Europe’s energy and climate policies get mixed review
Simon Evans
12.01.14The European Union is a global leader on climate change, but there’s still plenty of room for improvement. That’s the conclusion of a new energy policy review from influential thinktank the International Energy Agency (IEA).
The report summarises the big issues countries face when trying to decarbonise their energy sectors while keeping the lights on and preventing energy bill hikes.
It argues against schemes to pay power companies to ensure they’re always ready to supply energy when required, such as the capacity market currently being introduced in the UK. It also calls for a higher EU energy efficiency target, expanding energy efficient policies, rapid reform of EU carbon markets and caution when assessing shale gas’s potential contribution to the energy mix.
IEA publications tend to be fairly weighty and this is no exception. We’ve picked out some of the most interesting findings and recommendations from its 312 pages.
Shale gas pessimism
Back in 2012 the IEA published a widely-referenced report setting out how hydraulic fracturing of shale rocks could deliver a new “golden age” of natural gas. It said Europe could expect to produce 77 billion cubic metres of shale gas per year by 2035, about the same as the UK’s annual demand.
That outlook was pared back in 2013, when the IEA said countries were failing to replicate the North American shale gas revolution. Its new review is even less optimistic. It says the EU has yet to evaluate the potential of shale gas and has only “limited” exploration experience.
The IEA says this uncertainty, along with “less favourable conditions” such as the fracking bans in place in many EU nations, means that only around 17 billion cubic metres might be produced by the EU in 2040. That’s about a fifth of the UK’s annual consumption.
Integrating wind and solar
While Europe has yet to experience a shale gas boom, it is undergoing something of a revolution in its electricity supplies. This is bringing new challenges, the IEA says, as countries try to integrate low-carbon sources like wind and solar into the grid.
Plummeting power prices as a result of cheap wind and solar generation is causing a growing crisis among the owners of the costliest conventional power stations, which are first to be squeezed off the grid by cheaper renewable output.
The IEA takes a fairly optimistic view of these challenges, however. It says electricity grids can accommodate up to 45 per cent wind and solar power “without significantly increasing power system costs in the long run”.
Cost-effective integration requires transformation of electricity systems, it says.
This should include investment in connecting up grids in different countries and greater support of demand side response, where energy users can be rewarded for matching their demand to changes in levels of supply.
Another approach is to introduce a capacity market, which attempts to incentivise adequate generating capacity by paying plants a retainer just for being available. The UK is introducing one and several other EU states are likely to follow.
The IEA is not keen on such schemes, however. Capacity markets raise “substantial concerns”, it says, and may cost consumers over the odds. Most importantly the IEA points out that it will be difficult to phase out such schemes once they have been introduced.
Temporary coal renaissance
One criticism of the UK capacity market is that it is likely to help coal-fired power stations stay open longer than they otherwise would. This could exacerbate the mini “dash for coal”, which the IEA says the EU has been seeing since 2011.
Power companies have been switching to coal from cleaner, more expensive gas particularly in the UK, Germany, Spain and the Netherlands. The switch has been driven by falling coal prices as Asian demand has slowed, the US has replaced some coal with shale gas and mining capacity has expanded in top exporting nations like Indonesia and Australia.
The good news is that the IEA thinks this coal renaissance is temporary. It expects EU coal use to decline towards 2020. Coal use is already back to historic lows in the UK, for instance.
Climate targets mean older inefficient coal plants will have to be phased out or replaced with new ones equipped with carbon capture and storage, the IEA says. Though there may be a case for supporting a temporary role for older coal plants to be used as emergency reserve capacity in some countries, it says, running for just a few hours a year to ensure security of supply.
Rapid carbon market reform
Part of the reason why EU coal plants have thrived in recent years has been extremely low prices on EU carbon markets. Prices are low because there is a surplus of emissions credits as a result of over-generous allocations and reduced demand after the financial crisis.
The IEA is critical of an EU plan to temporarily shelve emissions credits to bolster prices, a process known as backloading. It shares the UK government view that cancelling surplus credits altogether would be more effective.
Another planned reform to create a reserve bank for the carbon market’s credits, known as the market stability reserve, should be introduced “without delay”, the IEA says. The mechanism will add to or remove credits from the market in an attempt to control prices.
The IEA says emissions credits would need to cost â?¬40 per tonne to drive power companies from coal to gas or â?¬30 to make subsidy-free onshore wind viable. Current prices are around â?¬6 and the IEA says those higher prices “are unlikely to materialise” unless reforms deal with the huge current surplus of allowances.
Energy efficiency enthusiasm
Along with “swift” carbon market reforms the IEA says energy efficiency should be a priority for the EU. The IEA notes the “compromise” EU target to shave “at least” 27 per cent off business as usual energy use projections by 2030, and says a review that could push the target up to 30 per cent is “very welcome”.
It argues the EU should use analysis of the multiple benefits of efficiency, such as health benefits, to “support a higher target”. Another “clear benefit” of greater efficiency would be improved energy security, the IEA says. It says energy efficiency policies are “crucial to delivering economic and social outcomes to consumers and to the economy as a whole”.
The IEA recommends a specific EU law to drive “comprehensive energy efficiency retrofits in the most vulnerable households by 2030”. This would help reduce consumer energy bills, it says. Energy efficiency retrofits for the poorest have been floated in the UK but not yet fully adopted by the major political parties.
The IEA also wants EU consumer goods energy efficiency rules to be expanded to cover more product types. This has already proved controversial with planned restrictions on inefficient vacuum cleaners provoking unfavourable headlines in the UK this autumn.
Commendable effort
Overall, the IEA review praises the EU’s “low-carbon leadership” and says its climate efforts are “to be commended”. The IEA expects the bloc to cut emissions by more than its 2020 target, and to come close to meeting additional targets on renewable energy and energy efficiency.
That doesn’t mean the EU can rest on its laurels, however. Current policies put the EU on track to cut emissions by 32 per cent of 1990 levels by 2030, the IEA says. This remains well short of the “at least” 40 per cent cut the EU recently pledged.