How to Meet the EU's Greenhouse Gas Emission Targets PRIMES modelling for the Winter Package

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1 E3MLab PRIMES Model 1 How to Meet the EU's Greenhouse Gas Emission Targets PRIMES modelling for the Winter Package By Professor Pantelis Capros, E3MLab central@e3mlab.eu

2 CLEAN ENERGY FOR ALL EUROPEANS announced in Nov. 30, 2016: Commission proposes new rules for consumer centered clean energy transition 2 The Winter Package has been conceived using a set of targets and concrete bottom-up policy measures The proposal mainly uses two policy scenarios, EUCO27 and EUCO30, based on the PRIMES model Policies ETS Increase of ETS linear factor to 2.2% for Policies RES Market Stability Reserve RES-E policies: new guidelines for auctions Policies for biofuels Support of RES in heating Policies Efficiency Policies Transport Energy efficiency of buildings: new EED, enhancement of article 7 More stringent eco-design Support of heat pumps Best available techniques in industry CO2 car standards (70-75gCO2/km in 2030, 25 in 2050) and for Vans (120 in 2030, 60 in 2050) Efficiency standards (1.5% increase per year) for trucks Measures improving the efficiency of the transport system

3 3 Scenarios quantified for the winter package using PRIMES Effort Sharing Regulation (Impact Assessment in parallel to the winter package) EuCo33 REF16 Reference EuCo27 or EuCo30 Targets for 2030 and 2050 Energy Efficiency (Impact Assessment) Electricity Market Design (Impact Assessment) EuCo 35 EuCo 40 EuCo30 and Res30 MDI Options 0,1,2,3 Capacity Mechanisms Low-emission mobility strategy (Impact Assessment of a communication in parallel to the winter package) RES Directive (Impact Assessment) CRA variants for RES-E RES in H&C Biofuels

4 Storyline of EUCO scenarios 4 The Targets are defined for 2030 but also for 2050 The EUCOs are decarbonisation scenarios, compatible with a 2 o C global scenario and the EU INDC in Paris-2015 COP ETS drives strong emission reduction in the power sector and mainly pushes development of RES which benefit from learning-by-doing requiring low or no out-of-the-market support The reforms of the EU internal markets of electricity and gas enhance integration of balancing and competition, supplemented by new interconnections Energy efficiency measures strongly reduce demand, including for electricity, but later electricity demand increases driven by electrification of transport and heat uses Transport undergoes significant emissions cutting through electrification of cars and LCVs and increased use of advanced biofuels in non-electrified transport modes Energy Efficiency Renewables Power sector Decarbonisation Infrastructure Completion of Internal Market Deep decarbonisation of the power sector Transport sector electrification Heating: electrification and further efficiency Advanced Biofuels in some transport sectors

5 Remaining GHG Emissions (EUCO) 5 The energy related CO2 emissions 6000 decrease primarily in the energy supply sectors, notably in the 5000 power sector, but also in the demand sectors 4000 The remaining non-abated emissions by 2050 are the non- CO2 GHG, the residual use of oil 3000 in transport and various small scale uses of gas in the domestic sector 2000 and in industry The reduction of emissions in ETS 1000 are much higher than in non-ets sectors 0 Key GHG emissions in Mt CO2-eq Non-CO2 GHGs emissions Non-energy related CO2 emissions Supply of energy Transport Domestic sector Industry Key GHG emissions in Mt CO2-eq non-ets ETS

6 6 Structure of Power Generation The ETS prices drive profound transformation of power generation Solid fuels strongly decline Nuclear maintains a rather stable share Gas has a significant share and plays an important balancing role in the system Emergence of power-to-x storage systems in the long term reduces gas importance Hydro power and biomass are stable The variable RES (solar PV, wind onshore and offshore) is the strongly emerging power generation industry: 30% of total in 2030 (50% all RES) 50% in 2050 (65% all RES)

7 Structure of Capacity Expansion 7 The investment requirements in gas-fired plants are significant mainly after 2025 and until 2050, in contrast to the continuous decrease in the rate of use The investment in nuclear both for extension of lifetime and new plants is also significant The investment outlook is dominated by the massive development of variable RES, notably wind and solar

8 Demand for Electricity 8 Electricity consumption hardly increases until The energy efficiency improvement drives electricity savings in the short/medium term, and energy savings overall Transport electrification and increased use of electricity for heat purposes add significant load, but only after 2030 In the long term, electricity produces clean gas (methane) and H2 through electrolysis and a chemical process

9 Indicators 9 Electricity decarbonisation takes place well before 2050 to enable emissions cuts in other sectors Electricity does not only decrease emissions in transport and heat sectors, but also by reducing the average emission factor of distributed methane (in the long term), serving storage purposes at the same time (Power-to-X). CHP decline is mainly due to heat savings The contribution of CCS is rather small

10 The Energy Efficiency pillar 10 Enablers: 1. Renovation of houses and buildings 2. Eco-design regulation 3. BAT in industry 4. Transport electrification and energy efficiency standards Based on costeffectiveness analysis, EUCO30 is selected

11 The Energy Efficiency pillar 11 Housing renovation is by assumption very intense until 2030 The eco-design measures reduce demand for electricity But new uses of electricity in heating and transport sustain growth of demand for electricity The efficiency policies show significant results in transport and industry over the entire projection period Final energy consumption in the domestic sector of the EU Final energy consumption in the transport sector of the EU28 REF2016 EUCO27 EUCO30 EUCO33 EUCO35 EUCO40 REF2016 EUCO27 EUCO30 EUCO33 EUCO35 EUCO Final energy consumption in industry of the EU Share of Electricity in Final Energy Consumption (%, EU28) REF2016 EUCO27 EUCO30 EUCO33 EUCO35 EUCO40 REF2016 EUCO27 EUCO30 EUCO33 EUCO35 EUCO

12 The RES Pillar 12 Solar and wind deploying in the power sector are the main drivers of the increase in the renewables Renewables in heating and cooling also develop, albeit at a slower pace, driven by heat pumps and RES-based production of heat The biofuels in transport constitute the main growing market for bioenergy, as biofuels are essential for reducing emissions in non-electrified transport segments (the RES-T includes for electricity used in transport the RES used in power sector) Note: The EUCO30-RES30 variant was only a sensitivity analysis Overall RES Share (%) RES-H&C share (%) REF2016 EUCO27 EUCO30 EUCO30-RES30 REF2016 EUCO27 EUCO30 EUCO30-RES RES-E share (%) RES-T share (%) REF2016 EUCO27 EUCO30 EUCO30-RES30 REF2016 EUCO27 EUCO30 EUCO30-RES30

13 Developments in the transport sector 13 Advanced car technologies (mainly plug-in hybrids and battery electric vehicles) dominate the car market as a result of the CO2 car standards, which continuously decrease The biofuels, mostly advanced lignocellulose-based fungible biofuels in the long term, get a significant market share in the non-electrified segments of the transport sector (trucks, ships, aircrafts) 80% 70% 60% 50% 40% 30% 20% 10% 0% 40% 35% 30% 25% 20% 15% 10% 5% 0% Share of advanced (mainly plug-in hybrid and pure electric) car technologies in the EU28 car fleet REF2016 EUCO27 EUCO Share of biofuels in total energy consumption in the transport sector, EU28 REF2016 EUCO27 EUCO

14 billion toe billion toe billion toe Impacts on import dependency 14 The EUCO scenarios imply significant gains regarding import dependency The scenarios succeed curbing imports of natural gas, which was raising concerns in the context of the Reference scenario Imports of oil considerably decrease in the EUCOs discontinuing past trends Biomass imports rise, however, as domestic feedstock resources are limited despite the assumed development of fast growing crops producing lignocellulose biomass Import Dependency % Net Imports of Oil, EU28 REF2016 EUCO27 EUCO30 EUCO30-RES30 REF2016 EUCO27 EUCO30 EUCO30-RES Net Imports of Natural Gas, EU Net Imports of Biomass, EU28 REF2016 EUCO27 EUCO30 EUCO30-RES30 REF2016 EUCO27 EUCO30 EUCO30-RES

15 Total costs and investments 15 Moderate increase in total costs relative to the Reference in EUCO27 and EUCO30 Considerable increase in investment in the demand sectors when the energy efficiency ambition increases The supply side investment increase relative to the Reference but not across the EUCOs Total energy system cost (bneur per year on average, EU28) REF2016 EUCO27 EUCO30 EUCO33 EUCO35 EUCO40 Total energy system cost as a % of GDP, on average per year in EU Demand side Investment (bneur per year on average) REF2016 EUCO27 EUCO30 EUCO33 EUCO35 EUCO40 Supply side Investment (bneur per year on average, EU28) REF2016 EUCO27 EUCO30 EUCO33 EUCO35 EUCO40 REF2016 EUCO27 EUCO30 EUCO33 EUCO35 EUCO40

16 Nuclear Outlook 16 Retrofitting old plants to extend lifetime is economically by far the best choice Limitations of sites for new nuclear and financial closure of investment are the main obstacles The EUCOs take an optimistic view about retrofitting and new constructions Despite this, the EUCOs project no increase of nuclear compared to 2015

17 Solid fuel Plant Outlook 17 Strong decline of solid fuel plants Retrofitting of old sold fuels plants is economically attractive if technically possible Very few new coal plants in the EUCO projection, as the model assumes anticipation of future ETS prices

18 Gas Plants Outlook 18 The gas plants are essential providers of flexibility and backup for the development of RES In the long term, storage systems complements gas plants, explaining the slight decrease in the capacity of the latter CCGT is the dominant technology, peak devices play a secondary role Avoiding mothballing of CCGT in the short/medium term is an important policy goal The economics of CCGT are at the limit of possibilities: in the projection, increasingly they produce less energy and higher capacity-related services for the system At the same time, the economic conditions must allow for significant new investment over the entire projection period

19 CCS Outlook 19 The projection takes into account acceptability issues and difficulties for licensing CO2 storage sites, both seriously obstructing CCS development. The model reflects scarcity of storage sites by assuming high costs of storage The projection takes the view that in the long term, decarbonisation conditions will enable some degree of acceptance of CCS, however not in all countries The large majority of CCS plant use gas, few use coal or lignite. This is due to the ramping flexibility of gas plants and the possibility of maintaining CHP without CO2 emissions.

20 20 Biomass and Waste using Plants Outlook The increase of biomass capacities after 2020 is small The cost of the feedstock and the slow progress of technology obstruct further development Economically it is more attractive to use the biomass feedstock to produce advanced biofuels and maintain their use in heat applications, rather producing electricity

21 Outlook for Variable RES 21 The projection shows variable RES capacity to more than double in 2030, from 2015 levels, and quadruple by 2050 Approximately, 60% is wind and 40% solar The majority of solar is in the long term smallscale applications Solar thermal, tidal and geothermal have small shares Wind offshore develop impressively after 2030, facilitated by cost reduction and the assumed DC super-grid connecting North Sea After 2035, development of small scale batteries, power-to-x chemical storage and hydro-pumping support the RES in the system GW Solar Wind onshore Wind offshore

22 Electricity prices and investment 22 On average, the prices of electricity in the EUCO scenarios do not increase in 2030 compared to the Reference projection However, the prices increase significantly after 2030 The investment expenditures in the EUCOs are significantly higher than in the Reference projection, mainly after 2030, but at a lesser degree also in the period before 2030

23 23 Decomposition of electricity prices Clearly, the main drivers of the increase in electricity prices in the EUCOs are the grid tariffs, the costs of system services (e.g. costs of storage and ancillary services) and the recovery of RES support costs. The latter, however, decreases a lot after The total unit cost of power generation is quite stable over time, despite the considerable shift in the structure of generation.

24 Concluding Remarks 24 The legislative package proposed by the Commission defines mandatory targets for 2030 within a decarbonisation roadmap to The policy ambition is without precedent The role of electricity is central in the transition, and the main two pillars are energy efficiency and renewables The energy efficiency improvement is ambitious and demands strong policies affecting consumers. The same high level of ambition applies to for the transport sector where challenged by electrification and significant massive development of biofuels is needed. The energy-related costs for individuals need shifting to CAPEX, away from OPEX, which can be a challenge for low income classes. However, the overall cost increases are moderate. The investment expenditures are likely to rise considerably in the decade and beyond. Significant gains regarding import dependency, as gas and oil imports significantly decrease Mainly driven by the ETS, power generation is projected to undergo profound restructuring towards dominance of renewables. Gas-firing capacities have a strategic role for balancing and reserve, a role increasingly performed by storage technologies in the long term. Nuclear plant retrofitting is essential to maintain total nuclear capacity, as investment in new nuclear plants suffers from limitations (sites, financing, etc.). Coal-firing generation is under strong decline; retrofitting old plants just postpones the decline. CCS is unlikely to become a major option Chemical storage, small scale batteries and smart controls are the long term challenges in the interplay of electricity, RES and dispersed producers-consumers, depending technology and commercial readiness. The projections do not see significant pressures on electricity prices in the medium term. The projection of rising electricity prices in the long term, is due to the increasing costs of grids and system services.