a new comprehensive analysis of the EU’s 2020 framework. The highlights that some of the key assumptions that drove the policy have proven to be incorrect:

1. A global deal – Without this the net benefits of the EU’s approach fall from over €200bn to between -€11.4bn and -€20.6bn.
2. Emissions targets will lead to lower emissions – while the UK’s domestic carbon emissions have stabilised or even fallen slightly, its overall consumption of carbon has risen (save for a drop during the financial crisis).
3. UK’s targets are achievable – Recent simulations for the European Commission suggest the UK will fall 4% short of its target of 15% of energy from renewable sources by 2020.

4. Technological developments will cut cost of renewables – renewable energy remains, for the large part, reliant on subsidies and unable to compete with fossil fuels on the open market.

5. UK’s energy security will increase – far from increasing, the UK’s energy future looks more uncertain than ever, with talk of blackouts now commonplace in the media. The renewables target is exacerbating the coming energy crunch. Given the intermittent and unpredictable nature of many renewable sources close to 50% of the UK’s generation capacity will need to be from renewables. The only real option is offshore wind. However, given the size of fields needed they will need to continually move into deeper, rougher water. The available data suggest a clear correlation between deeper water and higher costs.

Therefore, while the likely removal of the renewables and other binding targets from 2020 to 2030 is welcome, we believe it will not be sufficient. In particular we highlight that the current policies are having a significant impact on bills. Open Europe estimates that, in 2013, the average household’s dual gas and electricity bill was increased by £59 (5%) due to EU regulations or UK implementation of EU defined targets. By 2020, EU-related regulations or targets will increase annual household bills by £149 (11%).

The impact on medium sized businesses is particularly troubling as shown in the graph below. Open Europe estimates that in 2013 the average medium sized business bill was increased by 9% (£130,000) due to EU regulations or UK implementation of EU defined targets.  By 2020, EU-related regulations or targets will increase medium sized firms’ bills by 23% (£350,000). With these figures there are some caveats: DECC claims that there are sufficient offsetting policies which will reduce these costs, however, it’s not clear why these cannot exit in any case (i.e. why bills could not be even lower on net) and that even if these policies were changed, the costs may not evaporate entirely.

Lastly, in terms of the overall picture these policies have proven to be costly but with limited benefit, while many countries, including the UK, look off track. Therefore, we recommend an urgent reassessment of the current policy along with the 2030 framework. After all, if there is a move away from a binding renewables target after 2020, logically it seems strange for governments and businesses in the UK to make huge investments just to meet the current target which will soon be obsolete.

A crucial part of EU reform will creating more flexible policies which can adjust to changing circumstance, which involve continuous, rigorous economic assessment and where mistakes can be undone. This seems as good a place to start as any.

UK shifts renewables subsidies offshore

Change in direction in UK wind subsidies?

The BBC reported this morning an interesting development in UK energy policy. The UK government is set to shift its subsidies for renewable energy towards offshore wind, with support for solar power and onshore wind being cut. From 2015 the fixed prices for offshore wind will be higher, in the hope of driving investment.

While this seems to be a UK only issue, as we have noted at length before, much of UK energy policy (especially on renewables) ultimately comes back to the EU’s overarching targets.

Why not an overall cut?
As is immediately clear, this does not increase renewable subsidies but it also does not cut them, it is as has been noted, a “rebalancing”. The main reason for this is that the UK still needs to meet its EU mandated target for 2020 of 15% of energy, and 30% of electricity, from renewables. If it has any hope of doing so, a cut in subsidies seems impossible.

Why offshore wind?
Given the size of the jump in electricity production needed (currently just over 11% is produced by renewables) offshore wind is the only realistic option. Solar is unlikely to ever be viable as a key source of electricity production due to the UK’s climate, while onshore wind is severely limited by the lack of viable sites which both provide enough wind and are politically acceptable.

Will this have any significant impact?

• As noted above, this is mostly shifting around funding, albeit to possibility more realistic areas. That said, it remains incredibly uncertain whether offshore wind can deliver the level of electricity needed to meet the UK’s demand.
• Firstly, the costs of offshore wind look set to increase, this is because the wind farms are increasing in size meaning they need to shift to deeper water. Clearly, this means increased costs in terms of installation and maintenance (as well as some very serious technical challenges to be overcome). It will also increase costs of linking the farms back into the UK’s power grid. The working assumption from the government’s side, is that these costs and challenges will be offset by higher output due to more wind at the deeper locations, but there is little evidence to support this so far. Added to that increasing the subsidy at this point seems to imply that the costs of offshore wind will remain stubbornly high raising further questions about its long-term sustainability.
• Secondly, given the intermittent and uncertain nature of wind, the UK will need to install significant extra capacity as well as a huge standby energy reserve to ensure peak demand can be met. This will increase costs across the board.
• The hope is that these new higher prices will help drive investment into offshore wind. While action is necessary, it once again highlights that investment is lagging behind where it should be in the UK's vital renewable technology. It also adds to the growing anecdotal evidence that there are serious issues with attracting investment into the UK's energy market, at least under terms which don't involve higher fixed prices (see Hinkley Point C deal).
• The deal also does not bode well for the hopes of declining energy prices and bills in the future. It essentially locks in a price of £140 per MWh under offshore wind. This remains well above market prices for fossil fuels (its around £70 - £80 per MWh for gas) and keeps the price well above the target of £100 per MWh laid out under recent government studies. Any decrease in costs in the future is unlikely to filter through to prices. 

The key point here is that the UK government is trying to respond to the changing circumstances and changing public opinion, however, it remains locked into a very restrictive framework due to the targets agreed at the EU level. As we have said before, we can’t help but feel that as long as this is the case the UK’s energy woes, both in terms of prices and supply, will continue.

The EU might have something to say about Cameron's plan to roll back green policies

Former windmill on David Cameron's former home
publicising a former policy?

David Cameron once said his Coalition would be the "greenest ever", he once even installed a windmill on his own house in the hope of publicising his green credentials. No more it might seem. Yesterday he told the House of Commons:

"We need to roll back some of the green regulations and charges that are putting up bills."

The heat in the cost of living debate is only set to rise, but do not hold out any great hope of a dramatic reduction in energy bills. For the most part they flow from legally enforceable EU laws that the UK signed up to. Something we warned against here and looked at again here.

This begs the question, which ones can the UK scrap on its own and will it seek to renegotiate the others?

• EU Renewables Directive - imposes a legally binding target of 15% of all energy by renewables by 2020, which translates into producing 30% of UK electricity by costly renewables. This is the driving force behind subsidies and support for renewables. 
• The UK does have more control over its new Carbon Price Floor policy (which sets a minimum carbon price) and some of its strict energy efficiency policies. But even these fall under the overall banner of the EU defined emission's reduction targets which the EU will have to work very hard to hit.

So will the UK seek to renegotiate these headline targets to allow for cheaper forms of CO2 reductions? Lets see, but if not then all talk of reducing electricity bills are for the most part hot air.

UPDATE: Reuters reports on UK Government papers arguing that EU needs to cut greenhouse gas emissions by 50 percent from 1990 levels by 2030 to avoid the worst effects of climate change. The "roll back" is going well then!

Is Ed Miliband's "energy price freeze" compatible with the UK's EU commitments?

How will Ed Miliband's new Energy policies go down in the EU?

At our fringe event today at the Labour Party conference - that we organised together with IPPR (write-up to follow) - we sought to answer the question, how Labour should respond to a changing Europe. Well, here's a potentially interesting twist to that question.

Ed Miliband in his leader's speech earlier today promised to freeze energy prices for 20 months after 2015 if he is elected Prime Minister. Furthermore he also seemingly promised to reduce carbon emissions from the UK's energy sector to zero by 2030. Interesting ideas, both brave and potentially effective with the electorate (they can also count as real policy announcements). However, we wonder whether he has thought through the EU implications of all of this.

First, it's impossible to discuss energy policy without considering the EU dimension. Although UK governments - Labour and the Coalition - have no doubt added extra requirements, much of the cost of reducing CO2 and other emissions are now locked into legally binding EU agreements. Incidentally, Ed Miliband was Energy Minister from 2008-10 when many of these policies were being developed. Capping price increases while keeping the underlying policies will do nothing for long term energy affordability. Meeting the renewables target is costly and requires significant investment - this will not be forthcoming under a price freeze and the UK is already behind schedule in terms of meeting its target. UK energy companies may also find it impossible to stomach the cost of managing both policies at once.

The real question then is whether Miliband is also ready to go to Europe to renegotiate these policies to achieve affordable energy in the long-term?

Secondly, is it possible for the UK to unilaterally freeze prices in the UK while championing an integrated EU single market in energy? An integrated single market is one real way to help reduce prices - and is something that we believe Labour has rightly called for in the past.

Some have already questioned whether the move would be legal under EU competition law. We believe it might, just. Since there is currently no single market to break in energy but also because UK firms receive no competitive advantage from the move. Any imported energy would also face the same price cap since it is applied at the consumer level. Given the problems above though, tinkering along the edges of the plan seems likely (possibly to reduce the impact on UK energy firms) this could well create legal issues with the EU.

Thirdly, did Ed Miliband really mean to commit his party to reducing UK energy carbon emissions to Zero (its worth noting he made similar suggestions last year)? The EU's already ambitious targets are to cut carbon emissions by 85 - 90% by 2050, so bringing that forward to 2030 would add a huge cost to the UK's energy bill. We wonder whether he actually means 100% of UK electricity (note, not total "Energy") should be carbon free? That could technically be possible (just), but likely at an incredible cost, and require vast amounts of investment in both nuclear and renewables.

Perhaps we have been here before. When Tony Blair signed the UK up to a binding 15% of energy, it was thought by some he believed he was signing up to 15% of electricity. Former UK scientific adviser Sir David King for instance suggested that Blair and the other EU leaders did not understand what they were committing themselves to when agreeing the target:

"I think there was some degree of confusion at the heads of states meeting dealing with this. If they had said 20% renewables on the electricity grids across the European Union by 2020, we would have had a realistic target but by saying 20% of all energy, I actually wonder whether that wasn't a mistake."

It's an interesting idea - and credit to Ed Miliband for actually trying to address an issue that will be very important to people for years to come - but we would like to see more details.

But more fundamentally, it's also a reminder that, not matter how it tries, Labour won't be able to escape tough decisions on how to approach EU policy - in all its various shapes and forms.

Even more hot air? EU emissions targets post-2020...

Grand room, grand ideas....

Today, over a two hour working lunch in Dublin Castle's grand State Dining Room, EU Environment Ministers will be discussing the EU's contribution to reducing global CO2 emissions post-2020. The Commission's Green Paper on the menu is austere stuff - it calls for reductions in EU emissions of up to 80 - 95% by 2050.

This raises many obvious questions. Leaving aside arguments over climate change, the impact on living standards and whether unilateral decarbonisation is sensible in a global economy, is this plan remotely credible? And if it is, where does the EU believe the cuts will come from? 



Commission's plans to reduce CO2 by 80 - 95% (Mt CO2 eqv)

Firstly, as you can see on the right, as these cuts are calculated over 1990-levels, we're already some way down the road (due to a recession and continued de-industrialisation). But the majority of the heavy lifting is yet to come.

You can also see from this that emissions from some states (Spain for instance) are allowed to go up before 2020. This is due to "burden sharing" allowed under EU rules. If the assembled ministers decide to do that again for 2030 it will mean higher cuts for the UK.

So, again, where will the cuts come from? Well, mostly  from industry and power generation, it seems. The most startling projection is that power generation is planned to reduce to 0%. Right...


EU Green paper: Power generation - 0% CO2?

This is a massive and expensive undertaking as you can see from looking at the UK's current electricity generation mix (below). Currently, at only 7% renewables, a large share will either have to be modified to use Carbon Capture and Storage technology or replaced by new nuclear or renewables, such as wind. Beyond that, the UK's emissions from industry will also have to decrease by a very large percentage. Is that remotely credible while maintaining a manufacturing base? Strangely the only area to be exempted from the emissions cut is agriculture - always a special case in the EU. 


UK electricity gerneration (2010)

Keeping the lights on: The UK's looming energy gap and the EU

The UK's energy regulator Ofgem's chief executive Alistair Buchanan made headlines this week by highlighting a looming UK energy generation crisis saying that it:

"will face a tougher challenge over the next few years because of the possibility of a prolonged lack of spare power station capacity."

Very true, but this should have come as no surprise to anyone - Ofgem was already highlighting a serious generation gap in its October 2012 assessment - as others have for many years. To cut a long story short policy decisions (and the lack of policy decisions) over decades mean that, in Ofgem's assessment, by 2016/17 the excess capacity of UK electricity generation over demand is predicted to fall to just 5%. And that is a mid-point estimate - so if demand is higher (a cold winter), there are delays in building new gas plants or a problem with existing plants, there will be even greater problems dealing with peak demand.

In the short term this problem is exacerbated by EU environmental laws that require the closure of large coal plants. This is in addition to the closure of nuclear plants which are coming to the end of their lives.

This is a looming problem for the UK and something politicians of all stripes should be aware of given the political resonance of higher fuel bills and the possibility of black outs. Other than building more coal or gas plants, immediate action could require the UK to seek to renegotiate its legally binding commitments with the EU, something that has been highlighted by the EU Fresh Start Group of MPs.

The UK's electricity generation at the moment:

DECC 2010

This is what Ofgem thinks could happen to this capacity

Ofgem highlights that on a midpoint prediction the UK will only have a 5% safety threshold

The big difference is the decommissioning of coal plants. And if Ofgem is gloomy, some analysts such as Credit Suisse have gone further by predicting that the UK could even end up 10% short.


Credit Suisse

So why is this all happening now? Well there are two parts to this.

Firstly we have the failure of domestic policy. Energy generation has become a political football with politicians from all parties promising to reduce CO2 (a vote winner) without committing to the policies and costs required (a vote loser). Creating new energy generation capacity requires a long lead time, something the current political culture is seemingly ill fitted to.

Secondly, we have the EU. The UK has signed itself up to some of the most ambitious/unrealistic (delete as appropriate) legally binding environmental legislation in the world. Specific to power generation are the following:

2009 Renewables Energy Directive

The renewable target requires the UK to shift from just 1.3% of total energy (i.e. not just electricity) from renewables in 2005, the baseline year under the EU Directive, to 15% by 2020 – the largest proposed increase of any member state. The consensus is that the 15% target is likely to require the UK to produce 30-35% of its electricity from renewables by 2020, because it is far harder to source energy for transport or heating from renewables. This is obviously a big ask and it is not clear where the energy will come from.

2001 Large Combustion Plant Directive (LPCD) and 2011 Industrial Emissions Directive

If you look at the graph above Ofgem puts a large proportion of the generation gap down to the decommissioning of coal fired power stations. This is important as coal (unlike wind) is a base load generator and can respond to peak demand. Unfortunately many of these coal plants are due to close.


Kingsnorth coal power station due to be closed by EU emissions legislation

This is due to the LPCD, which is designed to reduce the amount of sulphur dioxide, nitrogen oxides and dust emitted from large conventional power stations. Existing plants had the choice to either comply with the new targets by installing new technology to remove emissions or remain open for a limited period only. In the UK, 11GW of capacity opted out of the Directive and will consequently have to close in 2015 - and some will close sooner. In fact, Ofgem notes that, "power stations 'opted out' under the LCPD are using up their running hours faster than expected" and that "most LCPD opted out plant will come off the system well before the 2015 deadline."

In addition, the EU's Industrial Emissions Directive will place restrictions on the operation of some existing coal and older gas stations from after 2016/2017.So what can be done?

The problem needs a solution in two parts. Firstly the UK needs a huge amount of investment in new generation capacity of all flavours. For instance in 2011 the Government noted that:

“Around a quarter of existing power plants in the UK are due to close by 2020. Replacing this capacity will require up to £110 billion of investment in new generation and grid connections by 2020. Compared with the last decade, rates of capital expenditure on energy infrastructure will need to double." 

A second option to escape the short term generation crunch brought on by the EU's LCPD could be to seek to negotiate for a UK opt-out or extension from the Directive. This could for instance come in the form of a limited exemption for a number of hours at times of peak demand. The problem with this is the Directive is legally binding and so would require other EU states to agree.

 
Will the Coalition attempt to re-negotiate a partial exemption? Well it is clear that a large number of Conservative MPs are becoming wary of how higher fuel bills and possible blackouts could reflect on them in the next election. The EU Fresh Start group of MPs has for instance called for the renewables and LCPD to be reviewed. This is what their manifesto says:

"The UK should renegotiate, or, if unsuccessful, suspend its obligations under the 2009 Renewables Directive, and not sign up to further commitments with respect to renewable energy targets. Our own roadmap (which would replace it) should maximise the cost efficacy of the reduction measures taken."

"We should review the timescale of the Large Combustion Plant and Industrial Emissions Directives with particular reference to the requirement to close down our large coal burning stations. To the extent we believe that premature closure is causing an unacceptable impact on fuel poverty or energy network resilience, we should extend their lives. We should make it clear to our EU partners that the large scale construction of unabated coal stations while we switch ours off is not a fair or an acceptable position."

Will this happen? Well David Cameron's commitment to re-negotiation is only for the post 2015 Parliament which might be too late. So could there be a case for early action? Yes, but immediate action seems unlikely, at least for as long as the lights are still on. Both the Conservatives and Liberal Democrats have reiterated their support for legally binding renewables targets and if Labour were to return to Government they were the party that originally put them in place!

So, expect to hear more about the looming energy crunch and expect the political temperature to increase.

What lies behind the Government’s renewed interest in the Severn barrage?

A lasting monument to the EU's renewables targets

It has been reported that David Cameron’s attention has fixed on the old idea of building a Severn barrage to provide renewable energy. Much of the reporting puts this in the context of the politics of infrastructure spending; however there may be another reason that we have previously highlighted for his renewed interest. That being that he has little choice if his own desire to comply with the UK’s EU target of producing 15% of its energy form renewable sources by 2020 is to be met.

Background
The EU’s renewable target, (agreed by Tony Blair in 2007) requires the UK to shift from just 1.3% of total energy from renewables in 2005, the baseline year under the EU Directive, to 15% by 2020 – the largest proposed increase of any member state (see graph below). The Government predicts that this will come at a net cost of £66bn to the UK over 20 years. This is a huge cost given that the UK already faces a major energy generation challenge – a quarter of existing power plants in the UK are due to close by 2020 – and that Britain should be in the enviable position of being one of the EU’s top energy producers, largely due to North Sea oil and gas, which makes it far less reliant on traditional energy imports than other member states.

The consensus is that the 15% target is likely to require the UK to produce 30-35% of its electricity from renewables by 2020, because it is far harder to source energy for transport or heating from renewables. The UK currently has one of the lowest proportions of electricity generated by renewables in the EU, illustrating the scale of the challenge.

So why do EU rules make the barrage almost a certainty?Article 5(2) of the original proposed renewables directive (requested by Britain) made it clear that the UK would have to build the controversial Severn Barrage in order to meet its EU renewables target.

The proposed article stated that:

“Member States may apply to the Commission for account to be taken, for the purposes of paragraph 1, of the construction of renewable energy plants with very long lead-times on their territory under the following conditions:

(a) construction of the renewable energy plant must have started by 2016;

(b) the renewable energy plant must have a production capacity equal to or in excess of 5000 MW;

(c) it must not be possible for the plant to become operational by 2020;

(d) it must be possible for the plant to become operational by 2022."

Given the extremely specific description (something five times more powerful than a large nuclear power plant which will be built between 2020 and 2022), this can only realistically have refered to the barrage.

Expensive stuff given this was possibly all based on a "mistake"
In 2008, the UK Government's former chief scientific adviser, Sir David King, suggested that Prime Minister Tony Blair and the other EU leaders did not understand what they were committing themselves to when agreeing the target:

"I think there was some degree of confusion at the heads of states meeting dealing with this. If they had said 20% renewables on the electricity grids across the European Union by 2020, we would have had a realistic target but by saying 20% of all energy, I actually wonder whether that wasn't a mistake."

Tony Blair thought he had signed up to  increase this: 15% of electricity from renewables

But he actually committed the UK to this: 15% renewable share of all energy by 2020

Leaving this: A UK renewables gap even the barrage might not fill

Source: Open Europe: The EU Climate Action and Renewable Energy Package: Are we about to be locked into the wrong policy? (2008)

But the whole idea was rather muddled in any event

Focusing on renewable energy from a climate change point of view sounds good but the 2020 rush to renewables is illogical as it ignores and actually diverts resources away from the easier and cheaper CO2 reduction wins to be gained from all other technologies (clean gas, clean coal, CCS, reducing consumption or even renewables that are at an earlier stage of technological development).

Several aspects of the EU’s climate change policy (forgetting the UK’s own self-imposed targets) are also self-defeating, including the competing and complex nature of the individual policies: the Emissions Trading System (ETS), which is essentially meant to be a market-based carbon pricing framework, and the aforementioned renewables target, which is essentially designed to change the energy mix of member states, often through subsidy.

In practice, forcing electricity generators towards prescribed renewable technologies, such as wind, through the 2020 target and government subsidy lowers the carbon price under the ETS because firms are being subsidised to meet the cap. This undermines the ETS’ carbon pricing function, which is meant to be the driver of investment in the cheapest low carbon alternatives.

A similar conflict can be seen between the EU’s initial push for a biofuels target, and the subsequent move to sustainability criteria, and additional production costs, due to the previously unforeseen impact certain biofuel production had on food prices and land use. All told, this policy mix is unlikely to be the best value for money option in reducing CO2 emissions.

EU green fatigue

An increasing number of countries in Europe are beginning to suffer from what can best be described as 'green fatigue'. In fact, the mood has changed radically since March 2007 when EU leaders agreed to their ambitious green targets.

This is particularly obvious in Germany, Europe's industrial powerhouse and paymaster.

Over recent days, the EU's directive on biofuels (soon to be overtaken by the Renewables Directive) has been absolutely hammered in the German press. As it stands, the Directive requires gas stations to sell fuel with 10 percent ethanol content - which has triggered boycotts, due to drivers’ fears that the new fuel will harm their vehicles.

Der Spiegel notes:

"All EU countries were supposed to have introduced E10 by the end of 2010, but only France and Germany have complied. And problems have not been limited to Germany. Because of slight differences in the E10 biofuels used in France, the ADAC, Germany's largest automobile association, is recommending that German drivers avoid E10 fuels should they cross the border into France."

In a comment, Handelsblatt criticises the Directive, arguing that due to rising food prices and environmental concerns "In 2008, EU Energy Ministers opposed extending the share of biofuels to beyond 10 percent". But, it notes:

“That isn't the end of the story however...Stable or falling prices for farm products, about which the agricultural lobby - led by France - is complaining, will be a thing of the past. The ones who need to pay, are consumers. In Europe, but especially in developing countries."

It concludes: "to burn food in order to obtain fuel is just a crazy idea."

We've warned against the EU's biofuel policies on several occasions, for example in January 2008, when we wrote that allocating more resources to biofuels would be a serious mistake:

"Biofuels are only likely to achieve between 0.9% and 1.1 % reductions in total EU emissions. This is a serious misallocation of resources. If the huge expense of achieving the miniscule reduction in greenhouse gases through biofuels were to be redirected towards reforestation projects, almost 28% of the EU’s total emissions would be saved. Even if it were to be redirected towards (relatively cost inefficient) renewables (at current costs), these funds would deliver a 2 – 5% reduction."

Meanwhile, the European Commission has just announced that EU climate policy will cost €270 billion annually, over the next 40 years. This is a massive amount. But the Commission is still intent on raising the EU's targets from the current levels of 20%.

FAZ comments:

"The ability of European industry to compete internationally will be undermined as a result of unilateral climate change targets. Energy-intensive production, for example of metals, is merely being transferred to third countries (...) without improvements to the world's climate. The Commission doesn't ask itself these fundamental questions."

To be fair, Germany's Commissioner in charge of the energy brief, Günther Oettinger, has been very critical of his own institution's attempt at raising CO2 targets. "I believe 20 percent is the right, middle way," he said, warning that if the EU would go it alone, "than we not only lose jobs, taxes and social contributions. We will also have no reduction of CO2 levels."

He seems to have lost, though, as the Commission has just announced that it will be pushing for a 25% target, up from 20% compared to 1990 levels.

Still, opposition to the EU's green agenda - agreed at a time when Europe's economy was booming and the EU was looking for a new role for itself (the 'world peace' theme was getting a bit dated) - is clearly growing.