By Sonja van Renssen and Hughes Belin
Expectations hang heavy over the EU’s autumn agenda for energy and climate policy. The internal energy market, grid investments, the broken EU Emission Trading Scheme, the future of nuclear, a dogged debate over indirect land-use change (ILUC), and a new climate and energy policy for 2030 are only just held at bay by July’s unusually balmy weather here in Brussels. Sonja van Renssen and Hughes Belin look ahead to the rest of the year under the Lithuanian EU presidency.
Photo: Ville Hyvönen
Energy is a priority for Lithuania and within that, completing the internal energy market. Lithuania took over the 6-month rotating EU presidency from Ireland on 1July. It’s the last full presidency before European parliamentary elections next May. For Lithuania, a fully-functioning internal energy market is part and parcel of the European single market and restoring economic growth and jobs. “Looking at the situation that we have – with declining competitiveness, rising unemployment, challenges in the financial sector – we think that energy should be one of the solutions,” said Lithuanian Energy Minister Jaroslav Neverovič in early July. This approach frames Lithuania’s work on energy.
The 2014 deadline for completion of the European internal energy market is looming. In June, EU energy ministers drew up a long shopping list of all that needs doing, including reducing subsidies to mature and competitive renewables, addressing unexpected power flows across the grid, solving gas congestion at Europe’s external borders, and implementing the demand response provisions of the energy efficiency directive. To help with all this, the European Commission is due to issue this September: guidelines on capacity markets, renewables support schemes, demand response, energy storage, and vulnerable consumers.
Energy ministers will keep a close eye on progress and by the end of the year the Lithuanian presidency will submit a progress report to other member states for approval.
Energy prices and 2030
In practice, one of the most contentious issues between the European Commission and member states remains regulated prices. The liberalisation of energy markets forbids them in principle. The rationale is that the market should get real price signals to stimulate investments in generation and infrastructure. But some European governments fear – with reason – that leaving prices to the market would result in power and gas price hikes.
The debate about energy prices more broadly has gained enormous traction in 2013 due to an increasingly uncomfortable comparison with the US. There, shale gas has driven energy prices – and greenhouse gas emissions – down to levels not seen for years. True to her approach, Lithuania’s President, Dalia Grybauskaitė, has pointed out that a fully integrated EU internal energy market alone could save as much as €35bn a year in electricity costs. The Commission will present an analysis of the drivers of energy prices by the end of the year.
Energy prices are central to competitiveness and therefore economic growth. Their climb up the political agenda is also reflected in the evolving debate over a 2030 climate and energy policy for Europe. The Commission is due to issue first proposals for this in autumn. In its presidency programme, Lithuania says such a policy “seeks to provide for long-term investment… that would ensure the security of energy supply, stability, affordability of prices… thereby retaining the competitiveness of the industry and promoting investment in the development of a low-carbon dioxide economy.” Note that decarbonisation is last, not first, on this list.
EU energy and industry commissioners Günther Oettinger and Antonio Tajani have made it clear they will be fighting hard to ensure a 2030 policy is “rebalanced” away from climate change towards competitiveness and security of supply. “We are trying to rebalance things,” said Oettinger’s head of cabinet Eric Mamer at a debate in Brussels in mid-June, “after a period when it seemed the only thing that had any value was fighting climate change.” He added: “If you do not take the other [two] issues into account, you are going to lose support… and eventually also lose the fight against climate change.”
Others argue that the 2030 debate matters more for climate change than energy. “The midpoint from 1990-2050 is 2020,” said Mark Johnston, senior advisor at think tank the European Policy Centre. “2030 is nearer the end than the beginning [yet] what we need to do is still much in the future.” The EU has committed to reducing greenhouse gas emissions by 80-95% by 2050, compared to a 1990 baseline.
It’s still unclear whether any of the proposals around 2030 will be legally binding – certainly DG Energy’s director-general Philip Lowe said in early July he did not expect any legislative proposals before 2015. But others – including the Commission’s climate department – say nothing is yet decided. What the Commission will definitely do in autumn is propose a greenhouse gas emission reduction target for Europe for 2030. The EU’s own low-carbon roadmap suggests 40%. This will then feed into UN climate talks in Warsaw in November. Expectations for these talks – originally considered anything but a milestone – have risen somewhat with China and the US’s recent announcements on climate change.
Renewables and EU ETS
The internal energy market is very much wrapped up with climate change. A well-functioning internal energy market is essential – if insufficient – for decarbonisation because of the need to absorb ever greater volumes of variable renewables. As a second market, the EU Emission Trading Scheme (EU ETS) is a natural fit. Less of a natural fit are the increasingly distortive national renewables support schemes, hence the upcoming Commission guidance on how to make them more coherent as well economical.
As part of its 2030 proposals, the Commission will set out a vision for future renewables support. It may propose a new EU-wide renewables target – which is what the industry and NGOs want – or reliance on the carbon market with targeted R&D support – preferred by utilities. Few expect any fresh announcements on energy efficiency, although European leaders re-affirmed its importance at a special summit on energy in May. The EU’s new energy efficiency directive is still to be fully implemented. But preliminary analysis by the multi-stakeholder Coalition for Energy Savings suggests member states’ indicative efficiency targets for 2020 do not add up to the EU’s overall 20% goal.
At the heart of any 2030 vision lies a decision over the future of the EU ETS. If this is to form another plank of the European Single Market and play a serious role in a future climate and energy policy, it desperately needs reform. The controversial “backloading” proposal – originally intended as a short-term boost to the ailing carbon price (still around €3-4 a tonne) – has become a symbol of Europe’s commitment to its carbon market. Backloading was finally accepted by the European Parliament just before the summer break (after MEPs had initially rejected it in spring). But now it waits for federal elections in Germany on 22 September to unlock a decision among member states.
Even if it goes ahead though, it will have little impact on the carbon price. That requires deeper, structural reform and that too, is on the agenda for this autumn. The Commission had previously issued a menu of different options, from changing the rate at which the ETS cap declines every year to extending the scheme to transport. But none look easy considering the opposition the supposedly minor backloading proposal kicked up. Energy producers are all for a bigger, better ETS (as an alternative to renewables targets) but the Commission will have to prove to energy-intensive industries that an ETS that requires deeper emission cuts will not drive them out of Europe. It will have to prove that decarbonisation makes Europe more, not less, competitive.
Investing in Europe’s electricity and gas networks is part and parcel of completing the internal energy market. Indeed, when Lithuania talks about one it naturally includes the other. “Infrastructure is a crucial part of implementation [of the internal energy market],” said Energy Minister Neverovič. “We cannot possibly have a common market without this interconnectivity.” It is especially important to Lithuania and the other Baltic States because in the long term they want to plug their electricity systems into the European grid (they currently remain part of the Russian power system).
The deadline for all EU member states to leave no “islands” within European gas and electricity networks is 2015. Meeting this deadline is as important for decarbonisation (to absorb growing volumes of renewables) as it is for security of supply and competitiveness. According to a Commission report last November, energy infrastructure investments need to increase by 30% for gas and 70% for electricity compared to 2010 levels.
A first step towards achieving this is a list of energy infrastructure projects “of common European interest” (e.g. cross-border interconnections) that has been drawn up regional stakeholder groups over the last months. Member states are due to give their go-ahead in late July and it should be formally approved by the Commission in early October, paving the way for investments. There are some 250 projects in the running. The Lithuanian presidency is organising a high level conference to present these projects in Vilnius on 4-5 November (see Box).
What’s special about them is that they will benefit from several advantages set out in a new EU infrastructure regulation. This cuts down permitting times to a maximum of 3.5 years, for example, from often over a decade today. They may benefit from tailor-made coordination at EU level and national one-stop shops to get permits. In addition, the new Connecting Europe Facility, agreed in June as part of the next EU budget for 2014-20, sets aside €5.1bn for these projects. Most of the money will go to electricity (rather than gas) and most of it will be in the form of loans (rather than grants). But grants will be available to some, providing they meet additional criteria such as completing a cross-border cost allocation exercise.
Nuclear and shale gas
There are threats to the internal energy market too. National renewables policies and fragmentation of climate policy are two obvious ones. But a third is looming: the UK wants to introduce feed-in tariffs for new nuclear reactors. Such subsidies would be illegal under current EU environmental state aid guidelines – but these are in the middle of being reviewed. New guidelines are due out next year and some countries would like to see exemptions for subsidies extended to all low-carbon technologies. Others are calling it the biggest threat yet to the European internal energy market.
“We received first requests from Member States. We cannot ignore it”, explained Oettinger on 19 July, arguing that “the preparation of state aid guidelines in the fields of energy and environmental protection and the decision regarding the support for nuclear energy in Europe needs a decent and intensive discussion”. Watch this space: a third public consultation is due in September.
For Lithuania, nuclear is a priority in the form of the EU’s proposal for a new nuclear safety directive. This comes on the back of the so-called “stress tests” of all European nuclear reactors following the Fukushima disaster. The draft law aims to raise the safety standards of European nuclear plants by giving more power to regulators, setting up a system of regular safety checks through peer review, lifting requirements for siting, design and construction of reactors, and increasing public transparency. The Commission is supposed to follow up later this year with far more controversial proposals on nuclear liability and insurance.
A second issue that is testing the limits of a European approach to energy is shale gas. The Commission’s environment department now says it plans to issue legislative proposals to regulate shale gas development this autumn. Late last year, a study for the Commission identified gaps in EU environment law when it came to shale gas exploration. Risks of water contamination are high, it concluded. The Commission is therefore expected to present a framework to plug these gaps. Details have yet to emerge.
In a related development, one of Lithuania’s priorities for its presidency, getting a deal on a revised Environmental Impact Assessment (EIA) directive, has been caught up in the shale gas storm. Just before the summer break, the European Parliament’s environment committee voted to make EIAs mandatory for all shale gas exploration. Yet some individual member states such as Poland have recently passed laws doing exactly the opposite, easing EIA requirements for shale gas projects. A plenary vote is due in September while member states have yet to adopt a position. With many eyeing shale gas as a potential solution to Europe’s high energy prices and competitiveness woes, this is a debate that will test the limits of Union unity.
Transport and fuels
A single market in transport is also considered a prerequisite for economic growth. Part of it should be delivered by the “Clean Power for Transport” package, or alternative fuel strategy, which came out in January. This seeks to create a pan-European charging infrastructure for electro-mobility, hydrogen-, and gas-fuelled vehicles (and ships). Lithuania hopes to broker an informal agreement among member states by December. But this will not be easy: ministers have already complained that the mandatory roll-out targets for electric charging points are unrealistic, impossible for 2020 and would require EU funds (the Commission envisages private investment). MEPs have yet to get going on the topic.
Lithuania expects to devote a considerable amount of time to biofuels and indirect land-use change (ILUC). This is the indirect displacement of forest by biofuel production that results in a higher carbon footprint for the fuel – sometimes even higher than conventional diesel. A proposal for taking ILUC into account in biofuels policy is winding its way past MEPs and member states and although a priority for Lithuania, the country does not expect to close this file. This is an issue that has dragged on for years.
The key issues for debate right now are a cap on food-based biofuels, a target for advanced biofuels and so-called ILUC factors, which spell out the carbon footprint of a specific feedstock. If made binding through the EU’s fuel quality directive, ILUC factors would effectively kill off the European biodiesel industry by kicking them off the list of sustainable biofuels (read: biofuels that may be subsidised). There is disagreement among MEPs, among member states and between them on how to tackle ILUC. Next stop: a parliament vote in September.
The ongoing financial and economic crisis will make the headlines in Brussels and European capitals for a long time still. Nevertheless, voters in the European Parliament’s elections in May should bear in mind that EU legislation in the field of energy will ultimately have an effect on energy prices, their purchasing power and the competitiveness of their industry. This is why expectations are very high for the Lithuanian Presidency. It has to ensure that everything is on track by the end of the year to meet the end of 2014 deadline for completion of the internal energy market. It will have to pilot tough discussions on support schemes for renewables, nuclear state aid, fixing the EU ETS, regulating shale gas and future climate and energy targets. Nothing less. Small country, big stakes.
Box: Key dates for the Lithuanian EU presidency
*Informal environment ministerial 16-17 July, Vilnius – shale gas and climate change (preparations for the UN climate conference in Warsaw in November, COP19)
*Informal energy ministerial 19-20 September, Vilnius – internal energy market, a 2030 climate and energy policy and external energy policy
*Environment council 14 October, Luxembourg
*High-level conference on energy infrastructure, 4-5 November, Vilnius
* UN climate conference COP19, 11-22 November, Warsaw
*Transport council 5 December, Brussels – alternative fuel strategy
*Energy council 12 December, Brussels
*Environment council, 13 December, Brussels