ETS and renewables: a win-win strategy?

Speakers: Zapfel Peter, Kempener Ruud, Matheu Michel, Fraile Daniel, Le Strat Florent
Moderator: Belin Hughes

On the 21st of March, PubAffairs Bruxelles hosted a debate on the link between the European emission trading system (ETS) and renewables with Mr Florent Le Strat, Researcher and Expert, Climate policy R&D, EDF, Mr Peter Zapfel, Head of Unit, ETS Policy Development and Auctioning, European Commission, Mr Ruud Kempener, Policy Officer, Renewables and CCS Policy Unit, European Commission, Mr Michel Matheu, Head of EU strategy, EDF and Mr Daniel Fraile, Senior Analyst, Wind Europe. The event was moderated by Hughes Belin, freelance journalist.

Mr Le Strat took the floor to present the findings of a recent EDF study entitled “Towards a successful coordination of climate energy policies”, which elaborates from the premise that the EU ETS has not yet been able to provide a carbon price signal which would foster a cost-effective decarbonisation of the EU economy. Mr Le Strat explained that the study started more than one year ago, when the so-called Market Stability Reserve (MSR) was put in place and at a time when the EU ETS reform was not at the end of the decision-making process. As a result, the first goal of the study, which focused on the power sector, was the assessment of the volume of allowances necessary to be absorbed by the MSR in order to ensure that the EU ETS could reach the decarbonisation targets that EU policy actions were aiming at. The speaker continued by showing how, according to the study findings, by assuming an MSR intervention which would make the carbon price progressively feature around a cost of 24 €/ton of C02 in 2013, consequently absorbing 2000 millions of allowances, it would be impossible to decarbonise the European economy with the first technological option available, namely the switching from coal to natural gas. The speaker then considered a scenario in which the volume of the above-mentioned allowances absorbed by the MSR was doubled and explained the reasons why, also under these circumstances, the decarbonisation through the first technological option would not be possible. Mr Le Strat continued by analysing the role of the Renewable Energy System (RES) and he reminded that the Climate Energy Package foresees a target of 27% renewables in the final consumption for the year 2030 leading to a share of 29% of intermittent RES (PV & Wind) in Power generation according to Impact Assessment study. Mr Le Strat stated that with a carbon price of around 37 €/ton, the share of intermittent RES in Power generation corresponding to the targets set by the Climate Energy Package would be reachable and added that it is interesting to notice that within a scenario which assumes a price of 69 €/ton, the percentage of RES varies by only two points. These findings are also relevant for “more mature” RES, such as on-shore wind, as they should be able to develop without needing a large amount of subsidies which could be more focused on the “less mature” RES, such as photovoltaic (PV) and offshore wind power generation. As a result, and in addition to the fact that the study did not take into account the technological advancement occurred meanwhile, the speaker outlined how both PV and on-shore wind would need few external support as they could mainly rely on the market price. Mr Le Strat concluded his intervention by stressing the importance of energy and climate policy coordination as the decarbonisation of the EU economy will not only depend on carbon reduction stemming from the ETS, but also on carbon reduction from other sources such as the support to RES and energy efficiency improvements. Mr Matheu then took the floor and explained how measures based on regulation are more costly than those implemented through market price signals. As a result, the dilemma which decision-makers are currently faced with in their effort to decarbonise the economy consists of the choice between increased CO2 costs and lower subsidies, on the one hand, and low CO2 prices but noticeable consequences on retail price for electricity through high subsidies, on the other hand. The former way is more cost-effective than the latter. Mr Matheu closed his opening remarks by stressing the importance of the issues at stake in the perspective of the next legislative choices, ETS directive and clean energy package.

Click here to download the executive summary of the study

Click here to download the slides of the introductory speech

After introducing the speakers Hughes Belin asked as a first point of discussion which were their thoughts about the questions emerging from both the current level of the carbon price and EU policy coordination.

Mr Zapfel pointed out that the EU institutions have first of all decided to rely on markets rather than trying to fix the carbon price. He recalled that the EU ETS decision-making process should be concluded in the coming months by marking a two year process and expressed his optimism on the fact that EU ETS revision will be successfully finalised. He continued by remarking that the question of strengthening the carbon market has become a major element of discussion and that the introduction of the Market Stability Reserve is indeed a result of European institutions awareness of low carbon prices and the effect on decarbonisation. Within this context, the EU ETS proposal has been object of several decisions amending, especially during the parliamentary debate. For these reasons and with special regard to the importance of strengthening the MSR, in Mr Zapfel’s opinion, there is room for optimism towards both the finalisation of the EU ETS reform and the outlook for the future. Mr Kempener firstly expressed his optimism on the coordination between the different European policies cornering energy and climate, marked by the current Commission’s setting which allows the institution to work under a single Commissioner for both energy and climate initiatives. He further reminded that the Council decision of 2014 is the starting point for both the EU ETS proposal and the Clean Energy Package. With regard to the Renewable Energy Directive, Mr Kempener explained that thorough impact assessments have been carried out, a procedure that required assessing different policy outcomes and better shaping of policy coordination. In these impact assessments, the Commission analyses the combined effects of the new electricity market design proposal, as well as their connections with the EU ETS revision and the national governance aspects of EU energy and climate policies on EU’s renewable energy policies. Mr Kempener closed his opening statement by saying that he expects a similar degree of coordination also throughout the Clean Energy Package legislative process. Mr Fraile began his opening remarks by pointing out the importance of support schemes in lowering costs and triggering investments in renewable energy technologies. He agreed on the fact that an adequate CO2 price can result in fuel switching and can encourage investments in RES, however, in his opinion, this setting might result only partly valid and exclusively for onshore wind projects. Consequently, Mr Fraile expressed his concern on whether a CO2 price of around 37€/ton is politically acceptable, as well as on the fact that the carbon price alone can eventually sustain investments in renewables that are notably capital-intensive. In addition, and with special regard to less mature renewable technologies such as photovoltaic and offshore, Mr Fraile added that investors need sheltering from market volatility and questioned whether Europe is willing to invest only in part of the renewable energy potential by operating on carbon price or if it would be wiser for the EU to rely on the entire range of possibilities available. Mr Fraile concluded by stating that RES supports are switching to more market-based incentive and that, in his opinion, this constitutes a valuable example to follow in the future. On the same matter, Mr Matheu stated that, according to several publications of the wind and photovoltaic industry, there are a number of onshore wind projects that will soon come to fruition at a reasonable cost, while there is margin to lower the cost for photovoltaic projects even further due to technological advancements. Mr Matheu concluded his intervention by saying that an appropriate carbon price, supplemented by long-term contracts for investments in renewable energy and a certain degree of support for less mature technologies, should enable the EU to achieve decarbonisation targets at a most affordable price.

Mr Belin asked as a second point of discussion if there are mechanisms that could be put in place in order to increase the carbon price and implement cost-efficient emission reductions in the near future.

Mr Zapfel believed necessary to put the discussion into perspective and he highlighted the effects of the economic recession on the power and electricity markets and, subsequently, on the CO2 price. According to Mr Zapfel, an important lesson learned from the long-lasting ETS debate was that in times of recession there is little interest for increasing environmental targets and the initial scheme for “backloading” allowances was a way to identify the essence of the problem and a first step towards the introduction of a structural solution which consisted of the set up of the Market Stability Reserve. Given these developments, Mr Zapfel said that the room for a positive outlook is justified. Coming to the issue of a CO2 price floor, he clarified that it is very difficult to find an acceptable degree of political agreement on the topic, and that the ETS system is based on quantitative-based measures for which target-setting is the most difficult task. Also for these reasons, he added, target-related decisions are eventually taken at European Council level. However, he concluded by agreeing on the fact that a higher carbon price would help to invest in renewables. Mr Fraile expressed his belief that the price increase of CO2 allowances would be able to develop the renewable energy sector, nevertheless, in Mr Fraile’s opinion, no clear timeframe for this development is on the horizon. For this reason and due to the fact that investments in renewable energy necessitate a long-term perspective to transform high-hanging fruits in low-hanging fruits, existing support schemes are essential. He also agreed with Mr Zapfel’s opinion that the increasing pressure on state budgets led states to reduce subsidies in renewable investments, while reiterating his belief that a higher carbon price can achieve that goal, however under the condition of keeping additional measures in place. Mr Matheu explained that some sort of “hybrid” system design is inevitable in regulating the carbon market. He gave the example of support schemes for renewable energy, which initially involved, on the one hand, volume-oriented measures, such as feed-in tariffs and, on the other hand, technology-driven green certificates. As Mr Matheu noticed, after a period of time, adjustment mechanisms and specific technological measures mingled the two approaches. The same applies to carbon pricing: in textbooks you find a clear-cut opposition between ETS and carbon tax, but real life effective systems are somewhere in between. It is possible to enhance the EU ETS without transforming it into a tax. This is why he expressed his disagreement towards a pure carbon price floor, which would strongly resemble a carbon tax, and suggested that a “price corridor”, paired with the Market Stability Reserve or a similar flexible mechanism, may serve as a viable “hybrid” solution. Regarding existing support schemes, Mr Matheu mentioned that in the EU debate on renewables and energy targets there is often a tendency to mix the so-called “2020 horizon” and the “2030 horizon”. Mechanisms that are badly needed currently in a situation of depressed energy and carbon markets will become less and less necessary as we near 2030.

A third point of discussion concerned regulation and whether it is a right method of phasing out fossil plants or whether market mechanisms can be more effective.

Mr Fraile remarked that regulatory measures are often the reason for which  such plants are sustained and that a change in regulatory legislation might prove the only way to phasing fossil plants out. Mr Fraile reiterated his belief that CO2 pricing is a very effective mechanism for fuel switching unless an adequate carbon price is achieved at European level through the ETS. However, he also noticed that member states, despite actions at EU level, might be tempted to proceed according to their own national initiatives. Mr Kempener stressed that the new energy proposals put forward by the European Commission are interrelated and that the Commission takes a systemic approach to ensure cost-effectiveness. He further added that it is likely that the market conditions in the period 2020-2030 will continue to transform, which means that regulatory measures for the period after 2030 may be different from the measures that are proposed today. As such, in the speaker’s opinion, regulatory measures need to be evaluated as the market continues to evolve. Mr Matheu referred to the example of the German energy and climate policy that notably set very ambitious targets on renewable energy policies, but, when these targets proved difficult to achieve through market-oriented mechanisms, reverted to very costly regulatory measures to eliminate lignite-fired plants and foster further energy efficiency. As Mr Matheu remarked, if a similar policy was implemented in Europe in order to ban all coal-fired plants, even though this could eventually accomplish the environmental targets, consumers would need to shoulder the high costs of those regulatory measures in their electricity bills. This would leave the crucial question of cost-efficiency unsolved while a policy based on a steady carbon price signal could really tackle it.

The final part of the debate and the Q&A session, also covered the following issues:  adjustment of structural ETS parameters such as the emissions cap; how to overcome investors’ uncertainty in the renewable energy market; whether member states will refrain from pursuing unilateral energy policies; the Clean Energy package and how best to incorporate the EU-ETS in its design; the Chinese emission trading system.

Do you want to go further into the issues discussed in our debate? Check our list of selected sources which we have provided for you

The EU Emissions Trading System (EU ETS), European Commission

EU Climate Policy Explained, European Commission

Commission proposes new rules for consumer centred clean energy transition, European Commission

Impact assessment for the revision of the revised energy Directive

Executive Summary – The need for a dynamic adjustment of allowance supply in order to ensure the resilience of EU-ETS, EDF R&D

Introductory speech slides – Towards a successful coordination of climate-energy policy, EDF R&D

Technical and economic issues of the integration of a large share of variable RES to the European interconnected electricity system, EDF R&D

Interactions between CO2 and RES targets: A cost assessment of European energy climate policies with POLES model

Interactions between ENR and CO2 Prices in Europe

How much wind was in Europe’s electricity yesterday?, Wind Europe