Utility Week

Utility Week 8th November 2013

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Policy & Regulation Market view Big debate: moving targets Europe is developing a 2030 climate change policy framework, but should it rest on a pure carbon target or continue to set energy efficiency and renewables goals too? We asked two experts. Three target approach I t is not counting targets that matters but delivering good outcomes. The Brussels energy debate has become obsessed with targetology, by discussions over the arcana of target design rather than how European policy can deliver affordable, reliable decarbonised energy. The big change for Europe since the 2020 package was formulated has been the unanticipated rise in the cost of oil and gas. These price rises are here to stay, and they have had a devastating economic impact. So the foundation of any future European policy must be to increase the efficiency of energy use. There is no point building expensive clean energy plants if the energy is wasted through poor demand infrastructure. Implementation of economically viable efficiency measures could save net costs of €240 billion a year by 2030. A cost-effective European energy policy Single carbon target S aving a ton of carbon through the Renewable Energy Target (RET) can cost upwards of €500, research produced independently by the OECD and Policy Exchange shows. Saving a ton of carbon in the EU ETS right now costs less than a fiver. Because emissions from the electricity sector (where the RET is mostly being met) are already capped by the EU ETS, the environmental benefit of the former saving is no greater than the latter. Only the price is. The RET is probably the most misguided of many recent energy policy blunders. While having no environmental benefit of its own, it undermines the main driver of European carbon policy, the EU ETS. It drives down the visible carbon price, while at the same time forcing energy users to pay a vastly higher, hidden price. Renewable energy targets accompanying a cap-and-trade system are either cost-ineffective, because they force more expensive for 2030 must focus on "demand side first" and be driven by an ambitious and mandatory energy efficiency target, backed by measures to help countries implement and finance their policies. Despite generous EU subsidies, carbon capture and storage (CCS) has made little progress towards commercialisation, but the costs of renewable energy equipment have fallen dramatically with China's entry into the global supply chain. As a result of these shifts, all recent studies of cost-effective EU decarbonisation pathways show a "no-regrets" pathway with a steady build out of renewables to 2030. A 2030 EU renewables target would give the foresight and certainty investors need to deliver the energy we need. However, it is not enough. Reliably delivering this growth in renewables requires complementary goals and mechanisms to build stronger and smarter grid infrastructure, and reforms to drive market integration and creation of demand-side markets. The current Commission proposal of 40  per cent emissions reductions could be met solely through cost-effective energy efficiency, removing any incentive for clean investment in other parts of the economy. A 40 per cent target would result in a slowing of EU decarbonisation, not an acceleration. To maintain investment incentives the EU should set a 2030 target of 55 per cent reductions on 1990 levels, and reform the EU ETS so it sets the carbon price as needed to help reach this goal. A 2030 energy and climate package is about driving a fundamental transition in EU infrastructure and markets. It must be built on a base of ambitious energy efficiency and continued build-out of diverse renewable energy sources, underpinned by reforms to deliver strong, smart European infrastructure and efficient, integrated markets. If that involves implementing a few targets, it seems a price well worth paying. Nick Mabey, chief executive and founder, E3G abatement than the marginal EU ETS price, or redundant, because they force abatement at the same cost or lower than the marginal EU ETS price. But, while they will not reduce emissions, they will get renewable energy projects built. Clearly that alone is what some politicians want, but when it has no environmental effect, there is no good reason to support it. Mandating deployment by a fixed date drives costs up, not down, as countries scramble to outbid each other for limited capacity, skills and equipment. By making decarbonisation more expensive, the RET makes it less appealing for the rest of the world to replicate Europe's efforts to tackle climate change. It uses up the public's willingness to pay more, while providing little in return in terms of reduced emissions. Energy efficiency policies should be less economically damaging, because efficiency measures are often (though by no means always) the cheapest abatement options. Still, taking decisions about energy efficiency out of the EU ETS removes the ability of the system to generate information about the relative costs of efficiency and other abatement options, which is one of the main advantages of a market-based system. There are valid arguments about support for currently immature technologies that will be needed to address climate change. But setting arbitrary targets that force you to subsidise the mass rollout of known, but immature, technology is a bad way to support innovation. Arguments on security of supply and green jobs, while politically attractive, are less convincing. There isn't an infinite amount of money sitting around, so we have to spend it well. The current approach is like being given £1,000 to feed as many people as possible and starting by ordering caviar. Squandering money on hugely expensive renewable energy projects is an unaffordable and wasteful luxury. Simon Moore is senior research fellow in the Environment and Energy unit at Policy Exchange UTILITY WEEK | 8th - 14th November 2013 | 13

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