1. 2007-2014 / 7 years of EU energy and climate policy: Age of reason or of divorce? Jean-Michel Glachant Director Florence School of Regulation European University Institute, Florence, Italy

2. www.florence-school.eu 7 years of EU energy & climate policy leading to? Divorce or reason? 1. 2004-2009: EU got an energy policy (based on internal market with a climate change pillar) ~1 Internal market / ~2 EU grid / ~3 EU RES 2. 2009-2014: Unfortunately derailing ~1 Internal market / ~2 EU grid / ~3 EU RES 3. 2014-2020: and so what? Do we move (reason) or divorce? ~1 EU Commission / ~2 EU power industry / ~3 EU power grids 5 3. www.florence-school.eu (1) 2004-2009 EU got an energy policy What was it about? Previsibility (foreseeability) very low: EU energy policy was not foreseen in 2004; & already packaged in 2009 Game Changer 1 (2005 Hampton Court Council Tony Blair: long life EU internal Security of Supply) Game Changer 2 (2007 -Lisbon treaty- Berlin Council Angela Merkel: long life EU energy sustainability 20-20-20 in 2020) Game Changer 3 (2006 & 2009 Russia - Ukraine: long life Emergency plans + security regulation 2010 & infrastructure package 2011-13) 6 4. www.florence-school.eu EU energy policy Whats about? (1.1) Internal Market First and foremost (Internal Market) Not because it is logical or astute to support an EU energy policy but because EU Commission strong & legitimate there: Internal Market raison detre (Single Act + Treaty) We got: Free Entry in Generation - B2B Consumer eligibility Free movement of goods at borders Second Package added: full retail eligibility; transparent & market friendly cross-border operation; regulators supporting market building; but cannot get open wholesale pricing & sequence of markets (Day-Ahead to real time) Third Package unable to add full EU harmonization of market design & operation rules >> but did set up a process to produce it with new Bodies: *ENTSO-E to EU the TSOs; **ACER to EU the NRAs 7 5. www.florence-school.eu EU energy policy Whats about? (1.2) EU Grid Second to Internal Market (EU Grids) because no power market at all can work if Grids arent market friendly We got: Third Party Access to Grids - Including all borders Second Package did add: Regulated access to grids; regulators duties for markets and grids; transparent & market friendly cross-border grid operation, congestion mechanisms, grid capacity allocation Third Package unable to add full EU harmonization of market design & grid operation rules >> but did set up a process to produce it with new Bodies: *ENTSO-E for EU TSOs grid codes &EU grid planning; **ACER for EU NRAs Third Package didnt try to EU harmonization of grid tariffs making; of grid country investment & data methodology; did miss all Distribution grids issue 8 6. www.florence-school.eu EU energy policy Whats about? (1.3) EU RES Only third and external to Internal Market and EU grids (EU RES) because RES are *subsidy pushed (not market pulled energy market or carbon price) and **country regulated (no EU wide system of RES push rules - except definition of countries quotas) We got a split: RES split between green part (out of market price & trade order, in own special circuit) &energy flow (into Market & system) -RES energy flows circulate through grids to directly enter the demand (while being variable and not dispatchable) >> very strong interactions between RES, power system and grids operation - NonRES can serve only residual demand; only what variable RES cannot feed at each moment > very strong market interactions between RES & nonRES (capacity adequacy given by amount of RES) Small RES > small interactions; Massive RES>> massive interactions 9 7. www.florence-school.eu (2) 2009-2014: Unfortunately its derailing Whats happening? EU RES policy inserted in Internal Market not conceived for massive RES; injected in EU grids not conceived for massive RES; A massive public push to be financed in worse ever EU economic crisis; An industrial strategy destabilized by non-EU big game changers 10 8. www.florence-school.eu Derailing What? (2.1) insertion into Internal Market RES already inserted in Internal Market and strongly interact with Volume effect only residual demand comes to nonRES generators; eviction effect (2012 Germany - 30TWh due to RES and - 45TWh for economic slowdown; 2014 Q1: record of 24TWh RES = 11 GW full time; while nominal capacity PV reaches 36 GW) Price effect: High cost nonRES generators are not called (evicted); only lower cost nonRES Gen. are needed; equilibrium price of energy market falls (2008: 66 Eur/MWh; 2012: 33 Eur; 2014 Q1: 27 Eur) Of course RES German pricing interacts with neighboring countries: (Thanks to internal EU market coupling) Low energy market prices expand to all core EU wholesale market 11 9. www.florence-school.eu 12 CERA 115 GW of Gas plants at risk of closure, albeit to different extent over 2012-2014 data Revenues over 2012-2014 enough to cover: Full Fixed Costs 15 GW Debt Repayment and Fixed O&M 69 GW Fixed O&M Only 26 GW Less than Fixed O&M 19 GW Source: IHS CERA 2013. Notes: Revenues include energy as well as ancillary services. Data do not consider plants which are combustion turbines, internal combustion engines, must-run plants, or plants smaller than 40MW. Full fixed cost set at 110,000 Euro per MW per year. Debt to equity ratio of investment assumed to be 70:30. Fixed O&M set at 20,000 Euro per MW per year. 10. www.florence-school.eu 13 11. www.florence-school.eu 14 12. www.florence-school.eu Derailing What? (2.2) RES insertion into EU Grids RES already injected into EU grids and strongly interact with system flows Generation changes its location RES generate where resource is; wind is not gas-like located >> new graphs of flows into the grids and of congestion (grid capacity availability) Generation changes its grid level: Wind more on regional grids that national ones; PV on local distribution grids >> new capacity investment; measurement & flow control; grid performance & revenue regulation issues Generation changes its pattern: both Wind & PV outpout varies according to renewable resource variations; flows changing more with shorter predictability; more balancing needs All these also modify flow influences among EU countries 15 13. www.florence-school.eu 16 Significant investments needed for power network: IEA: > 40% of existing network to be refurbished by 2035 TYNDP 2012: 104 billion over next 10 years for new projects (80% for RES integration) UK: new off-shore grid same order of magnitude that existing on-shore one 14. www.florence-school.eu Derailing What? (2.3) RES to be financed High RES regime has several piles of expenses to be financed Support schemes end up with significant amount (Germany power price at 33 Eur MWh & support at 64 Eur; Yearly total > 20 bn); while tariff deficits already big (Spain x10 bn) or significant (France x1bn). UK calls for LT nuclear at 110 EUR MWh. Energy base financing of RES is anti-redistributive (taps lower income). Even Germany protects 2 100 companies &lowers bills for 5 EUR bn in 2014. Grid reinforcements: many countries apply shallow costs to RES; Germany adds grid obligation to connect RES System balancing: RES intermittency calls for demanding system balancing actions All these costs adding up with limited budgeting & control 17 15. www.florence-school.eu Derailing What? (2.3) RES to be financed All RES regimes nevertheless end up with an (implicit) CO2 price [EUI data: Claudio Marcantonini] Germany Year 2010 Wind 60 Eur / CO2 Ton (1 MWh Wind actually displaced 0.7 CO2 ton) Solar 600 Eur/ CO2 ton Italy Year 2010 Wind 180 Eur / CO2 Ton (1 MWh Wind displaced 0.4 CO2 ton) Solar 900 Eur/ CO2 ton Spain Year 2012 Wind 85 Eur / CO2 Ton Solar 350 Eur/ CO2 ton 18 16. www.florence-school.eu Derailing What? (2.4.1) significant external game changers RES Green Revolution Boom for EU being questioned EU RES size and cumulated experience advantage is diminishing. EU RES installed based still near to world 50% but Asia by far first RES investor today and years to come World top ten manufacturers for wind and PV going upside down Chinese other noticeable power equipment manufacturing entries: already seen with hydro turbines; and nuclear (AP 1000 with Westinghouse; EPR with EDF); appearing with grid equipment (Grid State China in Portugal etc.) 19 17. www.florence-school.eu Derailing What? (2.4.2) significant external game changers RES Only significant Greener being questioned in the US by gas substituting to coal on a market base while EU very low CO2 price + high gas price do not make it against coal Gas cleaning the energy mix? by replacing coal (x 2 times more polluting with > 0.8 ton CO2 MWh). In USA GHG emissions at their lowest since 1994. In EU however coal ousts gas: German coal near to record 50% elec generation in year 2013; GHG emissions Up; and total emissions (> 750 Mt) 2 times France and > 3 times Spain Why so much coal? German wholesale price 36Eur in 2013 Total cost Coal gen. 55Eur (Only coal + CO2 = 28Eur) Total cost Gas gen. 70Eur (Only gas +CO2 = 51Eur) For gas to come back against coal: x2 price of coal or /2 price of gas; or x8 2013 price of C02 not for very soon 20 18. www.florence-school.eu (3) 2014-2020 And so what? To reason or to divorce? 2014 year of questioning and redefinition by excellence. It started in November 2013 and might end (or not) between entry of new Commission (end of 2014) and World Paris Summit (end of 2015) Commission Novelties (from November 2013 to April 2014) EU Power Industry Novelties (2014) EU Power TSOs Vision ( TYNDP 2014) 21 19. www.florence-school.eu (3.1) To reason or to divorce? Commission novelties June 2012: make your choice - November 2013: some guide lines January 2014: Berlin 20-20-20 game over. Competitiveness & costs back to top June 2012 - Options for RES policy post 2020 / S2: Only Carbon Price is risky and unfavorable to technology innovation / S3: National RES targets risk EU fragmentation and high unit costs but favors decentralization & distributed Gen. /S4 EU RES target and harmonized frame favor costs reduction, cross-border investments, large scale innovation but with grid & system costs November 2013 - Guide lines for RES support till 2020 / Only small units & less mature RES (as off-shore & bio-mass) keep FiT / big unit more deployed RES only FiP & Tgy neutral auction (ex: On-Shore >> PV 1MW) January 2014 - Framework post 2020 / favors MS GHG targets + EU RES target & appropriate EU governance for MS action plans 22 20. www.florence-school.eu (3.2) Reason or divorce? Eurelectrics differences At least 3 noticeable differences (Eurelectric Manifesto February 2014) Single target being GHG emission ( 40%); carbon market as most cost- effective instrument for decarbonisation Concentrate all state aid on RD&D and increase spending on technology demonstration Build long term generation investment adequacy on market based Capacity remuneration mechanism coordinated at Regional Level 23 21. www.florence-school.eu (3.3) Reason or divorce? ENTSO-Es differences At least 2 visible differences (ENTSO-E TYNDP2014 & Florence Forum May) 1/ Vis--vis Eurelectric: NO to that type of Capacity Mechanism Only sound mechanism is for flexibility services delivery measured to TSOs 2/ Vis--vis Commission: OK OK Commission has Top Down vision(s) being Green Revolution (still ambitious Commission RES target?) or The Money still- rules (a bit more relax Eurelectric?) But TSOs also have Bottom Up vision(s) being Slow Progress (Members States do not follow Commission at all) or Green Transition (Member States do it only at country level) 24 22. www.florence-school.eu 25 23. www.florence-school.eu 26 24. www.florence-school.eu 27 25. www.florence-school.eu To conclude: more reason than divorce? 1/ Existing EU energy policy (since 2009) not born as a Grand Programme but several EU policy opportunities crossing internal energy market building 2/ The Berlin 20-20-20 targets push into internal market resulted mainly in a Dash for RES 3/ RES pushed from outside internal market but strongly interact with. EU reference market design has been conceived to help a CCGT fleet spreading same generation costs all over EU. It ends up with 10s CCGT GW being financially stressed. And EU power system security at risk. 4/ RES schemes are mainly MS schemes fragmenting the EU investment and operation landscape while overpassing average EU willingness to pay . 5/ Commission tries to escape any new post 2020 RES burden sharing leading to veto or riot - while getting an EU open space for RES future 6/ Eurelectric to escape technology picking for new fringe by MS or Commission while getting strong ETS & capacity mechanism pricing support 7/ ENTSO-E tries to avoid building White elephants while delivering more EU system security 28 26. www.florence-school.eu 27. www.florence-school.eu 31 Thank you for your attention Email contact: jean-michel.glachant@eui.eu Follow me on Twitter: @JMGlachant Read the Journal I am chief-editor of: EEEP Economics of Energy and Environmental Policy My web site: http://www.florence-school.eu