Decarbonization requires improved methods of energy production and
consumption across four broad sectors-manufacturing, heating and
cooling, transportation and power generation- each with varying
potential depending on local conditions.
As clean technology matures, the investments into decarbonization are
increasingly driven by business decisions rather than regulation, e.g.
the European Commission has recommended eliminating renewable subsidies.
At the same time, cross-border hardware and software is boosting market
integration across the EU. And yet the patchwork of member state energy
policies and regulations remain significant roadblocks to the EU single
market, to long-term investments and the overall health of competition.
At an energy stakeholder meeting that took place during the GLOBSEC
Tatra Summit in the High Tatras at the end of October, the prevailing
message from the private sector was that the heterogeneous landscape of
EU, national and local climate policy regulations creates distortions
and uncertainty, leading to irrational utilization of infrastructure and
suboptimal macroeconomic outcomes for society. They suggest that
climate policy should be driven by one simple tool, the reconfigured
Emissions Trading Scheme (ETS), which would provide clarity and ensure
transparency.
Clearly greater regulatory harmonization and regional solidarity is
required to prevent excessive and redundant infrastructure investments
and minimize stranded assets. This article will provide a snapshot of
sectoral decarbonization pathways and highlight the challenges that will
ultimately require regional rather than national solutions.
First consider the demand side, and the most powerful form of
decarbonization which is energy not consumed. The more efficient and
smarter use of energy reduces overall consumption and flattens the
demand profile. In transportation and heating and cooling, electric
vehicles and smart new buildings offer huge potential for such
applications, serving as large batteries to absorb and release energy
when it is needed. In order for these capabilities to be integrated
massive grid investment is required, particularly at the distribution
level.
This is part of the energy transition potential on the demand side,
dependent on forms of storage, but beyond this autonomous vehicles and
the shared economy offer the prospect of even less consumption of energy
in transportation. In the meantime, more immediate sectoral
decarbonization is possible with biofuels in transportation,
retrofitting of existing building stock, and carbon abatement plans in
energy intensive industry.
The buildings sector in particular represents the greatest potential
for emissions reductions in Europe, responsible for 40% of energy
consumption and 70% of which are inefficient. This is even more
pronounced in Central and Eastern European member states where financing
and ownership structure create further challenges.
One important development was celebrated at a side-event at the
GLOBSEC Tatra Summit hosted by the Slovak Republic Ministry of Finance
and attended by Minister of Finance
Peter Kazimir, VP of the European Investment Bank
Vasil Hudak and VP Energy Union
Maroš Šefčovič.
This was in response to a long-awaited change in Eurostat’s statistical
treatment of energy performance contracts (EPCOs) that included
investments into the energy efficiency of public buildings on the public
balance sheet, effectively acting as an artificial barrier. With this
bureaucratic obstacle removed, private investment can flow into
municipalities and capitalize on existing models, which is good news for
Slovakia and the region going forward.
Shifting to the supply of energy, decarbonization of the electricity
occurs on two broad levels, one within the existing baseload system and
the other part of a renewables-based energy transition. In the former
this is traditionally accomplished by coal-to-gas switching, coal
co-firing with biomass and nuclear expansion (carbon capture and storage
or CCS is not considered here as it is not beyond trial stages).
In the United States, much of the fall in CO2 emissions over the past
few years can be attributed to the shale revolution that has kept
natural gas prices low and encouraged significant coal-to-gas switching.
In Europe, gas prices have fallen recently but for most of the decade
they remained stubbornly high, forcing several natural gas power plants,
even the most modern and efficient, to be mothballed or retired –
natural gas was simply not competitive in electricity generation with
coal and RES. At the same time, up until the end of 2016, coal prices
were low and with the soft EUA market the clean dark spread
(representing the profitability of a coal fired power plant) remained
positive.
In places like Japan, biomass co-firing is a way to push forward with
newbuild coal fired power plants, but in Europe it can also upgrade
existing coal plants to mitigate CO2 emissions. This is typically
supported by national feed-in-tariff schemes and contributes to national
EU mandated RES targets.
Large-scale nuclear fusion can contribute most significantly to
baseload decarbonization as a zero-emissions source. However, numerous
studies have concluded that modern large scale nuclear projects are not
competitive on a levelized MWh cost basis with emerging technologies,
compounded by nearly ubiquitous delays and cost overruns adding up to
billions of additional euros.
While today’s historically low wholesale electricity prices will
slowly rise in decades to come, the continued growth of zero marginal
cost RES will act as a soft cap, making return on investment for any new
project challenging, but especially for the exorbitant upfront costs
associated with large scale nuclear. Consequently such projects are not
conceived of in today’s market without an explicit pro-nuclear policy
led by the government and carried out by the incumbent state-owned
energy company and/or a guaranteed strike price to ensure bankability.
The allure of this technology for politicians is easy to grasp, not
only is it zero emission but depending on the provider of technology and
fuel rods it can dramatically improve energy independence. The downside
is that it is inflexible, and society will ultimately pay the cost
overruns through taxes or the end consumer bill. Emerging small modular
reactor (SMR) technologies, on the other hand, potentially gives the
nuclear industry new life with reduced capital costs, shorter
construction and greater flexibility.
Depending on who you talk to, the above ‘fixes’ appear to be
incomplete and insufficient. While natural gas is the cleanest burning
fossil fuel, critics point to methane leakage in the extraction process
and the fact that it is not part of a zero-carbon energy future. Nuclear
is not cost competitive and will only survive with government
subsidies, implicit or explicit. The problem for both of these sources
is that they cannot compete with falling costs of clean technologies in
the long term and thus risk becoming underutilized or preemptively
retired stranded assets.
More uncertainty surrounds the future of gas in electricity, not so
much as a primary source of generation, but its role serving as backup
for system flexibility and balancing for the increasing share of
intermittent renewable sources. The gas lobby asserts that these are two
important roles for gas in the decarbonization of the economy and the
energy transition respectively, yet climate enthusiasts insist that need
for gas capacity reserves will be precluded by advancements in storage
technology. The debate is not only about the source/technology that will
provide backup for variable sources, but more fundamentally how to
ensure sufficient investment meets anticipated future demand. For
obvious reasons, countries prefer to generate their own electricity and
export rather than rely on imports.
However, national energy strategies that fail to consider regional
developments and potential will lead to suboptimal outcomes. Countries
are endowed with varying topologies, geographies and climate conditions
corresponding to varying levels of cost-efficient technical renewable
potential. What should be noteworthy for Central Europe is the
tremendous renewable potential in South Eastern Europe that could be
cheaply exported further down the 2050 time horizon.
Already renewable energy sources like offshore wind and PV, under the
right conditions, are the cheapest form of power generation. The energy
transition envisioned by the European Commission’s EU 2050 Roadmap and
articulated in the ‘Winter Package’ of legislative proposals focuses on
policies that integrate such RES and enable the continued
decentralization and digitalization of the energy sector. Furthermore,
This returns to the big picture of Europe’s single market and more
practically the first step of regional integration, with levelized
regulations attracting investments in the most cost-effective clean
technologies and the domestic and cross-border infrastructure to connect
them. Ultimately, European social welfare is served by market coupling
and price convergence both within and between regions.
The underlying challenge for the energy sector is the mismatch
between long investment time horizons and the short term political cycle
that encourages politicians to cash in on short term gains at the
expense of effective, long term strategy. Policymakers are sensitive to
relying too heavily on imported energy, even when it is the right
economic choice. Thus it will be important for the European Commission
to continue to provide guidance and encourage sensible legislation from
the top down, and also for regions to communicate regularly and build
trust, similar to what is taking place in the Central and Southeast
European Gas Interconnectivity Group, which is adding electricity to its
agenda. This way decarbonization and efficiencies will be delivered
across Europe competitively with minimal redundancy and excess.
https://www.neweurope.eu/article/patchwork-member-state-energy-policies-challenges-competitive-decarbonization-europe/