On the eve of a crucial Summit of the European Heads of State and government, who will meet in Brussels on 20-21 March to discuss EU climate, energy and industrial policy, a group of prominent energy experts has issued a plea for a “new European energy policy”. The experts, led by Claude Mandil, former Executive Director of the International Energy Agency (IEA), say the state of European energy markets is “deeply unsatisfactory” as a result of many contradictory EU-wide and national policies. They call on EU leaders to set out a new energy policy, based on solidarity, far-reaching coordination among member states, a sole target for CO2 emissions, a functioning Emission Trading Scheme and a harmonised, non-discriminating support scheme for all forms of renewable energy.
- The internal energy market “was supposed to develop competition and cause prices to drop. In fact, individual consumers are paying more than ever before for natural gas and for power, in spite of ample supplies.”
- Renewable energy sources “were only meant to be supported temporarily (…), until they became profitable”, but “the opposite happened: generous subsidies allowed energy sources with little potential (…) to take root and innovation to stall.”
- “The security of the power generation system is compromised by the anarchic development of intermittent power sources, and the shutting down of gas-fired power plants.”
- “As far as climate change is concerned, Europe wanted to be the poster child … but the poster child keeps increasing his (emissions), especially in Germany.”
- “Economic recovery in Europe is compromised by the mindless pursuit of such policies and their resulting costs. Unfortunately, the situation has become largely irreversible: if Germany was to stop all support to renewable energy, the future cost of past decisions would still be in the region of 200 billion euros.”
- “Last but not least, public support for energy policies has been undermined, as people compare the early promise of competition, lower cost and broader choice, with the reality of state enforced choices, higher costs and higher subsidies.”
The six energy experts who got together, at the initiative of former Executive Director of the IEA Claude Mandil under the banner of the French think tank Synopia to call for a new European energy policy certainly do not mince their words. Mandil and his associates Albert Bressand of the Vale Columbia Center on Sustainable International Investment in New York, Coby van der Linde of the Clingendael International Energy Programme, Giacomo Luciani of the Graduate Institute of International and Development Studies in Geneva, Joan MacNaughton of the Energy Institute Machiel Mulder of the University of Groningen and Energy Academy Europe, paint a devastating picture of the current state of the European energy market. In a joint statement they call the current situation “deeply unsatisfactory”.
The Germans are obsessed with developing renewable energy, the French are ridden with their own unsolvable contradictions, the British are building their own system anyway
The reason for this state of affairs, they write, is that policymakers have pursued “overdetermined and often contradictory goals”. They have on the one hand attempted to set up an internal market, “subject to the mechanisms of competition law”, and at the same time tried to limit greenhouse gas emissions as well as increase the production of renewable energy. As a result, “price signals” have become distorted and fail to “foster efficient, competitive resource allocation”.
The situation is particularly bad in the power market, write the six experts. “The market is in theory a functioning one”, they note, “but since the prices paid to and volumes purchased from the producer of favoured power sources are guaranteed, price signals fail to drive efficient resource allocation. At the same time, renewable non-hydro power production is taking a more and more significant market share in the European Union (…) The gap between market prices and prices guaranteed to the producer of renewable energies has to be paid for, either by the whole consumer base in a country – through the CSPE system in France, for instance – or the whole consumer base with the exception of large industrial consumers – as is the case with the EEG system in Germany. The grotesque result is that bulk prices are very volatile and, on average, pulled down by the expansion of supply, while retail prices are pushed up by a more and more expensive CSPE- or EEG- like system. Governments consequently either try to regulate retail prices on the individual consumer market, increasing the number of economic players evading market rules or are tempted to threaten direct action, such as the price freeze being promoted by the main (Labour) Opposition party in the UK.”
Thus, although “the internal power market looks like a market”, it “enjoys none of the characteristics which should help it move towards a cost-effective equilibrium. One could argue that such a situation, whereby everybody lives with the illusion that the market is functioning, could in fact be worse than a centrally planned market. At least the latter situation shows where accountability should lie.”
To make matters worse, the one instrument that was supposed to be used to reduce CO2 emissions through a market-based mechanism, the EU Emission Trading Scheme (ETS), was not adequately designed. “As a consequence, investments made to limit emissions, related to nuclear
power, renewable energy, energy efficiency, coal-to-gas replacement programmes, and CO2 capture and sequestration, are less and less profitable. They are in danger of disappearing.”
So what can be done to remedy the situation? Mandil and his associates ask whether it would be an option to give up on the European energy market altogether, but they fear that this cure will be worse than the disease: “The Poles will refuse anything that may go against their coal production, the Germans are obsessed with developing renewable energy, the French are ridden with their own unsolvable contradictions, the British are building their own system anyway, and smaller member states are conflicted what strategy to follow without getting crushed by these wavering examples.” This option then “would inevitably cause the whole structure to implode, and lead to the development of 28 conflicting national policies: a dramatically suboptimal outcome.”
An energy source which is safe, plentiful, clean, non-radioactive, free of any equipment in my backyard, and cheap, simply does not exist
The only thing to do, therefore, is to take a “pragmatic” course and take measures to “get rid of [the system’s ] most appalling deficiencies.” The experts have seven recommendations for Europe’s policymakers:
- “Since markets exist (the power market, gas market, CO2 emissions market)”, make them “work as they should”. For example, “make buy-back prices for renewable energy non-specific – the same price for photovoltaics, offshore or inland wind power – and subject to a taper over time so as to promote energy sources that are closer to achieving profitability (like onshore wind power generation) or those which are likely to enjoy more technological progress (like photovoltaics).”
- With regard to the ETS, “a market intervention mechanism should be implemented in order to maintain confidence in the allowance price as a relevant signal for long term investment.”
- “Since the major influence on any energy policy comes from climate change, CO2 emissions should be the sole binding quantifiable target. Other targets, if any, should remain non-binding ones”.
- “Beyond the usual empty talk, European solidarity to be a reality commands precise and firm political commitments. All member states must publicly adhere to the hands-off-my-pal rule: any disruption of supply to any member state shall automatically trigger substitute supply from the rest of the European Union. This calls for developing flexible supply (e.g. LNG), and for continued progress in interconnecting Eastern members with the rest of Europe.”
- “But solidarity also requires responsibility and discipline: each member state must publicly and regularly announce the measures prepared to cope with the default of one of his suppliers or other disruptions to supply, and must refrain from policy interventions which transfer the burdens to other member states.”
- “Since it’s an illusion to believe that member states could be stripped of their prerogatives related to energy policy (in particular, those related to nuclear policy), it is essential that national decisions should be coherent. The (…) lack of European coordination is a primary concern of the energy business community. To alleviate this issue, “peer reviews” among member states, aimed at checking the coherence of indicative programs, should be organized by the Commission, based on the model of the International Energy Agency, and the results made public.”
- “A fraction of the savings achieved by an implementation of the above measures should be allotted to the financing of additional research effort, in particular concerning energy storage and CO2 capture and sequestration.”
Finally, write the six experts, an “arduous task remains: explaining”. To overcome “the crisis of confidence” that has emerged, we have to start “debunking several so-called obvious truths which are in fact myths”, write Mandil c.s. For example: “1) locally-produced energy is always safer than imported energy, 2) European energy policies suppose a common “energy mix”, 3) solidarity means we have to pay for the foolishness of others.”
And then there is perhaps the biggest myth of all: we have to “try to explain”, write the six energy specialists, “that an energy source which is safe, plentiful, clean, non-radioactive, free of any equipment in my backyard, and cheap, simply does not exist, even if the operations of the big energy companies are subject to external control.”
The Synopia report can be downloaded here.