Conceptual Framework of Enel/Ambrosetti Study

Building the European Energy Union Proposals and policy recommendations to power European competitiveness Conceptual framework of the study

Reference context

Energy: a key element for Europe’s competitiveness and global influence

2003 2nd Energy Package

1996 and 1998 1st Energy Package

2009 3nd Energy Package

2011 Roadmap 2050

2010 2020 Energy Strategy

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Climate and Energy Strategy

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Internal Market Regulation

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■■Energy has been at the heart of the European Commission’s legislative action over the last 20 years

Energy Union

2015 Energy Union Communication

2012 2030 Energy Framework

Main objectives of the initiatives Internal Market Regulation (1996-2009) ■■ Internal market liberalization and harmonization ■■ Increase of energy market competitiveness ■■ Improve customers’ rights ■■ Creation of trans-European grids ■■ Solidarity and security of supply

Climate and Energy Strategy (2010-2012)

Energy Union (2015)

■■ Sustainable energy consumption ■■ Secure energy supply ■■ Generate a competitive environment which ensures affordable prices for homes, business and industry

■■ Energy security, solidarity and trust ■■ Full integration of internal energy market ■■ Energy efficiency and moderation of energy demand ■■ Decarbonization of the economy ■■ Research, innovation and competitiveness

■■The efforts made by the European Commission and by the European Member States in the past years have resulted in significant accomplishments ■■The EU is on track to reach its 2020-2030 targets on energy and climate Renewables (% in the overall energy supply)

Target 2030: 27.0%

GHG emissions (% vs. 1990 levels)

Energy efficiency (max. Mtoe, primary energy consumption) «Business as Usual» Scenario used by the EU Commission to calculate the 2020 target

2004: 93.8%

1,951.2

1,853 2012: 82.1% Target 2020: 20.0%

2004: 1,706

1,787

Target 2020: 80% 2013: 1,567

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2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

2004: 8.3%

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Target 2030: 60%

Target 2020: 1,483 Target 2030: 1,424 20 04 20 06 20 08 20 10 20 12 20 14 20 16 20 18 20 20 20 22 20 24 20 26 20 28 20 30

2013: 15.0%

Reference context

Critical points and benefits of the European Energy Union

Energy: a key element for Europe’s competitiveness and global influence

The European Energy Union focuses on five areas SECURITY OF SUPPLY

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■■The EU has to consider all the aspects and relevant issues related to energy and to balance the various interests and trade-offs

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■■Energy has been at the heart of the European Commission’s legislative action over the last 20 years

To build the European Energy Union a holistic approach is needed

Energy Union Strategy EU policy, regulation and targets

Internal Market Regulation

2003 2 Energy Package

1996 and 1998 1st Energy Package

nd

Climate and Energy Strategy

2009 3 Energy Package

2011 Roadmap 2050

2010 2020 Energy Strategy

nd

Energy Union

RESEARCH AND INNOVATION

INTERNAL ENERGY MARKET

2015 Energy Union Communication

2012 2030 Energy Framework

Main objectives of the initiatives Internal Market Regulation (1996-2009) ■■ Internal market liberalization and harmonization ■■ Increase of energy market competitiveness ■■ Improve customers’ rights ■■ Creation of trans-European grids ■■ Solidarity and security of supply

Climate and Energy Strategy (2010-2012)

Energy Union (2015)

■■ Sustainable energy consumption ■■ Secure energy supply ■■ Generate a competitive environment which ensures affordable prices for homes, business and industry

■■ Energy security, solidarity and trust ■■ Full integration of internal energy market ■■ Energy efficiency and moderation of energy demand ■■ Decarbonization of the economy ■■ Research, innovation and competitiveness

■■The efforts made by the European Commission and by the European Member States in the past years have resulted in significant accomplishments ■■The EU is on track to reach its 2020-2030 targets on energy and climate Renewables (% in the overall energy supply)

Target 2030: 27.0%

GHG emissions (% vs. 1990 levels)

Energy efficiency (max. Mtoe, primary energy consumption) «Business as Usual» Scenario used by the EU Commission to calculate the 2020 target

2004: 93.8%

1,951.2

1,853 2012: 82.1% Target 2020: 20.0%

2004: 1,706

1,787

Target 2020: 80% 2013: 1,567

20 22 20 24 20 26 20 28 20 30

20 04 20 06 20 08

2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

20 10 20 12 20 14 20 16 20 18 20 20

Target 2030: 60%

2004: 8.3%

Target 2020: 1,483 Target 2030: 1,424 20 04 20 06 20 08 20 10 20 12 20 14 20 16 20 18 20 20 20 22 20 24 20 26 20 28 20 30

2013: 15.0%

ENVIRONMENT PROTECTION

ENERGY EFFICIENCY

Consumers

Utilities

■■ Empowerment and freedom of choice ■■ Possibility to sell self-produced energy on the market

■■ Long-term price signals to incentivize investments ■■ Stronger ETS and adequate CO2 prices ■■ Stability of regulation ■■ Framework favorable to Smart Grids development

Member States ■■ Freedom of choice in energy mix ■■ Autonomy in suppliers’ choice ■■ Energy security and efficiency

EU Institutions ■■ ■■ ■■ ■■

Energy security Integrated market Energy efficiency Decarbonization of economy ■■ Leadership in R&D

New entrants ■■ ICT companies ■■ New service providers ■■ Aggregators

Some critical issues remain unaddressed SECURITY OF SUPPLY

INTERNAL ENERGY MARKET

ENERGY EFFICIENCY

ENVIRONMENT PROTECTION

RESEARCH AND INNOVATION

■■ Insufficient market integration and interconnections1 ■■ High dependency on gas and oil imports2 ■■ High share of energy imports from countries at high geopolitical risk3 ■■ High differences in energy dependency levels among EU countries

■■ Depressed wholesale prices4 and lack of longterm price signals for investors ■■ Prices are not cost-reflective due to differences among national tax schemes and price structures ■■ Significant differences in retail energy prices5

■■ Lack of adequate metrics (absolute consumption) ■■ Low energy efficiency in buildings6 and transport ■■ EU financing schemes tend to support mainly large-scale and barries to investment are still relevant

■■ ETS failed in delivering adequate price signals for low-carbon investments7 ■■ Decentralized and uncoordinated policy implementation for renewables deployment among Member States8 ■■ Limited overall efficiency, with differences at geographical level across the EU

■■ Quantitative targets tend to incentivize deployment rather than costefficiency and innovation ■■ Overcapacity and lower industry margins discourage investments in new technologies

(1) 12 Member States have a level of interconnection below targeted 10%; (2) The EU imports 53% of its energy (€ 400 bln/year) and it is the largest energy importer in the world; (3) In 2013, the EU imported ~50% of its natural gas supply from such countries; (4) Between 2008 and 2014 wholesale power prices dropped by: 50% in Germany and France, 40% in Italy, and 35% in Spain; (5) Considering mid-size companies, electricity price ranges from €0.24/kWh in Denmark to €0.08/kWh in Sweden (second semester 2014); (6) In 2012 buildings were responsible of 40% of the EU-28 final energy consumption; 75% of EU housing stock is energy inefficient; (7) Price of allowances dropped from above €30 per tCO2 in 2007 to around €6-8 per tCO2 in 2015; (8) The lack of a common EU regulatory framework for Renewable Energy Sources (RES) incentives has produced inefficiencies among Member States.

Completing the Energy Union will provide relevant benefits for the EU, its firms and citizens ■■ competitiveness: enhancement of Europe’s technological leadership in the energy industry and its related sectors (about €12 trillion in the 2015-2025 period for European companies by maintaining their current market share in environmental technologies sector); lower energy imports (about €767 billion of savings for the EU-28 in the 2015-2030 period by reaching 2030 target on Renewable Energy Sources deployment) ■■ ENVIRONMENTAL PROTECTION: €66.3 billion of cumulated savings between 2012 and 2030 for European companies, thanks to a reduction of Green House Gases (GHG) emissions by 60% (vs. 1990 levels) ■■ ENERGY EFFICIENCY: development of technological innovation and digitalization of energy distribution (new services/products for the final consumer) and increased competitiveness of EU energy-efficient industries ■■ GEOPOLITICS: increased EU geopolitical influence and “soft power” on the global energy and climate change agenda (international trade negotiations and promotion of electrification and energy digitalization on emerging economies)

Proposals and policy recommendations

3 main priorities and 8 proposals for a successful implementation of the European Energy Union Strenghening European Governance 1. Harmonize, widen the scope and enforce top-down regulation at European level 2. Speed up market integration also through regional cooperation mechanisms on several aspects of the EU energy markets, ranging from regional auctioning of renewable sources, to system opera tion and cooperation among Transmission System Operators 3. Rationalize and streamline the process to complete EU interconnectors on the basis of cost-benefit analyses for a more efficient allocation and system security

Setting up a decarbonization-proof market design 4. Set a wholesale market design that is coherent with the EU’s decarbonization goals and the development of renewables, in order to provide adequate long-term price signals 5. Adopt transparent and cost-reflective criteria for the formation of retail electricity prices in order to foster customer engagement and promote comparable price structures across Europe

Adopting smart regulation for smart investments 6. Promote new regulation for the digitalization of the European power system, using smart grids as a key driver of this process 7. Enhance access to finance for energy efficiency projects 8. Make Europe the world pioneer in the application and market diffusion and export of innovative energy technologies

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