Philip Lowe is an experienced long-distance runner who has completed numerous events. That impressive stamina could come in handy. The European Council has fired the starting gun for major energy market reform, setting a deadline of 2014 for completion of an internal energy market. Reaching the finishing line at that pace would be impressive. But the establishment of an Electricity Coordination Group – with a mandate including security of supply, generation adequacy, and grid stability – as well as a flurry of communications from the European Commission on the internal energy market signal that the race is well under way. Major changes are pending, and Lowe is bullish on both their necessity and the direction they should take: “If European countries want to meet their climate change targets, preserve their security of supply, and also make sure their businesses get competitive energy, then they’ve got to do something about their increasing dependence on expensive fossil fuels.” These words are disarmingly straightforward. But their implementation is not. Lowe admits that the tasks ahead are daunting: unbundling network operators, dealing with highly divergent degrees of energy market development, and covering onerous capital costs for infrastructure modernization.
Integration of renewable energy is one of the challenges. Just four years ago, wind and solar power capacity worldwide stood at around 136 gigawatts − enough to power 80 million households. By the end of last year, global capacity stood at 300 gigawatts and rising, with Germany alone having installed more than 8,885 megawatts of wind energy since 2007. The investment in such variable generation has stretched power grids to their limits, including in Germany’s neighbors Poland and the Czech Republic, which have been hit hard by unplanned loop flows resulting from wind-drive surges across the border. Merely upgrading Germany’s system to address capacity and technical shortfalls will cost at least €32 billion (US$42 billion), according to the country’s four grid operators. In Lowe’s words, this is “a network industry with heavy capital costs.” It is also a new paradigm for operators looking at near-zero marginal costs. The answer, he insists, is not heavy handed regulation of outcomes, but rather greater flexibility, including in demandside management: “As you can imagine, as a former Director General of Competition, I am not particularly keen on trying to regulate outcomes; you should be trying to create processes that lead the market in the right way to a certain result.” Lowe suggests the answer lies in facilitating new interconnection capacity to support market integration and increase security of supply, allowing local peaks in demand and variable wind generation to be managed across a wider area. The notion of an “open, interconnected, integrated market” is one to which he returns repeatedly.
No 20/20 Foresight
The architecture for this vision is largely already in place, but with uncertainty continuing over CO2 emissions reduction targets beyond the “20/20” goal (reducing CO2 emissions by 20 percent from 1990 levels, raising the share of renewables in energy use to 20 percent, and improving efficiency by 20 percent), is it enough to simply break down market barriers, or is a national support framework needed? Lowe sighs. “We’re in an intermediate stage; this means governments are having to reintervene in one of the areas we wanted them to pull back from. The question is, what framework for national support of these projects on renewables is appropriate and also provides sufficient predictability beyond simply the level of subsidy? We need to ensure predictability for investors in a manner that doesn’t simply rely on national support but is as market oriented as possible,” Lowe says.“Now I think that a lot of people in 2008 believed that could be done simply by having an emissions trading system with a high carbon price − something that I think is a necessary, if not perhaps sufficient solution. Certainly, an effective emissions trading scheme is a necessary condition, but that can probably only be achieved by making clear to everyone what the longterm objective is in terms of CO2 emission reduction targets beyond 2030.”
Cheap Fuels Jinx Carbon Targets
The latter may be slower to come than many would like. Lowe’s counterpart at the Directorate-General for Climate Action, Jos Delbeke, has stated that clarity on post-2030 targets may not be reached until 2016. Lowe admits it is frustrating, but backs recent reform proposals for carbon trading: “Ultimately, investment intentions will be strongly influenced by the targets for CO2 emission reductions. For the moment, the carbon price is very low, which is why some ‘backloading’ (or delay in the issuing) of certificates could help to raise it a bit and create new incentives for the use of lower-carbon technologies. In Europe at the moment, the electricity price is being driven by coal because of a very significant development in world markets: US-produced gas is now very cheap. Gas is being used for electricity production in the USA, which has reduced the price of coal that is no longer required in the US economy and is being exported to the EU. Emissions are rising in the EU and falling in the USA due to the substitution of coal by gas. That could change as legislation on the use of polluting, large combustion installations comes into force, so some of the old coalfired capacity will go, and we’ll start using more gas in the system here.”
Regulation or Market Forces?
So what of target support schemes for individual technologies? Lowe is cautious in responding: “I think in purely competitive terms, the idea of allowing markets and electricity generators to determine which technology they use must be intellectually the most attractive proposition.”
Yet is this “intellectually attractive” proposition compatible with ambitious decarbonization targets, not to mention his earlier strong words on reducing fossil fuel dependence? Lowe admits the debate has been a difficult one. “Markets won’t work unless you have a minimal degree of regulation to force them towards the outcomes that society wants. If you intervene, it must be in a way that is necessary to achieve the correction of the market, proportionate in terms of the means provided, and limited: When do you expect to have accomplished this change in the market? Those three principles are legally enshrined, both in state aid controls and in the public service obligations. There is a clear obligation for the Commission to make sure that the interventions of governments in markets are integrated and interconnected, do not distort competition, and lead to the best use of the allocation of resources.”
Wake-up Call: Germany’s Nuclear Phaseout
The unilateral move by Germany to mothball its nuclear plants was a wake up call on the growing necessity for integration, he suggests – not least for Germany itself: “Germany, when it embarked on the change of policy, hadn’t really consulted anyone! Now they are very much in favor of doing something together. Germany was a net exporter of electricity until the nuclear shutdown: Within three weeks, it became in principle a net importer. Then the situation settled down, and in the cold spell of early 2012, Germany again became a net exporter,” says Lowe, adding:
“It just proves again that if you look at electricity flows nowadays, across Europe, it’s a bit artificial to talk about a national market. Electricity is flowing everywhere.”
Isn’t the fact that member states take such different approaches to meeting their energy needs a major obstacle for the internal market? Lowe doesn’t think so: “This leads to quite a diversified source of energy in Europe. People aren’t too worried precisely where the electrons come from when they’re traded; they do worry about a nuclear plant near to them or a wind turbine near to them. So the diversity of positions is probably quite a good thing, as it has resulted in a diversity of power sources.”
Our time is up, and Lowe is due at an- other appointment – for which he will demonstrate his own energy independence and pedal across Brussels on a bicycle locked outside the Energy Directorate’s austere offices – but picking up a helmet from his office desk, he has one final point to make. “In the area of energy, there is more and more to do together. You would be wrong to ignore what your neighbors are doing in energy, because energy depends so much on physical connections. And in energy, the more you do together in a network, the more likely it is that it will be cheaper and that it will be stable. There are already signs that things are becoming much more interconnected and integrated: In electricity, 17 out of the 27 national markets are already coupled together; and in gas, since the crisis of 2009 and the one before that of 2006, there has been a lot of investment in interconnection. While consumers can’t get necessarily cheaper energy, in a world where the demand for energy is growing exponentially in Asia and elsewhere, nevertheless, by creating a very open, interconnected, and integrated market, we can try and keep the level of prices as low as possible and we can make sure the lights stay on.”
(This article was first published in the recent issue of the Siemens Magazin "Living Energy".)