EU28: Achieving the
20/20/20 Targets in
EU15 and EU11
The EU Low Carbon Roadmap for 2050 provides a strong statement on the EU’s commitment to transition to a cleaner, more sustainable energy system. As part of the roadmap, the 20/20/20 strategy outlines the three core targets to be achieved across the European Union by 2020: 20% share of renewables in final energy consumption; 20% reduction in CO2 emissions compared to 1990 levels; and 20% efficiency improvements from 1990. These targets have set the pace for transition and are complemented by a range of directives which provide a sense of policy direction across energy end-use sectors, energy mix, renewable energy sources, etc.
EU15 member states, benefitting from generally deindustrialized, service-led economies, have been better placed to make the low-carbon development a key priority. Countries such as Germany, Denmark, Sweden and Spain have made significant investments in energy efficiency, renewable energy sources and carbon-abatement programmes – sometimes in excess of the EU 20/20/20 targets. Denmark’s Energy Strategy 2050 is targeting 100% energy supply for electricity, heating, industry and transport to come from renewable energy.
Although bound by the EU climate targets, the policy priorities of EU11 countries30 – consisting predominantly of Eastern European nations – are different from those of EU15 countries. EU11 countries are broadly defined by the development stage with more energy-intensive economies from nascent industries. The economic burden of investment and policy shifts necessary to meet the EU 20/20/20 targets is a key concern for EU11 countries, which fear this will impact economic development and the competitiveness of their industries. Poland, whose power-generating sector is dominated by coal, vetoed the proposal of 2011 for more aggressive EU targets to 2020 over concerns the impact these would have on industrial growth. According to a World Bank report, implementing the package of EU climate policies could cost Poland 1.5% to 2.2% of real GDP to 2015 – with the figure nearly doubling by 2030.31
Figure 6: GDP per unit of energy use (PPP $ per kg of oil equivalent), 2012
Source: World Bank
Figure 7: GDP per capita, PPP (current international $), 2012
Source: World Bank
Although the priorities of EU15 and EU11 member states are somewhat divergent, the EU Energy Efficiency Directive – which sets out numerous standards and regulations on achieving the energy efficiency targets – provides a sense of policy direction which can have key benefits such as energy savings, increased energy security as a result of lower consumption, reduced emissions and the development of new energy-efficiency related markets. These benefits are largely in line with the priorities of EU11 countries which are burdened by import dependence and growing energy costs. According to analysis from the European Union,32 the Energy Efficiency Directive could deliver up to € 220 billion in net savings – with € 60 billion coming from savings in power generation, and cumulative € 380 billion from reduction in fuel expenditure and imports over the period 2011-2020. To deliver these savings, however, the same analysis estimates an average € 24 billion will need to be invested annually into energy efficiency measures such as building insulation and energy management technologies.
Attracting this scale of investment and sustainably developing the energy efficiency market will mean the less wealthy EU11 countries need to identify opportunities and best practices in financing frameworks and market mechanisms. The European Investment Bank and the European Bank for Regional Development (EBRD) have mobilized significant funding in support of EU11 countries’ energy efficiency programmes. The EBRD, which provides funding for development projects in Eastern European countries, including EU11, has set energy efficiency as a cornerstone of its Energy Operations Policy, setting aside over € 1.5 billion of investment for energy efficiency initiatives and small distributed renewables projects since 2006.33 Through the Sustainable Energy Efficiency Initiative, the EBRD provides project finance, as well as technical assistance and policy dialogue – the latter two support mechanisms are in place to assist investments with activities such as market analysis, and to identify the necessary regulatory frameworks to ensure the success and long-term sustainability of projects. For example, in Bulgaria, the EBRD financed a € 180,000 project to install more efficient steam boilers in a pharmaceuticals company – resulting in a 20.7% reduction in annual energy costs (equal to € 72,000/year savings).34
To date, a number of efficiency-related investment funds and financing models have emerged across the EU in support of the Energy Efficiency Directive. Project financing models can, however, still be onerous and have a slow rate of return. When looking at implementing energy efficiency in the residential sector or in non-industrial end use sectors such as schools, this challenge is even more apparent. To address the barrier of upfront costs, a number of Energy Service Companies are taking on the performance risk by funding the improvements from energy savings delivered. In the Czech Republic, the introduction of these contracts have seen an increase in the number of efficiency projects realized, totalling over 150 in 2011.35
External Perspective: Update on Germany – Towards a Sustainable Energiewende
Chief Executive Officer,
Chief Executive Officer,
Acceptance of the Energiewende
Public acceptance may otherwise become an issue, as it is strongly affected by the costs of the Energiewende to society and concerns about security of supply. Excessive cost, deindustrialization and lower levels of system adequacy will not be accepted by the broader public, despite an otherwise strong preference for sustainability and renewables.
Competition and a Pan-European Approach Are Key to the Success of the Energiewende
Cost efficiency and security of supply can be maintained if policies underlying the Energiewende reflect the spirit of fair competition and the idea of the European Energy Market. The Energiewende is too ambitious to see it as a purely German undertaking. And it is essential to integrate both entrepreneurial initiative as well as administrative planning into the process.
The European Energy Market opens up a level playing field large enough to accommodate a project as extensive as the Energiewende. The European Commission is justified in its determination to do all in its power to promote and broaden the common Energy Market.
However, it must be recognized that there are also very promising German initiatives to align the Energiewende with the European Energy Market. The two leading energy industry associations – the German Association of Energy and Water Industries and the Association of Municipal Utilities – have made good proposals on the market integration of renewables and on security of supply.
A Structural Crisis in the Energy Industry
These proposals are based on the fact that European power generation is in a massive structural crisis. Subsidized renewable energy from Germany is ruining the business case for many thermal power plants. Renewable generators, however, are not able to replace coal- and gas-fired power plants since their output depends on fluctuating weather conditions.
There is a risk that the commercial meltdown of thermal power generation goes too far and may cause supply issues. The German government has already introduced provisional regulation which prevents selected power plants from going off the grid – despite the fact that they are no longer profitable. This will work in the short run, but will not be sustainable. Constantly falling prices on European power exchanges indicate that the situation will get worse if no sustainable policy action is taken.
The Case for Doing Something about Security of Supply
Sustainable policy action would design a mechanism that remunerates any power generator’s contribution to security of supply. There is a consensus within the German energy industry that such a mechanism should not take the form of subsidization to keep commercially non-performing power plants alive. Rather, the idea is to provide the European Energy Market with a security mechanism that will not distort competition in wholesale power trading and be as lean as possible.
Other European countries have also addressed the security of supply issue, e.g. the United Kingdom and Italy. France will implement a capacity market in 2016. It would be fatal if a patchwork of unilateral capacity mechanisms were to distort the European Energy Market. Nevertheless, the French approach is a good one in terms of market design and it takes a similar approach to the German energy industry’s proposal. This paves the way for a blueprint for the future European market.
The EU-ETS Needs Structural Reform
Finally, the European Union Emissions Trading System (EU-ETS) is under discussion. The EU-ETS is the instrument of choice for cost-efficient climate action. It must maintain this role beyond 2020. Because carbon trading works. Beyond 2020, however, its future is uncertain – which is detrimental for energy sector investment. Energy infrastructure investment entails distant time horizons. Hence, there is an urgent need for credible post-2020 climate targets and undistorted carbon trading.
Energy Policies High on the Agenda
Germany has every reason to put energy policies high on its agenda. The new legislative period offers much opportunity to kick-start with a new policy approach – towards more competition and a more European approach.