On May 18, 2021, Energy Post hosted an expert panel with the European Commission, E3G, CERRE and PKEE (the Polish Electricity Association, who also sponsored the discussion). It looked at some of the key EU support mechanisms offered to countries/companies transitioning away from coal, including the EU ETS’ Modernisation Fund, the Just Transition Fund and also how State Aid Guidelines (EEAG) contribute. We asked Stefaan Vergote (Senior Advisor at DG CLIMA) what we can expect from the “Fit for 55” package due next month (June 2021), and the overall effect of the EU’s transition supporting policy framework combined with the higher emissions reduction targets. The other panellists were Catherine Banet representing CERRE (and University of Oslo), Pieter de Pous representing E3G and Tomasz Dąbrowski , Director at PKEE. We’d like to draw particular attention to our excellent 4,000+ word summary – thank you to Sara Stefanini who has expertly condensed a 90 minute video.
Fit for 55: financing a successful transition across Europe
An online panel event held on 18th May 2021
To watch the video of the original debate as it happened, click the image below. The summary is given below.
- Stefaan Vergote Senior Advisor, DG CLIMA
- Pieter de Pous Senior Advisor, E3G
- Catherine Banet Associate Professor, University of Oslo, Faculty of Law and Academic Fellow, Centre on Regulation in Europe (CERRE)
- Tomasz Dąbrowski Director of the Polish Electricity Association (PKEE)
- Matthew James Managing Director at Energy Post (moderator)
The EU has announced new and ambitious targets to reduce its greenhouse gas emissions by 55% by 2030. However, the policies and instruments needed to support individual member states in reaching these targets have still not been put in place.
The new targets are putting yet more pressure on electricity systems in countries like Poland, which were already struggling with the pace of the coal phase out. Rising carbon prices mean that power utilities in these countries have even less money to invest in the new energy infrastructure.
They argue more money needs to be made available from EU funds, like the Modernisation Fund, and that it should be available for developing gas infrastructure, which is still the cheapest and quickest way they can provide back up for the growing levels of renewable power on the grid.
But the EU no longer considers gas a transition fuel. Even in the few countries where gas consumption may increase up until 2030, it will need to decrease by 2040, which will leave infrastructure stranded.
Phasing out coal
- A rapid departure from coal could be a cheaper option for many countries rather than a slow phaseout. Carbon Tracker analysis shows that all existing coal plants (except those supported by capacity mechanism) will be uncompetitive compared to new solar, wind and storage by 2025.
- However, countries heavily dependent on coal, like Poland, argue they will struggle to shut down all coal plants as there are factors to consider other than economics, such as equity.
- These countries argue that they need more support and the right to use gas as a transition fuel in order to meet the EU’s more ambitious 2030 and 2050 targets.
- Energy and Environmental State aid guidelines (EEAG) are not designed to support a coal phaseout or validate the compensation for the closure of power plants.
No gas, but few alternatives
- EU gas consumption overall should decline by 2030, and in every member state by 2040.
- Gas consumption could increase in certain states by 2030, as they use gas-fired power to replace nuclear or coal.
- Gas use in the EU will not be forbidden, as energy mix is a sovereign decision, but it will be increasingly difficult to attract investment in the sector.
- Countries heavily dependent on coal, like Poland, argue that they need support to build gas-fired capacity to provide a back-up to increasing renewable power on the grid.
- There are concerns that they will not be able to manage the transition if gas is effectively priced out of the market by being compliant with EEAG, and they can’t use other available funds to develop this capacity.
- Alternatives all have challenges: electricity storage technology needs to be improved and last beyond a few hours; nuclear is expensive and slow to build (takes 13-15 years if building from scratch); biomass is difficult to scale-up.
Imbalances on the ETS
- CO2 prices on the ETS have increased in reaction to the EU’s stronger climate ambitions, increasing the daily cost of operations for power companies in coal-dependent countries and limiting their ability to invest in the energy transition.
- However, the rising carbon prices should encourage investors to look at markets in Europe where there is potential for more investment in renewable energy.
- Regulators aren’t equipped to stop speculation by the growing number of financial institutions on the ETS.
Funds available to finance the transition
- There are a number of funds available to help member states with the transition:
- The €750 billion Recovery and Resilience facility, to drive economic growth after the financial crisis, with 37% earmarked for the low-carbon transformation.
- The Just Transition Fund to help the most carbon-intensive regions with their just transition plans. This makes €70.5 billion available through the Next Generation EU and MMF to help re-skill people.
- The Modernisation Fund for low-income member states, which at a carbon price of €40 per tonne will mobilise €25 billion.
- There is a need to align EU expenditure to the EU’s new climate targets. Coal-dependent states like Poland argue there is a massive gap in the funding needed to reach their 2030 targets.
This is a summary, not a verbatim transcript, of the key points made during the online panel event.
Pieter de Pous
Senior Advisor, E3G
PP: Globally the notion of the green race has gained momentum in the last year, particularly with EU leadership on net-zero emissions by 2050, and with announcements from China, Japan, South Africa and the US.
Nationally Determined Contributions for 2030 are increasing too. The EU was one of the first major economies to come forward.
As a result, there has been a pivot of energy diplomacy moving away from securing gas supply to moving forward on a global energy transition, including a global coal phaseout.
The US ambition is immensely important, adding new challenges and dynamics both domestically, like Biden’s Clean Power Plan, and internationally through his Leaders’ Summit on Climate in April. He also has a very active climate envoy in John Kerry, a regular at the EU Foreign Affairs Council Meeting.
The UK has made the clean energy transition, and particularly coal, central to the success of the COP26 climate summit in November. COP President Alok Sharma has said COP26 must consign coal to history, while working to end international coal financing.
The International Energy Agency’s new Net Zero by 2050 report confirms that all OECD countries need to reach zero-emissions power by 2035, and the rest of the world by 2040.
That’s confirmed by other analysis that has been done. Ember found an unspoken consensus on the need for clean energy by the mid-2030s in the UK, EU and US. The EU is on a much more comfortable, slower downward trajectory than the US, which raises the question of whether it can move faster. Carbon Tracker Initiative analysis on current growth rates also sees fossil fuels pushed out of the power system by the mid-2030s.
The US is coming in with a very ambitious domestic agenda. What does this mean for the EU? Is this something the EU should consider matching with its ‘Fit for 55’ package? Looking at the ETS price developments, the clear answer is ‘yes’; that’s what the markets seem to believe. But it’s not just about the ETS price, it’s about the whole policy framework. Rapidly phasing out coal and reducing gas cannot be done through pricing instruments alone. It will require planning, grid investments and the removal of obstacles to renewable energy growth.
There is a need to align EU expenditure, including for the Just Transition Fund, to the new climate goals. The EU has taken a very transactional approach to this – a new just transition mechanism in return for more climate ambition. But we need to address challenges such as the unionisation of clean energy jobs, where we see a clear task for trade unions to organise labour in those new and growing Industries.
Beyond that we need to strengthen the EU social pillar and revise state aid guidelines to align national expenditure with the European Green Deal’s objectives.
There are a couple of challenges to making Fit for 55 a success. The EU’s budget, including the Just Transition Fund – the mechanisms, the recovery instrument – were agreed before the 55% emission reduction goal, so everything is aligned with previous climate targets. Countries are also coming from different starting positions.
There are also reasons for optimism. All existing coal plants still online by 2025 will be uncompetitive compared to new solar, wind and storage, according to Carbon Tracker. Early departure from coal is becoming the cheaper option for a lot of countries, rather than slow phaseouts.
In Germany a constitutional court ruling recently triggered the government to revise its climate law and update its target for 2030, now aligned with the EU’s new target. Although the government hasn’t said this, it effectively makes an accelerated coal phaseout in Germany inevitable.
Poland is way ahead of other Višegrad countries in developing a renewables pipeline. It could go even faster. Slovakia and Hungary have also recently joined the international Powering Past Coal Alliance.
According to a recent E3G survey of business and industry in southeast Europe and the V4, there is a strong interest in purchasing renewables. One of the main drivers is concern over high energy prices caused by high levels of coal in the mix.
Managing Director at Energy Post (Moderator)
MJ: Tomasz, what are your main concerns around the EEAG being reviewed this year and the Fit for 55 package?
Director of the Polish Electricity Association (PKEE)
TD: Poland has come a long way from denying the target for renewables and emissions reductions to looking at how we can optimally adapt and fulfil them by 2030 and 2050.
The EU’s goals for net-zero by 2050 and a 55% reduction by 2030 will require significant financial investment in zero- and low-carbon technologies. The biggest effort will have to be borne by countries that are heavily coal-reliant, mainly in Central and Eastern Europe and especially in Poland.
There are several issues for investment. One is that CO2 prices are increasing in reaction to the higher targets. There has also been more speculation in the market, probably linked to the fact more financial institutions are actively trading, which has driven up prices. This increases the cost of daily operations for power companies and impacts their ability to make huge necessary investments.
The other issue is regulation. The Polish power sector has to close down its coal-based generation fleet, which cannot happen overnight. At the same time, we need to invest in the power generation to replace the plants that will be closed down, and at the proper pace in order to guarantee grid stability.
Then we need to solve the social issue linked with closing down the existing generation fleet.
And we need to make the right investments. The Polish government has decided to increase investments in all renewable energy resources, mainly offshore and onshore wind and photovoltaic. But for this to happen we need a stable regulatory framework, a favourable financial environment and, potentially, the possibility to invest in the gas sector, otherwise it will be difficult to guarantee a backup power. We hope gas is recognised as sustainable.
Covering the rising cost of emissions allowances is limiting our ability to invest in new renewable generation.
We hope that the coming revision of the EU ETS directive will address the fact that some member states do not receive revenues from auctioning the allowances that are equivalent to the cost paid by the ETS installations. With CO2 prices increasing, this is becoming more problematic. One option is to significantly increase the Modernisation Fund.
In addition, the use of options revenues in the EU ETS should be closely linked with the transformation of the sectors from which the money is taken by way of the CO2 allowances.
MJ: Are there specific things you are looking out for your members on the EEAG?
TD: We have to coordinate state intervention in order to incentivise the right investment and the proper transition. The guidelines should not prevent necessary investments.
There might be the social issue, there might be the issue of resolving the generation capacity, because we have to close down coal generation capacity at the pace that we bring online new capacity.
MJ: Stefaan, when you look at the mixture of mechanisms to ensure the transition is possible across Europe, do you recognise the concerns that Tomasz raises? Do you have concerns about how uniformly successful we are at executing the existing any NECPs?
Senior Advisor, DG CLIMA
SV: One of the intentions of the new climate law is to create more certainty for the business community on where we are heading. That is also what we want to provide over the next few months with the review of the entire climate and energy package which will have to be adapted to step up to at least 55%.
It’s a modernisation of our economy, which is also part of our economic strategy and industrial strategy. Given the changes in the US administration and that climate neutrality has been adopted by a number of important players in Asia, we could create a first-mover advantage in a number of important technologies, like offshore wind or batteries or energy efficiency, through the internal market.
We also see important changes in the transport sector. There will be more electrification, which means the power sector provides a bigger share of our energy mix. That of course, will go hand-in-hand with the fast-increasing amount of renewable power.
Things will have to go faster and that will not make the transition easier. But there are a number of important elements that should make us feel more comfortable that we can achieve this. Renewables have become much more competitive, so for Eastern European countries it is less a question of cost than a question of transition and how to make the system work as a whole.
What is good for Eastern European countries is that it may be less driven by subsidies and more driven by the carbon market itself. Investors will look at which markets are investable, so Eastern European countries will have a better chance of attracting more investments.
Speed will be important, and that requires financing. We have implemented specific measures to try to help all countries make the transformation.
The Modernisation Fund is a clear example of that: at a carbon price of €40 per tonne, it will mobilise €25 billion for low-income countries. The Recovery and Resilience facility provides €750 billion to recover from the economic crisis – 37% of that should be for the green transformation. In the draft plans – Poland’s – important amounts are being directed to accelerate the transformation.
The Just Transition Fund helps the most carbon-intensive regions make just transition plans. In total, €70.5 billion is made available from the Next Generation EU and the MMF to help re-skill people in those regions.
MJ: Could you make it clear how your network of policies has been structured so that it takes into account the increased investment required to do a more rapid transition?
SV: That is an issue we will look into further in the new proposals. Our impact assessments look at what kind of investments are needed for the transformation.
We are not starting from scratch, we have the National Energy and Climate Plans, so we understand what national strategies will look like. They will have to be revisited in light of the 55% target in the different sectors, and based on that we and member states can integrate the different funds.
The funds will be there, but member states need to ensure they are applied in a purposeful and impactful way.
MJ: Catherine, can the Energy and Environmental State Aid Guidelines solve any of these issues?
Associate Professor, University of Oslo, Faculty of Law and Academic Fellow, Centre on Regulation in Europe (CERRE)
CB: The Fit for 55 and its measures must be consistent. The guidelines are part of the compliance strategy for the EU’s climate and energy targets. They should help member states comply with the 2030 targets and prepare the ground for following ones. So the recent increase needs to be mirrored in the guidelines.
The guidelines are part of a specific legal ecosystem and there needs to be consistency in the criteria we develop in those regulation directives, which will be reflected in the software instrument that are the guidelines.
The guidelines do not support a coal phaseout, they cannot validate the compensation for the closure of electricity generation plants. They can contribute to compliance strategies. We have another set of rules for the coal phaseout, which relies on the treaty provision directly, Article 107 3C of the Treaty on the Functioning of the European Union.
It is important to discuss how we develop the framework now around the guidelines, around other instruments, to ensure consistency in the signals we send to the market and how member states develop support mechanisms.
What can the guidelines support? In the discussion around the regulation on the Just Transition Fund there were references to support for structural changes to the coal phaseout. That’s questionable, because it relates to economic and social aid objectives – unlike the purpose of the guidelines, which is environmental protection and energy objectives.
This is a unique opportunity to look at all the different instruments together, but there is a challenge of consistency in developing the criteria.
MJ: Tomasz, can you highlight your key concerns on where the investment will be lacking?
TD: Higher targets mean bigger investment. The financial arrangements at our disposal today are not enough to finance the economic transformation of a country like Poland that is heavily reliant on coal.
There is a structural problem in the ETS framework, including the imbalance between the cost paid by coal power end-users and the auction revenues generated for the country. These revenues should finance all of a country’s transformation needs, but some of the money is shifting away from the Polish budget.
Data from 2005 to today shows that there is no correlation between the pace of emissions reduction and the imbalance of the whole system. That is a structural problem that needs to be addressed in the coming legislation. One way is to increase the Modernisation Fund, but this will probably not be enough to cover the whole gap.
Poland has to coordinate a few very difficult problems. One is closing down coal capacity and replacing it with new capacity. For this, we need state intervention in line with EU state aid guidelines. The coming guidelines should not preclude or exclude any mechanism needed for this.
The Just Transition Fund will only help finance part of the transition to net-zero by 2050.
MJ: Pieter, you said Poland is leading the way in developing renewable assets, but there’s a difference between assets being built and the whole system transformation. Do you recognise these concerns?
PP: Poland is leading the way in comparison to its peers in the region. But there are still major obstacles, such as restrictive planning regulations on onshore wind farms.
There is still a lot to be done to support faster renewables development, like with grid development.
Government plans, the NECPs, tend to seriously underestimate the pace at which they are going to transform their energy sectors. National governments have a lot to do in deciding what it will take to achieve these new goals in the most cost-effective way. Removing coal from the system faster because it will become the most expensive option is key.
MJ: The concern is that Poland will not be able to manage the transition if gas is effectively priced out of the market through not being compliant with State Aid Guidelines, and if they are not getting benefit from the other funds.
PP: The IEA reports show that are several options, like nuclear, or gas with CCS. Several options are being considered by different countries. Some people think keeping coal plants with strict limits on how much they can run per year could also provide flexibility services.
But there are new technologies on the horizon that can be scaled up in the next 10 years that may become cost-competitive. It’s difficult to judge what we’re going to need in the mid-2030s.
The science is clear, gas is not a transitional fuel.
MJ: Stefaan, will state aid help nations like Poland use gas as a transitional fuel?
SV: The overall consumption of gas in 2030, in the context of the 55% target, is declining because of energy efficiency, notably also in heating. But the picture is more diverse when you look at the member state level. In several member states, gas consumption potentially goes up by 2030, whether because of a nuclear phaseout, or because it can meet the 2030 emissions reduction goal when compared to coal.
But by 2040, gas is no longer a sustainable solution.
State Aid Guidelines do not replace EU law. We have an electricity regulation that talks about support for generation adequacy. Guidelines can help to evaluate the potential positive effects of aid in terms of reducing emissions, with the potential negative effects on the internal market and on trade. They can help frame how the commission will evaluate state aid notifications. But it is the electricity regulation that determines what is and is not possible.
While funds are being gathered at the European level, I want to stress the role of member states in this. A lot of the funds are governed bottom-up. The rules for the Modernisation Fund, for example, are quite flexible. There are checks and balances, but member states have to put together a comprehensive plan to deal with the transformation.
The NECPs have encouraged member states to create an integrated plan. Few member states are up speed with the 55% target.
CB: Gas has a very broad definition and one of the discussion issues is, what kind of gas do we want to promote in the future? Nothing forbids the use of gas, but it will be less commercially attractive, including for the private sector, the insurance sector and for states.
Nils-Olov Jonsson asks: If you’re in a hurry to replace coal, why not put more emphasis on nuclear?
TD: In Poland there is a huge emphasis on nuclear. But it will take 13 to 15 years before the first nuclear reactor will come online and start producing electricity so it will not help us resolve the problem for 2030. If we start today, the first reactor will be probably ready in 2033.
But nuclear power is one option for meeting the neutrality target by 2050.
MJ: How quickly do you need to be able to bring these technologies online?
TD: This is why we are looking at gas, because it will enable us to have more renewables online and to satisfy electricity demand in Poland. We need backup power for intermittent sources, and the only available technology today is gas.
Storage works for a few hours. In the future, I assume we’ll have electricity storage capacity that last longer, perhaps for a week. But before that unfortunately we will be bound to use gas.
Łukasz Lech asks: How do you see the development of the stability of electricity supply in countries like Poland that are heavily dependent on coal, if you can’t have gas? What are the alternatives to nuclear and hydrogen?
SV: We will certainly see more renewables in the electricity mix, so that does raise the issue of guaranteeing security of supply. On the other hand, the existing dispatchable power does not disappear from one day to another.
In many Western European countries the amount of renewables has increased substantially and they have been able to solve those issues during transition. Gas looks like a solution for the short term, but there are issues in the longer term. Investments in that technology are not forbidden, but there is a question about how far you label it, for instance in the taxonomy.
There are other potential dispatchable generation technologies, and that might increase in the future. More storage, for instance, or biomass. Using biomass as baseload does not make that much sense anyway.
MJ: Biomass is green, right?
SV: If it is done in a sustainable way. The Renewable Energy Directive sets out when biomass is considered sustainable. It is also a scarce resource, but it can be part of a mix.
We are looking at a mixture of solutions, diversity through interconnection, diversity with several dispatchable solutions, diversity by gradually – as technology comes – bringing storage in.
Diana Powers asks: Poland has a large agricultural sector. Could it invest in and encourage an agricultural biogas sector to inject renewable gas into the gas pipelines, as is done in France with multiple benefits for the farming sector?
PP: Biogas and biomass are a limited resource, you run into fundamental conflicts over the use of land. It’s effectively an offsetting scheme where you accept tailpipe emissions on the assumption that somewhere else, carbon has been sequestered. This only works if you have a system in place that manages that.
If you look at the IEA’s net zero report, a lot of the confusion comes from the fact that coal will go first, and then gas will go out later, more slowly. That, does not make gas a transitional fuel, it just means you’ll have more gas in the system for longer compared to coal.
Biogas is a technology that may play some role in some context in a limited way.
One final reflection on the financing question. Countries that want to save money by retiring coal assets early need to develop a case for those who may be willing to help them and agree to an increased share of the Modernisation Fund, or putting resources into the World Bank’s Climate Investment Fund.
There needs to be a plausible case that convinces these countries that this is the most cost-effective, fastest way of doing it. Most countries are trying to get rid of their coal assets as fast as they can.
MJ: Tomasz, is biomass a potential solution?
TD: Biomass is difficult to transport and difficult to store, because it’s explosive. However, in Poland, we are using biomass and have started a limited support scheme for biomass.
This is why gas, which is a simple technology, available very quickly, could help to achieve the emission reductions targets.
CB: Carbon capture and storage technology is covered by the different measures as being a carbon reduction technology. That is clear. We can distinguish this technology for decarbonisation from the final energy carrier, for example, gas.
SV: As we transition over the next 10-20 years, we need pay attention to the availability of the necessary infrastructure, whether it is electricity infrastructure to connect different countries, or to connect renewable sources, or future infrastructure solutions, like CCS and hydrogen storage.
The future will be enabled by different infrastructure solutions, including the conversion of existing infrastructure, such as gas.
Extra question answered after the event…
Lukasz Lech (TAURON, PL) asks: Natural gas should stand out as a transition fuel because of its electricity supply stability and possible flexibility potential compared to RES technologies. Usage of natural gas in highly efficient CHP leads to less polluting effects compared to other fossil fuels. Eventually, natural gas might be replaced by zero or low emission e.g. biogas, hydrogen. There is a need to build a stable resources to compansate RES output instability. How to you see the development of power supply stability in countries phasing out coal, w/o nuclear and low potential for hydro
PP: How much gas will be needed correlates strongly with how much RES will be built out. There is still a big gap between current plans v cost-effective potential by 2030, e.g analysis by Instrat finds 76% RES by 2030, no need for new gas at factor 4 lower cost compared to NABE proposal: https://bit.ly/3hwn09
Summary compiled by Sara Stefanini
Produced by Energy Post