No Country is an Energy Island: Securing Investment for the EU's Future - European Union Committee Contents

CHAPTER 5: research and innovation

The role of research and innovation

139.  There was widespread agreement that funding for research and development (R&D) and support for innovation in the energy sector are very important, not least in order that the EU can take the global lead in moving away from fossil-fuel dependency at an affordable price. According to the ETI, for example, "innovation is vital to help reduce our energy consumption", and to "deliver our energy needs with a far lower carbon content, at prices which do not damage our competitiveness and in ways that generate broad economic benefits".[270] ABB Limited, the EESC, the Florence School of Regulation (FSR), the ECF and E.ON all agreed that investment in research into low carbon energy technologies and initiatives could have a positive economic effect.[271]

140.  We were warned of threats to the EU's future competitiveness if it failed to boost its innovation capacity. While its level of investment in low carbon energy in 2011 was $94 billion, comparing favourably to the amount of $50 billion invested by each of the US and China, the EU's level of investment was expected to be lower in 2012.[272] Both the European Commission and the Secretary of State argued that carbon capture and storage (CCS) would be developed in countries such as the US and China if it was not demonstrated soon in the EU.[273] Mr Zenghelis observed that clean energy and energy efficiency were two of the "magic growth sectors" included in China's most recent Five-Year Plan.[274] Several witnesses pointed to the fact that China was developing a strong base in the manufacture of renewable energy equipment, notably for the solar industry.[275]

141.  In terms of boosting R&D, Dr Neuhoff argued that the EU needed to develop a clear strategy to trigger innovation and a shift to low carbon processes and products, including commercialisation. According to ABB Limited, ETI, RenewableUK and the WWF, more certainty on the direction of energy policy was needed, so that investors could begin more comfortably to make the substantial investments needed to create a sustainable energy market. The IPPR argued that, by pooling investments and sharing risk, EU governments were likely to increase the attractiveness of major innovation projects to private sector investors. The ETI's experience pointed to the value of partnership between public and private sectors, and taking a strong evidence-based approach to targeting research and innovation. According to the FSR, public support, whether in the form of loans, prizes or grants, needed to be tailored to the features of each project.[276]

142.  We discussed with witnesses the extent to which support should focus on embryonic technologies, or whether it should also extend to helping relatively new technologies reach commercial viability. Professor Helm was vocal in his view that the emphasis should be on researching new technologies that had the potential to achieve the longer-term goals, such as tidal, next-generation solar, negative emission technologies to replicate photosynthesis and demand-side response technologies such as batteries and smart networks. His preference would be increased support for research into those technologies, rather than spending money on the commercialisation of more mature, but still relatively expensive, technologies such as offshore wind power.[277]

143.  On the other hand, a number of witnesses noted that development work could also help reduce the costs of building and operating existing technologies such as offshore wind.[278] The Secretary of State argued that research also required deployment and that "if you simply focus in on the researching of new technologies, you are never going to get there". Referring specifically to offshore wind, he observed that companies "are learning how to do it more efficiently and more cheaply every day". He added that "it would be bizarre" if the UK did not try to exploit what, in offshore wind, was a "fantastic resource".[279] The FSR and IET agreed that there was economic benefit to be derived from acting as a pioneer.[280]

144.  Innovation is central to the EU's future competitiveness, but the EU risks being eclipsed by others, including the US and China. Two main factors could undermine energy innovation in Europe: inadequacy of finance; and uncertainty about the future policy framework. Both of these could be addressed by an adequate 2030 framework, particularly if this included a reformed ETS which made direct links to innovation through the use of carbon revenues and greater certainty over long-term price trends.

The EU's approach

145.  The EU's approach to research and innovation in the area of energy is spearheaded by its Strategic Energy Technology (SET) Plan, which was proposed by the Commission in 2007. It now represents the technology development pillar of the EU's Energy 2020 Strategy. Key technologies identified in the plan for 2020 are: second generation biofuels; smart grids; CCS; energy efficiency in buildings, transport and industry; wind (particularly offshore wind); photovoltaic and concentrated solar power; nuclear fission (including waste management); and new materials for SET Plan technologies.[281] The Commission emphasised the importance of developing advanced, second generation biofuels given the need to move away from those biofuels that are causing concern about their impact on land use.[282]

146.  The SET Plan will be supported primarily by the Horizon 2020 Programme, the new EU programme for investment in research and innovation, running from 2014 to 2020. The Commission's proposed budget for the programme over that period was around €80 billion. While final agreement on the budget is yet to be reached, it is likely to represent a substantial increase from the amount devoted to the current framework programme, which is €50.5 billion, of which €2.35bn was earmarked for energy.[283] Horizon 2020, by contrast, includes a new societal challenge 'Secure, Clean and Efficient Energy', with a suggested budget of €6.5 billion for non-nuclear energy research for the period 2014-2020. Futhermore, under the EU's Risk Sharing Financing Facility, €1.1 billion is earmarked for energy-related projects. This will be managed by the EIB. The Euratom proposal covering the period 2014-2018 foresees €1 billion for fission and fusion activities. In addition, €2.7 billion will be available as the EU's contribution to the international nuclear fusion project, ITER.

147.  We received mixed views in relation to the SET Plan. The Commission explained that, when the original research budgets for the EU for the period 2007-13 were drawn up, no major priority was given to energy. In recognition of that gap, the SET Plan was established in an attempt to mobilise public and private funding monies for researching major issues such as biofuels, storage and smart grids. The Commission noted, however, that it had not resulted in any major reorientation of national research budgets: only EU and private funds support the SET Plan in a significant way. A particular example of that was CCS, which had failed to attract the necessary finance by Member States (see Chapter 3). In terms of the future development of the SET Plan, DECC indicated that the UK had been supporting proposals for marine energy technologies to be included in the SET Plan quickly. The SET Plan should be under ongoing review so that it could incorporate new technologies as they emerge. Those technologies currently expected to have an important role for the EU in 2050 include: energy storage; trans-European energy networks; new technologies for energy efficiency; nuclear fusion; hydrogen fuel cell vehicles; and generation IV nuclear fission. The CIBSE emphasised demand-side response technologies as key, as did the ETI alongside bioenergy, CCS and nuclear power.[284]

148.  DECC confirmed that funding to deliver the SET Plan remained an issue and set out the scale of the challenge: "Activity under the Plan is estimated to require spending of up to €80bn over 10 years (a threefold increase on average cumulative EU and Member State spending in this area over recent years)". It went on to observe that "there continues to be an expectation that Member States and the private sector will ramp up their funding, which seems impractical in the present financial climate". DECC noted that the low carbon price under the EU Emissions Trading System (ETS) meant that there was significantly less funding than expected to spend on the first phase of projects under the NER-300 programme (see paragraph 57). That stream of funding was highlighted by WWF, which emphasised the importance of reinvesting some revenues from the ETS into the development of new low carbon technologies.[285]

149. Similar doubts as to the source of financing for the SET Plan were expressed by the EESC, describing the required expenditure as "massively underestimated". The EESC therefore recommended that appropriate financing plans supported by the Commission, Member States and industry be drawn up.[286] Professor Newbery described the SET Plan as reasonably sensible but observed that it lacked "the mechanism to mobilise sufficient funding through collective action, and the institutions to ensure that any such money is well-spent".[287] SSE expressed a concern that Member States and the Commission were not taking an appropriate share of risk on energy technology development, which could partly explain the difficulties in mobilising funding. Both SSE and RenewableUK argued that the SET Plan should have a devoted budget line under Horizon 2020.[288]

150.  The Commission observed that Horizon 2020 would allow a "significant increase in our energy research and innovation expenditure in the EU budget".[289] This was described as "welcome but still inadequate" by the Centre for European Reform (CER), particularly as the EU's "future prosperity will depend on staying at the technological frontier".[290] SSE agreed that "a major increase" in R&D was needed. It called for administrative hurdles related to EU research programmes to be removed and flexibility considered for bottom-up initiatives.[291]

151.  RenewableUK suggested that one third of the non-nuclear energy research budget under Horizon 2020 be spent on the SET Plan and that the remaining two thirds be spent on renewable energies and on energy efficiency. WWF agreed that a strong focus of funding should be on renewable energy and warned against moves to extend the Horizon 2020 energy budget to cover the gas sector. This was partly because the gas industry was already investing in research, an assertion confirmed by the Energy Networks Association (ENA).[292]

152.  As highlighted in paragraph 146, an EIB Risk Sharing Finance Facility will be available to support Horizon 2020. This facility, which is aimed at R&D, has so far resulted in loans amounting to over €9.5 billion, of which around 15% has been in the area of energy, particularly in the solar and wind power sectors and in energy efficiency. The facility, which shares the risk between the EU budget and the EIB, allows projects to be supported that would otherwise be too risky for the EIB to support on its own.[293]

153.  The CER was critical of EU funding for the international nuclear fusion project, ITER, arguing that the EU should cancel its participation in the project: "Even if it works eventually, ITER will not generate electricity for the grid until 2040 at the earliest, so fusion will contribute little to efforts to control climate change or to increase energy security."[294] It was explained that the budget of the project had tripled since 2001. In our report, 'EU Financial Framework from 2014', we strongly regretted the delays, cost overruns and management difficulties that had beset ITER.[295] While we did not argue against EU participation, we emphasised the need for improved financial management.

154.  The Committee was also told about the 'Smart Cities and Communities' European Innovation Partnership (EIP), which is encouraging consortia of industry to link up with cities to promote the most innovative ways of using energy, water and transport.[296] The EESC highlighted the EIP as of particular benefit. On the more general principle of EIPs, it emphasised that there must be close ties with stakeholders at national, regional and local level with a view to taking account of particular national and regional features.[297]

155.  We heard about some of the work in which the private sector is investing. For example, ABB Limited is supporting the development of the UK wave and tidal sector by providing components, systems and expertise. EDF highlighted two tidal stream and wave projects, in Brittany and in the French Overseas Territory of Runion, which are focused on demonstrating the potential commercialisation of both technologies. ABB Limited has also developed and delivered the first battery energy storage device which is connected to a local distribution network. This allows the network to manage power flows and voltage levels on part of the system. By contrast, EDF is not undertaking any new work in the area of battery storage. The company does not see significant market opportunities for this technology at an industrial scale. [298]

156.  Funding to support research and innovation activities across all areas will be increased for the next financing period running from 2014 to 2020. Clarity on how it will divide between the various priorities is now required. The EU's research and innovation policy is explored further in our report, 'The Effectiveness of EU Research and Innovation Proposals.[299]

157.  We are alarmed at the degree of evidence that we have heard to suggest that the SET Plan is at risk of failing to deliver its objectives due to inadequate funding. We conclude that the Commission must, as a matter of urgency, revise the SET Plan with a view not only to the technologies on which it should concentrate but also to how the SET Plan will be financed. Such work must be undertaken in partnership with Member States, the private sector and the EIB.

158.  The EIB's risk-sharing finance ability will be of particular value in the context of the market's reluctance to lend to certain Member States because of budget deficits.

159.  In terms of the future focus of investment in R&D, we agree with those witnesses who emphasised the increasing importance of demand-side technologies and so an increased focus on areas such as storage and smart meters would be helpful. As regards renewable energy, further work on advanced biofuels would be helpful, as it would on solar and tidal energies.

160.  We welcome innovative approaches to energy, including those that might be developed through innovation networks such as the new Smart Cities EIP. The value of such partnerships is dependent on their ability to engage with local, regional and national actors.

270   ETI Back

271   Q 123, ABB Limited, EESC, E.ON,FSR Back

272   Q 171 Back

273   Q 66, Q 368  Back

274   Dimitri Zenghelis  Back

275   Q 43, Q 88, CER, EUI, Scientific Alliance  Back

276   ABB Limited, ETI, FSR, IPPR, Dr Karsten Neuhoff supplementary evidence, RenewableUK, WWF  Back

277   Q 134 Back

278   QQ 263-264, E.ON, SSE Back

279   Q 380 Back

280   FSR, IET Back

281   COM(2007) 723 Back

282   Q 66, Q 270 Back

283   Decision 1982/2006 Back

284   Q 66, CIBSE, DECC, EIT Back

285   DECC, WWF  Back

286   EESC Back

287   Professor David Newbery Back

288   SSE, RenewableUK Back

289   Q 66  Back

290   CER Back

291   SSE Back

292   ENA, RenewableUK, WWF Back

293   Q 174 Back

294   op. citBack

295   European Union Committee, 13th Report (2010-11): EU Financial Framework from 2014 (HL Paper 125) Back

296   Q 270 Back

297   EESC Back

298   ABB Limited, EDF supplementary evidence Back

299   European Union Committee, 15th Report (2012-13): The Effectiveness of EU Research and Innovation Proposals (HL Paper 162) Back

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