Building the European Energy Union

Building the European Energy Union Proposals and policy recommendations to power European competitiveness

Building the European Energy Union Proposals and policy recommendations to power European competitiveness

This study was prepared by The European House - Ambrosetti for Enel.

The study included the participation of an Advisory Board whose members are: >> Francesco Starace (Chief Executive Officer and General Manager, Enel) >> Simone Mori (Head of European Affairs, Enel) >> Joaquín Almunia (Visiting Professor, London School of Economics; former Vice President and Commissioner responsible for Competition, European Commission) >> Vittorio Grilli (Chairman of the Corporate and Investment Banking EMEA, JP Morgan; Chairman of the Board, the Italian Institute of Technology – IIT; former Minister of Economy and Finance, Italian government) >> Wolfgang Schüssel (former Federal Chancellor of Austria) >> Jorge Vasconcelos (Chairman, NEWES – New Energy Solutions, Portugal; Member of the Administrative Board, Agency for the Cooperation of Energy Regulators – ACER; founder and first Chairman, the Council of European Energy Regulators – CEER) >> Jean-Arnold Vinois (Advisor on European Energy Policy, Jacques Delors Institute; Honorary Director of the European Commission – DG for Energy; former Director of the Internal Energy Market of the DG Energy, European Commission) >> Valerio De Molli (Managing Partner, The European House - Ambrosetti) >> Paolo Borzatta (Senior Partner, The European House - Ambrosetti)

Taking part in Advisory Board activities for Enel were: >> Giuseppe Montesano (Head of European Energy Policy and Analysis and Project Leader) >> Fabio Bulgarelli (Head of European Regulation) >> Davide Puglielli (Senior analyst, European Energy Policy and Analysis and Project Coordinator)

The European House - Ambrosetti working group was comprised of: >> Lorenzo Tavazzi (Head of Scenarios and Intelligence Division, Project Leader) >> Pio Parma (Project Coordinator) >> Umberto Marengo (Analyst) >> Matteo Zaupa (Analyst)

The European House - Ambrosetti working group benefited from the collaboration of Fabio Genoese (Research Fellow, Centre for European Policy Studies – CEPS, Belgium; Visiting Professor, SciencesPo in Paris, France).

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building the european energy union

We would like to thank for their contributions and suggestions: >> Ronnie Belmans (Chairman, the European Smart Grid Technology Platform; Full Professor of Electric Power and Energy Systems, Katholieke Universiteit Leuven; co-founder, KU Leuven Energy Institute of the European Energy Institute, Belgium) >> Örjan Brinkman (Chairman, Bureau Européen des Unions de Consommateurs – BEUC; Chairman, Sveriges Konsumenter, Sweden) >> Nicola Ciniero (General Manager, IBM Italy) >> Jos Delbeke (Director-General for Climate Action, European Commission) >> Fabio Fregi (Chief Executive Officer, Google for Work Italy) >> Dirk Forrister (President & Chief Executive Officer, IETA - the International Emissions Trading Association) >> Monica Frassoni (Co-Chair, European Green Party; President, European Alliance to Save Energy - EU-ASE) >> Sergio Garribba (Advisor on Energy Policies to the Italian Ministry of Foreign Affairs and to the Italian Ministry of Economic Development; former Director-General for Energy and Mineral Resources, Ministry of Economic Development; former Professor, Polytechnic of Milan) >> Simon Hill (Vice President Regulatory Affairs EMEA, Opower) with Giulia Gioffreda (Head of European Union Affairs, Opower) >> Giovanni La Via (Chairman of the Committee on the Environment, Public Health and Food Safety, European Parliament) >> Stefano Manservisi (Chef de Cabinet of the EU High Representative for Foreign Affairs and Security Policy, European Commission) >> Andrei Marcu (Senior Advisor and Head of the Carbon Market Forum, Centre for European Policy Studies – CEPS, Belgium) >> Francesco Profumo (Chairman, IREN; former Minister for Education, University and Research, Italian government; Full Professor and former Dean, Turin Polytechnic) >> Dominique Ristori (Director-General of DG Energy, European Commission) >> Carlo Sangalli (Chairman, Confcommercio – the Italian General Confederation of Enterprises) >> Agostino Santoni (Chief Executive Officer, Cisco Italy) >> Christof Schoser (Deputy Head of Unit “State Aids - Energy and Environment” – DG Competition, European Commission) >> Manuel Szapiro (Member of the Cabinet of the Vice President and Commissioner for Energy Union, Maroš Šefčovič, and Responsible for Relations with Academia and Think Tanks, European Commission) >> Pierre Tardieu (Deputy Director for Public Affairs, EWEA - the European Wind Energy Association) >> Federico Testa (Commissioner, the Italian National Agency for New Technologies, Energy - ENEA) >> Frauke Thies (Chief Policy Officer, EPIA - European Photovoltaic Industry Association) >> Patrizia Toia (Vice President of the Committee on Industry, Research and Energy, European Parliament) >> Flavio Zanonato (Member of the Committee on Industry, Research and Energy, European Parliament; former Minister for Economic Development, Italian government) The contents of this report refer exclusively to the analysis and research carried out by The European House - Ambrosetti and represent its opinion, which may not coincide with the opinions and viewpoints of the individuals interviewed. © Enel S.p.A. and The European House - Ambrosetti S.p.A., 2015

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Contents

Preface | 7

Remarks by the Scientific Committee | 9

10 key points of the study | 12

Executive Summary | 14

Chapter 1. Why Europe needs a common energy market and an integrated energy policy | 26 1.1. Energy policy is a key driver for enhancing Europe’s competitiveness and global influence | 28 1.2. The importance of energy policy | 29 1.3. A holistic approach to European energy policy | 34

Chapter 2. Our proposals and policy recommendations for a successful implementation of the European Energy Union | 36 2.1. Introduction | 38 2.2. Strengthening European governance | 39 2.3. Setting up a decarbonization-proof market design | 47 2.4. Adopting smart regulation for smart investments | 50

Chapter 3. The energy sector scenario in Europe | 56 3.1. The energy scenario and main trends in the world and Europe | 58 3.2. Critical points and open questions in EU energy markets | 73 3.3. The benefits of the European Energy Union | 90

Bibliography | 99

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Preface

In outlining the future energy system, clear and ambitious objectives help us to define the direction we want to take. Europe has shown an unprecedented level of purpose and commitment in defining its climate and energy targets. In this respect, the long term goal of decarbonizing the system by 2050 is straightforward, and interim targets –namely the 2020 and 2030 targets for renewables, energy efficiency and CO2 emissions– have set the necessary milestones.

Decarbonization encompasses several benefits for the European economy: it makes Europe an early mover in the growing global market for energy-related goods and services; it contributes to increasing energy security by reducing import dependency and exposure to the volatility of fossil fuel prices; and it brings significant air pollution and health co-benefits.

But defining what is the target is just as important as figuring out how to get there, because the latter is what ultimately determines whether one actually reaches it or not. This is where the Energy Union Framework comes into play.

Launched by the European Commission in February 2015, the Framework is an ambitious step forward in the right direction of making the European energy system secure, sustainable and competitive. It outlines a clear action plan to deliver a coordinated vision and a deep harmonization of energy and climate policies, and this is what Europe needs.

At this stage, the Energy Union Framework is still just a plan in need of action by all stakeholders involved. The European Commission has set the groundwork on which Member States and other institutions, the industry and end customers will build the future European energy system. The framework is the last chance to prove the level of commitment regarding our shared ambitions, and finally make a leap forward.

As one of the major European energy companies, Enel has always been at the forefront in supporting the European roadmap for energy and climate. From the very outset of our international expansion, we advocated for the full integration of European energy markets as a means to reach European targets in an efficient and sustainable manner.

Also based on our global experience and leadership, we now see three main challenges for the European energy system and its decarbonization: the enforcement of truly integrated European governance, the achievement of a future-proof market design and the development of digital technologies. Such elements are instrumental to shift the sector’s focus and visibility from short- to long-term, to allow efficient investment plans in both renewable and conventional generation and to effectively integrate renewable energy sources into an eventually European-wide market.

The report “Building the Energy Union. Proposals and policy recommendations to power European competitiveness” by The European House – Ambrosetti points out the reasons behind these three challenges and provides a set of proposals to effectively address them.

My hope is that this study will provide valuable input to policy-makers and encourage other stakeholders to take concrete action and contribute to the successful shaping of our common energy future.

Francesco Starace Chief Executive Officer and General Manager, Enel

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Energy cooperation has been a driving force of European integration for over sixty years. In fact, the forefather of our European Union was the Coal and Steel Community. Established back in 1951, its goal was to unite formerly-conflicting countries to pool the most important energy source of the time-coal.

Today, the nexus between energy integration and political integration is just as critical for our common future. Europe is being called upon to rise to an unprecedented challenge: governing the transition towards energy sustainability and climate change while preserving and strengthening its global competitive edge.

New energy sources (such as shale oil and gas) are becoming available and new technologies are transforming the way in which we use and benefit from energy as private individuals and companies, and so we need a European commitment equal to this unparalleled moment of opportunity. Smart grids and digital technologies are placed to transform traditional energy business models radically, bringing new players and new products to compete in the market.

Much has been achieved already. Since the 1990s, the European Union has launched three Energy Packages that introduced sweeping reforms. Energy markets are more liberalized, open, competitive and transparent than ever before.

Yet, the journey is far from complete. Without strong political vision there can be no true integration. The transformations we face call for a quantum leap in the way we shape our policies. We need a new holistic approach that brings together the political, technological and economic dimensions of energy to make Europe the most competitive, innovative and dynamic source of clean power in the world.

As a leading European think tank, The European House - Ambrosetti partnered with Enel to help take this journey forward.

With this research study, we invite European leaders to look at energy policy from a fresh perspective that tackles the nuts and bolts of regulatory integration, never loosing track of the broader vision and the global arena in which we play. The Juncker Commission has set an ambitious framework for the creation of a true Energy Union in Europe. This study aims to contribute to the success of that project by pointing to some of the key societal and economic challenges ahead in the field of energy.

We need better market regulation to make sure that our investments are based on long-term market considerations and price signals. We need more effective and coherent governance at EU level. And we need more innovation-friendly regulation to unleash the full potential of digital technologies in this sector.

A more integrated energy market will produce sizable benefits for Europe: lower costs, more efficient investments and a cleaner environment for us and for future generations.

Finally, this study would not have been possible without the invaluable support and advice of Joaquín Almunia, Vittorio Grilli, Wolfgang Schüssel, Jorge Vasconcelos and Jean-Arnold Vinois, to whom we extend our deep gratitude.

To quote Robert Schuman, “Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity.” The energy industry, governments and European institutions need to join in a common effort to make energy, once again, a driver of integration, competitiveness and solidarity.

Valerio De Molli Managing Partner, The European House – Ambrosetti

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building the european energy union

Remarks by the Scientific Committee

Climate change is the main global challenge of our times. As President Obama recently said, “we are the first generation to feel the consequences of climate change, and the last one to be able to do something to stop it”. Competitiveness is what European economies need to overcome the crisis once and for all, setting the ground for a sustained path of growth and the improvement of employment levels and social standards. Security is a necessary condition to guarantee the stability of our societies and the support of citizens for democratic institutions.

What the European Union will decide regarding the Energy Union initiative will be crucial to gradually reach these goals in a coherent way. Regarding climate change, it is imperative to advance towards a decarbonized economy based on renewable sources and an efficient use of energy. To improve competitiveness, we need to achieve the single market for electricity and gas, through interconnections, common regulations and adequate incentives for investors. And to improve our external security, the EU must reduce the degree of dependency on foreign suppliers and put into place a common European energy diplomacy.

The Energy Union is –together with the completion of the Economic and Monetary Union, the achievement of the Digital Single Market and the agreement around a common strategy vis-à-vis immigration– a milestone in the way towards the European integration, that our citizens need to reap the benefits of the 21st century.

Joaquín Almunia Visiting Professor, London School of Economics former Vice President and Commissioner responsible for Competition, European Commission

The completion of strategic interconnectors amongst the EU-28 Member States and with neighboring third countries is at the core of the Energy Union. Infrastructure development and the promotion of energy efficiency initiatives will enhance energy allocation and security of supply in Europe. This will require in the next few years a major, pan-European investment effort.

As demand for infrastructure in the utilities sector in Europe is expected to continue to increase, the risk appetite investors for this type of projects remains high. Institutional investor interest in energy related infrastructures has risen significantly in Europe and at global level: the utilities sector is attracting 65% of the infrastructure funds deployed globally, and 45% of global infrastructural deals took place in Europe in 2014. The infrastructure investor base is expanding and becoming increasingly diverse (bank funds, private equity, sovereign wealth funds, pension funds, etc.). Infrastructure funds are exploring more complex and bolder transactions, and infrastructure minority investments have also become more common in the energy sector.

A significant boost for enhancing energy infrastructure networks in the European Union is offered by the Juncker Investment Plan, aimed at making large-scale infrastructural investments less risky for private investors. Approximately €240 billion out of €315 billion should be activated over the 2015-2017 period in digital, energy and transport grids.

A swift implementation of the Juncker Plan will offer the opportunity to leverage resources for financing big infrastructural projects and energy efficiency initiatives that are key for Europe’s competitiveness and, thus, for economic growth.

Vittorio Grilli Chairman of the Corporate and Investment Banking EMEA, JP Morgan former Minister of Economy and Finance, Italian government

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A Common Energy Market for the European Union is one of the best ideas to complete our common single market for political, economic and strategic reasons: >> Political: the EU will remain for the next decades a big importer of fossils-oil, gas, coal (53% of consumption imported).

Most exports are coming from crisis regions affected by war, political unrest and autocratic regimes. Speaking with “one voice” gives the EU a greater influence on the global scene. >> Economic: EU energy imports annually are approx. €400 billion. Over the next 10 years, new investment in energy production/transmission of €250 billion is necessary. For important industries affordable energy prices are a precondition for maintaining their presence in Europe. But major competitors operate with much cheaper tariffs (i.e., US 1/3 gas). >> Strategic: a “sea change” in the future energy sector is coming. Fracking, rise of renewables, e-mobility, prosumers, smart grids & homes, etc.: this requires excellent regulation, standardization, open markets, comparable tariffs, prices and subsidies.

The consequences are clear: less national sovereignty, no solo initiatives (such as the German “Energiewende”), more transparency, investment-friendly framework, public discussion and acceptance.

Wolfgang Schüssel Former Federal Chancellor of Austria

Regulation of electricity and natural gas markets in the European Union needs to be urgently redesigned for two major reasons: one quantitative and one qualitative. Accomplishing this task means facing two major obstacles – one institutional and one conceptual.

Liberalization and regulation of energy markets in Europe were designed under the assumption of increasing energy demand. In fact, in the decade previous to liberalization, i.e., between 1980 and 1990, total primary energy consumption in Europe increased 10.6% (IEA). In the following decades demand in the EU-28 increased just 3.6% (1990-2000) and 2.0% (2000-2010). Since 2006, EU energy demand has been decreasing: in 2013 it was 0.9% below the 2006 level (Eurostat). This is indeed in line with the EU “objective of saving 20% of total primary energy consumption by 2020”, established in 2007.

Regulating energy infrastructures in order to incentivize further reduction of energy demand is not the same as regulating these infrastructures under stable or growing energy demand scenarios.

In the meantime, the structure of both electricity generation and demand has changed considerably and is expected to change even faster in the near future. Incentivizing the transition towards new electricity systems based on massive deployment of intermittent generation, flexible demand, different kinds of storage and new modes of operation requires a completely different regulatory toolkit.

Without a proper regulatory authority at EU level the internal energy market cannot be achieved. Institutional reform is needed to allow for the transformation of the existing “Agency for the Cooperation of Energy Regulators” into a new “Agency for the Regulation of Energy Markets”. Transforming a club of national regulators managed by the European Commission into a regulatory authority “above” national regulatory authorities and independent from the European Commission requires strong political will.

Finally, innovative thinking is needed to reinvent, simultaneously, the multi-level governance of energy markets and energy systems, the corresponding multi-level institutional architecture of energy regulation and the conceptual and instrumental toolkit of energy regulators. Given the growing sophistication of energy markets, the rising convolution of EU policies and the increasing complexity of the interfaces among them, this will not be an easy task. In this context, it is worth recalling what President Theodore Roosevelt wrote to the U.S. Congress in December 1905, asking for the establishment of effective and independent regulation: “The opponents of government regulation dwell upon the difficulties to be encountered and the intricate and involved nature of the problem. Their contention is true. […] But while I fully admit the difficulties in the way, I do not for a moment admit that these difficulties warrant us in stopping in our effort to secure a wise and just system.”

Jorge Vasconcelos Chairman, NEWES Founder and first Chairman, CEER

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building the european energy union

The Energy Union is a single and necessary project based on a holistic approach to energy and climate for the benefit of all citizens and the whole economy.

After fifty years of Member States’ reluctance to consider a European energy policy, in spite of the Steel and Coal and the Euratom treaties of the 1950s, a decisive breakthrough occurred in March 2007 with an Energy Policy for Europe decided by the European Council. This policy was based on security of supply, sustainability and competitiveness, and translated into three 20% targets for 2020: reduction of greenhouse gas emissions compared to 1990, promotion of renewable sources of energy in the energy mix and improvement of energy efficiency. In 2010, the Treaty on the Functioning of the European Union included a new Article 194 that became the legal basis for an extensive energy policy, built on the internal market, interconnections, security of supply and renewable and energy efficiency-all this in a spirit of solidarity. However, Member States retain sovereignty in deciding their energy mix, the exploitation of natural resources and energy taxation.

The last five years have been rich in developments, some positive and some others disturbing regarding the integration of the European energy market, with some trends to renationalize the energy policy in the name of a narrow and nationalistic approach to security of supply, revealing a lack of trust between Member States and aversion to competition. The Energy Union, launched in 2014 by the new Commission, led by President Juncker and supported by the European Council, intends to counter these challenges by advocating a decisive step towards a genuine European energy and climate policy, breaking the silo mentalities and ensuring the best use of all the resources and infrastructures within the European Union, for the satisfaction of the customers, households and business alike.

Solidarity should mean combining the strengths to eliminate or mitigate the weaknesses of each Member State for the benefit of all. The internal market remains the best tool to achieve such optimization of resources and infrastructures. Its full completion requires enhanced governance and fewer contradictions between national and European objectives and measures. Unquestionably, more cooperation at all levels is needed as well as an effective empowerment of actors, like the transmission system operators and the European Agency for the cooperation of Energy Regulators, and last but not least, of customers to optimize their demand management. Long distance transmission of electricity produced from the best sources of renewable energy and decentralized production will have to develop in a smarter system to match supply and demand and to deliver the new targets set for 2030 and in the framework of the December 2015 Paris Conference on climate.

A silent revolution is underway and a clear and dynamic European framework should make it a success for all citizens and our economy. This report is therefore a timely and useful contribution for all those concerned.

Jean-Arnold Vinois Advisor on European Energy Policy, Jacques Delors Institute Honorary Director of the European Commission

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10 key points of the study

>> Energy efficiency: improvements on energy efficiency

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financing initiatives (such as risk sharing, dedicated credit lines and on bill repayment) are needed, in particular to promote efficiency in high potential sectors.

Energy has been at the heart of the European Commis-

Moreover, the energy efficiency incentive framework

sion’s legislative action over the last 20 years. The three

should avoid excessive impacts on electricity bill.

Energy Packages of the Commission (1996-2009) focused

>> Environmental protection: reforming the EU Emissions

their intervention especially on EU energy market inte-

Trading System (EU-ETS) and an appropriate compe-

gration and liberalization, while since the 2009 Climate

titive framework for renewables are preconditions

and Energy Package, the European Union has also integra-

for the success of the EU’s decarbonization strategy in

ted the pillars of energy and environmental protection.

the long-term. Plus, the lack of a clear European framework for RES incentives has produced inefficien-

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cies among Member States. >> Research and innovation: the EU lags behind in the deployment of key enabling technologies.

The efforts made by the European Commission and by the European Member States in the past have resulted in significant accomplishments. The European Union is diversifying away from conventional sources towards renewables and low-carbon energy generation and it is also on-track to reach its 2020-2030 targets on energy.

3 Some critical issues have remained unaddressed in the European energy sector. Among these: >> Security of energy supply: the EU remains highly dependent on petroleum and natural gas imports and on countries at high geopolitical risk. Completing market integration, as well as strengthening and better planning interconnections –including with neighboring countries– can improve security.

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4 The European Commission has renewed its political commitment towards an integrated energy strategy. In February 2015 it published the “Framework strategy for a resilient Energy Union with a forward-looking climate change policy” which outlines a more comprehensive approach, setting the vision and integrating a series of policy areas (security of supply, internal energy market, energy efficiency, environmental protection and research and innovation) into a cohesive strategy.

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>> Internal energy market: on the wholesale market, the

To build the European Energy Union a holistic approach is

lack of long-term price signals has produced ineffi-

needed. This must consider all the aspects affected directly

cient investment decisions, resulting in unbalanced

and indirectly by energy and their relations (i.e., the external

installed generation capacity in several European

dimension of competitiveness, foreign policy, industry value

countries. Moreover, energy retail prices are not cost-

chains development, etc.). Including the key issues related

reflective and in line with the decarbonization objec-

to energy into the EU-28 energy policy, understanding how

tive, due to significant differences in national policy

these affect each other, and balancing the various inte-

choices, tax schemes and weight of system costs that

rests and trade-offs (Member States, European institutions,

generate market distortions among the Member Sta-

consumers, energy players and new entrants) are, today, the

tes.

main challenge for the success of the European Energy Union.

building the european energy union

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On the basis of the analysis of the critical issues in the five

In order to define a decarbonization-proof market de-

aspects identified by the EU, we have identified eight pro-

sign, we propose to:

posals and policy recommendations for a successful im-

>> Set a wholesale market design that is coherent with the

plementation of the European Energy Union. These include

EU’s decarbonization goals and the development of re-

both governance and regulatory recommendations and

newables, including through the adoption of long-term

market-oriented tools, and require action on three-levels

contracts that provide adequate price signals for in-

(strong European governance; decarbonization-proof mar-

vestment and disinvestment choices over the long-term.

ket design; and smart regulation for smart investments).

>> Adopt transparent and cost-reflective criteria for the formation of retail electricity prices in order to foster

7 In order to strengthen governance of a truly European energy policy and markets, we propose to: >> Harmonize, widen the scope and enforce top-down re-

customer engagement and promote comparable price structures across Europe.

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gulation at European level. In order to complete the in-

In order to adopt smart regulation for smart investments,

ternal energy market a core of European rules and bodies

we propose to:

is needed. In fact, as of today, the European Union lacks

>> Promote new regulation for the digitalization of the

strong political guidance and binding decision-making

European power system using smart grids as a key dri-

powers in the energy sector. >> Speed up market integration also through regional cooperation mechanisms on several aspects of the EU ener-

ver of this process. >> Enhance access to finance for energy efficiency projects.

gy markets, ranging from regional auctioning of renew-

>> Make Europe the world pioneer in the application

able sources, to system operation and TSOs cooperation.

and market diffusion and export of innovative energy

>> Rationalize and streamline the process to complete EU

technologies.

interconnectors on the basis of cost-benefit analyses.

This would allow for more efficient allocation and system security since the lack of strategic infrastructures causes problems both internally and externally.

10 Completing the Energy Union can provide significant benefits for the European Union, its firms and citizens at several levels: competitiveness (technological leadership in the European energy industry and related sectors; and lower imports of fossil fuels and energy dependence), environmental protection (lower carbon emissions and related savings), energy efficiency (development of technological innovation and competitiveness of EU energy-efficient industries) and geopolitics (increased EU geopolitical influence and “soft power� on the global energy and climate change agenda).

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Executive summary

Why Europe needs a common energy market and an integrated energy policy 1. The European Union is moving towards the completion

2. Energy has been at the heart of the European Commis-

of an integrated energy market and the development of a

sion’s legislative action over the last 20 years:

common energy strategy. A common framework on ener-

>> The three Energy Packages of the Commission (1996-

gy will allow Europe to take advantage on different levels –

2009) focused their intervention especially on EU energy

geo-politics, environmental protection, competitiveness

market integration and liberalization.

and market integration. In particular, the benefits of achie-

>> Since the 2009 Climate and Energy Package, the Europe-

ving the Energy Union are mainly related to:

an Union has also integrated the pillars of energy and

>> Promoting the shift from national markets to a single

environmental protection.

energy market.

Following the “20-20-20 Plan”, in 2014 the European Council

>> Strengthening security of energy supply and prioritizing the strategic interconnections needed.

adopted a new policy framework with ambitious decarbonization targets to be met by 2030: at least 40% reduction

>> Integrating energy and climate change policies and ta-

of greenhouse gas emissions compared to 1990 levels; at le-

king a leadership position in the global negotiations on

ast a 27% share of renewable energy sources (RES) in gross

climate change (i.e., in the forthcoming COP 21 in Paris).

final energy consumption; and at least a 27% reduction in

>> Maintaining and enhancing the competitiveness of European industrial value chains.

final energy consumption compared to estimates. The 2030 framework also proposes a new governance framework ba-

>> Protecting energy consumers and encouraging them to a more active and aware role.

sed on national plans and a set of key indicators to assess progress over time.

Figure 1. Key headline indicators and targets concerning EU energy and climate policy.

Note: current status based on 2013 or latest available data.

EU Target

Current status

2020

2030

2040

2050

GHG emissions reduction (% vs. 1990 levels)

-18%

-20%

-40%

-60%

-80%

Renewables share (% in the overall energy supply)

15%

20%

27%

Energy efficiency (maximum Mtoe primary energy consumption)

1,567

1,483

1,424

Source: The European House - Ambrosetti elaboration on European Commission and Eurostat data, 2015

3. With the “Framework strategy for a resilient Energy Union

a. Energy security, solidarity and trust.

with a forward-looking climate change policy” (February

b. A fully-integrated internal energy market.

2015), the European Commission outlined an action plan for

c. Energy efficiency as a contribution to moderation of

its energy strategy based on five mutually-reinforcing and closely-interrelated dimensions:

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building the european energy union

energy demand. d. Decarbonization of the economy.

e. Research, innovation and competitiveness.

5. Starting from the five key areas identified by the European

The goals and guidelines contained in the Energy Union fra-

Union, we have formulated a set of proposals and policy

mework strategy provide a solid foundation and have the

recommendations that address the key future challenges

merit of integrating the cornerstones of energy and envi-

of the Energy Union regarding the following aspects:

ronmental protection.

>> Governance (allocation of responsibilities and powers for rule-making and goal-setting between the EU and

4. The future challenges of the Energy Union need to be addressed adopting a holistic approach. In fact, EU ini-

Member States). >> Market design (definition of the technical rules and cri-

tiatives on energy have followed an incremental logic but have lacked a comprehensive and coherent approach open

teria under which market participants interact). >> Infrastructures (definition and development of key in-

to the external aspect of competitiveness and capable of including all the perspectives related to energy and other

frastructure, as enabler of markets development). >> R&D (schemes to promote and finance energy-related

connected policy areas (i.e., foreign policy, industrial policy, etc.). This has brought about some distortions and imba-

technological development and R&D). >> Investments and financing, which cuts across all the

lances in the internal energy market.

above-mentioned areas.

Our proposals and policy recommendations for a successful implementation of the European Energy Union 6. Successful implementation of the European Energy Union

(Member States, European institutions, consumers, energy

requires the balancing of different interests and trade-offs

players and new entrants).

Figure 2. Overview of the various players and interests impacting on EU Energy Union implementation.

Energy Union Strategy

EU policy, regulation and targets

Consumers

Utilities

Member States

EU Institutions

Empowerment and freedom of choice

Long-term price signals to incentivize investments

Freedom of choice in energy mix

Energy security

New entrants

Integrated market

ICT companies

Autonomy in suppliers’ choice

Energy efficiency

Possibility to sell self-produced energy on the market

Stronger ETS and adequate CO2 prices Stability of regulation Framework favourable to Smart Grids development

Energy security and efficiency

Decarbonization of economy Leadership in R&D

New service providers Aggregators

Source: The European House - Ambrosetti elaboration, 2015

7. Our proposals and policy recommendations indicate

III. Adopting smart regulation for smart investments.

three main priorities that should guide Europe’s energy

These actions include governance, regulatory recommen-

agenda:

dations and market-oriented tools, and could help the EU

I. Strengthening European governance.

to solve the current problems for an efficient functioning

II. Setting up a decarbonization-proof market design.

of its energy market.

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Figure 3. Europe’s main problems on the five aspects of the EU Energy Union.

SECURITY OF SUPPLY Insufficient market integration and interconnections High dependency on gas and oil imports High share of energy imports from countries at high geopolitical risk High differences in energy dependency levels among EU countries

INTERNAL ENERGY MARKET

Depressed wholesale prices and lack of long term price signals for investors

Prices are not cost-reflective due to differences among national tax schemes and price structures

Significant differences in retail energy prices

ENERGY EFFICIENCY

ENVIRONMENT PROTECTION

RESEARCH AND INNOVATION

Lack of adequate metrics (absolute consumption)

ETS failed in delivering adequate price signals for low-carbon investments

Quantitative targets tend to incentivize deployment rather than cost-efficiency and innovation

Low energy efficiency in buildings and transport EU financing schemes tend to support large-scale investments and barriers to investment are still relevant

Decentralized and uncoordinated policy implementation for RES deployment among Member States

Overcapacity and lower industry margins discourage investments in new technologies

Limited overall efficiency, with differences at geographical level across the EU

Source: The European House - Ambrosetti elaboration, 2015

Strengthening European governance Proposal 1. Harmonizing, widening the scope and enforcing top-down regulation

Proposal 2. Speeding up market integration, by also leveraging on regional cooperation 10. The EU should speed up market integration. In achieving this goal, regional and European cooperation is a

8. As of today, the European Union lacks strong political

fundamental tool that the EU should take advantage of,

guidance and binding decision-making powers in the ener-

on several aspects of the EU energy markets, ranging from

gy sector. Therefore, the EU should harmonize, widen the

regional deployment of renewable sources to system ope-

scope and enforce top-down regulation by assigning a

ration.

strong guidance role to the European Commission, and by harmonizing national regulations and adopting a top-

11. The institutionalization of forms of cooperation betwe-

down approach on future regulations and decisions on

en neighboring countries and regional clusters can serve as

cross-border energy issues.

an interim step towards gradual progress in the European Energy Union agenda, including through the sharing of best

16

9. In this context –to have enhanced certainty and uni-

practices and the creation of common standards. The sug-

formity in EU regulatory framework, greater coordina-

gested actions should include: promoting the integration

tion and reliability– the powers currently granted to the

of regional Transmission System Operators (TSOs), or

Agency for the Cooperation of Energy Regulators (ACER)

forms of close cooperation on a regional basis of the diffe-

should be reinforced to guarantee coordination of markets

rent national TSOs, to provide coordinated network mana-

and the operational capabilities of energy systems in the EU.

gement and in real time; instituting regional auctions for

The European Network of Transmission System Operators

the development of renewable energy sources to allow

(ENTSO-E) and the European Network of Transmission Sy-

their development across Europe based on the resource

stem Operators for Gas (ENTSOG) could also be granted ad-

availability and lack of grid congestions; creating regional

ditional responsibilities and powers. This should match with

electrical power exchanges; and defining regionally-based

an increasingly integrated management of operations at

infrastructure initiatives and projects in collaboration with

European level (for instance, in network codes definition).

third countries.

building the european energy union

Proposal 3. Streamlining the completion of EU interconnectors on the basis of costbenefit analyses

tural priorities; involving in the decision-making process of third countries (e.g., Switzerland, Norway or North African countries) critical to reaching the interconnection goals of the European network; adopting shared and uniform cri-

12. Today, the internal European energy market faces pro-

teria for evaluation of secure sources of supply and actual

blems related to efficient allocation and system security

interconnection needs.

since a sub-optimal level of cross-border infrastructures does not allow markets with over-capacity to interface with those with more limited energy resources. On one side, some interconnection projects have low return on investment and long amortization times, and this situation

Setting up a decarbonization-proof market design

will or even government opposition to specific projects.

Proposal 4. Setting a wholesale market design that is coherent with the EU’s decarbonization goals

13. Currently, each country of the EU-28 has defined its own

15. Over the last 10 years in Europe, substantial investment

national energy strategy. What is lacking is EU-wide coordi-

decisions have been made in the energy market that are

nation, including by the TSOs, that would be able to organize

not correlated to the long-term needs of electrical power

the individual national plans within a systemic and coherent

systems, but rather to short-term price signals. This has cau-

whole. In addition, the decision-making process for the iden-

sed, in several Member States, conditions of over-capacity

tification and selection of the Projects of Common Interest

or under-capacity. The adoption of long-term price signals

(PCIs) has led to a great number of infrastructural projects

would have made it possible to prevent this situation.

hinders investments. On the other, there is a lack of political

(as of today, 248 initiatives without a clear prioritization).

16. Furthermore, the growth of renewable sources in the va14. Therefore, the EU should rationalize and streamline the

rious Member States has occurred within a context of major

completion of EU interconnectors, on the basis of cost-

fragmentation of incentive systems created on a national

benefit analyses, by: assessing Europe’s energy needs and

level. This contributes to making their integration into the

the ways to meet them, in order to define clear infrastruc-

market on a European level particularly complex.

Figure 4. Investments in the electricity sector in the EU, 2000-2006 and 2007-2013.

120

100

80

60

40

20

0 2000-2006 Other renewables

Solar and wind

2007-2013 Hydro

Nuclear

Fossil fuels

Source: International Energy Agency (IEA), “World Energy Outlook – Investment Report 2014”

17

17. The EU should set a wholesale market structure cohe-

market design solutions, this requires integrated liquid

rent with the goal of decarbonization through:

intraday markets with harmonized gate closure time near

>> Adopting long-term contracting that provides adequa-

real time and integrated balancing markets.

te price signals for investment and disinvestment choices

Proposal 5. Adopting transparent and costreflective criteria for the formation of electricity retail prices

over the long-term, including also through the adoption of suitable mechanisms (introduction of well-defined reliability options and implementation of regional tenders for new RES). >> Introducing mechanisms to lower the cost of guarante-

18. There are currently significant differences in the structu-

es for counter parties that could be quite significant, in

re of retail prices for electrical power in the various Europe-

particular regarding longer-term deliveries.

an countries. The setting of retail electrical power prices is

>> Effectively integrating RES into the market through

influenced, in particular, by the tax and system costs com-

the definition of markets which can provide long-term

ponents. These discrepancies generate market distortion

signals and properly value flexibility. Besides other new

across the EU.

Figure 5. The different components of electricity prices among the European Member States (%, for average household consumers in capital cities), 2013.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Network

Taxes (VAT incl.)

DK

SE

NO

RO

IT

DE

LV

EE

PT

LT

ES

BE

CZ

FR

NL

AT

SL

SK

FI

PL

HU

LU

BG

Energy

HR

GR

CY

UK

IE

MT

0%

Subsidies to RES

Source: The European House - Ambrosetti re-elaboration on ACER data, 2014

19. In order to foster customer engagement and promote comparable price structures across Europe, the EU should adopt, on a European scale, uniform and transparent criteria, and best practices, for the structuring of electricity bills, especially in terms of grid fees and taxes and tax-related fees. In addition, an “operation transparency� should be launched in all Member States, to make more transparent

18

Adopting smart regulation for smart investments Proposal 6. Promoting new regulation for the digitalization of the European power system

and cost-reflective end-user electricity prices (i.e., tied to the

20. The entry of digital technologies into the energy sector

actual costs of generation, transmission and distribution, mi-

is radically changing models of energy production and con-

nimizing fees not connected with the service).

sumption. Digitalization is already underway in the energy

building the european energy union

sector, but it is progressing slowly, in particular as a result of

the digital transformation of the European electric system, but

significant investment in the state-of-the-art ICTs requested of

initiatives involving smart grids require significant investments

consumers and grid operators, and of the lack of regulatory in-

from sector companies (to build and/or redesign extensive

struments. In particular, smart grids will be a key tool in driving

electrical power grids often dating from 40-50 years ago).

Figure 6. Smart metering in Europe up to 2020 (meters installed, confirmed plans and forecast 2020 - number of thousands of meters).

4,650*

2,600*

1,760* 680* 720* 960* 10,400*

1,920* 1,800*

27,000

5,840* 32,000* 3,600*

Implemented 35,000*

Confirmed plans

3,440 1,360*

2,880*

5,920*

560*

3,040 2,320*

Forecast total 2020 3,040* 23,000*

*- Total AMI Market

32,000* 3,440* 245*

Source: GTM Research, “The Smart Grid in Europe 2012-2016: Technologies, Market Forecasts and Utility Profiles�, 2011.

21. The EU should go beyond the current regulatory system

tee communication and interoperability among the va-

mainly based on costs reduction, and instead promote, on

rious solutions proposed on a European level.

a European-wide level, a regulatory system that provides incentive for digitalization of the power system. The suggested actions should include: defining guidelines by

Proposal 7. Enhancing access to finance for energy efficiency projects

the European Commission aimed at national regulators for the development of innovation incentive schemes and

22. To reach the target of a 20% increase in energy effi-

funds; harmonizing the regulatory framework of incen-

ciency by 2020 and a 27% increase by 2030, Europe re-

tive schemes and providing measures in support of digita-

quires significant investment, in particular in the areas of

lization and electrification (e.g., tax breaks, low-interest and

buildings and mobility. Buildings are responsible for the

unsecured loans); streamlining and eliminating bureaucratic

largest share of European final energy consumption in the

red-tape; defining common technical standards to guaran-

EU-28 (40% in 2012).

Figure 7. Share of final energy consumption in different sectors in the EU-28 (%), 1990 and 2012.

40% 35%

34%

32% 26%

26%

4% Buildings

Transport

Industry 1990

3%

Agriculture

2012

Source: The European House – Ambrosetti re-elaboration on Energy Efficiency Financial Institutions Group and Eurostat data, 2015.

19

23. The EU should promote instruments and mechanisms

competitive position in the global market and its share

aimed at making European energy efficiency projects

of energy-related technology export. In particular, the

fundable, such as: transparency, scalability and standardiza-

European Union must focus attention on those technolo-

tion of financing in the private sector to create a secondary

gies most coherent with the goals of decarbonization and

market of energy efficiency financial products; improvement

those “closest” to the market, in order to: be able to im-

of the role of dedicated credit lines (and in particular con-

plement them on a large scale; capitalize on the R&D

cessional loans), through public banks in order to increase

expertise of individual Member States and consolidate it

the bankability of projects; sharing best practices regarding

on a European level; and create a bridge for competitive-

“On-Bill Repayment” mechanisms; better use of risk-sharing

ness (exports on foreign markets).

facilities by public banks and multilateral development banks; allocation of incentives to service and product provi-

25. Therefore, the EU should focus investments on the

ders rather than only to customers, in order to benefit from

most innovative energy technologies and those cohe-

economies of scale and learning; standardization and pro-

rent with the goals of decarbonization and European ener-

motion of Energy Performance Contracting (EPC) programs.

gy transition with a greater level of maturity and greater market potential by: identifying and selecting a limited

Proposal 8. Making Europe the world pioneer in the application and market diffusion and export of innovative energy technologies

number of key technologies; pooling all available instruments; and identifying a limited number of high-impact driver-projects on the basis of a regional approach. The EU should also create partnerships with emerging econo-

24. The energy sector is undergoing a profound transfor-

mies to promote the digital energy transition and secure a

mation. Europe needs to stay ahead of the curve to keep its

growing market share for its technological exports.

The energy sector scenario in Europe 26. In the last 20 years, primary energy consumption has

in 2013: this trend is related, in part, to the effects of the

grown in every global area except the EU (CAGR: -0.1%

economic crisis.

between 1994 and 2014). Gross inland consumption in the European Union has steadily decreased since 2006 (-9.1%

27. EU energy consumption is expected to decline, while

between 2006 and 2013), reaching a value of 1,666 Mtoe

the share of renewables in final consumption will grow.

Figure 8. Energy mix in gross inland consumption in the EU-28 (% share), 1990 and 2013 (left graph).

EU Member States energy mix (% share), 2013 (right graph).

12% 14%

1%

2013

4% 12% 1990 38%

33%

27% 18% 17% 23%

Total petroleum products

Gas

Solid fuels

Nuclear heat

Renewable energies

Waste (non RES)

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

20

building the european energy union

EU-28 BE BG CZ DK DE EE IE EL ES FR HR IT LV LT LU HU NL AT PL PT RO SI SK FI SE UK 0%

20%

40%

60%

80%

100%

In fact, the European Union is diversifying away from con-

>> The EU remains highly dependent on energy imports:

ventional sources towards renewables and low-carbon

between 1995 and 2012, the import share of consumption

energy generation. At global level, despite the key role

of petroleum and natural gas increased more than 12 per-

of oil and coal in energy consumption, renewable sources

centage points (from 74% to 86.4%) and more than 22

have experienced the fastest growth in the past two dec-

percentage points (from 43.4% to 65.8%), respectively. In

ades. As of today, the energy mix varies greatly among EU-

addition, the EU imports about half of its natural gas sup-

28 Member States: 11 European countries have a share of

ply from countries at high geopolitical risk.

renewables in total gross inland consumption higher than

>> Cross-country interconnectors are insufficient and not

15%, but Eastern countries still rely greatly on solid fuels

adequately planned: in 2014, 12 European countries out

and 12 countries have a share of petroleum products still

of 28, mainly in the periphery of the EU, remain below

higher than 35%.

the 10% electricity interconnection target and are thus isolated from the internal electricity market. Plus, a more

28. The EU is the largest energy importer in the world: in 2013, it imported 53% of its energy, for a value of €400 bil-

efficient metric for the interconnection target should be considered.

lion. Six European Member States depend on a single exter-

>> Liberalization of the wholesale market has increased sec-

nal supplier for their entire natural gas imports and therefo-

tor competition and depressed wholesale electricity pri-

re they show a high level of vulnerability.

ces, but the lack of adequate long-term price signals has produced inefficient investment decisions. This re-

29. Some key trends are revolutionizing the European energy

sulted in overcapacity in the majority of countries –mainly

sector and will affect the implementation and development

due to over-investment and deployment of RES with high

of the Energy Union and that of its industrial players:

costs– and under-capacity in other countries (where the

>> A shift towards electricity for heating and cooling (hi-

risk of electricity disruptions remains considerable).

gher demand for air conditioning, spread of electric heat

>> Electricity retail prices are often burdened by other

pumps) and an increasing use of electric appliances in re-

costs related to different national policy choices, tax

sidential and tertiary sectors.

schemes and system costs, which differ among Member

>> The entrance of new competitors from different sectors (e.g., telecommunications, computing and ICT, etc.)

States, creating biases and artificially rising the price of electricity, penalizing its consumption.

into the energy market, providing customers with inno-

>> There is a lack of adequate metrics for measuring ener-

vative services and solutions, disintermediating traditio-

gy efficiency, and an increased focus on energy effi-

nal players.

ciency investments in the transport and building sec-

>> The empowerment of energy consumers, also thanks

tors is needed.

to smart technologies and new ICT solutions – such as

>> The EU is currently on-track to meet its 20% greenhouse

smart metering systems that provide customers with

reduction target but carbon prices have fallen to a histo-

complete and real-time information. New devices and

ric low: reforming the EU Emissions Trading System

applications promote a more active role of customers in

(EU-ETS) and an appropriate competitive framework

the production system and will also allow them to bet-

for renewables are preconditions for the success of the

ter understand and manage their energy usage, getting

EU’s decarbonization strategy in the long-term.

control over their energy consumption. >> Further development of renewable energy sources and widespread diffusion of decentralized generation.

>> The lack of a clear European framework for RES incentives has produced inefficiencies. In fact, in order to meet the target of 20% gross final energy consumption from renewable energy sources, EU Member States

30. Europe is progressing towards 2020 and 2030 targets and

have introduced a wide range of incentive schemes.

focused on how to adapt the EU regulatory and incentive sy-

>> The EU lags behind in the deployment of key enabling

stem to create a more competitive and decarbonized ener-

technologies. The European Commission set deve-

gy market. However, some critical issues have remained

lopment policies only for RES deployment and not for key

unaddressed in each of the five aspects of the Energy Union

technological transformation (such as digitalization and

identified by the European Commission. Among these:

energy storage).

21

Figure 9. Spare electricity capacity in European countries, January 2015.

≥ 20% ≥ 10% & < 20% ≥ 0% & < 10% < 0%

Source: The European House - Ambrosetti elaboration on ENTSO-E, “Scenario outlook and adequacy forecast 2014-2030”, 2015. Note: Spare Capacity is the ratio (Remaining Available Capacity – Adequacy Reference Margin)/Adequacy Reference Margin. The Adequacy Reference Margin includes Margin Against Seasonal Peak Load. As seasonal peak load does not occur simultaneously, this map shall not be understood as a European-level assessment of adequacy.

Figure 10. Types of support schemes for new RES capacity in selected EU countries.

Auctions Feed-in Tariff Feed-in Premium (including fixed, sliding) Green Certificates Minimum return on invested capital Retroactive changes Other legal changes

Source: The European House - Ambrosetti re-elaboration on Ecofys, Eurelectric and Enel data, 2015

31. Completing the Energy Union will provide relevant be-

key aspects: competitiveness, environmental protection,

nefits for the European Union, its citizens and companies

energy efficiency and geopolitics.

at different levels. In particular, our analyses focus on four

22

building the european energy union

32. European companies have a share of 40% of all pa-

the market share of its environmental technologies firms

tents for renewable technologies and a significant

despite growing international competition. In doing so, EU

market share in environmental technologies. Through

environmental technologies firms could generate €1,452

a consistent energy strategy focusing on competitiveness

billion by 2025. The cumulated value will be equal to

and research and innovation financing, Europe can keep

about €12 trillion between 2015 and 2025.

Figure 11. Value of Environmental Technology market at global and European level (€ billion), 2015(e)-2025(e).

4,400

4,500 4,000 3,500 3,000 2,500

2,399

2,000 1,452

1,500 1,000

792 Cumulated Value: €12,012 bln.

500 2015

2016

2017

2018

2019

2020

2021

World

2022

2023

2024

2025

EU-28

Source: The European House - Ambrosetti elaboration on European Commission data and various sources, 2015

33. Furthermore, increasing the share of RES in gross inland

RES deployment, the EU would save about €767 billion in

consumption would improve the EU balance of payments

the period 2015-2030 (at 2013 prices) compared to a scena-

and reduce the amount of energy imports currently at

rio where renewables share of gross consumption remains

over €400 billion per year. By reaching the 2030 target on

constant.

Figure 12. RES production and extra-EU imports in the EU-28 (Mtoe), 2015(e)-2030(e).

900

850

800

750

700

650

600

2015

2016

2017

2018

2019

2020

2021

2022

2023

Imports reduction thanks to RES increase

2024

2025

2026

2027

2028

2029

2030

Imports with no RES increase

Source: The European House - Ambrosetti elaboration on Eurostat and BP data, 2015

23

34. Considering the current CO2 price delivered by the EU-

and energy policies) would result in €66.3 billion cumula-

ETS (€8/CO2 per ton, as of July 2015), it has been evaluated

ted savings between 2012 and 2030 for European com-

that reducing Green House Gas (GHG) emissions by 60% (vs.

panies.

1990 levels, as decided in the 2030 framework for climate

Figure 13. GHG emissions levels in the EU-28 (% reduction to 1990 levels and € billion savings), 2004-2030.

93.8%

82.1% Target 2020: 80% Savings (2012-2020) €4,4 bln

Target 2030: 60% Savings (2012-2030): €66.3 bln

1990 = 5,696 million tonnes of CO2-equivalents

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Source: The European House - Ambrosetti elaboration on European Commission data, 2015

35. In terms of energy efficiency, the European Commis-

binding target agreed by the European Council in October

sion estimates that energy efficiency will have significant

2014) would produce a reduction of 14% of net energy

positive spillover effects on environmental policy and EU

imports (from a 2010 baseline) and would reduce ETS allo-

balance of payments. An increase in energy efficiency by

wance costs to €39/ton by 2030.

27% on the baseline scenario (which is the EU-wide non-

Figure 14. The impact of energy efficiency targets on Green House Gas reduction (GHG) and imports.

EU-wide impacts Energy efficiency target options (in%)

Additional annual energy system costs, relative to 40% GHG target in 2030 (in EUR billion)

ETS Carbon Price in 2030 (in EUR)

Net energy imports 100=2010 levels

25

-

42

87

27 (EU Target 2030)

-

39

85

28

5

35

85

29

13

30

83

30

20

25

82

35

55

13

78

40

112

6

74

Source: European Commission, 2014

24

building the european energy union

36. Finally, a strong and ambitious Energy Union will streng-

>> In the past, the EU’s timely delivery of the EU Energy and

then the geopolitical role and “soft power” of the EU in

Climate Change Package (2008) allowed the EU to “lead

international relations:

by example” at the 2009 Copenhagen Climate Change

>> Europe has a strong economic and geopolitical interest in

Conference, setting a model for other countries. Full

the successful completion of an ambitious decarboniza-

ownership by developing countries of an ambitious de-

tion policy at the global level. This would prompt a pro-

carbonization agenda is a key priority for Europe in order

cess of de-investment from energy inefficient industries,

to prevent “carbon leakages” from carbon-efficient econ-

boost the competitiveness of the EU’s energy-efficient

omies to less-efficient developing countries.

industries and support the EU’s export of state-of-the-art energy-related technologies.

25

CHAPTER 1 Why Europe needs a common energy market and an integrated energy policy

26

building the european energy union

Key messages Energy is a horizontal policy issue cutting across foreign policy, environmental/climate change policy and competitiveness.

The European Union is moving towards the completion of an integrated energy market and the development of a common energy strategy. In particular, a common framework on energy will allow Europe to: – Strengthen security of energy supply (geo-politics).

– Integrate energy and climate change policies (environmental protection).

– Maintain and enhance EU industrial value chains and protect energy consumers (competitiveness).

– Promote the shift from national markets to a single energy market (EU integration).

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

– The three Energy Packages of the Commission (1996-2009) focused their intervention especially on EU energy market integration and liberalization.

– Since the 2009 Climate and Energy Package, the European Union has also integrated the pillars of energy and environmental protection.

The lack of a comprehensive and coherent approach capable of including all the perspectives related to energy and other connected policy areas (foreign policy, industrial policy, etc.) has brought about some distortions and imbalances in the internal energy market.

Today, the main challenge for the success of the European Energy Union is to adopt a holistic approach that takes into consideration both internal and external aspects, while implementing governance and regulation mechanisms and market-oriented tools.

The definition and adoption of common rules will help European industry to reduce costs and increase its global competitiveness.

27

1.1 Energy policy is a key driver for enhancing Europe’s competitiveness and global influence 1. The European Union is moving towards the completion

>> The conflict in Ukraine, together with the fact that Libya

of an integrated energy market and the development of

and other Mediterranean countries are experiencing pe-

a common energy strategy. In fact, energy is a horizontal

riods of extended political crisis, further heighten con-

policy issue that cuts across foreign policy, environmental/

cerns about European energy supply security.

climate change policy and competitiveness.

5. The close interrelation of energy policies with economic and security issues, therefore, requires a comprehensive and

The EU is the largest energy importer in the world

coordinated strategy at a European level.

More than half of European energy comes from countries outside the EU and the level has been generally rising over the last decade, costing around €400 billion in 2013.

The integration of energy and climate change security aspects in the EU foreign and security policy responses

2. A common energy policy, in particular, is regarded as pi-

On July 20, 2015, the European Council reaffirmed

votal to ensure European consumers access to secure, su-

that policy objectives defined in the EU Energy Union

stainable, competitive and affordable energy. This will also

should be supported by coherent action in EU fo-

allow Europe to better manage the changes occurring in the

reign and energy policy that takes into account ge-

global energy scenario, to address more efficiently some of

opolitical developments. It welcomed, as a basis for

its current issues and to achieve substantial benefits from

further work, the EU Energy Diplomacy Action Plan

the geo-strategic and competitive standpoint.

presented jointly by the High Representative and the Commission.

3. A common energy strategy could help to address the

The Council also underlined the importance of the se-

problems related to energy supply at the European-level,

curity aspect of climate change, including building up

considering also the aspects related to foreign policy and

EU climate diplomacy as an inherent part of its foreign

security.

policy. It also emphasized the need to further intensify the joint efforts in EU climate diplomacy and welcomed the role of the EU Green Diplomacy Network and

A common energy policy is pivotal to ensure secure, competitive and affordable energy and to strenghten European global influence

close collaboration of all EU actors to contribute to strengthening Europe’s voice and efforts internationally in the fight against climate change.

Source: European Council, “Council conclusions on energy diplomacy” and “Council conclusions on climate diplomacy”, July 20, 2015

6. An EU “single voice” on energy will also help Europe to take a leadership position in the global negotiations on climate change. Europe is already a key player in the United Nations Framework Convention on Climate Change

28

4. European energy dependence is growing:

and can “lead by example”, thanks to its efforts in redu-

>> 6 Member States out of 28 depend on a single external

cing carbon emissions, increasing use of renewable energy

supplier for their entire natural gas imports, remaining

sources and improving energy efficiency. In addition, with

extremely vulnerable to supply shocks.

a common energy strategy, Europe could take the leader-

building the european energy union

ship in the global environmental agenda, ensuring the

8. To improve its competitiveness, Europe needs a compre-

success of the forthcoming Paris Conference on Climate

hensive energy strategy, coherent with foreign and indus-

Change (COP21)1 and achieving a binding carbon reduc-

trial policies, capable of sustaining investments in R&D and

tion target for developed and developing countries. This

innovation and identifying strategic priorities at European

will allow Europe to indicate the direction for future deve-

level, while overcoming the growing competition in green

lopments.

technologies. In fact, the integration of energy and climate change policies would contribute to putting in motion a “green growth” pattern, helping the development of industries related to clean energy and energy efficiency.

The key role of EU leadership at COP21 in Paris

9. On the internal side, a coordinated European approach on

The Paris Conference in late 2015 could offer the EU

to foster investments in innovative and environmental tech-

the chance to have a “single voice” on climate change

nologies, while at the same time preserving the competitive-

negotiations. Therefore, the full commitment of the

ness of the EU-28 economy, including its energy-intensive

European Union and its Member States is a vital con-

industries.2 In this regard, the ongoing process of review of

dition for the success of COP21.

the Emissions Trading Scheme (EU-ETS) should also consider

energy will allow strengthening of the price signals needed

the expected impacts on manufacturing firms, in order to prevent, in the future, that industrial investments be shifted from Europe to United States or Asia due to higher carbon 7. A single energy policy will have an impact on the com-

costs (the so-called risk of “carbon leakage”)3 – with signifi-

petitiveness of European firms and on market efficiency

cant impact on employment levels in these sectors.

(including, in the medium-long term, prices). Europe is world leader in environmental technologies, a market that is

10. Finally, a common EU strategy on energy will also facili-

worth today over €2 trillion (see also Chapter 3). A global

tate the reaching of 2020 and 2030 targets on energy effi-

process of de-investment in energy inefficient technologies

ciency, renewables and carbon emissions reduction and will

will also allow European enterprises to exploit the first-mover

help to identify and prioritize the strategic interconnections

advantage and gain market share in developing markets. This

needed, in order to sustain an integrated European market,

will happen especially if Europe is able to take a leading role

with benefits for households and firms.

in development and deployment of electrification and environmental technologies in emerging economies.

1.2 The importance of energy policy 11. Energy has been an element of particular importance

markets. The adoption of the 2009 Climate and Energy le-

for the European Commission since the beginning of its

gislative package marked a paradigm shift in the EU from

legislative action. The first initiatives of the Commission,

the predominance of market consideration to a more cli-

between 1996 and 2009, were aimed especially at the

mate-centered energy policy.

integration and liberalization of the European energy

(1) The 21st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21/CMP11), otherwise known as “Paris 2015” (November 30-December 11, 2015), will be a crucial conference because it needs to achieve a new international agreement on climate that is applicable to all countries, with the aim of keeping global warming below 2°C. (2) Energy-intensive industries included in the European Emissions Trading Scheme (EU-ETS) involve the following products: cement, lime and plaster; iron and steel; oven products; refined petroleum products; pulp, paper and paperboard; basic chemicals and other chemical products; basic precious and non-ferrous metals; non-refractory ceramic goods and manufacture of refractory ceramic products; other products (glass and glass products, ceramic tiles and flags, bricks, tiles and construction products, first processing of iron and steel).

(3) The term “carbon leakage” describes the situation that may occur if, for reasons of costs related to climate policies, businesses (and, in particular, certain energy-intensive industries) were to transfer production to other countries which have laxer constraints on greenhouse gas emissions. This could lead to an increase in their total emissions.

29

Figure 1. Legislative framework of the EU energy and climate policy, 1996-2050.

50 20 20 20 15 20 14 20 13 20 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 20 99 19

98 19 97 19 96 19

1st Liberalization Package

Market regulation

3rd Liberalization Package

2nd Liberalization Package 1st RES Directive

Renewable Energy Sources (RES)

2nd RES Directive RES Financing Comm.

CO2 emissions reduction

ETS I 1st EE Action Plan

Energy efficiency

ETS II 2nd EE Action Plan

ETS III 3rd EE Action Plan Infrastructure Package

Energy strategy

EU Energy Strategy EU 2050 Roadmap

R&D and Innovation

5th Framework Prog.

6th Framework Prog.

7th Framework Prog.

H2020

Electricity Directive

Security of supply

Gas Directive

Gas Regulation

50 20 20 20 15 20 14 20 13 20 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 20 99 19

98 19 97 19 96 19

Source: The European House - Ambrosetti elaboration on European Commission data, 2015

12. The first Liberalization Directives –the so called “First

sible for implementing the third party access systems. It

Energy Package”– were adopted in 1996 (for electricity)

also defined mechanisms for cross-border transit of elec-

4

and in 1998 (for natural gas). The first Energy Package was

tricity, transmission charges and capacity allocation. It set

aimed at opening the electricity and gas market and gra-

two deadlines for liberalization of energy retail markets

dually introducing competition:

(July 2004 for industrial customers and July 2007 for private

>> It set non-discrimination principles and measures to im-

households).

prove interconnection and interoperability. >> It also imposed on integrated companies broad

14. The shortcomings still existing in progress towards a

unbundling requirements for generation and sale activi-

truly open electricity and natural gas market led to a third

ties from transmission operations.

legislative package adopted in September 2009 –the “Third

>> Member States were also required to create efficient me-

Energy Package”– aimed at introducing common rules

chanisms to regulate and monitor the market to prevent

for the generation, transmission, distribution and supply

abusive behavior.

of electricity and gas.6 It established a new unbundling regime,7 improved consumers’ rights and set a target on smart

13. In 2003, the so called “Second Energy Package”5 set

metering: 80% of customers should have access to more in-

further unbundling requirements, while Member States

telligent metering systems by 2020. The Third Energy Pack-

were required to protect final customers and were respon-

age also provided a number of measures for the functioning

(4) Directive 96/92/EC for electricity and Directive 98/30/EC for natural gas.

(5) Directive 2003/54/EC, Regulation (EC) 1228/2003 and Directive 2005/89/EC. (6) The Third Energy Package consists of two Directives and three Regulations: Directive 2009/72/EC concerning common rules for the internal market in electricity; Directive 2009/73/EC concerning common rules for the internal market in gas; Regulation (EC) No 713/2009 on the establishment of the Agency for the Cooperation of Energy Regulators (ACER), Regulation (EC) No 714/2009 on conditions for access to the network for cross-border exchange of electricity; and Regulation (EC) No 715/2009 on conditions for access to the natural gas transmission networks.

(7) Member States can choose between three different unbundling options to separate generation and supply activities from networks operations: full ownership unbundling (integrated energy companies sell off their electricity grids establishing separate TSOs); Independent System Operator (ISO - the energy company maintains the ownership of its transmission networks but hands over operations to a separate entity); Independent Transmission Operator (ITO - the energy company keeps the ownership of its transmission network but must abide by specific rules).

30

building the european energy union

of the internal electricity and gas market and promoted re-

complementary legislation: a comprehensive revision and

gional solidarity and national emergency measures in the

strengthening of the Emission Trading System Directive,

event of severe disruptions of gas supply. In particular, Eu-

national targets for non-EU ETS emissions, the Renewa-

ropean Member States were asked to designate a single Na-

ble Energy Directive and a directive creating the legal fra-

tional Regulatory Authority (NRA), while a single Agency for

mework for environmentally safe use of carbon capture and

Cooperation of Energy Regulators (ACER) was established

storage (CCS) technologies.

to coordinate and assist the NRAs of the Member States.

16. In 2011, the European Commission issued the “Ro15. Toward the end of the first decade of the 2000s, the sco-

admap for moving to a competitive low-carbon eco-

pe of the Commission action was extended to environmen-

nomy in 2050”. This document looks beyond short-term

tal sustainability. In 2007, European leaders committed to

objectives and sets out a cost-effective pathway for achie-

put Europe on the path toward an energy-efficient and

ving much deeper emissions cuts by 2050:

low-carbon economy and agreed on three targets to be

>> The Roadmap suggests that, by 2050, the EU should cut

reached by 2020 (“20-20-20 Plan”):

its emissions to 80% below 1990 levels through domestic

>> A 20% reduction in EU greenhouse gas emissions from

reductions alone.

1990 levels.

>> It sets out middle-term milestones to reach this goal in a

>> Raising the share of EU energy consumption produced from renewable resources to 20%.

cost-effective way (reductions of 40% by 2030 and 60% by 2040).

>> A 20% improvement in the EU’s energy efficiency.

>> It shows how the main sectors responsible for Europe’s

These targets were enacted through the Climate and Ener-

emissions can make the transition to a low-carbon eco-

gy Package in 2009, which contained four elements of

nomy most cost-effectively.

Figure 2. Key headline indicators and targets concerning EU energy and climate policy.

Note: current status based on 2013 or latest available data.

EU Target

Current status

2020

2030

2040

2050

GHG emissions reduction (% vs. 1990 levels)

-18%

-20%

-40%

-60%

-80%

Renewables share (% in the overall energy supply)

15%

20%

27%

Energy efficiency (maximum Mtoe primary energy consumption)

1,567

1,483

1,424

Source: The European House - Ambrosetti elaboration on European Commission and Eurostat data, 2015

17. As proposed by the European Commission in Janua-

>> The 2030 framework also proposed a new governance

ry 2014, the European Council adopted a new policy fra-

framework based on national plans and a set of key in-

mework (October 2014) which introduced a new deadline

dicators to assess progress over time. The Commission

(2030) and set new targets:

also proposed to establish a Market Stability Reserve

>> At least 40% reduction of greenhouse gas emissions

(MSR) to address the surplus of emission allowances in

8

compared to 1990 levels. >> At least 27% share of renewables in gross final energy consumption. >> At least 27% reduction in final energy consumption compared to estimates.

the EU-ETS, improving the system’s resilience and incentivizing low-carbon investment. As of September 2015, the European Council and the Parliament have reached an agreement which enables unallocated allowances to be transferred to the MSR in 2020.

(8) Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, “A policy framework for climate and energy in the period from 2020 to 2030”, COM (2014) 15 final.

31

2004

2003

2002

2001

2000

1999

1998

1997

1996

Figure 3. The policy path of the European Union towards Energy Union.

Internal Market Regulation

1996 and 1998 1st Energy Package

2003 2nd Energy Package

Sets broad unbundling requirements for generation/ sale activities from transmission operations

Sets further unbundling requirements Member States are required to protect final customers and are responsible for implementation of the 3rd party access systems

Member States are required to create efficient mechanisms to regulate and monitor the market to prevent abusive behaviors

Defines mechanisms for crossborder transit of electricity, transmission charges and capacity allocation

Sets measures to improve interconnection and interoperability

Sets 2 deadlines for liberalization of energy retail markets (July 2004 for industrial customers and July 2007 for households)

Sets non discrimination principles between users

Main objectives of the initiatives

Internal Market Regulation (1996-2009)

Internal market liberalization and harmonization Increase of energy market competitiveness Improve customersâ&#x20AC;&#x2122; rights Creation of trans-European grids Solidarity and security of supply

Source: The European House - Ambrosetti elaboration on European Commission data, 2015

32

building the european energy union

2009 3nd Energy Package

Unbundling regime: separation of generation and supply activities from transmission-related operations Improves customersâ&#x20AC;&#x2122; rights and sets a target: 80% of customers should have access to more intelligent metering systems by 2020 Member States have to designate a single National Regulatory Authority (NRA) Institution of ACER - the Agency for Cooperation of Energy Regulators to coordinate and assist NRAs

2011 Roadmap 2050

2012 2030 Energy Framework

Climate and energy policy developed through binding targets to be reached by 2020

Analyzes the roadmap to reach long-term goal of reducing greenhouse gas emissions by 8095% (vs. 1990 levels) by 2050

New framework of targets with common deadline at 2030: 1. -40% in greenhouse gas emissions (vs.1990 levels) binding 2. 27% of renewable energy share binding 3. +27% energy efficiency (possible rise to 30%) 4. Electricity interconnection of 15% between EU countries

Sets out 4 main routes to reach a more sustainable, competitive and secure energy system in 2050: energy efficiency, renewable energy, nuclear energy and carbon capture and storage

2015 Energy Union

2010 2020 Energy Strategy

Targets: 1. -20% of EU greenhouse gas emissions from 1990 levels 2. 20% in the share of energy consumption produced from renewable resources 3. +20% in the EU’s energy efficiency

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

Climate and Energy Strategy

Combines these routes to create and analyze 7 scenarios for 2050 to set out a cost-effective pathway

2015 Energy Union Communication

A framework strategy to achieve a resilient Energy Union Sets goals in five policy dimensions and details the steps to achieve Energy Union Defines the measures required to achieve the target of 10% electricity interconnection by 2020 Defines EU’s vision for new global climate change agreement (due to be adopted in December 2015) First initiatives have been released in the “Summer Package“ (July 2015)

Main objectives of the initiatives

Climate and Energy Strategy (2010-2012)

Sustainable energy consumption

Energy Union (2015) Energy security, solidarity and trust

Secure energy supply

Full integration of internal energy market

Generate a competitive environment which ensures affordable prices for homes, business and industry

Energy efficiency and moderation of energy demand Decarbonization of the economy Research, innovation and competitiveness

33

18. Since 1996, European policy makers have promoted

merit of integrating the cornerstones of energy and envi-

various legislative initiatives which have followed an incre-

ronmental protection.

mental logic, focusing first on internal market regulation, and then adding environment to the legislative scope. However, some argue that the European energy policy has lacked a comprehensive and coherent approach and this has brought about some distortions and imbalances in the internal energy market. A strategy capable of including all the aspects related to energy and other connected policy areas (such as foreign policy, industrial policy, etc.) would have been more effective.

19. Recently (February 2015), a more comprehensive approach was used in the “Framework strategy for a resilient

A “New Deal” for energy consumers The July 2015 Communication presents a three-pillar consumer energy strategy: 1. Helping consumers save money and energy through better information; 2. Giving consumers a wider choice of action when choosing their participation in energy markets; 3. Maintaining the highest level of consumer protection.

Energy Union with a forward-looking climate change policy” published by the European Commission. This framework sets the vision and integrates a series of policy areas

21. This framework will be deployed in initiatives at natio-

into a cohesive strategy. It is based on five mutually-rein-

nal and European level to implement a coherent energy

forcing and closely-interrelated areas:

strategy. The first initiatives have been recently released

a. Energy security, solidarity and trust.

(July 2015) under the so called “Summer Package” which

b. A fully-integrated internal energy market.

includes: a Communication on electricity market design, a

c. Energy efficiency as a contribution to moderation of

Communication on retail markets, a review of the Energy

energy demand.

Labelling Framework, a review of the EU-ETS Directive and

d. Decarbonization of the economy.

best practices on self-consumption of renewable energy.

e. Research, innovation and competitiveness.

Specifically, the Commission’s proposals give prominence to a new electricity market design9 and put households

20. The goals and guidelines contained in the Energy Union

and business consumers at the core of the European

framework strategy provide a solid foundation and have the

energy market.

1.3 A holistic approach to European energy policy 22. The efforts made by the European Commission and by the European Member States in the past years have resulted in significant accomplishments. The combined effect of ambitious EU energy policies and the economic crisis have resulted in a 11% reduction in carbon emissions (against a global increase of 34%) between 2000 and 2012.

23. Despite the high number of strategic decisions that the

An efficient system of common rules can lead to costs reduction and enhance the global competitiveness of the EU industry

European Union has to tackle in several fields,10 the Euro-

(9) To achieve the goals of the Energy Union strategy a fundamental transformation of Europe’s electricity system is needed. Therefore, the European Commission has launched a public consultation on what the new electricity market design should look like in order to meet consumers’ expectations, deliver real benefits from new technologies and facilitate investments (i.e., in renewables and low carbon generation).

(10) Capital Markets Union, Digital Single Market, Growth and Jobs agenda, immigration policies, security around the EU and the Greek crisis that menaces European stability.

34

building the european energy union

pean Commission has renewed its political commitment

25. For this reason, a holistic approach is needed. In our re-

towards an integrated energy strategy, as testified by the

search study, we have considered the five areas identified

Energy Union Communication and the following initiatives.

by the European Union (security of supply, internal energy market, energy efficiency, environmental protection and re-

24. The main challenge for the EU is to consider all the

search and innovation). Starting from these, we have explo-

aspects and relevant issues related to energy. For instance:

red the causes of the critical issues in each area-current im-

>> An integrated market requires the completion of stra-

balances or negative aspects in the European energy market

tegic energy infrastructures and networks, but also the

(see Chapter 3). Given the causes, we have then identified

harmonization of existing national regulations.

several actions on different areas of intervention:

>> Energy efficiency can contribute to reaching envi-

>> Governance (allocation of responsibilities and powers

ronmental sustainability targets, lowering energy de-

for rule-making and goal-setting between the EU and

pendence and thus reinforcing the competitiveness of

Member States).

EU firms.

>> Market design (definition of the technical rules and cri-

>> Energy policy objectives should be supported by a coherent European foreign policy, taking into account geopolitical developments.

teria under which market participants interact). >> Infrastructures (definition and development of key infrastructural projects at a geographical level and along the

>> Governance instruments must be compatible with the

energy value chain, as enablers of markets development).

right of each European Member State to decide its own

>> R&D (schemes to promote and finance energy-related

energy mix.

technological development and R&D).

>> Competitiveness should be improved through consistent support for R&D and innovation.

>> Investments and financing, which cuts across all the above-mentioned areas.

Figure 4. Towards a holistic approach for the European Energy Union.

Governance 1. Strengthening European governance

Investments and financing

R&D

Market design

Infrastructures

2. Setting up a decarbonizationproof market design

3. Adopting smart regulation for smart investments

Source: The European House - Ambrosetti, 2015

26. The eight proposals and policy recommendations for a

into three clusters (see Chapter 2):

successful implementation of the European Energy Union

I. Strengthening European governance.

include both governance and regulatory recommenda-

II. Setting up a decarbonization-proof market design.

tions and market-oriented tools, and have been grouped

III. Adopting smart regulation for smart investments.

35

CHAPTER 2 Our proposals and policy recommendations for a successful implementation of the European Energy Union

36

building the european energy union

Key messages Following a holistic approach, our proposals and policy recommendations indicate three main priorities that should guide Europe’s energy agenda: – Strengthening European governance.

– Setting up a decarbonization-proof market design.

– Adopting smart regulation for smart investments.

In order to strengthen governance of truly European energy policy and markets, we propose to: 1. Harmonize, widen the scope and enforce top-down regulation at European level. In order to complete the internal energy market a core of European rules and bodies is needed. In fact, as of today, the European Union lacks strong political guidance and binding decision powers in the energy sector.

2. Speed up market integration by improving regional cooperation on several aspects of the EU energy markets, ranging from regional auctioning of renewable sources, to system operation and TSOs cooperation.

3. Rationalize and streamline the process to complete EU interconnectors on the basis of cost-benefit analyses. This would allow for more efficient allocation and system security, since the lack of strategic infrastructures causes problems both internally and externally.

In order to define a decarbonization-proof market design, we propose to: 4. Set a wholesale market design that is coherent with the EU’s decarbonization goals, including through the adoption of long-term contracts that provide adequate price signals for investment and disinvestment choices over the long-term.

5. Adopt transparent and cost-reflective criteria for the formation of retail electricity prices, in order to foster customers’ engagement and promote comparable price structures across Europe.

In order to have smart regulation for smart investments, we propose to: 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.

8. Make Europe the world pioneer in the application and market diffusion and export of innovative energy technologies.

37

2.1 Introduction 1. Successful implementation of the European Energy

trade-offs (Member States, European institutions, consu-

Union requires the balancing of different interests and

mers, energy players and new entrants).

Figure 1. Overview of the various players and interests impacting on EU Energy Union implementation.

Energy Union Strategy

EU policy, regulation and targets

Consumers

Utilities

Member States

EU Institutions

Empowerment and freedom of choice

Long-term price signals to incentivize investments

Freedom of choice in energy mix

Energy security

New entrants

Integrated market

ICT companies

Autonomy in suppliers’ choice

Energy efficiency

Possibility to sell self-produced energy on the market

Stronger ETS and adequate CO2 prices Stability of regulation Framework favourable to Smart Grids development

Decarbonization of economy

Energy security and efficiency

Leadership in R&D

New service providers Aggregators

Source: The European House - Ambrosetti elaboration, 2015

2. On the basis of our analysis (see also Chapter 3) we have

the current problems for the efficient functioning of its

formulated eight proposals and policy recommendations

energy market. In fact, several problems can be identified for

that address the key future challenges of the Energy Union

each of the five aspects at the core of the EU Energy Union.

from a holistic approach, and could help the EU to solve

Figure 2. Europe’s main problems on the five aspects of the EU Energy Union.

SECURITY OF SUPPLY Incomplete market integration and insufficient interconnections High dependency on gas and oil imports High share of energy imports from countries at high geopolitical risk High differences in energy dependency levels among EU countries

INTERNAL ENERGY MARKET

Depressed wholesale prices and lack of long-term price signals for investors

Prices are not cost-reflective due to differences among national tax schemes and price structure

Significant differences in retail energy prices

Source: The European House - Ambrosetti elaboration, 2015

38

building the european energy union

ENERGY EFFICIENCY

ENVIRONMENT PROTECTION

RESEARCH AND INNOVATION

Lack of adequate metrics (absolute consumption)

ETS failed in delivering adequate price signals for low-carbon investments

Quantitative targets tend to incentivize deployment rather than cost efficiency and innovation

Low energy efficiency in buildings and transport EU financing schemes tend to support mainly large-scale investments and barriers to investment are still relevant

Decentralized and uncoordinated policy implementation for RES deployment among Member States

Limited overall efficiency, with differences at geographical level across the EU

Overcapacity and lower industry margins discourage investments in new technologies

3. The proposals indicate three main priorities and policy re-

level; in part, they suggest the introduction and subsequent

commendations that should guide the EU agenda on energy:

adoption of new mechanisms and operating tools into

I. Strengthening European governance.

the European energy market. In addition, each proposal is

II. Setting up a decarbonization-proof market design.

introduced by a section outlining these key elements:

III. Adopting smart regulation for smart investments.

>> The rationale. >> A detailed description of the proposal.

4. These proposals, in part, are policy recommendations

>> Proposal recipients.

that act on regulation and governance at central or local

>> Potential elements of resistance to the proposal.

2.2 Strengthening European governance Proposal 1 Harmonizing, widening the scope and enforcing top-down regulation Rationale: 5. The current governance structure of the European energy market is not coherent with the objectives of the single market and the EU Energy Union. As of today, within the

rators, regulatory bodies and the EU Institutions – European Parliament, Council and Commission), it is responsible for taking binding individual decisions on specific cross-border issues and can additionally adopt non-binding guidelines.1 Upon request from the European Commission, ACER submits

ACER’s current powers and responsibilities

European Union, there is no body with strong political gui-

Active since 2011, ACER’s mission is to complement

dance. The various decisions and progress on a European-

and coordinate the work of national regulatory bodies

wide energy strategy have been the result of single initiati-

regarding energy on a European level towards the re-

ves coming from the European Commission or from groups

alization of a single energy market. ACER has been as-

of Member States on specific topics (e.g., energy security,

signed “hybrid” functions and tasks. On one hand, it

climate change, etc.).

has the task of assisting Member States in the event of regulatory conflict, acting as a coordinating and arbitral

6. As of today, the Juncker Commission has given a new boost

body in any disputes between national regulators, as

towards a comprehensive European energy strategy, but the-

well as assisting the European Commission, Parliament

re is still a lack of a European body with binding powers,

and Council in the event of requests for technical advi-

capable of providing strong political guidance and adopting

ce (technical consulting body). On the other, it makes

a top-down approach on energy-related decisions.

available –together with national regulators– long-term guidelines for gas and electricity, from which are develo-

7. The European Union also lacks a regulating body that can

ped, together with system operators (representatives of

decide on energy issues at a supranational level. The Third

Transmission System Operators), system codes to regula-

Energy Package of the European Union led to the creation

te on a competitive basis the allocation of cross-border

of the Agency for the Cooperation of Energy Regulators

transport capacity for natural gas and transmission of

(ACER). However, ACER does not have adequate powers to

electrical energy, in order to render the energy market

carry out the role of a true European regulatory body, given

within the EU more flexible, while also guaranteeing

the fact that it can issue non-binding opinions and recom-

adequate profits for transmission system operators.

mendations to different players (Transmission System Ope-

(1) According to Article 4 “Acts of the Agency” of Regulation 713/2009, ACER “has an important role in developing framework guidelines which are non-binding by nature (framework guidelines) with which network codes must be in line. It is also considered appropriate for the Agency, and consistent with its purpose, to have a role in reviewing network codes (both when created and upon modification) to ensure that they are in line with the framework guidelines, before it may recommend them to the Commission for adoption.” As a result, once the network codes have been defined by ENTSO, ACER has no decision-making or veto power, but only advisory powers.

Source: Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators.

In 2011, ACER received additional tasks under Regulation 1227/2011 on Wholesale Energy Market Integrity and Transparency (REMIT) and in 2013 under Regulation 347/2013 on guidelines for trans-European energy infrastructure.

39

draft framework guidelines which serve as the basis for the drafting of network codes (which become binding after a co-

there must be the corresponding power to enforce their decisions.

mitology process involving Member States and the European

>> Define a coordinated regulatory framework for the

Commission). Therefore, ACER is not empowered to adopt

European energy market that includes players currently

binding rules. As such, it is not a European regulator but more

excluded (e.g., energy market operators), in conjunction

a platform of cooperation for the national regulators un-

with national regulators and TSOs.

der the close supervision of the Member States (sitting on its

>> Define a regulatory framework for regional TSOs and

Administrative Board) and their National Regulatory Authori-

regional power exchanges (identified in Proposal no.2)

ties (sitting on the Board of Regulators).

and their coordination and control.

2

>> Decision-making and/or veto powers (going beyond

Our proposal:

current advisory powers) in terms of the activity of European networks of transmission system operators for electrici-

8. Harmonize and enforce top-down regulation at European level through:

ty and natural gas transport - ENTSOs (e.g., network codes). >> Define European regulations for regional energy auctions.

>> Assigning a strong role of guidance to the European Commission, together with binding regulatory powers on the definition of a comprehensive European-wide energy framework. >> Harmonizing national regulations and adopting a topdown approach on future regulations and decisions on cross-border energy issues. >> Developing all the required instruments for an effective implementation of this proposal.

Energy sector regulatory authorities in the U.S. and China >> In the United States, the Federal Energy Regulatory Commission (FERC) is the independent agency in charge of regulation on the interstate transmission of electricity, natural gas, and oil. FERC also reviews proposals to build liquefied natural gas (LNG) terminals

9. In this context, the powers currently granted to ACER should be reinforced, to guarantee coordination of markets and the operational capabilities of energy systems in the EU. In particular, ACER should have the following characteristics: >> Adoption of decisions that are binding and directly applicable to initiatives on an EU and/or regional level,

and interstate natural gas pipelines as well as licensing hydropower projects. As part of its responsibility, FERC protects the reliability of the high voltage interstate transmission system through mandatory reliability standards, monitors and investigates energy markets and enforces FERC regulatory requirements through imposition of civil penalties and other means.

leaving to the responsibility of national regulators –on

>> In China, the National Energy Administration (NEA)

the basis of a principle of subsidiarity– the decisions bet-

has a comprehensive role in the national energy sec-

ter faced at that level. For instance:

tor. This institution, established in March 2008, is re-

-- Decisional powers on energy policies attributed to the

sponsible for formulating and implementing energy

Director together with the Board of Regulators (e.g.,

development plans and industrial policies, promoting

implementation of the Third Energy Package; imple-

institutional reform in the energy sector, administering

mentation of the Regulation on Wholesale Energy

energy sectors, guiding scientific and technological

Market Integrity and Transparency - REMIT; grids; etc.).

advancement, conducting energy forecasting, taking

-- Decisional powers attributed only to the Director in

the lead in launching international energy coopera-

disputes among Member States and in technical que-

tion, participating in the formulation of policies related

stions.

to energy and addressing climate change. NEA is also

3

>> Role of arbitrator in disputes on a regional and European level and for cross-border issues; for this function

entitled to make recommendations on energy price adjustment and imports and exports aggregates.

(2) See: Sami Andoura, Jean-Arnold Vinois, “From the European Energy Community to the Energy Union. A policy proposal for the short and the long term”, Jacques Delors Institute, January 2015.

(3) Regulation on Energy Market Integrity and Transparency (REMIT) requires market participants to report wholesale energy market contracts within the EU to a Registered Reporting Mechanism (RRM). ACER is asked to monitor the reporting regime and to ensure greater transparency in markets by helping to reduce the risk of manipulation. REMIT consists of three pillars: (i) the prohibition of market abuse/manipulation and trading on inside information; (ii) the implementation of a transaction and data reporting framework to allow for EU-wide market monitoring by ACER; (iii) provision to ensure that where market monitoring indicates potential market abuse, the incidents are investigated and action is taken.

40

building the european energy union

10. At the same time, the other key stakeholders in the

>> Achieve greater coordination among the various Eu-

European energy system could also be granted additio-

ropean bodies (e.g., European Parliament, European

nal responsibilities and powers: 4

Council, ACER, ENTSO-E/ENTSOG) and individual Mem-

>> The European Network of Transmission System Opera-

ber States.

tors (ENTSO-E) with the power to coordinate electricity 5

flows throughout the EU in real time. >> The European Network of Transmission System Opera-

>> Allow for the operability and efficiency of regional Transmission System Operators (TSOs) and regional power exchanges (see also Proposal no.2).

tors for Gas (ENTSOG) with the power to fully integrate

By doing so, the European energy market would be equip-

storage and liquid natural gas (LNG) terminals into the

ped with a consistent and common regulatory fra-

transmission network, at least to ensure maximum flexi-

mework, as happened in other sectors in Europe, such as

bility and reliability in case of disruption.

Finance and Air transport (Single European Sky initiative).

6

11. The harmonization of national regulations, together

Proposal recipients:

with the empowerment of the European Commission and of the other central bodies on energy issues, would allow

12. The proposal is addressed to:

for:

>> National governments, which must adopt the new regu-

>> Enhanced certainty and uniformity within the European

latory framework and accept the stronger guidance of the

regulatory framework, with an acceleration in the com-

European Commission and ACER regulation, also adap-

pletion of the single energy market integration process

ting national regulatory authorities, where necessary.

as well as provide incentive for private investment in this sector.

>> The European Commission, which should propose the amendment of regulation establishing ACER.

An example of a common EU legislative framework: the Single European Sky Aviation makes a vital contribution to the EU’s overall

The “key components” which form the structure of the

economy (€365 billion, about 2.4% of European GDP)

SES are:

and employment (5.1 million jobs). Despite the current

>> Performance Scheme, setting binding performance

economic crisis, global air transport over the long term is

targets in key areas, such as: safety, environment, capa-

expected to grow by around 5% annually until 2030.

city, cost efficiency, etc.

As traffic increases so do concerns about safety: therefore, the common EU aviation policy aims at making Europe the safest air space in the world.

>> Network Manager (currently Eurocontrol), dealing with the network function in a centralized manner. >> Functional Airspace Blocks (FABs) intended to restruc-

As a response to the growth in air traffic in recent de-

ture European airspace according to traffic flows ra-

cades, the European Commission approved two Single

ther than national boundaries.

European Sky (SES) Packages to create a legislative

>> The Single European Sky ATM Research (SESAR) Joint

framework for European aviation, also addressing

Undertaking, set up in 2007, which manages the

the issue of balancing responsibilities and functions

technological and industrial dimension of the SES.

among different bodies. The Single European Sky ini-

According to European Commission estimates, once com-

tiative is aimed at increasing the efficiency of air traffic

pleted around 2030 and compared with 2004 levels, the

management and air navigation services by reducing

SES initiative is expected to triple airspace capacity, halve

the fragmentation of European airspace. It is based on

the costs of Air Traffic Management, improve safety ten-

a pan-European approach and open to neighboring

fold and reduce by 10% the impact of aviation on the en-

countries.

vironment thanks to shorter routes.

(4) See also: Sami Andoura, Jean-Arnold Vinois, “From the European Energy Community to the Energy Union. A policy proposal for the short and the long term”, Jacques Delors Institute, January 2015.

(5) ENTSO-E, the European Network of Transmission System Operators, represents 41 electricity Transmission System Operators from 34 countries across Europe. It was established and given legal mandates by the EU’s Third Legislative Package for the Internal Energy Market in 2009, which aims at further liberalizing the gas and electricity markets in the EU. (6) The role of the European Network of Transmission System Operators for Gas (ENTSOG) is to facilitate and enhance cooperation between national gas Transmission System Operators across Europe in order to ensure the development of a pan-European transmission system in line with European Union Energy goals. To-date there are 44 TSO members and 3 associated partners from 26 European countries, plus 4 observers from EU affiliate countries (Macedonia, Norway, Switzerland and Ukraine).

41

Potential resistance to the proposal:

zed by the European Commission to be an important type of approach in order to proceed towards the goal of crea-

13. The main resistance to the proposal could come from the

ting the European Energy Union.8 The institutionalization

opposition (or a lack of commitment) from some Member

of forms of cooperation between neighboring countries

States (and/or other European entities7) that might want to

and regional clusters can serve as an interim step towards

preserve strong power over energy, which is a strategic area

gradual progress in the European Energy Union agenda,

and also closely tied to national security choices.

including through the sharing of best practices and the creation of common standards.

Proposal 2 Speeding up market integration, also leveraging on regional cooperation Rationale: 14. The swift creation of a fully integrated pan-European energy market is a fundamental strategic goal for the EU. Promoting regionally-based forms of cooperation is recogni-

Recent examples of regional cooperation on energy among European countries

15. Although examples of regional approaches exist (e.g., the Pentalateral Energy Forum), possibility of exchanging capacity and the problems related to congestion management are still often approached in an autonomous and uncoordinated way by different Member States.

The Pentalateral Energy Forum: an institutionalized framework to evaluate security of supply at regional level The Pentalateral Energy Forum was created in 2005 by Energy Ministers from the Netherlands, Belgium, Luxembourg, Austria, Germany, France and Switzerland

The “Political Declaration for Regional Cooperation

(the latter as a permanent observer) to promote col-

on security of electricity supply” has been signed by

laboration on cross-border exchange of electricity.

Germany, Denmark, Poland, the Czech Republic, Aus-

Today it is the framework for regional cooperation in

tria, France, Luxembourg, Belgium, The Netherlands,

Central-Western Europe, accounting for more than

Sweden, Switzerland and Norway and establishes the

one-third of the EU population and covers more than

political commitment by these countries to coordinate

40% of the electricity generation in the EU. It aims to

national energy policies. It also sets a more efficient use

promote open and transparent regional dialog to in-

of existing electric power grids and greater integration

crease secure energy supplies, market integration and

of renewable energy sources in national markets.

promote greater market flexibility.

A “Memorandum of Understanding on the rein-

In particular, a common approach will be developed

forced Baltic Energy Market Interconnection Plan”

for evaluating risks to energy supply on a regional

(BEMIP) has also been signed by Estonia, Finland, Ger-

level and creating favorable conditions for cross-bor-

many, Latvia, Lithuania, Poland, Sweden and Norway

der exchange of electric power.

(Denmark is expected to sign it at a later stage). This plan sets regional cooperation on issues such as: internal energy markets, interconnections, power generation, energy efficiency, renewables and security of supply. It aims to overcome the energy isolation of the Baltic Sea Region and to integrate it into the European energy market.

16. Moreover, the products traded on the national power exchanges (day ahead, intra-day and long-term products) are not standardized on a European level. This makes selling of these products between the different European power exchanges and a true cross-border integration of energy markets difficult.

(7) See, for example: “ENTSO-E response to ACER’s European Energy Regulation – A Bridge to 2025”, June 2014. Specifically, ENTSO-E encourages ACER to concentrate its efforts more on coordination with national energy regulatory authorities to find solutions on key issues, such as the implementation of network codes, and to accelerate the development of cross-border infrastructures that could potentially impact on the correct and complete implementation of the internal energy market. Nonetheless, at the same time, ENTSO-E does not believe that reinforcing regulatory surveillance or control functions over ENTSOs could lead to a positive contribution in carrying out European energy goals (ENTSOs are not natural monopolies whose profits must be regulated).

(8) See also: European Commission, Press Release “Energy union: secure, sustainable, competitive and affordable energy for Europe”, June 8, 2015.

42

building the european energy union

Our proposal:

-- Define strategies for allocation of infrastructure costs and integrated transport rates (currently covered by

17. To adopt the regional approach as an interim operating step towards a European-wide energy agenda, starting from:

agreements between individual national operators). >> Instituting regional auctions for the development of renewable energy sources in order to guarantee an ef-

>> Promoting the integration of regional Transmission Sys-

ficient allocation of resources within the European Union:

tem Operators (TSOs), or forms of close cooperation on

-- Define a competitive mechanism based on both tech-

a regional basis of the different national TSOs, to pro-

nology neutrality and technology specific auctions in or-

vide coordinated network management and in real time:

der to allow RES to be developed across Europe.

-- Provide these regional bodies with sufficient coordi-

-- Define regional areas to promote RES development

nating powers that go beyond the definition of 10-

based on the resource availability and lack of grid con-

year energy plans, and with formal competence on key

gestions.

topics, such as: important new investments, dispatch-

-- Ensure the achievement of the 2030 European target

ing centers, management of bottlenecks, reserve ca-

based on a governance system able to monitor the RES

pacity, etc.

development.

-- Define a shared model between the various TSOs for the

>> Creating regional electrical power exchanges and/or

evaluation of energy security (resource adequacy assess-

standardization of products exchanged in the various na-

ment), shared metrics for measuring interconnection requirements and priority infrastructures on a regional basis.

tional exchanges. >> Defining regionally-based infrastructure initiatives and projects in collaboration with third countries out-

-- Advance identification of a shared, regionally-based

side the European Union (such as Switzerland, Norway or

strateg y to take on potential energy shortages and

North African countries) if and when their contribution is

for efficient management of cross-border congestion

indispensable or would mean improved output and ef-

problems.

ficiency of the initiatives.

CASC.EU, CAO and CORESO: existing regional approaches to coordinate energy transmission in Europe > CASC.EU > (Capacity Allocating Service Company) is the central auction office for cross-border transmission

process with auction algorithm for allocation of available capacity based on maximization of social welfare.

capacity for Central Western Europe (including the bor-

> > In June 2015 the General Assemblies of CAO and CASC.EU

ders of Italy, Northern Switzerland and parts of Scandina-

approved the merger agreement to create, by 2016, the

via). It was established in 2008 by a number of national

Joint Allocation Office (JAO) for cross-border electricity

TSOs to facilitate the purchasing and selling of transmis-

transmission capacities. JAO will be a joint service com-

sion capacity by providing a single auction platform and

pany of 20 TSOs from 27 countries, open for other TSOsâ&#x20AC;&#x2122;

point of contact to furnish cross-market services through

participation. It will perform the yearly, monthly and daily

promoting integration of local markets within an integra-

auctions of transmission rights on 27 borders. The aim is

ted regional European market. CASC.EU is the sole auctio-

to increase the efficiency and transparency of the Europe-

neer that implements and organizes long-term auctions

an electricity market creating the single point of contact

(monthly and annual) of cross-border transmission capa-

for market participants.

city, utilizing standardized systems and rules to facilitate cross-border energy exchange.

> CORESO > (Coordination of Electricity System Operators) is the first regional center of technical coordination cre-

> Created > in 2008 by 8 TSOs, CAO is the Common Auction

ated on the initiative of a number of TSOs to increment

Office in charge of the allocation of cross-border electricity

operational security of the grid in Central-Western Europe

transmission capacity for the TSOs of the CEE region (Au-

(since November 2010, Terna and 50Hertz have also ta-

stria, Czech Republic, Germany, Hungary, Poland, Slovakia,

ken part). Among other services, CORESO provides daily

Slovenia and Croatia). It supports the participating TSOs

estimates of energy flows and constant monitoring and

in common capacity determination assessment and

analysis of grid security, thus contributing more secure

operates the regional NTC coordinated capacity allocation

management of cross-border flows.

43

18. A regional energy approach would allow for: >> Institutionalizing cooperation between Member Sta-

tion of their own national TSOs in order to facilitate and create more interest for cooperation and integration.

tes with incremental improvements on a regional scale in

>> European Commission, ACER and national energy regu-

terms of enhanced energy security and efficiency in sup-

latory authorities: they should provide guidelines, sup-

ply and distribution.

port and coordination to ensure the most effective go-

9

>> Obtaining greater coordination in decisions related to infrastructure and investments on a regional scale, with greater efficiency in resource allocation, shared

vernance.

Potential resistance to the proposal:

prioritization and the potential for network design on a Community-wide scale, to have emerge common stan-

20. The main constraint to the application of this proposal

dards (including energy products on a regional level and

comes from the potential lack of commitment from the

their harmonization and promoting cross-border tra-

various players involved in working together from a regio-

ding) and best practices of reference.

nal standpoint. This type of resistance could be overcome thanks to the benefits to be obtained in the area of ener-

PJM Interconnection: a case of regional transmission planning in the U.S. PJM Interconnection is a Regional Transmission Organization (RTO) that coordinates the electric transmission system serving 13 states (Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North

gy efficiency and security and related cost savings, as well as from the positive experience and results of the existing examples of cooperation.

Proposal 3 Streamlining the completion of EU interconnectors on the basis of costbenefit analyses

Carolina, Ohio, Pennsylvania, Tennessee, Virginia and West Virginia) and the District of Columbia in the Uni-

Rationale:

ted States.

It is part of the Eastern Interconnection Grid, coordina-

21. Today, the internal European energy market has problems

ting about 1,400 electric generators and 62,566 miles

of efficient allocation and system security, since sub-optimal

of high-voltage transmission lines. It represents appro-

level of cross-border infrastructures does not allow markets

ximately one-fifth of electrical power distribution

with over-capacity to interface with those with more limited

in the U.S. and serves over 61 million people. Among

energy resources (e.g., critical areas in the Iberian peninsula,

the other roles, PJM monitors and manages the future

the Baltic region and the United Kingdom/Ireland). On one

needs of the electric system, conducting the long-ran-

side, some interconnection projects have low return on in-

ge Regional Transmission Expansion Planning process.

It is aimed to identify needed changes and additions to the grid to ensure reliability and successful operation of the wholesale markets. It also conducts a review process, ensuring that all interested parties (including state regulatory agencies) participate in the planning of future electricity supply and reliability needs.

Towards a pan-European approach for developing energy infrastructures The infrastructural connection of EU â&#x20AC;&#x153;energy islandsâ&#x20AC;?

(Spain/Portugal, Italy, United Kingdom/Ireland and the Baltic countries) to Central and Western Europe

Proposal recipients:

will be the major challenge for grid development over the next decades: a key driver for this goal is the de-

19. This proposal is addressed to:

velopment of renewable energy generation and the

>> European Member States and national energy regulatory

integration of RES generation plants into the grid.

authorities: they must take action to modify the regula-

(9) Among these: optimizing the management of excess energy capacity transmission on a regional level; managing congestion problems from an integrated cross-border standpoint that makes it possible to respond to crises rapidly and in the most cost-efficient way possible; etc.

44

building the european energy union

vestment and long amortization times, and this situation hinders investments. On the other, there is a lack of political will

The case of the Santa Llogaia – Baixàs power line between Spain and France

or government opposition to specific projects (such as in the case of the interconnector between France and Spain).

22. The European Union has set as a target the reaching of

In February 2015, the Santa Llogaia – Baixàs power

an interconnection level of at least 10% of the installed ge-

line was completed. This interconnector is expected

neration capacity. This is a flat target that does not make it

to double the existing electricity interconnection

possible to define the actual needs of the various specific

capacity between France and Spain and to help

European situations.

connecting the power system of the Iberian Penin-

10

sula to other European energy markets. The project, 23. From an external perspective, the creation of further

identified as a Project of Common Interest, received

interconnectors with neighboring third countries to the

€255 million support from the European Union un-

South (the Mediterranean area) and the East (the Balkans

der the European Energy Programme for Recovery

and former Soviet Union countries) would benefit long-

(on an overall cost of €700 million). The aim was to

term decarbonization targets and secure supplies for the

boost Spain’s interconnection capacity to 10% of its

European Union. In particular, in the Mediterranean area,

power generation capacity by 2020 (in 2014 its level

two-way flows should be fostered as opportunities for ge-

of interconnection was <3%). In fact, the low level of

nerating and exchanging energy in an efficient way, in order

interconnection capacity in Spain is a major obstacle

to promote the creation of a Mediterranean energy hub.

for the creation of a regional electricity market in South-West Europe and it has prevented the energy

24. Currently, each European country has defined its own

companies of the Iberian Peninsula from participa-

national energy strategy. What is lacking is European-wide

ting in the European internal electricity market. The

coordination, including by the TSOs, that would be able to

project, proposed in 2007, faced diverging positions

organize the individual national plans within a systemic and

between the two governments.

coherent whole.

Figure 3. Interconnection levels for electricity in the EU-28 (% of installed production capacity), 2014.

245%

250%

200%

11%

11%

10%

10%

9%

7%

7%

7%

6%

4%

4%

4%

3%

2%

0%

0%

Greece

Germany

France

Ireland

Italy

Romania

Portugal

United Kingdom

Estonia

Lithuania

Latvia

Spain

Poland

Cyprus

Malta

17% The Netherlands

Bulgaria

17%

26% Sweden

Czech Rep.

29% Hungary

17%

29% Austria

Belgium

30%

61% Slovakia

Finland

65% Slovenia

50%

44%

69%

100%

Croatia

150%

Denmark

Luxembourg

0%

Source: The European House - Ambrosetti elaboration on ENTSO-E, “Scenario Outlook and Adequacy Forecast 2014”, 2015

(10) In addition, it would be more appropriate to define the target in terms of peak demand, rather than installed capacity.

45

25. Included within the Ten-Year Network Development

approaches and the needs of individual member countri-

designed to identify the needs of the Euro-

es12 or groups of countries. In addition, the decision-making

pean infrastructural grid in a coordinated way among all

process for the identification and selection of the PCIs (see

TSOs), were the Projects of Common Interest (PCIs), adop-

Chapter 3) has led to a great number of projects (as of to-

ted as a short-term instrument, often following political

day, 248 initiatives without a clear prioritization).

Plan (TYNDP,

11

The Projects of Common Interest in Europe The first Union list of Projects of Common Interest (adopted in 2013) consists of 248 projects, of which 137 are in electricity, including 52 electricity interconnections and one project with anticipatory investments enabling future interconnections, out of which 37 projects involve Member States currently with an interconnection level below 10%.

Figure 4. Projects of Common Interest (PCIs) for electricity and smart grids in the EU-28, 2014.

Source: European Commission, 2015

Our proposal:

>> Adoption of shared and uniform criteria for evaluation of secure sources of supply and actual interconnection

26. Streamline the completion of European interconnectors

needs,13 and according to a cost-benefit analysis (that

based on cost-benefit analyses, through:

should shape interconnection goals to avoid inefficient

>> Assessment of Europeâ&#x20AC;&#x2122;s energy needs and the ways to

investments).

meet them, in order to define clear infrastructural priorities.

Proposal recipients:

>> Involvement in the decision-making process of third countries (e.g., Switzerland, Norway or North African

27. The proposal is addressed to: the European Commission,

countries) critical to reaching the interconnection goals

national energy regulators and Transmission System Opera-

of the European network.

tors, ENTSOs and Member States.

(11) The pan-European requirements for developing transmission systems are forecast mainly in the Ten-Year Network Development Plan conducted by ENTSO-E. (12) Some of the Member States are too small or not yet sufficiently liberalized (due to the incomplete implementation of the Third Energy Package) to attract demand and interconnection projects.

(13) If adoption of preset, fixed targets is confirmed, the definition of these targets in terms of energy used overall in a country over a given period of time, or the peak of capacity actually utilized over the year (instead of productive capacity which, in many countries, is underutilized).

46

building the european energy union

Potential resistance to the proposal:

tegy, starting from national strategies. In addition, the failure to meet deadlines for strategic infrastructure projects in

28. Main resistance to the proposal comes from the lack of

respect to the official deadline of the European Commission

political commitment or inability to define a common stra-

mandate would prejudice the realization of this proposal.

2.3 Setting up a decarbonization-proof market design Proposal 4 Setting a wholesale market design that is coherent with the EU’s decarbonization goals

(e.g., Italy) or under-capacity (e.g., the United Kingdom) –

Rationale:

wer sector, primarily from renewable sources (such as so-

29. Over the last 10 years in Europe, substantial investment

the energy sector. The development of renewable sources

decisions have been made in the energy market that are

in the various Member States has occurred within a context

not correlated to the long-term needs of electrical power

of major fragmentation of incentive systems created on a

systems, but rather to short-term price signals. This has

national level. This contributes to making their integration

caused, in some Member States, conditions of over-capacity

into the market on a European level particularly complex.

see also Chapter 3. The adoption of long-term price signals would have made it possible to prevent this situation.

30. Significant growth in investments in the electrical polar and wind) have contributed to major transformation in

Figure 5. Investments in the electricity sector in the EU, 2000-2006 and 2007-2013.

120

100

80

60

40

20

0 2000-2006 Other renewables

Solar and wind

2007-2013 Hydro

Nuclear

Fossil fuels

Source: International Energy Agency (IEA), “World Energy Outlook – Investment Report 2014”

31. A key component of the integration of European elec-

together. In addition, the Czech Republic, Hungary, Slovakia

tricity markets is the cross-border trading of electricity

and Romania have been integrated as part of the 4M Mar-

As of 2015, 15

ket Coupling. In addition, in February 2015, Italy was inte-

within the market coupling framework.

14

European countries have their electricity markets coupled

grated into the existing market coupling framework.

(14) “Market coupling” a is mechanism for the integration of power markets which, through the definition of the electricity value in the different areas of the European market, allocates the available transportation capacity between such areas, maximizing their use.

47

Figure 6. European electricity market integration: status of market coupling in Europe, as of June 2015.

MARKET COUPLING STATUS North Western Europe (NEW) and South Western Europe (SWE)

Price coupling

Poland

Poland price coupled within NWE through SwePol-link

Ireland and Northern Ireland

All Island market, single price zone

Czech - Slovak - Hungary Romania (4M Market Coupling)

Price coupling

Source: The European House – Ambrosetti re-elaboration on International Energy Agency (IEA) and APEX data, 2015

Our proposal:

-- Characteristics and antitrust conditions of bilateral long-term contracts should also be better clarified. In

32. Set a wholesale market structure coherent with the goal

particular, it should be made clear that these agree-

of decarbonization by:

ments between consumers, retailers and producers are

>> Adopting long-term contracting (even longer than

allowed when they are based on competitive proces-

5 years) that provides adequate price signals for in-

ses, they allow for the participation of different opera-

vestment and disinvestment choices over the long-term,

tors, and when they are not deployed to limit compe-

including also through the introduction of suitable ca-

tition (e.g., reduce the contestable market in an unfair

pacity remuneration mechanisms. The introduction of

>> Introducing mechanisms to lower the cost of guaran-

differences between generators and the TSO) –especial-

tees for counterparties that could be quite significant, in

ly for conventional power plants– could be an effective

particular regarding longer-term deliveries.

solution for promoting long-term contracts and provi-

>> Integrating renewable energy sources into the mar-

ding competitive long-term price signals to the market,

ket through the definition of well functioning fit for RES

thus minimizing decarbonization costs and defining

markets which can provide long-term signals and are also

efficient investment/divestment plans in conventional

able to assign the right value to flexibility.

capacity.

-- The market design shall enhance flexibilty in order

-- Long-term contracts also reduce risk-premia for renew-

to allow the most efficient use of variable renewable

able sources which are and will always be more suscep-

sources. Flexibility is granted by liquid and integrated

tible given their infra-marginal nature in the economic

intraday markets (based on continuous trading and

ranking of energy sources. In order to support the de-

harmonized gate closure time near real time), imba-

velopment of RES and to reduce their risk, renewable

lance settlement periods that are set out accordingly,

capacity should be able to sign long-term contracts

and balancing markets which are integrated delivering

that can completely hedge all the volatility related to

larger balancing zones and offer balancing products

spot prices. These contracts could be signed through

48

way).

well-defined reliability options (one-way contracts for

appropriate to enable RES participation.

competitive mechanisms –such as regional tenders

-- Until a market design is defined which enables a level-

for new RES– for the full price of energy (and not just

playing-field where all generators are equally respon-

for the incentive).

sible for balancing the system and can fairly compete,

building the european energy union

Proposal 5 Adopting transparent and costreflective criteria for the formation of electricity retail prices

some measures may be envisaged to facilitate a smooth transition.

There are many benefits to be derived from the introduction of these instruments: >> Make it possible to achieve decarbonization targets, with a more balanced development of renewable sources

Rationale:

(including through long-term agreements). >> Make it possible for energy companies to make effective,

35. There are currently significant differences in the struc-

long-term investments.

ture of retail prices in the various European countries,

>> Greater price stability.

particularly as a result of the political choices of national

>> Greater electrical system security and flexibility.

governments which have preferred to maintain (direct or indirect) control over the price of electrical power.

Proposal recipients:

36. Retail prices for electrical power vary significantly from 33. The proposal is addressed to: European Commis-

country to country and, unlike wholesale prices, have incre-

sion, consumer associations, national regulators, national

ased in recent years. The setting of retail electrical power

transmission system operators and energy producers.

prices is influenced, in particular, by the increase in the tax and system costs components:

Potential resistance to the proposal:

>> for manufacturing consumers, between 2008 and 2012, it rose by 109%15 (compared to the +17% in transmission

34. Potential market resistance could arise from:

and distribution system costs and the 10% drop in ener-

>> European Regulators, which in the past have seen, in

gy generation costs and demand);

some cases, long-term contracts as a tool for monopoli-

>> for households during the same period, it rose by 31%

zing electricity markets. Given these negative messages,

(compared to the +10% in transmission and distribution

some wholesale operators have wrongly considered all

system costs and the 4% drop in energy costs).

long-term agreements as not allowed under European

37. The discrepancies in the level of the tax and tax-related

competition rules.

component in the various countries (e.g., in 2012, up to

>> Retailers, for whom, because of the highly-mobile natu-

34% of the end-cost of electricity in Italy, 46% in Germany

re of their customers, long-term contracts are risky.

and 50% in Spain)16 generate market distortion.

Figure 7. The different components of electricity prices among the European Member States (%, for average household consumers in capital cities), 2013.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Energy

Network

Taxes (VAT incl.)

DK

NO

SE

RO

DE

IT

LV

PT

LT

EE

BE

ES

CZ

FR

NL

AT

SL

FI

SK

HU

PL

LU

HR

BG

GR

UK

IE

CY

MT

0%

Subsidies to RES

Source: The European House - Ambrosetti re-elaboration on ACER data, 2014

(15) In Europe, this component increased from 12.8 a 26.7 €/MWh between 2008 and 2012 in the manufacturing sector. Source: Eurelectric, “Analysis of European power price increase drivers”, May 2014.

(16) Source: Eurelectric, “Analysis of European power price increase drivers”, May 2014.

49

Our proposal:

39. The benefits associated with these initiatives are: >> Promoting cost-reflective price signals to increase the ef-

38. Adopt, on a European scale, uniform and transparent

ficiency of the system.

criteria, and best practices for the structuring of electri-

>> Providing incentive for the use of electrical power as a

city retail prices, especially in terms of grid fees and taxes

fundamental driver in decarbonization and energy effi-

and tax-related fees.

ciency for end-consumption.

At the same time, launch an “operation transparency” in

>> Increase competitiveness and quality of service for Euro-

all Member States aimed at making more transparent and

pean power consumers, by making it easier for foreign

cost-reflective end-user electricity prices (i.e., tied to the ac-

companies to understand price structures in other Mem-

tual costs of generation, transmission and distribution, mini-

ber States.

mizing fees not connected with the service).

Proposal recipients: 40. The proposal is addressed to: national governments,

The Electric Bill 2.0 in Italy

consumer associations, European Commission and Eurostat (asked to review and harmonize the monitoring

The Electric Bill 2.0 (“Bolletta 2.0”), to be introduced

process of the components of retail electric prices among

in Italy from January 2016, will feature a single and

Member States).

simplified page, highlighting the key elements of ex-

Potential resistance to the proposal:

penditure and delivery for a better understanding of the final expenditure. The bill will also highlight “system fees”, an item currently shown in Italian electric bills, but in a scarcely clear and intelligible way for the consumer.

41. Resistance could arise from national governments (due to lower flexibility in electricity prices as a potential leverage point for internal policy or needs) and from non-electrical sectors (should such costs be transferred to the general taxation and/or to other industries).

2.4 Adopting smart regulation for smart investments Proposal 6 Promoting new regulation for the digitalization of the European power system Rationale: 42. The entry of digital technologies into the energy sector is radically changing models of energy production and consumption. New technologies make it possible to:

New technologies are being deployed as the energy systems become “smarter” New technologies –such as smart grid technologies, energy storage, demand-side management, energy efficiency solutions and electric vehicles– can make energy systems more efficient and resilient, but are also a key step in integrating larger amounts of renewable and distributed generation.

>> Have widespread generation grids in which consumers are transformed into potential generators of electric energy.

50

43. Digitalization is already underway in the energy sector,

>> Offer new services to consumers and industry.

but it is progressing slowly, in particular as a result of signi-

>> Reduce consumption in peak periods with resulting sa-

ficant investment in the state-of-the-art ICTs requested of

vings in energy bills and cost of creating additional infra-

consumers and grid operators, and of the lack of regulatory

structure for energy transmission/generation.

instruments suitable to providing support to this process.

building the european energy union

44. The development of smart grids is a central element given that these grids make it possible to increase the effi-

>> Reduction in costs to consumers and transport-related energy loss. >> Completion of infrastructural initiatives that create

ciency of the electrical system: >> Integration into the electrical system of renewable

advantages for the entire economy (e.g., development

sources and dispersed generation using innovative pro-

of spin-offs for components companies and technology

cesses and devices.

providers with a high level of innovation and specialist

>> Improvement in the quality of the service offered.

expertise), including through partnerships between tra-

>> Enabling of the development of new efficient electrical

ditional utilities and high-tech providers.

applications (e.g., electric cars, smart metering, applications connected with the potential offered by the Inter-

45. Initiatives involving smart grids require significant in-

net of Things, etc.).

vestments from sector companies (to build and/or redesign

>> Greater awareness and active involvement by consumers in the management of the electrical power system.

extensive electrical power grids often dating from 40-50 years ago).

Figure 8. Smart metering in Europe up to 2020

Figure 9. PLC smart metering deployment

(meters installed, confirmed plans and forecast 2020 -

in Europe.

number of thousands of meters).

Implemented

Complete rollout

Confirmed plans

Large scale rollout (>100k)

Forecast total 2020

Pilot (<100k)

*- Total AMI Market

4,650*

2,600*

1,760* 680* 720* 960* 10,400*

1,920* 1,800*

27,000

5,840* 32,000* 3,600*

35,000*

3,440 1,360*

2,880* 560*

5,920* 3,040 2,320*

3,040* 23,000*

32,000* 3,440* 245*

Source: GTM Research, â&#x20AC;&#x153;The Smart Grid in Europe 2012-2016: Technologies, Market Forecasts and Utility Profilesâ&#x20AC;?, 2011.

Source: The European House - Ambrosetti re-elaboration on various data, 2015.

Our proposal:

Italy is a pioneer on PLC smart metering deployment

46. Go beyond the current regulation of power grids, which is mainly based on costs reduction, and instead promote a

Italy and Northern European countries (e.g., Denmark,

EU-wide regulatory system that provides incentive for

Finland, Sweden and Norway) have already com-

digitalization of the power system:

pleted the deployment of advanced metering infra-

>> Defining guidelines by the European Commission aimed

structures based on power line communication (PLC).

at national regulators for the development of innova-

Spain, France and the Netherlands have also mana-

tion incentive schemes and funds.

ged large-scale rollouts.

>> Harmonizing the regulatory framework of incentive schemes and providing measures in support of digitali-

51

zation and electrification (e.g., tax breaks, low-interest

Proposal recipients:

and unsecured loans). >> Streamlining and eliminating bureaucratic red-tape (e.g., authorization and access to incentives). >> Defining common technical standards to guarantee communication and interoperability among the va-

48. This proposal is addressed to: European Commission, national governments and national energy regulators.

Potential resistance to the proposal:

rious solutions proposed on a European level.

49. Member States (and their respective national regulators) called upon to adapt and modify existing regulations, may

Smart grids will be a key tool in driving the digital transformation of the European electric system 47. The primary benefit associated with defining a regulatory framework in support of digitalization is the substantial acceleration of deployment of smart grids and other “digital” initiatives already on the way across Europe, thus fully exploiting the related advantages (e.g., better management of RES, information for a smart regulation, widespread diffusion of innovative products/services, etc.) coherent with the decarbonization goals of the European Energy Union.

be at variance with this proposal. In addition to regulatory improvements, public budget constraints may represent a constraint. These issues could be partially overcome by adopting “revolving” financing instruments.17

Proposal 7 Enhancing access to finance for energy efficiency projects Rationale: 50. To reach the target of a 20% increase in energy efficiency by 2020 and a 27% increase by 2030, Europe requires significant investment, in particular in the area of residential and industrial construction, and in the area of mobility.

Buildings are responsible for the largest share of European final energy consumption in the EU-28 (40% in 2012, of which 26% in residential buildings and 14% in non-residen-

The “GRID4EU” project

tial buildings). Since buildings’ demolition renovation rates remain both low (0.1% and 1.2% per year, respectively) and

“GRID4EU” is a project funded by the European Com-

the rate of highly energy efficient new-buildings is statio-

mission (€25 million out of a total budget of €54 mil-

nary (1% additions per year) in the EU-28, Europe’s energy

lion) to lay the groundwork for the development of

efficiency challenge in buildings is mainly related to energy

tomorrow’s electricity grids. The project brings toge-

efficient renovation.

ther a consortium of 6 European energy distributors (ERDF, Enel Distribuzione, Iberdrola, CEZ Distribuce, Vattenfall Eldistribution and RWE).

The objective is to test the potential of smart grids in areas such as renewable energy integration, electric vehicle development, grid automation, energy storage, energy efficiency and load reduction (over 50 tests are to be conducted between 2012 and 2016).

Europe’s energy efficiency challenge in buildings mainly concerns energy efficient renovation

(17) By revolving financing instruments is meant loans and equity investments which generate returns that must, in turn, be reinvested in the same area. For example, the European structural fund JESSICA (Joint European Support for Sustainable Investment in City Areas) for urban renewal follows this model: it is an initiative of the European Commission developed in co-operation with the European Investment Bank (EIB) and the Council of Europe Development Bank (CEB) aimed at supporting sustainable urban development and regeneration through financial engineering mechanisms.

52

building the european energy union

Figure 10. Share of final energy consumption in different sectors in the EU-28 (%), 1990 and 2012.

40% 35%

34%

32% 26%

26%

4% Buildings

Transport

Industry 1990

3%

Agriculture

2012

Source: The European House – Ambrosetti re-elaboration on Energy Efficiency Financial Institutions Group and Eurostat data, 2015.

51. According to recent estimates,18 the EU should invest: >> around €60-100 billion per year in modernizing buildings to reach the 2020 target;

>> Transparency, scalability and standardization of financing in the private sector to create a secondary market of energy efficiency financial products.

>> around €4,250 billion (in addition to the “business as

>> Improve the role of dedicated credit lines, and in par-

usual” scenario) to meet the ambitious goal of decarbo-

ticular concessional loans, through public banks in order

nizing the economy by 2050.

to increase the bankability of projects. >> Sharing best practices regarding “On-Bill Repayment”

52. It is estimated that, to-date, investment in the construction sector has been:19 >> less than half what would be required to meet the 2020 target; >> less than one-fifth what would be required to meet the 2050 decarbonization target.

mechanisms.20 >> Better use of risk-sharing facilities by public banks and multilateral development banks. >> Assign incentives to service and product providers rather than only to customers, in order to benefit from economies of scale and learning. >> Standardization and promotion of Energy Performance

53. As of today, initiatives in support of investment in ener-

Contracting (EPC) programs, energy performance con-

gy efficiency must often come to terms with:

tracts that guarantee companies immediate savings wi-

>> Processes that are inefficient and lacking clarity.

thout capital expenditure.21

>> Programs directed towards large-scale projects (when, in reality, the targets should be individual consumers on a residential level through small and fragmented investments). >> Need for major investment in the initial phase. >> Shortcomings in the regulatory framework. >> Corporate returns that are too low or spread out over too long a period of time.

Our proposal:

We propose to promote instruments and mechanisms aimed at making European energy efficiency projects fundable

54. Promote instruments and mechanisms aimed at making European energy efficiency projects fundable, such as:

(18) Source: Energy Efficiency Financial Institutions Group, “Energy Efficiency – the first fuel for the EU Economy. How to drive new finance for energy efficiency investments”, February 2015.

(19) Source: Energy Efficiency Financial Institutions Group, February 2015.

(20) For example, some systems take advantage of pre-existing relationships between utilities and their customers to promote construction investment for energy efficiency.

(21) EPC agreements also provide for the possibility of the supplier making investments aimed at efficiency initiatives on behalf of a customer, against a fixed or variable monthly sum equal to or less than the energy savings guaranteed for the duration of the EPC (on average, between 5 and 10 years, based on the extent of the project itself). When the agreement expires, the customer becomes the sole beneficiary of the energy saving and owner of the installed system.

53

deployments of launch and deployment of the energy effi-

How the U.S. finance energy efficiency: the PACE program

ciency initiatives.

Potential resistance to the proposal:

Several countries have introduced financing programs for household energy efficiency investments in which

58. Resistance to adopt this proposal could be due to financ-

the debt is repaid by the beneficiary (i.e., the building

ing higher-risk investments (risk-sharing approach) and to

occupant) through their utility or local tax bill. In many

problems related to coordinating initiatives between local

of these schemes, the debt is attached to the property rather than the owner. Such schemes take advantage of the relationships that already exist between utilities or local governments, on the one hand, and occupants on the other.

In the United States, the PACE program (Property Assessed Clean Energy) offers an instrument to share the risk and returns of household energy efficiency investments. PACE pays for 100% of a projectâ&#x20AC;&#x2122;s costs and is repaid over a period of up to 20 years with an asses-

entities.

Proposal 8 Making Europe the world pioneer in the application and market diffusion and export of innovative energy technologies Rationale:

sment added to the propertyâ&#x20AC;&#x2122;s tax bill. As of January 2014, on-bill financing programs using utility electricity

59. The energy sector is undergoing a profound transfor-

invoices were operating or preparing to be launched in

mation. Europe needs to stay ahead of the curve to keep its

at least 25 states.

competitive position in the global market and its share of energy-related technology export.

55. In preparation, national governments and the European Commission must play a leading role in: >> Selecting priority energy efficiency projects. >> Identifying the metrics to set these priorities and evaluate whether the projects have been successful.

Europe has to maintain and defend its competitiveness in the energy sector on a global scale

>> Promoting initiatives for local and regional cooperation in order to create sufficient critical mass to take advantage of EC financing projects. >> Increase standardization on energy savings measurement.

56. The benefits associated with the realization of energy efficiency initiatives include: >> Long-term savings in energy bills while contributing to the environment thanks to adoption of innovative applications (such as electric vehicles, heat pumps, etc.); >> Greater scalability of energy efficiency projects on a local scale. >> Sufficient rates of return for private investors thanks to the creation of public funding schemes.

Proposal recipients: 57. This proposal is addressed to: European Commission, European Investment Bank, national governments and local public entities (regions and municipalities) to launch tailormade programs; public and private investors in the phase of

54

building the european energy union

60. The digitalization of energy infrastructure will be a key factor in providing support to distributors in efficiently and actively managing energy flows and related data. Distributed Generation allows consumers to have an active role in the market. In addition, the development of technologies that can promote electrification (battery storage systems, smart grids, etc.) must be a EU priority to reach the decarbonization target.

Finding new ways to be smarter about energy The Silicon valley-based company Tesla Motors Inc. announced in early 2015 the launch of energy storage products called the Powerwall and Power Pack for residential and commercial customers, respectively.

Tesla, best known for its pioneering plug-in electric cars, is also building the worldâ&#x20AC;&#x2122;s largest battery factory in the Nevada desert to implement its automotive and energy-storage plans.

61. Europe has well-established expertise in energy techno-

65. The identification of the key technologies on which the

logies. However, European countries have to face growing

European Energy Union could concentrate over the coming

competition from external players. The Strategic Energy

decades will make it possible to reduce current uncertainty

Technology Plan (SET-Plan) promoted by the European

while also providing incentive to the private sector to invest

Commission to meet the “20-20-20” goal identifies 21 key

and focus its investments in specific areas.

energy technologies to attain the goal of energy decarbonization and improvement of energy efficiency. According

66. Finally, the EU should create partnership with emerging

to some estimates, the SET-Plan could result in €60 billion

economies to promote digital energy transition and secure

worth of savings in oil and natural gas imports by 2020.

a growing market share for its technological export.

62. Today, however, R&D investment remains limited and divided among a high number of projects (fragmentation and lack of guidance).

The Juncker Investment Plan The “Juncker Plan” is a package of measures introduced

63. Therefore, the European Union must focus attention on

by the European Commission to mobilize investment

those technologies most coherent with the goals of decar-

finance without creating new public debt, to support

bonization and those “closest” to the market, in order to:

projects and investments in key areas, and to remove

>> Be able to implement them on a large scale.

sector-specific and other financial and non-financial

>> Capitalize on the R&D expertise of individual Member

barriers to investment. It aims to mobilize approxima-

States and consolidate it on a European level.

tely €315 billion through the EIB in additional (public

>> Create a bridge for competitiveness (with the potential

and private) investments in the EU over the 2015-2017

for European companies to sell new technologies on fo-

period. Energy efficiency is one of the key areas of in-

reign markets).

vestments covered by the plan. The new resources will

Our proposal: 64. Focus European investments on the most innovative energy technologies and those coherent with the goals of

complement already existing energy efficiency financial instruments (e.g., European Energy Efficiency Fund, HORIZON 2020, European structural funds and EIB debt for energy efficiency projects).

decarbonization and European energy transition with a greater level of maturity and greater market potential, through: >> Identifying and selecting a limited number of key technologies through direct interaction between the European Commission, Member States and private stakeholders. >> Pooling of all available instruments (including the European Fund for Strategic Investments,22 a significant part of the revenues coming from a renewed Emission Trading Scheme - ETS, unsecured loans, etc.). >> Once the technologies to be focused on have been selected, identifying a limited number of high-impact driver-projects, developed –to the extent possible– on the basis of a regional approach.

As anticipated, the technologies eligible for financing

Proposal recipients: 67. The recipients of this proposal are: >> European Commission, Member States and energy sector operators during the strategic technologies selection phase. >> European Commission, European Investment Bank (EIB) and other public financing sources that could invest in R&D and innovation projects. >> Energy sector operators and related supply chain during the implementation phase of pilot initiatives.

Potential resistance to the proposal:

should be selected on the basis of three main principles: >> Capability to maximize the decarbonization impact.

68. There might be divergent interests between countries

>> Proximity to commercial maturity.

and industries, as well as different priorities in defining stra-

>> Share of the potential markets.

tegic technologies.

(22) Approximately €240 billion out of €315 billion in investment that could be activated over the three-year period 2015-2017 by the European Fund for Strategic Investments (EFSI) involve the sectors of digital, energy, transport grids, research and education.

55

CHAPTER 3 The energy sector scenario in Europe

56

building the european energy union

Key messages The European Union is diversifying away from conventional sources towards renewables and low-carbon energy generation.

Widespread electrification, the entrance of new players and the empowerment of consumers thanks to new digital technologies are revolutionizing the energy sector.

Europe is progressing towards decarbonization but some critical issues remain unaddressed. Among these: – High dependency on natural gas and petroleum imports.

– Cross-country interconnectors are insufficient and not adequately planned.

– The lack of adequate long-term price signals has produced inefficient investment decisions in the wholesale market.

– Energy retail prices are not cost-reflective and in line with the decarbonization objective.

– An increased focus on energy efficiency investments in the transport and building sectors is needed.

– Defining an appropriate competitive framework for renewables and reforming the EU Emissions Trading System (ETS) are preconditions for the success of the EU’s decarbonization strategy in the long term.

– The EU lags behind in the deployment of key enabling technologies.

Completing the Energy Union can provide relevant benefits for the European Union at several levels, such as: price convergence, lower energy imports, enhancement of technological leadership in the energy industry and its related sectors (also in the light of the global “energy transition”), increased energy efficiency, supply-side innovation (new services/products for the final consumer), environmental protection, EU geopolitical influence and “soft power” in climate change and trade negotiations.

57

3.1 The energy scenario and main trends in the world and Europe 1. World energy demand has grown steadily in the past

regions have recorded the highest growth (CAGR 1994-

two decades.

2014: +4.6%), while the EU-28 is the only global area whe-

Total primary energy consumption has increased from

re primary energy consumption has decreased starting

over 8,000 Mtoe (million tonnes of oil equivalent) in 1994

from 2006 (CAGR: -0.1% between 1994 and 2014).

1

to almost 13,000 Mtoe in 2014, with a compound annual growth rate (CAGR) of 2.2%.2 Middle East and Asia-Pacific

2. Economic activity has been the main driver of growth in global energy demand. In fact, energy demand tends to grow in accordance with Gross Domestic Product (GDP),

The rise of China in world energy consumption

even if typically at a lower rate.3 However, there are considerable differences across regions in the amount of energy used per dollar of GDP:

Asia-Pacific region has reached a primary energy con-

Emerging economies have seen primary energy con-

sumption of 5,335 Mtoe in 2014: with 55.7% of the to-

sumption and GDP grow between 1994 and 2014. In China,

tal, China has surpassed the United States, becoming

energy use increased more than GDP, also due to the boom

the no. 1 country for final consumption of energy.

in energy intensive manufacturing during the 2000s.

Figure 1. Final energy consumption per geographical area (Mtoe), 1994-2014.

12,000

10,000

8,000

6,000

4,000

2,000

North America

South and Central America

EU-28

Other Europe and Eurasia

Middle East

Africa

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

-

Asia Pacific

Source: The European House - Ambrosetti elaboration on International Energy Agency and BP data, 2015

(1) Primary energy consumption refers to the direct use at the source, or supply to users without transformation, of crude energy, that is, energy that has not been subjected to any conversion or transformation process.

(2) Source: International Energy Agency (IEA) and BP, 2015.

(3) On average, between 1994 and 2014, an increase of 1% in GDP corresponded to an increase of 0.5% in energy demand at global level.

58

building the european energy union

In developed countries, conversely, the link between GDP

3. In the European Union, the economic recession started

growth and energy use growth has weakened because of a

in 2008 has led to a decrease in energy consumption (-1.1%

shift towards services (in the United States, GDP has grown

in final energy consumption and +122% in GDP between

by 138% between 1994 and 2014, while primary energy

1994 and 2014). However, the ensuing recovery has not

consumption has grown by only 10.7%).

been matched by an increase in energy consumption, which has continued to decrease.

Figure 2. Growth in GDP (current $ billion) and primary energy consumption (Mtoe) in selected countries and global regions, 1994-2014.

Primary Energy Consumption (Thousands of Mtoe)

3.0

2.5

2.0

1.5

1.0

1994 2014

0.5

-

5,000

-

10,000

15,000

20,000 GDP ($ bln.)

South America

India

China

European Union

Africa

United States

Source: The European House - Ambrosetti re-elaboration on World Bank, IEA, OECD, and BP data, 2015

Despite the key role of oil and coal in energy consumption, renewable sources have experienced the fastest growth in the past two decades

4. Considering the fuel mix, oil and coal remain the mostused energy sources, accounting respectively for 32.6% of world primary energy consumption (4,211 Mtoe) and 30.0% (3,881 Mtoe) in 2014. These sources are followed by natural gas (3,065 MToe, 23.7%), hydroelectricity (879 Mtoe, 6.8%), nuclear energy (574 Mtoe, 4.4%), and renewable energy sources (316 Mtoe, 2.5% of the total). Compared to the other energy sources, renewables have experienced the fastest growth in the past two decades (+110% at global level),4 also thanks to the support of subsidies, accounting for $120 billion in 2013 worldwide.5

(4) Considering RES without hydroelectric power, the percentage variation was equal to 786% in the period under consideration, while CAGR was equal to 11.5%.

(5) Source: International Energy Agency, â&#x20AC;&#x153;World Energy Outlookâ&#x20AC;?, 2014.

59

Figure 3. Growth of different sources in primary energy consumption at global level (index, 1994=100), 1994-2014.

Note: in the left graph, RES includes hydroelectricity, while on the right graph hydroelectricity is separated from other RES.

900

220 200

Total RES (including hydroelectricity)

RES (excluding hydroelectricity)

800 700 600

160

500 400

140

300 120

Oil

Nuclear

Natural gas

RES (total)

Coal

Oil

Hydroelectric

Natural gas

Nuclear

Coal

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

100

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

100

200

1994

Index, 1994 = 100

180

Other RES

Source: The European House - Ambrosetti elaboration on BP and IEA data, 2015

5. Considering future trends, in the next two decades global energy demand is expected to grow, reaching about 17,450 Mtoe in 2035,6 equal to a 35% increase in the period 2014-2035. This growth, however, is expected to slow markedly during the period, in part as a result of the effects of policy measures, and in part because of a structural shift in the global economy toward services and less energy-in-

In the future, global energy demand is expected to grow, even if at a slower pace

tensive industries.

Figure 4. Compound Annual Growth Rate (CAGR) of energy demand at global level (%), 1990-2035(e).

Forecast

2.78% 2.22% 1.98%

2.13%

1.72% 1.41% 1.13%

1.11%

1990-1995

1995-2000

2000-2005

2005-2010

Source: The European House - Ambrosetti elaboration on BP data, 2015

(6) Source: BP, â&#x20AC;&#x153;BP Energy Outlook 2035â&#x20AC;?, February 2015.

60

building the european energy union

2010-2015

2015-2020

2020-2025

2025-2030

0.99%

2030-2035

6. The slowdown in energy demand will characterize de-

but their energy demand growth is also expected to decre-

veloped economies especially (+0.02% between 2020 and

ase, reflecting slower economic growth and less energy-in-

2035 in OECD countries).7 World energy demand will be

tensive economies.9

pulled by developing countries, such as China and India, 8

Figure 5. Trends in energy demand growth and GDP growth at global level (index, 1990=100), 1990-2035.

600

World GDP 2035(e): 128,015.6 $bln.

CAGR (1990-2035): +3.9%

550 500 Index, 1990=100

450 400

Non-OECD Energy Consumption 2035(e): 11,742.2 Mtoe CAGR (1990-2035): +2.7%

350 300

World Energy Consumption 2035(e): 17,454.7 Mtoe CAGR (1990-2035): +1.7%

250 200 150

OECD Energy Consumption 2035(e): 5,712.5 Mtoe CAGR (1990-2035): +0.47%

100 1990

1995

GDP (World)

2000

2005

2010

2015

Total Energy Consumption (World)

2020

2025

2030

Total Energy Consumption (OECD)

2035

Total Energy Consumption (non-OECD)

Source: The European House - Ambrosetti on BP, IMF, World Bank, and OECD data, 2015

7. This trend will lead to a change in global energy demand

and China for only 8.2%.

distribution:

>> In 2035, non-OECD countries are expected to account

>> In 1990, together the United States and the EU-28

for 67.3% of total energy demand.

countries accounted for 44.6% of total energy demand,

Figure 6. Share of global energy demand (%): comparison between 1995, 2015(e) and 2035(e).

1990 World Total: 8,118 Mtoe 4% 3% 2%

3% 5%

2015(e) World Total: 13,186 Mtoe

8%

5% 12%

2035(e) World Total: 17,454 Mtoe

3% 4%

4% 4%

6%

26%

23%

7%

8%

5% 8% 19% 24%

10%

13%

13% 9%

20%

China

13% Other Europe and Eurasia

Africa

Other Asia Pacific

India

17%

Other North America

9% US

Middle East

EU-28

13% South and Central America

Source: The European House - Ambrosetti elaboration on BP data, 2015

(7) In this context, European Union energy demand is expected to decrease steadily with a CAGR equal to -0.20% between 2015 and 2035. United States demand will remain nearly steady between 2015 and 2035 (CAGR equal to 0.04%), but will decrease in the period between 2020 and 2035, with a CAGR of -0.15%.

(8) Energy demand in China is expected to grow with a CAGR of 3.94% between 2015 and 2020.

(9) CAGR of Chinese energy demand between 2020 and 2035 is expected to decrease to 1.36%, although it grew by 6.13% per annum on average between 1990 and 2015. Indian energy demand will grow with a CAGR of 4.52% between 2015 and 2020 and with a CAGR of only 3.52% between 2020-2035. Non-OECD countries will see their energy demand grow with a CAGR of 3.22% between 2015 and 2020 and with a CAGR of 1.82% in the period 2020-2035. Source: IEA and BP, â&#x20AC;&#x153;BP Energy Outlook 2035â&#x20AC;?, February 2015.

61

8. Considering energy sources, oil, coal and natural gas will

2,766 Mtoe in 2015 to 3,726 Mtoe in 2035). This situation

remain the most used sources also in the future, accounting

will pose serious consequences for environment and global

together for 80.5% of world total energy consumption in

carbon emissions. For this reason, the success of internatio-

2035 (86.1% in 2013). In this scenario, however, coal con-

nal negotiations on energy and environment (such as Paris

sumption is expected to increase in the Asia-Pacific region,

2015) in achieving a strong political commitment to reduce

sustaining the growth in countries such as China and India

CO2 emissions at global level will be of pivotal importance.

(coal consumption in this region is expected to increase from

18,000

Index, 2015=100

Mtoe

Figure 7. Share of global energy consumption by energy source (Mtoe and index, 2015=100), 1990-2035(e).

16,000 14,000 12,000

305 255 205

10,000

155

8,000 6,000

105

4,000

Total Liquids Consumption

Total Nuclear Energy Consumption

RES + Hydroelectricity

Total Natural Gas Consumption

Total Hydroelectricity Consumption

Total Coal Consumption

2035

2030

2025

2020

2015

2010

2005

2000

1995

5

2035

2030

2025

2020

2015

2010

2005

2000

1995

1990

0

1990

55

2,000

Total Renewables Consumption

Source: The European House - Ambrosetti elaboration on BP data, 2015

9. Between 2015 and 2035, the consumption of liquid energy sources10 will grow at global level,11 but it is expected to decrease in North America (-8.3%) and in Europe (-6.9%).12 In particular, natural gas consumption will grow by 41.8%13 and its share in global demand will rise from 23.7% to 26.1%, becoming the leading fuel in the OECD energy mix by around 2030.14 Total consumption of coal will also increase (+19.6%,

A shift in global energy demand distribution towards non-OECD countries is expected, while renewables will keep growing fast

from 3,816.1 to 4,563.7 Mtoe).15 Its share in total energy consumption, however, will decrease from 30.1% to 26.1%.

10. On the supply side, world primary energy production will

Hydroelectric consumption will grow by 39.2%, mainly boo-

follow the global demand trend: in 2013 it reached 12,817

sted by developing countries, while other renewables will

Mtoe and it is expected to increase up to about 17,437 Mtoe

grow by +239.8%, to a level of almost 7% of world energy

in 2035. As for global demand, forecasts show a progressive

demand.

slowdown in supply growth.

16

17

(10) Including oil, biofuels, gas-to-liquids and coal-to-liquids.

(11) Growth of +18.35% between 2015 and 2035, boosted mainly by biofuels (+93.29).

(12) The International Energy Agency estimates that, for each barrel of oil no longer used in the OECD countries, two barrels more will be used in non-OECD countries.

(13) Higher growth between 2015 and 2025 (CAGR of +2.12%) than in the period 2025-2035 (+1.4%).

(14) Source: International Energy Agency, 2015.

(15) In North America its consumption will drop by 42% (-184 Mtoe) and in Europe and Eurasia by 20.5% (-97 Mtoe).

(16) Between 2015 and 2035, in South and Central America hydroelectric consumption is expected to grow by 65.7%. In Africa, in the same period, this growth will be equal to 129.5%, in the Asia-Pacific region by 49.2% and in the Middle East by 78%.

(17) Nuclear energy demand will increase by 33% globally and its share will remain stable (from 4.4% of total demand in 2013 to 4.8% in 2035).

62

building the european energy union

Figure 8. Global production forecast and CAGR in the five-year period at global level (Mtoe and % growth), 1990-2035(e).

18,000

17,437

16,648

6%

15,721

16,000

14,677

14,000

5%

13,298 12,043

12,000

10,792

10,000 8,197

4%

9,331

8,570

3.0%

8,000

3% 6,000

2.2%

2.0%

1.7%

4,000

2.0% 2%

1.4% 2,000

1.2% 0.9%

0.9%

0

1% 1990

1995

2000

2005

2010

2015(e)

2020(e)

2025(e)

2030(e)

2035(e)

Source: The European House - Ambrosetti elaboration on BP data, 2015

11. Considering types of fuels, energy production is gra-

account for 80.5% of total energy production in 2035, less

dually moving towards higher sustainability and a more

than the 1990 levels (88.1%).

balanced mix. Coal, oil and natural gas are expected to

Figure 9. Energy mix in global production at global level (MToe and % share): comparison between 1990, 2015(e) and 2035(e).

2015(e) World Total: 13,298 Mtoe

1990 World Total: 8,197 Mtoe 0.1%0.3% 6.0% 5.5%

6.8% 38.7%

0.5%

2035(e) World Total: 17,437 Mtoe

2.6% 0.8%

6.8%

7.2%

4.8%

28.0%

4.8% 31.9% 27.4%

29.1% 26.3%

26% 26%

21.9%

Oil

Natural gas

26.2% 24.4%

Coal

Nuclear

Hydroelectricity

Biofuels

Renewables

Source: The European House - Ambrosetti elaboration on IEA and BP data, 2015

63

12. Thanks to the increase in energy efficiency and the use

the development of shale gas.18 On the contrary, non-OECD

of renewables, OECD countries are expected to reduce their

countries will see their consumption grow more than their

energy dependence. The United States, in particular, are

production. The Asia-Pacific region, however, will remain

expected to produce more energy than the amount it con-

the no. 1 region for energy production (34.7% of world total

sumes by 2025 (2,441 vs. 2,359 Mtoe), thanks, in part, to

in 2035, with more than 1/5 produced by China).19

Figure 10. Energy balance forecast in selected regions (Mtoe), 1990-2035(e).

Net Producer

2000.0

500.0

2035 (e)

1000.0 1990

0.0

Net Consumers

Energy Balance (Mtoe)

1500.0

-500.0 -1000.0 -1500.0 -2000.0 OECD

Non-OECD

EU

US

China

India

South and Central America

Middle East

Africa

Source: The European House - Ambrosetti on BP data, 2015

13. In this global scenario, the EU is moving towards increa-

to decline slightly in the coming decades, while the share of

sed sustainability and efficiency. According to the European

renewables on final consumption will continue to increase.

Commission estimates, its energy consumption is expected

Figure 11. EU energy flow (Mtoe), 2013.

Net Imports: 908.9

Gross Inland Consumption: 1,666.2

Total Production: 804.1

.6 42 s: .6 :9 se

er

nk

tU

c re

Ch

Bu

a

ck

o St

4

5.

Di

s:

e ng

Supply

Transformation Input: 1,302

Transformation Output: 946

Available for final Consumption: 1,204.9

Final Non-Energy Consumption: 101.1 Final Energy Consumption: 1,103.8

Co an nsu Tr d an Di mpt sfo str io rm ib n i ut n at io En ion n L er Lo os gy sse se Se s: s: 35 11 ctor 6 0.6

Demand

Intermediary

Final

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

(18) According to the U.S. Energy Information Administration, shale gas production increased from 2,116 to 11,415 billion cubic feet (between 2008 and 2013 in the United States.

(19) Source: BP, â&#x20AC;&#x153;BP Energy Outlook 2035. Country and regional insightsâ&#x20AC;?, 2015.

64

building the european energy union

14. Gross inland consumption20 in the European Union has

the economic crisis: gross inland consumption of energy de-

steadily decreased since 2006 (-9.1% between 2006 and

creased by 5.7% in 2009 and by 3.6% in 2011 (bound to the

2013), reaching a value of 1,666 Mtoe in 2013, lower than

double dip recession of the European economy). However, it

in the 1990s. This trend is related, in part, to the effects of

started before, in part as a result of energy savings policies.

Figure 12. Gross inland consumption in the EU-28 and at global level (Mtoe), 1990-2013.

14,000

2,000

12,807 1,950

12,000

1,900

10,000

1,850 8,133

8,000

1,800 6,000 1,750

1,666

4,000 1,667

1,700

EU-28

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

0 1992

1,600 1991

2,000

1990

1,650

World

Source: The European House - Ambrosetti elaboration on IEA and Eurostat data, 2015

15. Regarding the overall energy source mix, European gross inland consumption is becoming increasingly balanced and sustainable. On one side, between 1990 and 2013, petroleum products decreased from 38% to 33% and the share of solid fuels dropped from 27% to 17%. On the other side, the share of renewable energy sources increased from 4% to 12% of the total in 2013. If we look at the composition of energy consumption at a national level, some rele-

EU-28 shows good energy diversification and sustainability, despite relevant differences among Member States

vant differences emerge among EU Member States: in fact, 11 European countries have a share of renewables in total gross inland consumption higher than 15%,21 but Eastern countries still rely greatly on solid fuels22 and 12 countries have a share of petroleum products still higher than 35%.23

(20) Gross inland consumption is calculated as follows: primary production + recovered products + total imports + variations of stocks - total exports - bunkers. It corresponds to the addition of final consumption, distribution losses, transformation losses and statistical differences.

(21) Latvia, Sweden, Austria, Finland, Denmark, Portugal, Lithuania, Romania, Italy, Slovenia and Croatia.

(22) Estonia, Poland, the Czech Republic and Bulgaria have a share of solid fuels in gross inland consumption higher than 35% of the total; Germany and Greece higher than 25%.

(23) Luxembourg, Ireland, Greece, Portugal, Spain, the Netherlands, Croatia, Belgium, Denmark, Lithuania, Austria and Italy.

65

Figure 13. Energy mix in gross inland consumption in the EU-28 (% share), 1990 and 2013 (left graph). EU Member States energy mix (% share), 2013 (right graph).

1%

2013

12%

14%

4%

33%

12% 1990 38% 27% 18% 17%

23%

EU-28 BE BG CZ DK DE EE IE EL ES FR HR IT LV LT LU HU NL AT PL PT RO SI SK FI SE UK 0%

Total petroleum products

Gas

Solid fuels

Nuclear heat

20%

40%

60%

Renewable energies

80%

100%

Waste (non RES)

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

16. Despite the gradual economic recovery, a decrease in consumption and an increase in the usage of renewables are expected to continue in the future. Gross inland consumption is expected to slightly decrease, reaching a value close to 1,605 Mtoe in 2035.24 This trend will be enhanced by policy measures and legislation on energy efficiency.25 Renewables will increase their share up to 21.3% of total

European energy production will become more sustainable and will continue to decrease

gross inland consumption in 2035, having reached maturity and helped by subsidies and policy measures.

17. On the supply side, total production in the European Union has decreased steadily since 1996 (-15.1% between 2000 and 2013), reaching a level of 804.2 Mtoe in 2013, when almost 70% was produced by six European countries (France, Germany, the United Kingdom, Austria, Poland, and Italy).

(24) Source: European Commission, Trends to 2050. Reference Scenario 2013. Estimates from the BP Energy Outlook expect a value lower than 1,580 Mtoe. After 2035, energy consumption is expected to increase moderately, yet remain below 2010 level.

(25) Such as the 2009 Eco-Design Directive, the 2010 Energy Performance of Buildings Directive (EPBD), the 2012 Energy Efficiency Directive (EED), etc.

66

building the european energy union

Mtoe

Figure 14. Production and net imports in the EU-28 (Mtoe), 1990-2013.

1,050 1,000 950

947.1 909.0

900 850 804.2 800 753.5

Net import

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

700

1990

750

Production

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

18. The fuel mix is becoming more balanced and sustaina-

for 27.5% of total production, while renewable sources are

ble also on the production side. In 2015, solid fuels account

in second place. With a share of 25.5% of total production in

for 18.0% of total production (vs. 39% in 1990), natural gas

2015, RES have shown a significant increase: +98% between

for 18.0% (vs. 17.4% in 1990) and petroleum products for

2000 and 2013, helped by policy measures (such as binding

10.9% (vs. 14% in 1990). Nuclear power still remains the

targets for renewables by 2020) and incentives.26

most important source in terms of contribution, accounting

120% 100% 80% 60% 40% 20% 0%

% share and Mtoe

Figure 15. Estimated energy production per fuel input in the EU-28 (Mtoe and % share), 2015-2035(e).

831.7 808.1

800.0

775.1 750.2

25.5%

27.5%

31.8%

39.4%

35.7%

23.9%

23.3%

755.8

41.8%

26.8% 28.4%

18.0%

17.4%

16.1%

10.9%

9.6%

8.4%

18.0%

17.3%

16.4%

11.8%

5.8% 10.5%

2015

2020

2025

2030

2035

Solid fuels

Oil

Natural gas

14.6% 7.4%

Nuclear

RES

13.5%

Total production

Source: The European House - Ambrosetti elaboration on European Commission data, 2015

(26) According to ECOFYS data, interventions to support renewable energy sources were worth €41 billion in 2012, compared to €10.1 billion for coal, €7 billion for nuclear and €5.2 billion for natural gas. Source: ECOFYS, “Subsidies and costs of EU energy. Final report”, 2014.

67

19. The European course towards a more sustainable

20. Despite the reduction in energy consumption (-3.5%

energy mix in production is expected to continue over

between 2000 and 2013), lower energy production (-15.1%

the coming years. According to European Commission

in the same period) led to an increase of primary energy

projections, renewable sources are expected to account

imports, from 826 to 909 Mtoe between 2000 and 2013.

for 41.8% of total energy production in 2035, with nuclear

Since 2007, however, net imports have begun to decrease.

power maintaining a share of about 28%. Total production

European energy exports grew from 442 to 535.8 Mtoe in

will continue its downward trend (with a small recovery after

2013 (+21.2% between 2000 and 2013),27 while imports

2030).

increased by 18.6% between 2000 and 2008, subsequently stabilizing as a result of the crisis.28

1,444.8

Figure 16. Import, export and net import of energy products of the EU-28 (Mtoe), 1990-2013.

1,268.4

1,600

400

909.0

826.3

535.8

600

442.1

800

753.5

1,000

353.1

1,200

1,106.7

1,400

Import

Export

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

1990

200

Net import

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

The EU is the largest energy importer in the world

22. Regarding the origin of EU energy imports, the role of Russia has progressively increased over time. it is the main supplier of oil (34.6% of total Extra-EU imports in 2013), natural gas (39.0%, even if its share of the total has progressi-

21. In 2013, the EU imported 53% of its energy, for a

vely diminished) and solid fuels (28.8%). In 2013, 35.1% of

value of €400 billion.29 Six European Member States de-

all energy products imported to the EU came from Russia.

pend on a single external supplier for their entire natural

Norway is the second supplier for crude oil (11.7%) and na-

gas imports and therefore they show a high level of vul-

tural gas (29.8%). In 2013, 71.4% of total extra-EU energy

nerability. The largest net importers of primary energy are

imports came from only five countries.

generally those countries with the greatest population and consumption (with the exception of Poland that still has reserves of coal).

Russia remains the main energy supplier for the EU

(27) From 2004 to 2012, Denmark was the only net exporter of energy in the EU-28.

(28) Imports dropped by 6.6% in 2009 and decreased by 1.3% in 2011.

(29) See also: European Commission, Communication “A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy”, 2015.

68

building the european energy union

Figure 17. Share of EU-28 energy imports coming from Russia on total extra-EU imports per type of fuel (% share), 1990-2013.

70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0%

Total fuels

Natural gas

Solid fuels

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

0.0%

Oil

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

23. The EU-28 energy dependency rate30 grew from 42.8%

A need for a better balanced energy supply system across the EU

in 1994 to 54.7% in 2008, subsequently decreasing to 53.2% in 2013. The highest energy dependency rates in 2013 were recorded for crude oil (88.4 %) and for natural gas (65.3 %).

Only 6 out of 28 European Member States have an

Over the next decades, net imports are expected to remain

import dependency rate below 30%: Estonia (11.9%),

stable reaching 911Mtoe in 2035, despite the decreasing

Denmark (12.3%), Romania (18.6%), Poland (25.8%),

trend in final energy demand for fossil fuels. Import depen-

the Netherlands (26%) and the Czech Republic

dence is expected to increase moderately, reaching 54.7% in

(27.9%). Other economies can leverage on lower

2035. As of 2013, all the â&#x20AC;&#x153;EU Big 5â&#x20AC;? countries showed high

dependence rates, such as the United States (15% in

energy dependency rates (Italy 76.9%, Spain 70.5%, Ger-

2013) and China (12.7% in 2013).

many 62.7%, France 47.9% and the United Kingdom 46.4%).

60

1,000

58

900

56

800

54

700

52

600

50

500

48

400

46

300

44

200

42

100

40

1990

1995

2000

2005 Net imports

2010

2015(e)

2020(e)

2025(e)

2030(e)

2035(e)

Net import (MToe)

Import dependence (%)

Figure 18. Net imports and energy dependency rate in the EU-28 (Mtoe and %), 1990-2035(e).

0

Import dependency

Source: The European House - Ambrosetti elaboration on European Commission data, 2015

(30) Energy dependency shows the extent to which an economy relies upon imports in order to meet its energy needs. The indicator is calculated as net imports divided by the sum of gross inland energy consumption plus bunkers.

69

11.9%

12.3%

Estonia

Denmark

25.8% Poland

18.6%

26.0% The Netherlands

Romania

27.9% Czech Republic

46.4% United Kingdom

31.6%

47.1% Slovenia

Sweden

47.9% France

37.8%

48.7% Finland

EU-28 average: 53.2%

Bulgaria

52.3% Hungary

52.3%

59.6% Slovakia

Croatia

62.1% Greece

55.9%

62.3% Austria

Latvia

62.7%

70.5% Spain

Germany

73.5% Portugal

76.9% Italy

77.5% Belgium

78.3% Lithuania

89.0% Ireland

96.4% Cyprus

96.9% Luxembourg

Malta

104.1%

Figure 19. Energy dependency rate among the EU-28 Member States (%), 2013.

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

24. In 2013, EU-28 final energy consumption31 was equal

economic crisis). This reduction helped to put final energy

to 1,104 Mtoe, equivalent to 66.2% of gross inland con-

consumption on the right path to reach the target of 20%

sumption. As gross inland consumption, final energy con-

energy saving by the year 2020 set by the European Com-

sumption started decreasing in 2006 and dropped in

mission. However, this trend should continue also during

2009, reaching a level of 1,106.9 Mtoe (mainly due to the

the expected economic recovery.

Mtoe

Figure 20. Final Energy Consumption in the EU-28 and 2020 target (Mtoe), 1990-2013 and 2020 target.

1,210 1,187.2

1,190 1,170 1,150 1,130

1,104.6

1,110

1,086 1,090 1,070

Final Energy Consumption

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

(31) Excluding energy used by power producers and energy transformation processes.

70

building the european energy union

2020 target

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1,050

25. Considering the key sectors of European economy, in

consumption (+40%). Energy consumption by transpor-

2013 transport accounted for 31% of final energy con-

tation increased until 2007, then began to decrease. The

sumption,32 residential consumption for 27% and indu-

residential sector, which relies especially on natural gas and

stry for 25%. From 1990 to 2013, services –a sector intensi-

electricity, remained virtually stable (+8%),33 while industrial

ve in electricity and gas– saw the highest increase in energy

consumption has dropped (-24%).

Figure 21. Final energy consumption per sector in the EU-28 (index, 1990=100, left graph), 1990-2013; % of the total (right graph), 2013.

150

2013 World Total: 1,104 Mtoe

140 130 14%

120

3% 25%

110 100 90 80

Industry

Transport

Residential

Services

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

60

1990

70

27%

31%

Others

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

26. In the future, the industrial sector is projected to recover and its consumption is expected to stabilize at about 305 Mtoe per year, with an increase in renewables and electricity as a result of EU energy efficiency directives, national binding targets and policy measures, as well as

The energy sector is a key driver for the EU in terms of value added and employment

improved ETS resulting in a higher carbon price and incen-

27. The value added created by the entire energy supply

tive for green investments. Residential sector energy de-

chain35 in Europe has grown despite the economic crisis

mand should also stabilize below 2010 levels (about 300

(+33% between 2005 and 2012), up to €223.9 billion in

Mtoe). Electrification is expected to be a major trend also

2012. European energy companies employ 1.3 million

in the tertiary sector (with renewables accounting for 58%

people.36 The value of production in the EU energy sec-

of final consumption of services), where increase in pro-

tor has grown since 2005 with a CAGR of 7.2%, reaching

ductivity will be over-compensated by energy efficiency

a value of €1,440 billion in 2013. Labor productivity has

gains pushed by policy measures. Transportation will re-

also grown by an average of 3.7% per year and there are

gister a moderate decrease until 2035, with diesel and ga-

97,000 companies operating in the energy sector (+228%

soline remaining the main energy sources, while electricity

between 2005 and 2013).37 However, R&D expenditure in

will reach 8% of total consumption in the sector.

energy remains low (especially when compared to other

34

industrial sectors) and there are significant discrepancies among EU Member States (see also section 3.2.).

(32) This sector consumed 326.8 Mtoe of petroleum products in 2013.

(33) According to European Commission, 75% of EU housing stock is energy inefficient and 94% percent of transport relies on oil products.

(34) Electrification in the residential sector is expected to account for 36% of total consumption in 2050.

(35) Including: production of electric power, natural gas, steam, hot water, etc. through a permanent infrastructure (network) of lines, mains and pipes; distribution of electricity, gas, steam, hot water, etc. in industrial parks or residential buildings; provision of steam and air-conditioning supply. Source: Eurostat, 2015.

(36) The energy sector accounts for 2% of total value added and 0.6% of total employment.

(37) Enterprises active in the electric power generation, transmission and distribution sectors.

71

Figure 22. Growth in selected dimensions of EU-28 energy sector (index, 2005=100), 2005-2013 (left graph); expenditure for R&D in solar and wind energy in the EU Big-5 (€ million), 2013.

180

80

170

70

160

60

150

50

140

40

130

30

120

20

110

10

100

0 Germany

90 2005

2006

Value of Production (mln€)

2007

2008

2009

Gross Value Added (mln€)

2010

2011

2012

Productivity

France

2013

Employment

United Kingdom

Expenditures for R&D - Solar

Spain

Italy

Expenditures for R&D - Wind

Source: The European House - Ambrosetti elaboration on Eurostat and European Commission R&D Scoreboard data, 2015

28. In the future, some key trends in Europe will affect the

consumption in transport will see a steady increase (thanks

implementation and development of the EU Energy Union

to electrification of rail transport, penetration of rechargea-

and that of its industrial players:

ble vehicles,39 decreasing battery costs, etc.).

>> A shift towards electricity for heating and cooling (higher demand for air conditioning, spread of electric heat

30. New players from different sectors (e.g., telecommuni-

pumps) and an increasing use of electric appliances in re-

cations, computing and ICT, etc.) are entering the energy in-

sidential and tertiary sectors (IT, leisure, communication,

dustry, providing customers with new solutions, information

etc.).

and smart and connected energy management services, di-

38

>> The entrance of new competitors into the energy market.

sintermediating traditional players and acting as “game changers. Utilities and other traditional energy players can

>> The empowerment of energy consumers.

compete with these players, acquire these companies or, alter-

>> Further development of renewable energy sources and

natively, cooperate with new entrants, building value added

widespread diffusion of decentralized generation.

services for customers in a “win-win” relationship and benefiting from valuable data and information, lower grid conge-

29. The European Commission estimates that the share of

stion, increase in energy efficiency and customer satisfaction.

electricity in final energy consumption will reach a share of 28% of the total in 2050 (compared to the current 21.6%).

Final electricity demand is expected to reach 250 Mtoe in 2015 and 320 Mtoe in 2050. Efficiency requirements and the development of electronic appliances will make electri-

Towards a “new skin” for energy operators across the EU

city account for 36% of final energy demand in the residen-

The consolidation of the Energy Union could promote

tial sector by 2050 (from 23% in 2010), becoming the no.

the evolution of the energy industry and reshape the

1 form of energy. There will also be a major increase in the

traditional business model by facilitating the supply of

tertiary sector, with electricity expected to account for al-

new services and products, thus creating opportuni-

most 60% of final energy demand. Electrification will have a

ties for greater competitiveness in the industry.

lower impact in industry and transport. However, electricity

(38) See also: European Commission, “Trends to 2050 Report, Reference Scenario 2013”, 2015.

(39) By 2050 the European Commission estimates that the share of electric vehicles in the total EU stock of cars will reach approximately 8%.

72

building the european energy union

31. The empowerment of energy consumers will be enhanced by smart technologies and new ICT solutions that will enable them to take better consumption choices. Decentralizing production will provide customers with greater independence and could allow them to become energy producers (“prosumers”). In fact, thanks to the development of Distributed Generation and “energy communities” (which alre-

Electrification will become a priority in transport, heating and cooling

ady exist in several European countries including Germany, the United Kingdom and Denmark), consumers can become protagonists in the production of energy from renewable

32. Smart grids rely on smart metering systems that pro-

sources. Therefore, energy system players –in particular, TSOs

vide customers with complete and real time information.40

and DSOs– are asked to a great extent to accompany the

Thanks to smart metering, smart appliances, smart ther-

process currently underway and, as a result, massively invest

mostats and open data, consumers will have frequent and

in their infrastructural grid in order to accommodate large

complete information about prices and consumption habits.

amount of dispersed generation. In fact, while in the past the

New devices and applications will also allow consumers to

flow of energy was one-way (from the center of the network

better understand and manage their energy usage get-

to its periphery), in the future this flow will be increasingly

ting control over their energy consumption. Thanks to “smart

inverted and smart grids can be a mechanism capable of op-

homes”, customers will be able to manage, monitor and opti-

timizing interactions among all stakeholders of the electricity

mize their energy consumption easily and remotely, allowing

system, by better linking wholesale and retail markets.

greater flexibility and energy savings.

3.2 Critical points and open questions in EU energy markets 33. As previously explained in Chapter 1, EU energy policy

and affordable energy: ensuring security of supply, comple-

is based on five main dimensions, according to the ove-

ting the internal market for energy, ensuring environmen-

rall mission to build a resilient Energy Union with an ambi-

tal sustainability, improving energy efficiency and fostering

tious climate policy at its core is to give EU consumers –hou-

research and innovation.

seholds and businesses– secure, sustainable, competitive

Figure 23. The five pillars of EU Energy Union Framework.

Energy Supply Security

Internal Energy Market

Diversification of supply (geography and energy mix)

Physical infrastructure network integration

Cooperation for supply security

Grid software update (smart grids)

EU role in global energy markets

Common EU regulatory framework focused on the system’s long term needs

Transparency on gas supply prices

Energy Efficiency

Environmental Protection

Energy efficiency increase in building and transport sectors

“EU Active Climate diplomacy”

Decarbonization of the transport sector (modal shift towards railways)

Consumer empowerment

Research and Innovation

Strengthening of the Emission Trading Scheme (broader application, progressive allowance reduction and Reserve Mechanism)

Large-scale deployment of innovative technologies, starting from next generation Renewable Energy Sources (energy storage, biofuels, biomass, etc.)

Increase of Renewable Energy Sources share in final consumption

Roll-out of smart grids, smart home appliances, smart cities

Source: The European House - Ambrosetti elaboration on European Commission data, 2015

(40) The European Commission aims to replace at least 80% of electricity meters with smart meters by 2020. Italy has been a European leader in deploying advanced metering systems and is close to 100% coverage of its 36 million customers.

73

34. Although from 2006 to 2013 –as shown in the pre-

instruments to achieve these objectives across the five

vious section– energy consumption decreased 9%, renew-

above-mentioned policy areas.

able energy consumption increased by 4% and greenhouse emissions decreased by 12%, EU energy policy has so far fal-

36. Overall, the Commission Communication goes in the

len short of creating an integrated energy market.

right direction by focusing on how to adapt the EU regulatory and incentive system to create a more competitive and

35. The Juncker Commission indicated energy as one of its

decarbonized energy market. However, some critical issues

ten political priorities and it published in February 2015 a

have remained unaddressed and would require further

Communication

41

that has the objective of completing an

consideration.

“Energy Union” by setting new energy targets and new

Figure 24. The EU Energy Union main policy instruments and objectives.

Energy supply security Gas: emergency plans at EU and regional level Create voluntary demand aggregation mechanisms for gas purchasing Define EU-wide acceptable risk in electricity supply Build capacity mechanisms Leverage on trade negotiations and diplomacy to create new energy partnerships with US, Canada, Norway, neighborhood countries

Internal energy market

Energy efficiency

Environmental sustainability

Research and Innovation

Electricity interconnection target raised to 15% by 2030

Further action on buildings energy efficiency required

Implementation of Market Stability Reserve (MSR) and review of the ETS in 2015

New EU energy R&I approach on technology and transport

EU investment in infrastructures

Transport efficiency (road charging schemes based on polluter / user pay to be introduced)

Redesign electricity markets linking wholesale and retail Smart grids promotion and standardization

Promoting rail transport (”Shift2Rail”)

Upgrading Transmission System Operations (3rd Int. Energy Package)

National targets need to be set on non-ETS covered sectors EU should become number one in RES: target 27% RES by 2030 Create more stable regulatory framework at EU and MS level

Horizon 2020 resources available Maintain technological leadership in nuclear (ITER) Leverage EU trade agenda to open up third-party public procurement

Strengthening ACER’s powers

Source: The European House - Ambrosetti elaboration on European Commission data, 2015

3.2.1 Security of energy supply High dependency on energy imports 37. Europe is highly dependent on natural gas and petroleum imports: between 1995 and 2012, the import share of consumption of petroleum increased more than 12 percentage points (from 74% to 86.4%), while natural gas increased more than 22 percentage points (from 43.4% to 65.8%).

The EU will remain highly dependent on energy imports

(41) European Commission, Communication “A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy”, 2015.

74

building the european energy union

Figure 25. Energy import dependency in the EU-28 (%): comparison between 1995, 2012 and 2030(e).

95.0% 86.4%

84.0%

74.0%

67.0%

65.8%

63.0%

53.4% 43.0%

43.4%

42.2% 21.5%

Total

Solid Fuels

Petroleum and products

1995

2012

Natural gas

2030

Source: The European House - Ambrosetti elaboration on Eurostat and ENTSO-E data, 2015

The EU imports about half of its natural gas supply from countries at high geopolitical risk After the 2009 Ukrainian gas shortage crisis, the European Union introduced new measures to strengthen the external dimension of security of supply policy by setting: > A common European standard for energy cross-border energy supply. > A regulatory framework to prevent and deal with emergencies in a coordinated way to avoid shortages.

However, the EU continues to be highly dependent on gas and petroleum imports from politically unstable countries such as Russia and other potentially unstable countries.

Figure 26. Top EU natural gas suppliers (% of total EU imports), 2013.

Quatar 8.40% Algeria 13.50%

Norway 31.30%

Nigeria 3.50%

Other countries 11.40%

Russia 31.90%

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

38. Significant differences also remain among Member States. The degree of import dependency is set to increase in the coming years for the whole EU. This is mainly due to dwindling domestic energy sources, popular opposition (the so called NIMBY effect – “Not in My Back Yard”) to new infrastructures and non-traditional energy resource development (e.g., shale gas) and the cost uncertainty of such new sources. Furthermore, the good level of interconnection between Europe and Russia results in Russian gas

Energy infrastructure network: the role of public opinion (NIMBY effect) According to Eurobarometer, over 40% of Europeans would be very concerned if a shale gas project were to be located in the neighborhood, whereas only 20% would not be very concerned or not concerned at all.

75

being comparatively cheap and accessible. This, in turn, di-

In fact, excessive dependency on a single producer reduces

scourages development of new energy sources.

the market power of European consumers. For example, the Russian gas producer Gazprom charges, on average, higher

39. In view of this trend of increasing import dependency,

gas prices to energy countries that have a higher depen-

energy supply diversification is set to remain a EU priority.

dency on its supply.

Figure 27. Gas prices charged by Russian supplier Gazprom in selected European countries (US$/thousand cubic

367

meters).

420

Finland

480

382

420

Estonia

Lithuania

387

Hungary Romania 394

Austria 399

438

Czech Rep. Slovakia 418

404

Germany

402

366

400

United Netherlands Kingdom

France

Latvia

Poland

396

285

400

429

Denmark

Italy Slovenia 469

Bulgaria

Greece

Source: Bruegel Institute, 2015

40. Energy diplomacy can also play a role in ensuring the

41. On a commercial level, some argue that demand aggre-

security of supply. The European Commission has exclusive

gation on a regional basis could increase the bargaining

responsibility for trade and investment negotiations for bi-

power of energy companies operating in smaller and less

lateral trade talks and it negotiates on behalf of European

interconnected countries vis-Ă -vis producers. However, poli-

Member States. After the Lisbon Treaty, the European Union

tical and regulatory discrepancies among EU Member States

expanded its external energy relations further by establi-

have made this option unfeasible until now.

shing a large number of bilateral energy dialogues with key consumer and producer countries. The European Union

42. Furthermore, there is a clear lack of information and

has also started negotiations on major trade agreements

technical analyses on import reduction and diversification

which have an energy dimension to them, notably with Ca-

policies. For example, there is a lack of feasibility studies on

nada, Japan and the United States. In addition, the Europe-

the cost-effectiveness of alternative energy sources (e.g.,

an Union intensified its external energy relations with China

shale gas) at the EU aggregate level.

as energy policy is a key area of cooperation.

76

building the european energy union

Low interconnection between Member States

44. To address this issue, the Energy Union Communication of February 201542 demands that EU Member States have electricity interconnection links to other Member States of

43. An efficient system of cross-country energy interconnec-

at least 10% of their own electricity production capa-

tors could reduce external import dependency of individual

city by 2020, confirming that the interconnection of the

countries and improve market efficiency. As of today, inter-

electricity markets is a political priority for the European

connections between EU Member States are insufficient

Union in the years to come.

and new investments are not adequately planned.

Figure 28. Interconnections, generation and demand in selected European countries.

1,000

Capacity (GW)

800 600 400

13% 17%

200

23%

0 Interconnectors

Generation

Demand 34%

27%

3% 3%

10% 23%

11%

48%

15% 21%

9% 5% 4%

3%

Source: International Energy Agency (IEA) and ENTSO-E, 2014. Note: interconnection levels of individual Member States refer to 2013.

45. This target is based on an inefficient metric (i.e., instal-

out of 28, mainly in the periphery of the EU (such as the th-

led production capacity). For example, transit countries, like

ree Baltic states as well as Poland and Spain), remain below

Switzerland or Belgium, should have interconnectors to

the 10% electricity interconnection target43 and are thus

be able to support a functioning pan-European market. A

isolated from the internal electricity market.

more efficient metric for interconnectors should be considered. This could be based, for example, on net and/or peak demand rather than production and it would ensure that there is adequate cross-country transmission capacity available when it is most needed. In addition, the 10% electricity interconnection target presents the limit to be a “flat” rate for all EU countries. Even if Member States have increased their interconnection capacities during recent decades, as already seen in Chapter 2, in 2014 12 European countries

Cross-country interconnectors of electricity markets are insufficient across the EU and the current metrics show some limits

(42) See: European Commission, Communication “Energy Union Package - Achieving the 10% electricity interconnection target. Making Europe’s electricity grid fit for 2020”, Brussels, 25 February 2015 COM(2015) 82 final.

(43) Source: ENTSO-E, “Scenario Outlook and Adequacy Forecast 2014”.

77

46. Furthermore, interconnection financing remains an is-

with the Energy Union Communication should be comple-

sue, especially in small countries in Eastern Europe. Some

mented with a series of new measures that addresses th-

interconnection projects have low return on investment

ree aspects:

and long amortization times (i.e., gas projects in Greece

>> Promoting regional cooperation of TSOs, with the

and Bulgaria), and this situation hinders investments. At

aim to have regional operators.

the same time, some European countries are too small

>> Stronger European Commission guidance in the se-

and/or not sufficiently liberalized (for instance, the Third

lection and prioritization of Projects of Common Inte-

Energy Package has not been adequately implemented

rest (PCIs) and strategic interconnectors to be based on

in some states) to attract demand and interconnection

better metrics and congestion assessments.

projects.

>> Financial support through incentives, European funds (e.g., via the European Investment Bank - EIB) and tax

47. To overcome these obstacles, the approach introduced

deductions for strategic interconnector projects.

Figure 29. Scheme of the decision-making process for the identification and selection of Projects of Common Interest.

284 Projects of Common Interest (PCIs) identiďŹ ed by Transmission System Operators (TSOs), project promoters, the European Agency for the Cooperation of Energy Regulators (ACER), the European Commission and Member States

PROJECT PROMOTERS

ENTSO -E

SUBMIT CANDIDATE PROJECTS PREPARE TEN YEAR NETWORK DEVELOPMENT PLAN (TYNDP)

NRAs*

CHECK CRITERIA APPLICATION

CROSSBORDER RELEVANCE

(*) National Regulatory Authorities

Source: The European House - Ambrosetti elaboration on ACER data, 2015

78

building the european energy union

EVALUATE PROJECTS

RANK

CRITERIA

COST-BENEFIT ANALYSIS FOR MATURE PROJECTS

REGIONAL GROUPS

DEFINE REGIONAL LISTS

ACER

OPINION ON THE DRAFT REGIONAL LISTS AND CROSS-BORDER CONSISTENCY

MEMBER STATES & EU COMMISSION

MEMBER STATES AND THE EU COMMISSION DECIDE ON REGIONAL PCI LISTS THE EU COMMISSION ADOPTS PCI LIST

The PCI toolbox Quick permit granting procedures:

General criteria of eligibility:

> Priority status

> Contribute to infrastructure priorities (corridors)

> Competent authority to manage permitting

> Economic, social, environmental viability

> Time limits for procedures (3.5 years max)

> Involve at least two EU Member States

> Enhanced transparency and public participation

> Have significant cross-border impact > Part of the Ten-Year Network Development Plan –

Regulatory and other support measures:

TYNDP (from the 2015 PCI list)

> Cost-benefit analysis (CBA) > Cross-border cost allocation (CBCA): “beneficiaries pay” principle

Specific criteria of eligibility: > Market integration (market, price convergence)

> Risk-related incentives

> Security of supply

> Financial support (grants for studies and financial

> Sustainability

instruments for all PCIs and grants for works for

> Competition (diversification-natural gas only)

some)

3.2.2 Internal market Imbalances in the European retail market

>> Freeing up the supply side of the market (e.g., removal of barriers preventing alternative suppliers from importing or producing energy). >> Freedom of consumers to choose their supplier and the

48. The EU has introduced three Energy Packages with the

removal of restrictions on customers from changing

objective of creating a single and liberalized European energy

their supplier.

market. These directives opened up national markets and increased cross-border trade and business activities during the

>> Creation of independent regulators to monitor the sector and enforce these measures.

1990s and 2000s. They introduced the basic principles which characterize today the European regulatory framework:

49. The three Packages have so far fallen short of creating

>> Differentiation between competitive parts of the indust-

a truly integrated energy market in Europe. In particular,

ry (e.g., supply) and regulated parts (e.g., operation of the

in the retail market significant differences remain in

networks) – with ex ante regulation and unbundling.

the structure and levels of energy prices for individuals

>> Obligation on operators of the regulated parts of the indu-

and companies (ranging from €0.24/kWh in Denmark to

stry (e.g., the networks and other infrastructure) to allow

€0.08/kWh in Sweden for mid-sized enterprises in the se-

third parties to have access to the infrastructure.

cond semester 2014).

79

Figure 30. Average electricity costs (â&#x201A;Ź/kWh for a mid-sized enterprise, 500 MWh < consumption < 2,000 MWh), second semester 2014.

0.25

0.20

0.15

0.10

0.05

Energy cost

Sweden

Finland

Czech Republic

Romania

Bulgaria

Poland

Slovenia

Luxembourg

The Netherlands

France

Estonia

Hungary

Croatia

Austria

Belgium

Latvia

Slovakia

Spain

Lithuania

Portugal

Greece

Ireland

EU-28

UK

Malta

Germany

Italy

Cyprus

Denmark

0.00

Taxes and levies

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

50. Furthermore, retail prices are not cost-reflective due the significant weight of national policy choices, tax schemes and other system costs, which have increased substantially

Retail prices are not cost-reflective

over the last ten years.

213.2 245.9 272.8 276.3 28.9

84.3 89.3 96.4

117.0 171.8 184.5 180.2

France

201.4 233.4

169.9 155.8 149.1 161.6

EU-28

108.9

164.4 165.6 172.8

143.1 119.3 122.3 114.2

168.5 197.4 183.0 185.3

Figure 31. Tax wedge in selected European countries (Euro/Toe): comparison between 1995, 2005, 2010 and 2012.

Germany

Spain

1995

2005

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

80

building the european energy union

Italy 2010

The Netherlands 2012

Poland

UK

51. These imbalances in the retail market are the result of

tions. Therefore, regulated prices should be progressively

a series of political and regulatory decisions and, in par-

phased out.

ticular, of: >> Strong political interest of national governments in

Depressed prices in the wholesale market

maintaining control over retail energy prices (through 54. The current EU electricity target model, which sets out

directly- or indirectly-regulated prices). >> Different targets for renewable energy targets (2008

the guidelines for integration of the EU wholesale market,

Climate Energy Package) and support schemes for each

relies on having efficient cross-border capacity calculation,

Member State, which is free to set incentives and taxa-

efficient long-term capacity allocation and efficient day-

tion with minimal guidelines from the EU.

ahead and intra-day cross-border markets, and efficient bal-

>> Lack of adequate coordination across Member States in the definition of national energy mixes.

ancing markets.

44

55. The liberalization of wholesale markets has had posi52. In order to reduce such imbalances an overhaul of na-

tive effects on competition and it has increased the num-

tional incentive schemes for renewables is warranted. In

ber of market operators.

particular, it should be ensured that financial incentives for renewables are allocated in a more efficient way.

56. Furthermore, the increase in RES deployment has led to a significant decrease of wholesale prices. In the period

53. Furthermore, price regulation (direct and indirect) by

from 2008 to 2014, wholesale prices have decreased by

national governments has also contributed to misaligning

50% in Germany, by 50% in France, by 40% in Italy and by

energy prices across Member States, thus creating distor-

35% in Spain.

Figure 32. Wholesale power prices (€/MWh): comparison between Germany, France, Italy and Spain, 2008-2014.

90

87

80 70

69

66

64

60 52 50 42 40

35

33

30 20 10 0 Germany

France 2008

2009

Italy 2010

2011

2012

Spain 2013

2014

Source: The European House - Ambrosetti re-elaboration on CEPS data, 2015

(44) Article 194 of the revised Treaty on the Functioning of the European Union (TFEU) states that measures defined by the European Parliament and the Council on energy policy do not affect “a member state’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply”.

81

57. The lack of adequate long-term price signals has produced inefficient investment decisions by market operators.45 This resulted in overcapacity in the majority of countries (mainly due to over-investment and deployment of RES with high costs) and under-capacity in other countries. In the latter countries, the risk of electricity disruptions (due to low investments) remains considerable.

The lack of adequate long-term price signals has produced inefficient investment decisions

Figure 33. Spare electricity capacity in European countries, January 2015.

≥ 20% ≥ 10% & < 20% ≥ 0% & < 10% < 0%

Source: The European House - Ambrosetti elaboration on ENTSO-E, “Scenario outlook and adequacy forecast 2014-2030”, 2015. Note: Spare Capacity is the ratio (Remaining Available Capacity – Adequacy Reference Margin)/Adequacy Reference Margin. The Adequacy Reference Margin includes Margin Against Seasonal Peak Load. As seasonal peak load does not occur simultaneously, this map shall not be understood as a European-level assessment of adequacy.

58. The lack of long-term price signals and price uncertain-

59. Furthermore, the European Parliament has recently ap-

ty have deterred investments as well as de-investments. In

proved (July 2015) the Commission’s proposal to establish

fact, without long-term price signals, investors are not wil-

a Market Stability Reserve. This will address the current

ling to divest assets in market with capacity surplus and tend

surplus of allowances and improve the system’s reliance to

to wait until competitors shut down their generation capa-

major shocks by adjusting the supply of allowances to be

city. A wider utilization of long-term contracts would help

auctioned. 46 As a result, these measures will create the ex-

to address this imbalance and would create more stable and

pectation of an increasing CO2 price, and will lead to more

clearer signals for investments.

stable wholesale prices.

(45) Reliable price signals also have important implications for long-term contracts since importers have more bargaining power and a price reference for contract renegotiations with producers.

(46) See: European Commission, “Transforming Europe’s energy system - Commission’s energy summer package leads the way”, 15 July 2015.

82

building the european energy union

62. A fully-functioning and interconnected energy mar-

The reform of the EU European Trading System

ket will reduce (but not eliminate) the need for market

The EU Emissions Trading System (ETS) is Europe’s

in one country to be used in another country. Clear, ba-

flagship tool for tackling climate change and placing

lanced and shared common rules on market capacity

the EU on-track towards a low-carbon economy. As

would thus help to reduce costs.

capacity mechanisms and the relted costs. This could be done, for example, by allowing market capacity located

recently announced by the European Commission (July 2015), the review of the EU ETS aims to ensure that it remains the most efficient and cost-effective way to cut emissions in the decade to come, as the first legislative step towards implementing the EU’s

3.2.3 Energy efficiency Lack of adequate metrics

commitment to reducing greenhouse gas emissions by at least 40% domestically by 2030.

63. Energy efficiency is gaining new momentum in the

The key components of the ETS reform (including

EU amid concerns about decreasing industrial competi-

Market Stability Reserve implementation and ETS re-

tiveness and energy security. Energy efficiency has been

form legislative proposal) are the following:

identified as a key tool with strong benefits for ensuring

> The reform will take effect on January 1, 2019.

better competitiveness, security of supply and social out-

> The surplus allowances temporarily taken out (or

comes, as well as fostering energy and climate objecti-

“backloaded”) from the market last year, would

ves. It is estimated that 1% in additional energy savings

be placed into the Market Stability Reserve rather

(beyond the 25%) can decrease EU gas imports by 2.6%.47

than returned to the (already flooded) market. > The overall quantity of allowances will decline by 2.2% every year starting from 2021.

64. The EU set ambitious energy efficiency objectives: the 2008 EU Energy and Climate Change Package set the

> Over the current trading period (2013 to 2020),

target of a 20% energy efficiency increase by 2020

57% of the total amount of allowances will be

compared to the “business as usual” scenario. In October

auctioned, while the remaining allowances are

2014, the European Council agreed to a further non-bin-

available for free allocation (actually the remai-

ding EU-wide target of at least 27% energy efficiency

ning alllowances are not all free allocations but

by 2030, based on current criteria, but kept the option

also innovation fund). The share of allowances to

open to review the target in 2020, having a 30% target

be auctioned will remain the same after 2020.

in mind.

The agreement on the ETS reform proposal would reinforce the effective operation of the internal

65. It is questionable, however, whether this is an ade-

energy market and would provide adequate long-

quate metric to gauge energy efficiency. The European

term price signals to induce investments in low-car-

Commission decided to measure the target through ab-

bon technologies.

solute consumption but it is not clear whether this needs to be achieved through higher efficiency or lower energy intensity of the economy (energy-intensive industries in

60. Finally, internal market integration and efficient envi-

Europe are already in structural decline). In this respect,

ronmental protection are two faces of the same coin and

Member States should be allowed to define different

should be addressed in parallel.

metrics that measures energy efficiency rather than focusing on absolute consumption trends (e.g., the diffe-

61. Each Member State currently sets out its own rules for

rence between primary and final energy demand, carbon

market capacity remuneration mechanisms. The lack of a

intensity, etc.), which would provide a more effective sy-

coordinated approach among Member States may, howe-

stem to gauge energy efficiency.

ver, lead to an inefficient allocation of resources.

(47) International Energy Agency, “Energy Policy of IEA Countries: European Union”, 2014.

83

Low energy efficiency in building and transport sectors

A large proportion of EU buildings have poor energy performance According to the European Commission, about 75%

66. Even though the EU has already seen an overall decline in energy intensity of 31.5% since 1990,

48

of European housing stock is energy-inefficient.

some economic

sectors –such as transport and buildings– have seen limited progress in energy efficiency. Today, building and transport

and cooling are the largest single sources of energy demand

account for over two-thirds of energy consumption. Heating

in the EU and the main driver of gas imports.

Figure 34. Final Energy Consumption (FEC) by sector in the EU-28 (Mtoe), 1990-2013.

1,200

-58%

1,000

+41% -26%

800

+8%

600

+15%

400

+23%

200

-25%

Industry

Transport

Residential

Agriculture/Forestry

Services

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

0 70 % of total FEC

Non-specified (Other)

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

67. Energy efficiency and technological innovation are closely interdependent. While energy efficiency technology is available, its usage is not yet sufficiently widespread. Governments and the EU need thus to intervene to increase in-

ing savings for consumers (about 10-15 years on average). d. Limited public awareness as to the long-term benefits of energy efficiency incentive schemes.

vestments, incentivize the electrification of heating systems and transport and the installation of efficiency-related

69. Finally, since electricity is the most efficient energy

technologies (mass storage, smart grids, etc.).

source for end users, an explicit electrification target could be set at the EU level to stimulate the adoption of electricity

68. Until now, energy efficiency investment in the transport

instead of gas and coal.

and building sectors have not been adequately widespread.

This was mainly due to four factors:

70. The penetration of energy efficient technologies and be-

a. Lack of political will at national and EU level to impose

haviors is strongly hindered by the presence of non-econo-

standards on vehicle producers. b. Lack of demand and high costs for increasing energy efficiency in households and commercial buildings. c. The time-lag between upfront investment and the result-

mic barriers. In particular, financing is becoming more and more one of the main barriers hindering the development of energy efficiency. Improving financing inititiaves, such as risk sharing mechanisms, dedicated credit lines, or on-

(48) Public investment in energy efficiency in 2010 across eleven Member States averaged between €4 and €20 per capita. In 2014, the European Union had lower energy intensity than its major trade partners Australia, the United States and Canada. In addition to energy efficiency improvements, the collapse in industrial demand amid the economic crisis in 2008 added to lower energy consumption. Source: International Energy Agency, 2014.

84

building the european energy union

bill repayments, for the investments of commercial firms is essential to meet EU energy efficiency targets. Moreover, financing programs are also a key topic. The EU is funding energy efficiency through several mechanisms including the

3.2.4 Environmental protection Low carbon prices

European Structural and Investment Funds (€5.6 billion to

72. In 2009, the European Union took on a unilateral target to

energy efficiency, co-generation and energy management

reduce its greenhouse gas emissions by 20% in 2020 below

from 2006 to 2013), the European Energy Efficiency Fund

1990 levels and introduced a system of carbon allowances (EU

(established in 2011 by the European Commission with an

Emission Trading Scheme - ETS). The EU is currently on-track

initial volume of €265 million), and the Horizon 2020 Pro-

to meet its 20% greenhouse reduction target, also thanks to

gram (€285 million allocated to energy efficiency between

the increase in RES deployment but, at the same time, due to

2006 and 2013).

the current economic slowdown. An extensive reform of the ETS system is warranted and already in the pipeline.

71. However, in view of their long maturity and return required, many energy effiency projects have not yet been

73. The EU carbon market under the EU ETS has experienced

funded. The Juncker Plan (€315 billion over the period

a major price collapse from around €30 per tonne of carbon

2015-2018) offers an opportunity to leverage resources

dioxide (tCO2) to around €6-8 per tCO2 since 2008. These pri-

through the European Investment Bank to finance energy

ce levels did not act as a signal for the decarbonisation of the

efficiency projects that require longer maturities.

power sector or the investment in low-carbon technologies.

Figure 35. Overall surplus of CO2 market (MtCO2) (left graph); CO2 emission allowance price (€/t tCO2) (right graph).

CO2 emissions allowance price (€/tCO2), 2008-2015

Overall surplus on the EU CO2 market (MtCO2) 2008 - 2020 3,000

35 30

2,500

25 2,000

20 15

1,500

10 1,000

5

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

0

08/04/2008 08/08/2008 08/12/2008 08/04/2009 08/08/2009 08/12/2009 08/04/2010 08/08/2010 08/12/2010 08/04/2011 08/08/2011 08/12/2011 08/04/2012 08/08/2012 08/12/2012 08/04/2013 08/08/2013 08/12/2013 08/04/2014 08/08/2014 08/12/2014 08/04/2015

0

500

Source: The European House - Ambrosetti elaboration on EEA and EEX data, 2015

74. According to the ETS, emission allowances are to be

ation of a market stability reserve after 2020 to address the

progressively reduced. The current rate of allowance allo-

current surplus of emission allowances by automatically

cation reduction is 1.74% per year: this reduction rate has

adjusting the supply, together with an increase in the EU

clearly failed to keep carbon prices at a meaningful level.

ETS linear emission reduction factor from 1.74% to 2.2%.

This would significantly reduce the surplus market for CO2

75. As previously anticipated, to make the ETS system more

allowances and should be implemented swiftly.

effective, the European Commission has proposed the cre-

85

Figure 36. The impact of the Market Stability Reserve (MSR) on the CO2 allowance surplus (Mt CO2).

3,500 3,000 2,500 2,000 1,500 1,000 500 0 2015

2016

2017

2018

2019

Surplus with EC MSR

2020

2021

2022

2023

2024

Surplus with current regulation

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

76. Furthermore, there is a risk that the sectors covered by

Imbalances in the RES support scheme

the ETS could fall out-of-step with the emission reductions in sectors that do not fall under the ETS, such as transport

77. In order to meet the target of 20% gross final energy con-

To address this problem, the ETS could be

sumption from renewable energy sources, EU Member Sta-

extended to all relevant sectors. Where it would not be fe-

tes have introduced a wide range of incentive schemes (e.g.,

asible to charge consumers directly (e.g., car owners), new

capital subsidies/rebates, investment or production credits,

measures could be introduced to charge the producers of

taxes, production payments, public loans or grants) to sup-

such final goods (e.g., car manufacturers).

port the deployment of renewables at a national level.

and heating.

49

Figure 37. Fiscal incentives to RES in selected European countries.

Capital subsidy and rebate

Investment or production credits

Reduction in sales, energy, CO2, VAT or other taxes

Energy production payment

Public investment, loans or grants

Austria Belgium France Germany Greece Ireland Italy The Netherlands Poland Spain Sweden UK Source: The European House - Ambrosetti re-elaboration on various sources, 2015

(49) The system covers carbon dioxide (CO2) emissions from power and heat generation, energy-intensive industry sectors (including oil refineries, steel works and production of iron, aluminum, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals) and commercial aviation.

86

building the european energy union

78. Under the Renewable Energy Directive, individual Member States remain primarily responsible for designing the energy market to achieve RES targets and thus support schemes for RES have remained national in scope. This lack of a clear framework for RES incentives has sometimes resulted in inefficiencies and overcompensation of already mature technologies. A more harmonized EU approach on EU state aid on RES is thus warranted to ensure a more efficient allocation of public resources.

The lack of a common EU regulatory framework for RES incentives has produced inefficiencies 79. In this respect, the European Commission should encourage the adoption of the feed-in premium as the common incentive scheme for RES deployment across the EU (as indicated by the DG Competitionâ&#x20AC;&#x2122;s guidelines on RES state aid) and promote competitive allocation of incentives

The German photovoltaic case

(e.g., through tenders) as an effective tool.

Germany has installed more photovoltaic energy ca-

80. Furthermore, Member States should be required to in-

pacity than other countries with higher solar exposure.

crease the frequency and transparency of incentive scheme reviews in order to promote greater alignment between deployment compensations and actual deployment cost/returns.

Figure 38. Types of support schemes for new RES capacity in selected EU countries.

Auctions Feed-in Tariff Feed-in Premium (including fixed, sliding) Green Certificates Minimum return on invested capital Retroactive changes Other legal changes

Source: The European House - Ambrosetti re-elaboration on Ecofys, Eurelectric and Enel data, 2015

87

Figure Share of renewable energy gross final energy consumption in the EU-28: comparison between 2005 Share 39. of renewable energy in gross final energyin consumption in the EU-28,2005-2015 and 2013.

60 50 40 30 20 10

2013

Luxembourg

Malta

The Netherlands

United Kingdom

Ireland

Belgium

Cyprus

Slovakia

Hungary

Poland

Germanty

Czech Republic

France

Greece

EU-28

Spain

Italy

Croatia

Bulgaria

Slovenia

Lithuania

Romania

Estonia

Portugal

Denmark

Austria

Finland

Latvia

Sweden

0

2005

Source: The European House - Ambrosetti elaboration on ENTSO-E and Eurostat data, 2015

3.2.5 Research & Innovation

batteries). Similarly, the European Commission set targets

The EU lags behind in the deployment of key technologies

RES-related technologies in energy transition.

only for RES deployment, underestimating the role of non

82. This could prevent the EU from developing pivotal techno81. The European Commission set development policies

logies in the future and does not provide adequate incentives

only for RES deployment and not for key technological tran-

to direct financial resources to technologies currently not yet

sformation such as digitalization and energy storage (e.g.,

mature for commercialization but with high potential.

Investments in R&D vs. RES deployment in the EU Big-5

Figure 40. R&D expenditure compared to RES deployment costs (ratio), 2013.

In the â&#x20AC;&#x153;EU Big-5â&#x20AC;? (United Kingdom, France, Spain,

14.0%

Germany and Italy) public and private sectors have

12.0%

devoted much more attention and resources to RES deployment compared to energy R&D finan-

10.0%

cing. The United Kingdom is a partial exception to

8.0%

this trend where, in 2013, the ratio between R&D

6.0%

expenditure and RES deployment costs on average

4.0%

were above 10% (12.2% for solar energy and 8.2% for wind energy), whereas in the other countries this ratio was well below 1%.

2.0% 0.0%

UK

France

Spain Solar

Germany

Italy

Wind

Source: The European House - Ambrosetti elaboration on Bruegel Institute data, 2014

88

building the european energy union

83. Collective EU action in supporting R&D investment in new energy technologies is particularly important in the current market context for three main reasons: a. Current overcapacity and lower industry margins discour-

The most innovative energy technologies for the EU The Strategic Energy Technology Plan (SET-Plan) has

age investments in new technologies. b. Lack of proper regulation on negative prices discourages

identified 21 main energy technologies as key to Eu-

customers from adopting the so-called “flexibility tech-

rope’s effort to decarbonize its economy and increase

nologies”.

energy efficiency.

c. Small spreads between higher and lower retail prices in the electricity market discourage investments in technologies such as storage. in 2008, the SET-Plan aims to accelerate the development 84. The European Union aims to increase the overall share

and deployment of low-carbon technologies and to promo-

of R&D to 3% of GDP from less than 2% in 2010. Under the

te research and innovation efforts across Europe by suppor-

Europe 2020 Strategy, two flagship initiatives –the Resource

ting technologies with the greatest impact on the EU’s tran-

Efficiency and the Innovation Union – are of particular re-

sformation to a low-carbon energy system. The Plan lists six

levance to EU energy R&D policies. Furthermore, Horizon

technology areas as the most relevant for both the Europe-

2020 has made €5.6 billion available for non-nuclear energy

an Union’s targets for 2020 and 2050: wind, solar, bioener-

sources.

gy (with the focus on second-generation biofuels), carbon

50

capture and storage, electricity grids and nuclear fission. In 85. The Strategic Energy Technology Plan (SET-Plan) is the

these six key areas, European Industrial Initiatives (EIIs) were

research and innovation pillar of EU energy policy. Launched

established.

Figure 41. SET-Plan: strategic energy technologies.

Advanced Fossil Fuel Power Generation

Bioenergy

Biofuels

Carbon Capture Utilisation and Storage

Cogeneration of Heat and Power

Concentrated Solar Power

Electricity Storage in the Power Sector

Energy Efficiency in the Cement Industry

Energy Efficiency in the Iron and Steel Industry

Energy Efficiency in the Pulp and Paper Industry

Fuel Cells and Hydrogen

Geothermal Power

Heating and Cooling Technologies

Hydropower

Nuclear Fission Power

Nuclear Fusion Power

Ocean Energy

Road Transport Efficiency

Smart Electricity Grids

Solar Photovoltaic

Wind Energy

Source: European Commission, SETIS – Strategic Energy Technologies Information System, 2015

(50) The Resource Efficiency and the Innovation Union provide a long-term framework for action and financing under Horizon 2020 in many policy areas, supporting policy agendas for climate change, energy, transport, industry, raw materials, agriculture, fisheries, biodiversity and regional development.

89

86. Further resources for energy-related R&D have been

innovation indicators, similar indicators to track energy-

made available throug Horizon 2020, the 7 Framework

related R&D results at EU and Member State levels have not

Programme for Research and Technological Development,

been developed so far, however.

th

and EIB’s instruments such as the EIB Green Bond Initiative.

88. Finally, the EU should continue efforts to better align EU 87. An essential part of R&D policy is systematic monitoring

and national R&D priorities, policies, and international techno-

of progress and effective program evaluation. More atten-

logy co-operation. Market- based criteria should be identified

tion to these areas would be desirable. While monitoring

at EU-level to select technological innovation projects with

the progress of EU R&D efforts includes economy-wide

high potential and channel resources toward them.

3.3 The benefits of the European Energy Union 89. Completing the Energy Union will provide relevant be-

>> EU industry gas prices were three to four times more

nefits for the European Union and its citizens and compa-

expensive than comparable U.S., Indian and Russian

nies at different levels. In particular, our analyses focus on four key dimensions: a. Competitiveness: technological leadership in the energy industry and its related sectors; lower imports of

prices and 12% higher than Chinese prices. >> EU industrial retail electricity prices were also more than twice those in the U.S. and Russia, 20% more than in China.51

energy products and energy dependence. b. Environmental protection: lower carbon emissions and related savings.

92. This price difference with other economies hinders the competitiveness of European industries, especially energy-

c. Energy efficiency: technological innovation, competi-

intensive ones. Also, the developing of new technologies

tiveness of EU energy-efficient industries and prevention

(such as shale gas) will bring the U.S. from being a net ener-

of “carbon leakage”.

gy consumer to become a net energy producer in the next

d. Geopolitics: increasing EU geopolitical influence on the

few years.

global energy and climate change Agenda; trade negotiations and diplomacy.

93. Considering research and development, European companies have a share of 40% of all patents for rene-

3.3.1 The Energy Union as a driver of European competitiveness

wable technologies and a relevant market share in environment technologies. However, the European Union is still far from having a fully coordinated and focused research approach, capable of combining EU and Member

90. In its recent Communication “A Framework Strategy for

State research programs around selected and strategic

a Resilient Energy Union with a Forward-Looking Climate

common goals and technologies (e.g., smart grids, storage

Change Policy”, the European Commission recognized com-

solutions, etc.) that will be critical for tomorrow’s energy

petitiveness of Europe and its companies as a key element

sector.

in the Energy Union strategy.

94. Moreover, the Emissions Trading System (ETS) has been 91. As of today, Europe is leader in key technologies, such

forefront in innovation in environment policies and will

as renewables, clean technologies and energy efficiency.

continue in the future to be the EU flagship climate change

However, the European energy sector still presents several

tool. However, as of today, it is failing in communicating pri-

critical issues that hinder the competitiveness of EU firms. In

ce signals that incentivize European companies to invest in

2014, according to European Commission estimates:

clean and energy-efficient technologies.

(51) European Commission, “Energy prices and costs in Europe report”, 2014.

90

building the european energy union

95. Considering the great changes underway in the global

crease energy efficiency and reduce greenhouse gas

energy sector and the growing competition, European ener-

emissions.52

gy policy can be a unique opportunity to create synergies between climate policy and business and deliver an ener-

99. The European Commission also identifies other research

gy policy for the European Union that fosters innovation,

priorities for those Member States who want to use these

strengthens European leadership in high value sectors and

technologies – such as carbon capture and storage (CCS),

drives investments in strategic technologies.

carbon capture and use (CCU), nuclear energy, etc.

96. Recognizing the importance of competitiveness and considering it a top priority for the European Union, in its Energy Union Communication the European Commission has called on research, industry, the financing sector and public authorities to work together to take advantage of the creation of the Energy Union.

Environmental technology: a growing industry in the years to come The environmental technology market has grown by

97. The aim of the Commission is to build strong and com-

11.8% per year, on average at a global level between

petitive European companies, capable of developing cut-

2007 and 2012, reaching a value of €2 trillion and it is

ting-edge technologies (such as smart grids, smart homes,

expected to reach a value of €4.4 trillion in 2025.

renewables, storage solutions, clean transport solutions, clean fossil fuel and nuclear generation) and to create industrial products that will become the standard inside and outside Europe in the coming decades.

100. A clear strategy along these core areas will enable EU industry to benefit from the first-mover advantage, becoming

98. To reach this goal, a new approach in research and

a leader in cutting-edge environmental technology.53 As

innovation is needed. Key technologies must be clearly

of today, Europe is a world leader in environmental techno-

identified, in order to not dispel resources and to drive in-

logy: its industries employ more than two million people,

vestments. The Commission has identified four core priori-

accounting for about one-third of the global market.

ties to which all Member States, European Commission and other stakeholders must commit:

101. Through a consistent energy strategy focusing on com-

a. Achieve leadership in developing the next generation of

petitiveness and research and innovation financing, Europe

renewable energy technologies, including environment-

can keep its market share despite growing international

friendly production and use of biomass and biofuels, to-

competition. In doing so, EU environmental technologies

gether with energy storage.

firms could generate €1,452 billion by 2025. The cumulated

b. Facilitate consumer empowerment through smart grids, smart home appliances, smart cities and home automa-

value will be equal to about €12 trillion between 2015 and 2025.

tion systems. c. Increase energy efficiency and make building stock energy neutral. d. Develop sustainable transport systems and deploy on a large scale innovative technologies and services to in-

102. In addition, gaining competitiveness in cutting-edge technologies will allow Europe to develop new standards and innovative business models and create valuable skills and jobs.

(52) Source: European Commission, “A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy”, 2015.

(53) The “environmental technology” sector includes: power generation with renewable energy sources, environmental-friendly use of fossil fuels, storage technologies, efficient grids, waste collection and transport, waste utilization, waste disposal, environmental remediation, water procurement and treatment, water utilization, efficiency increases in water utilization, alternative fuels, alternative drive technology, infrastructure and traffic control, sustainable mobility management, cross-sectional technology, new materials, material-efficient processes, sustainable design, industry-specific energy-efficient production processes, efficient appliances and energyefficient buildings.

91

Figure 42. Value of Environmental Technology market at global and European level (€ billion), 2015(e) - 2025(e).

4,400

4,500 4,000 3,500 3,000 2,500

2,399

2,000 1,452

1,500 1,000

792 Cumulated Value: €12,012 bln.

500 2015

2016

2017

2018

2019

2020

2021

World

2022

2023

2024

2025

EU-28

Source: The European House - Ambrosetti elaboration on European Commission data and various sources, 2015

103. Furthermore, increasing the share of RES in gross inland

deployment, the EU would save about €767 billion in the

consumption would improve the EU balance of payments

period 2015-2030 (at 2013 prices) compared to a scenario

and reduce the amount of energy imports currently at over

where renewables share of gross consumption remains con-

€400 billion per year. By reaching the 2030 target on RES

stant.

Figure 43. RES production and extra-EU imports in the EU-28 (Mtoe), 2015(e)-2030(e).

900

850

800

750

700

650

600

2015

2016

2017

2018

2019

2020

2021

2022

2023

Imports reduction thanks to RES increase

Source: The European House - Ambrosetti elaboration on Eurostat and BP data, 2015

92

building the european energy union

2024

2025

2026

2027

Imports with no RES increase

2028

2029

2030

3.3.2 Europe’s contribution to the global environmental agenda

setting targets on emissions, renewables and energy efficiency.

105. On October 2014, European Member States agreed to

104. Since the European Union has started to focus on

strengthen their commitment with the 2030 Climate and

energy, environmental issues have been at the core. In

Energy Package, which aims to make the European Union’s

1991, the Commission issued the first community stra-

economy and energy system more competitive, secure and

tegy to limit CO2 emissions and improve energy efficiency.

sustainable. This new package sets the following 2030 targets:

Then, in 2000, it launched the first European climate chan-

>> Greenhouse gas reduction target of at least 40% compared to 1990.

ge program (with the target to cut by 8% EU greenhouse

>> Increasing the share of renewable energy to at least 27%

gas emissions to 8% below 1990 levels by 2008-2012 and

of EU energy consumption.

achieve Kyoto targets). This paved the way to a more inte-

>> Increasing energy efficiency by at least 27%.

grated action, with the 2020 Climate and Energy Package,

Figure 44. EU climate action: targets for 2020 and 2030 (target), 2004-2030.

Share of renewables

Energy efficiency (max. Mtoe, primary energy consumption)

GHG emissions

“Business as usual” scenario used by the EU Commission to calculate the 2020 target

2004: 93.8%

Target 2030: 27%

1,951.2

1,853 2012: 82.1% 1,787

2004: 1,706

Target 2020: 80%

-

Target 2020: 20.0%

2013: 15.0% 2013: 1,567 2020: 1,483

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2030

2030: 1,424 2028

2026

2024

2022

2020

2016

2014

2012

2010

2008

2006

2004

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2004: 8.3%

2018

Target 2030: 60%

Source: The European House - Ambrosetti elaboration on Eurostat data, 2015

106. To reach these ambitious goals, however, a forward looking climate policy could not be enough. A more comprehensive energy strategy, capable of improving the governance of the European energy sector and considering all the interrelated aspects is needed. In this sense, the European

ETS reform is needed to deliver price signals that incentivize energy savings investments

Energy Union can offer a unique opportunity to tackle climate change and environmental issues, providing the

107. First of all, the Energy Union should reform the Emis-

“control room” and far-ranging regulation for a comprehen-

sions Trading System (ETS). As of today, it is delivering low

sive European environmental strategy. It can also deliver the

prices for CO2 emissions, disincentivizing investments in cle-

comparative advantage that Europe needs to become the

an technologies. The European Parliament has approved, in

world leader in sustainability, to cut emissions to unprece-

July 2015, the Market Stability Reserve (MSR) proposed by

dentedly low levels and to be in the forefront of renewable

the European Commission and expected to become fully

energy production and in the fight against climate change.

operational by 2019. It will balance demand and offer CO2

93

allowances, addressing the current surplus of allowances and improving the resilience of the ETS to major economic shocks. It will operate according to pre-defined EU-level ru-

Changing global habits is needed

les with no discretion to the Commission or Member States

According to World Health Organization (WHO) esti-

in its implementation. The revised ETS Directive will also in-

mates, in 2012 deaths due to outdoor air pollution

clude an innovation fund (to support low-carbon demon-

were 3.7 million, of which nearly 90% were in deve-

stration activities across the EU) and a modernization fund

loping countries.

(to fund the modernization of energy systems in low-income Member States) financed by the sale of emission allowances from 2021 to 2030.

tor in Europe and accounts for about one-fifth of emissions.

An integrated approach will have to promote electrification

108. Moreover, the Energy Union strategy will also help to

and clean fuels investments, collaborating with business and

further develop renewable energy sources thanks to new

consumers and merging policy and financial instruments.

policies and legislation, measures to incentivize investments and financing of cutting-edge research and development

112. Environment is today a compelling priority in the glo-

projects. The Energy Union will also keep in mind the impor-

bal agenda. At the end of 2015, France will be hosting the

tance of international competitiveness of European firms in

21st session of the Conference of the Parties to the United

the environmental technology sector.

Nations Framework Convention on Climate Change (COP21 in Paris). The EU will have to play a major role in this crucial

109. The Energy Union also aims to ensure that renewable

conference, where a new international agreement on clima-

energy will be integrated into a “secure and cost-efficient

te must be reached that must be applicable to all countries,

energy system”54 where consumer empowerment and de-

with the aim of keeping global warming below 2°C.

centralization of production will be taken into account and will contribute to efficiency and sustainability of the entire

113. Reducing pollutant emissions will not only save lives

system.

and the environment, but also economic resources for environmental-friendly European companies. There have been

110. Another key aspect is related to energy efficiency: ac-

several attempts to quantify the cost of carbon emissions

cording to the European Commission, 75% of EU housing

and air pollutants,56 taking into account all the externalities

stock is currently energy inefficient55 and heating and cooling

they cause. We have decided to consider this cost only from

remain the main single source of energy demand in Europe.

an economic standpoint, using the price of a ton of CO2

The Energy Union will have to take into account this problem,

delivered by the EU-ETS (€8/CO2 ton, as of July 2015).57

simplifying financing for a comprehensive renewal of the European building stock, incentivizing investments and re-

114. Considering this CO2 price, it has been evaluated that

viewing Energy Efficiency and Energy Performance Directives.

reducing Green House Gas emissions by 60% (vs. 1990 levels, as decided in the 2030 framework for climate and

111. The Energy Union will also have to tackle the problem of

energy policies) would result in €66.3 billion cumulated

pollutants and GHG emissions, especially in the transport sec-

savings between 2012 and 2030 for European compa-

tor. Transport, in fact, is the second largest GHG-emitting sec-

nies.

(54) European Commission, “A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy”, 2015.

(55) According to European Commission estimates, to achieve the 27% energy efficiency target by 2030, the energy intensity of the residential sector will have to improve almost five times faster between 2020 and 2030 than it did between 2000 and 2010.

(56) For instance, the Environmental and Energy Study Institute - EESI, “Carbon pricing around the world”, 2012.

(57) Several attempts to evaluate CO2 emissions have been made. In particular, some of them use the price of CO2 delivered by carbon taxes implemented around the globe (the average value of carbon taxes in the world was about €25.45/ton as of October 2012) or ETS allowances price. We have adopted a conservative value of CO2, using the current EU-ETS price for CO2.

94

building the european energy union

Figure 45. GHG emissions levels in the EU-28 (% reduction to 1990 levels and € billion savings), 2004-2030.

93.8%

82.1% Target 2020: 80% Savings (2012-2020) €4,4 bln

Target 2030: 60% Savings (2012-2030): €66.3 bln

1990 = 5,696 million tonnes of CO2-equivalents

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Source: The European House - Ambrosetti elaboration on European Commission data, 2015

3.3.3 The benefits of a more efficient energy sector

118. Calculating the benefits of energy efficiency presents

115. Energy efficiency brings multiple benefits that go

or technology that is being renovated:

beyond traditional outcomes of energy demand and green-

>> The European Commission estimates that energy effi-

house gas emissions reduction, and include supporting stra-

ciency will have significant positive spillover effects on

tegic objectives for energy system security, economic and

environmental policy and EU balance of payments. An

social development and environmental sustainability.

increase in energy efficiency by 27% on the baseline sce-

serious challenges. Benefits vary widely depending on the nature of the investment and the state of the infrastructure

nario (which is the EU-wide non-binding target agreed 116. The energy efficiency transition requires a multifaceted

by the European Council in October 2014) would produ-

approach, combining economic, industrial, technological

ce a reduction of 14% of net energy imports (from a

and geopolitical aspects.

2010 baseline) and would reduce ETS allowance costs to €39/ton by 2030.58

117. Beyond the issues related to the supply of fossil fuels

>> An increase in energy efficiency by 30% would reduce

and raw materials, renewed dialogues and partnerships are

imports by 18% from the 2010 baseline, and would re-

an opportunity for the EU to promote its foreign direct in-

duce the ETS carbon price to €25/ton by 2030.

vestments, open new markets for its technologies and services, and share its vision of the energy transition pathway

119. Furthermore, an integrated energy market in Europe,

and innovative governance across society.

coupled with targeted financial incentives for energy effi-

(58) This estimate assume that EU ETS allowance prices will rise significantly in the coming years as a result of the planned ETS reform. Source: European Commission, “Impact Assessment accompanying the Communication from the Commission to the European Parliament and the Council, Energy Efficiency and its contribution to energy security and the 2030 Framework for climate and energy policy”, SWD(2014) 255 final, Brussels.

95

Figure 46. The impact of energy efficiency targets on Green House Gas (GHG) reduction and imports.

EU-wide impacts Energy efficiency target options (in%)

Additional annual energy system costs, relative to 40% GHG target in 2030 (in EUR billion)

ETS Carbon Price in 2030 (in EUR)

Net energy imports 100=2010 levels

25

-

42

87

27 (EU Target 2030)

-

39

85

28

5

35

85

29

13

30

83

30

20

25

82

35

55

13

78

40

112

6

74

Source: European Commission, 2014

ciency technologies and R&D, would ensure that Europe

countries, as well as at a multilateral level with neighboring

maintains its leadership in this sector and continue to be a

regions, and with international organizations. Furthermore,

net exporter of such technologies.

the EU is a key player in the United Nations Framework Convention on Climate Change.

120. The digitalization of energy distribution would also bring significant efficiency savings and benefits: it would

124. Europe has a strong economic and geopolitical interest

open more smart technologies for the grids and the home

in the successful completion of an ambitious decarboniza-

which should simplify consumer involvement in the new

tion policy at the global level. This would prompt a process

retail market. For consumers, investments in digitalization

of de-investment from energy inefficient industries, boost the

would increase energy efficiency and reduce costs.

competitiveness of the EU’s energy-efficient industries and support the EU’s export of state-of-the-art energy-related

3.3.4 Boosting Europe’s “soft power” in global relations

technologies.

125. With regard to multilateral relations, by taking a leadership role in global energy policy, as mentioned before, the

121. A strong and ambitious Energy Union will also streng-

EU can help to ensure a successful agreement at the forthco-

then the role and “soft power” of the EU in international

ming 2015 Paris Conference on Climate Change. This should

relations.

include the setting of binding carbon reduction targets for developed and developing countries.

122. Energy policy can become a launch-pad for the EU’s global influence by projecting the internal market rules towards

126. In the past, the EU’s timely delivery of the EU Energy and

neighboring countries, promoting European values of inclu-

Climate Change Package (2008) allowed the EU to “lead by

sion and energy transition in third countries and supporting

example” at the 2009 Copenhagen Climate Change Confe-

EU economic and geopolitical priorities in bilateral and mul-

rence, setting a model for other countries. Full ownership by

tilateral forums.

developing countries of an ambitious decarbonization agenda is a key priority for Europe in order to prevent “carbon

96

123. The EU has already established external energy rela-

leakages” from carbon-efficient economies to less-efficient

tions at a bilateral level with key consuming and producing

developing countries.

building the european energy union

127. The EU also has a strong interest in seeing an effective

cess towards the harmonization of energy laws and to link

implementation of the G20 energy agenda on energy effi-

the markets of the contracting parties with each other and

ciency, reduction of fuel subsidies and marine environmental

with the internal market of the European Union and new

protection. In fact, a reduction of fuel subsidies and an incre-

supplies from the Caspian Region. The Energy Community

ase in energy efficiency investments in developing countries

expanded its membership and recently extended its man-

would create new markets for European-developed energy

date until 2023. A stronger EU common energy market

efficiency technologies.

would be better positioned to project its norms and principles in Eastern Europe and thus to provide better energy

128. Finally, Europe could promote the adoption by emer-

security to partner countries.

ging countries of carbon pricing mechanisms similar to the EU’s ETS (e.g., China is in the process of adopting a carbon

132. In addition, in 2008, the EU launched the Union for

trading scheme modeled on the EU’s experience).

the Mediterranean, a stronger and more integrated EU energy market which would give more leverage to the EU vis-à-vis Northern African countries, especially if this were to include an exchange of expertise and resources on cli-

“Power Africa” initiative

mate change adaptation and RES deployment, where there is a high potential for growth.

U.S. President Barack Obama launched “Power Africa” to bring together technical and legal experts, the pri-

133. Finally, in 2009, the European Commission started

vate sector and governments from around the world

negotiations on behalf of member states with Central

to work in partnership to increase the number of pe-

Asia on the Southern Gas Corridor, the construction of

ople with access to power. The project aims to enable

the Trans-Caspian Pipeline and with Belarus and Russia on

electricity access in Africa by adding 60 million new

the integration of the Baltic States into the EU electricity

electricity connections and 30,000 MW of new and

system. More effective demand aggregation at EU level

cleaner power generation.

could further support the EU’s effort to diversify its energy suppliers.

129. The completion of the Energy Union would also strengthen the EU position in bilateral relations with other energy producers and consumers. Climate change adaptation and electrification are set to be key priorities of developing countries in the coming years. Competing with global players such as the United States and China, Europe has a leading competitive role in the development and deployment of electrification and ICT technologies in

Europe can play a leading role in promoting electrification and energy digitalization in emerging economies

emerging economies and this can constitute a powerful leverage for the EU to boost its exports and global influence.

134. The European Union has also begun negotiations on major trade agreements, notably with Canada, Japan and

130. Furthermore, the full integration of Energy Diplomacy

the United States, the so-called TTIP, which include energy

and Climate Change in the EU’s international agenda would

questions. Strengthening the Energy Union would put the

give the EU more leverage in diplomatic and commercial re-

EU in a stronger negotiating position. For example, with re-

lations with its partners.

gard to trade relations with the United States, the elimination of export restrictions for U.S. gas and oil is a key priority

131. In 2005, the Energy Community set in motion a pro59

for the EU to diversity its energy sources and lower prices.

(59) The Energy Community includes: Albania, Bosnia and Herzegovina, Kosovo, the former Yugoslav Republic of Macedonia, Moldova, Montenegro, Serbia and the Ukraine, and Armenia, Georgia, Norway and Turkey as observers.

97

Figure 47. Free trade agreements and partnerships between the EU and third countries/regions.

Canada (2014) EU

South Korea (2010)

USA (started in 2013) Mexico (2010)

ASEAN (started in 2012)

GCC (started in 2001) India (started in 2007) Malasya (started in 2010) Chile (2002) South Africa (2004) Ongoing negotiations

Source: The European House - Ambrosetti elaboration on European Commission data, 2015

98

building the european energy union

Signed agreements

Singapore (started in 2011)

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