European Power sector s perspective on the role of the EU ETS

Transcription

1 European Power sector s perspective on the role of the EU ETS Brussels, 12 January 2016 The European Decarbonisation agenda brings a new reality to the power system Long term EU decarbonisation objectives 2030 Energy & Climate Framework Source: EURELECTRIC The necessary growth of RES to decarbonise the power sector will require market adaptations that have to satisfy two fundamental requirements on the part of electricity customers across Europe: To maximise value for their money, RES should be developed through integrated electricity markets using competitive means wherever possible Customers expect that their lights stay on security of supply is key and should also be guaranteed in a cost-effective way 1

2 Share of low carbon in the generation mix > 50% 60% 55% 50% 45% 40% Power generation mix in 2014 Low-carbon generation is leading the way Other Low carbon The total electricity production in 2014 amounts to 3,025 TWh, RES and Nuclear are contributing to this total equally with 28% 27% RES target by 2030 assessed to translate into 45% RES share in the mix Commissioned and decommissioned plants ( ) Nuclear 28% Oil and other fossil fuels 2% 15% Gas All sources: EURELECTRIC Hydro 12% Wind 8% 3% Solar 5% Bioenergy and other RES 2% Other 25% Coal and lignite A clear investment dilemma for power companies: how to meet the decarbonisation ambition at today s power prices : 1,3 trillion euros were spent in new power generation of which 3/4 went to RES. An estimated additional 740 GW of capacity has to be built by 2035 (IEA) Today s price levels do not allow economically justified investment in any of the existing conventional or low carbon technologies - The Platts PEP (which indicates wholesale price trend for the European market as a whole) varied between 35 and 48 since January 2014, - the Nordpool monthly average price has not exceeded 35 since November 2013 while few power generation technologies have below 50/MWh LCOE Existing capacity is being mothballed/closed down influencing the available firm and flexible capacity At a time when RES technologies are seeing a sharp decline in their capital costs, this raises the issue as to how to pursue investment in a way that is market-based and technology-neutral 2

3 At the same time the energy policy triangle is being challenged both in terms of competitiveness and security of supply Current status Competitiveness Security of Supply Sustainability Customers across the EU are faced with rising energy bills RES support costs have escalated in some countries with inefficient or outdated design mechanisms Increasing levels of intermittent generation are displacing conventional generation which is needed for generation adequacy but is being forced to shut down (economic factors) Long term system adequacy is at risk in many markets: energy price signals alone are not always sufficient to drive the necessary investments to ensure the right level of SoS The EU is currently on track to meet its emissions reductions and RES targets up to 2020 but sustained effort is required to achieve 2030 goals RES integration into the market is central to rebalance the triangle RES policy after 2020 should be guided by the following principles: RES investments Support immature ETS as key driver driven by market RES signals Ensure a market-based and cost-effective deployment of RES through a strengthened ETS RES to be fully integrated into the market and the grid; RES investments fully driven by competitive market signals + + Public support in the form of research, development and demonstration funding primarily oriented towards new, highpotential immature lowcarbon technologies that have not reached market readiness 3

4 A strengthened EU ETS will ensure cost-effective, technology-neutral and market-based delivery of the decarbonisation agenda Once strengthened, the EU ETS will drive major investment in renewables and energy efficiency in the ETS sectors - Additional, cross-cutting measures in those sectors should therefore be avoided The uncoordinated operation of hundreds of different national renewables support schemes leads to a serious risk that a non-ets approach to decarbonisation will not only further distort, but also fragment the internal energy market A non-harmonised approach to reduce GHG emissions is potentially counter-productive leading to significantly higher overall energy and decarbonisation costs as the level of ambition increases Power companies have to bridge the investment gap and offer a continued, safe and affordable electricity supply to their customers To redirect climate and energy policies towards greater competitiveness and affordability, it is urgent and vital to: Reinforce the ETS so that it provides a strong decarbonisation signal and delivers a robust carbon price that support continued investment in low carbon technologies Only the combination of an effectively reformed EU ETS and an improved EU electricity market design can lead to proper price signals from the relevant markets (carbon, energy, flexibility and where applicable capacity) to drive investments into mature low carbon technologies while maintaining secure and affordable electricity supply The IEM should be fully implemented through integrated forward, intraday, day-ahead and balancing and ancillary services markets that ensure appropriate incentives for flexibility in a technology neutral manner The market design needs to evolve to deliver long term system adequacy, while integrating RES fully into the market; this should be done in a manner which underpins long-term predictability and transparency for investors 4

5 European Power sector s priorities on the EU ETS reform proposal EU ETS Reform Proposal EURELECTRIC s priorities Basic architecture Unallocated allowances Innovation Fund Modernisation Fund & free allocation to the power sector Indirect cost compensation Missing Elements 5

6 Linear Reduction Factor of 2,2% Basic Architecture In line with the 2050 decarbonisation perspective Explicit definition of share of auctioning at 57% Predictability and certainty on the amount of allowances at the beginning of Phase IV Continuation of free allocation to industrial sectors at risk of carbon leakage Periodically revised to take account of economic and technological developments If subsequent to COP21, the EU decides to go beyond a 40% GHG reduction target, there is potential (surplus) to achieve further ambition. However the non-ets sectors should contribute in a balanced manner to any increase in ambition. Unallocated Allowances Unallocated allowances (250mln from the MSR plus an estimated 145mln further unallocated allowances from phase III) will feed the Phase IV NER It results in greater amount of allowances being left over for auctioning and for free allocation and thus not resolve the current oversupply x Our recommendation: the endowment of the NER at the beginning of phase IV should exclusively come from allowances set aside for free allocation under Phase IV 6

7 Innovation Fund 400 mln allowances will be monetised to feed into the new Innovation fund. On top of that, 50 mln of the unallocated allowances from Phase III will feed into the Innovation fund before 2021 All emerging low-carbon technologies and solutions should be considered in the framework of the Innovation Fund Our recommendation: - Priority should be given to research and demonstration projects that have the biggest potential for cost-efficient carbon reduction and the potential for market viability in the medium term - The timing of the inflow of the Innovation Fund allowances into the market should be predictable for market parties Modernisation Fund & free allocation to the power sector (Art 10c) Set-up of a Modernisation Fund Necessary to modernise the power systems of the eligible Member States in order to contribute to long term decarbonisation objective Governance of the Modernisation Fund The beneficiary Member States should be responsible for determining the eligibility of projects in accordance with the subsidiarity principle, in consultation with the EC and with technical support from the EIB Free allocation for the modernisation of the energy sector with investments based on a bidding process The current approach for selecting investments should be maintained and can be complemented by the bidding process as proposed x x 7

8 Indirect cost compensation Member States should adopt financial measures to compensate sectors exposed to a risk of carbon leakage for indirect costs in accordance with state aid rules. It strengthens the language regarding indirect cost compensation, ~ without however making it binding on Member States Our recommendation: - Compensation for indirect costs should no longer be possible through the power bill - Indirect cost compensation through free allocation of CO2 allowances should not be allowed - Harmonised EU indirect cost compensation measures: funding for indirect cost compensation should originate from allowances auction revenues (as proposed in Art. 10(3)), and in accordance with the relevant state aid rules Missing elements Ensure a strengthened harmonized European approach to GHG emission reductions 1. Carefully analyse the proposed flexibility mechanism (limited, one-off reduction of ETS allowances for non-ets compliance) in a transparent way, clarifying the benefits and costs for market operators and the limitation in size Any flexibility mechanism should contribute to the strengthening of the EU ETS 2. Analyse extending the scope to more sectors. (In parallel a further electrification of other sectors will lead to a cost-effective decarbonisation pathway) 8

9 Missing elements Ensure a strong CO2 price signal for low carbon investments 3. Ensure consistency of new funding mechanism with the MSR Include provision for establishing a coherent, transparent and predictable calendar for the monetising of funds, auctioning and flows of allowances into and out of the MSR 4. Ensure consistency with other EU climate and energy policies The success of the reformed EU ETS will depend on ensuring full consistency and coherence between the elements and targets of the 2030 Framework Thank You For Your Attention! 9