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

CHAPTER 7: conclusions and recommendations

Chapter 2: Investment and costs

197.  We recommend that the Commission includes energy policy within its annual growth strategy and that Member States be encouraged, through the European Semester, to consider how their fiscal policies can contribute to unlocking investment in the energy sector (paragraph 18).

198.  We agree with the evidence presented that the time is right for infrastructure investment, including in energy, because it can have a multiplier effect, it can provide secure energy at a stable cost and it can boost technological advance. Low carbon generation and system infrastructure in particular can provide domestic energy production for decades at low and stable operating costs but at a high capital cost. We conclude that such investment is particularly appropriate at a time of historically low interest rates and recession. The potential to utilise underemployed financial resources, at low financing costs, while providing a secure indigenous supply for future growth means that investment, particularly in low carbon energy, could make a material and enduring contribution to European economic recovery (paragraph 24).

199.  Investment in low carbon energy will undoubtedly create jobs, but we caution that the case is not yet clear as to the extent to which net new jobs will be generated in the EU. We recognise the significant job creation potential of energy efficiency and energy connectivity developments (paragraph 28).

200.  We conclude that there is a crisis of investment, which needs to be overcome if the estimated €1 trillion of investment required in the EU's energy system to 2020 is to be released. The balance sheets of utility companies have slumped. Public funding can make a small but catalytic contribution. The bulk of the financing will therefore rely on institutional investment (paragraph 38).

201.  We recommend that the Commission and Member States work urgently with investors, including pension funds, to ensure their awareness of the opportunities, to identify obstacles and to propose solutions, such as the development of instruments to allow the pooling of resources in order to mitigate risk and encourage investment. Initiatives such as the EIB's Project Bond Initiative should be appropriately financed and promoted within the investment community. The EIB has a particular role in that promotion, but responsibility falls also to the Commission and Member States (paragraph 39).

202.  It is evident to us that a clear and credible EU energy and climate change policy through to 2030 is a pre-requisite for attracting investment and must therefore be adopted as a matter of urgency. Failure to invest, or investment at high financing costs due to perceived policy risk, could push up the overall cost of energy to consumers (paragraph 40).

203.  Energy pricing is, rightly, attracting attention as a factor of competitiveness and affordable energy should certainly be a goal of policy makers. The impact of the required energy transformation on retail bills, for industry and consumers, is uncertain. Ultimately, retail bills depend on a combination of taxation, energy efficiency and, most significantly, potentially volatile energy costs driven by business cycles and uncertainty. Policy makers cannot totally control volatility but their actions can mitigate its impact. We consider that bills are more likely to increase long-term if delays in developing a clear policy framework fail to ensure adequate and timely investment, including and particularly relating to low carbon sources which do not depend on global fossil fuel markets (paragraph 49).

204.  Failure to stabilise bills could provoke a serious political backlash. This underlines the need for governments and energy suppliers to convey a transparent and credible narrative to their consumers about the objectives of energy policy. As recommended by the Commission, specific measures must be defined at national and local levels to tackle fuel poverty (paragraph 50).

Chapter 3: The energy mix

205.  We recommend that consideration should be given to annual obligatory reporting by Member States to the Commission on their national energy policies, with assessments conducted by the Commission on the implications of emerging policies for neighbouring countries and the EU as a whole. This must extend to assessment of the compatibility of national policies with EU rules on state aid, on which we recommend the Commission provides further clarity (paragraph 54).

206.  In terms of worldwide electricity generation, CCS could make a larger contribution than anything else to reducing greenhouse gas emissions. The EU has a common interest in the development of CCS because of its common decarbonisation target and availability of significant carbon storage capacity (paragraph 60).

207.  We consider that, in relation to both coal and gas, CCS is technically feasible, but faces both financial and political obstacles. We urge the UK Government to deliver and build on its commitments to support pilot projects and stress the importance of an EU CCS portfolio including at least one CCS project applied to gas (paragraph 61).

208.  Where possible, CCS should be developed in industrial clusters so that it can be applied to industry as well as the power sector, thereby allowing its by-products to be used for industrial purposes (paragraph 62).

209.  It is particularly disturbing that as the need for CCS has increased, the effort to deliver it appears to have diminished. The slow progress of CCS thus far and its importance to EU energy policy suggest that a stronger incentive needs to be developed at EU and Member State level. This requires a stable source of national and EU funding and a credible carbon price or regulatory approach. Such an approach should include a provisional target date for requiring CCS to be applied to any new fossil fuel power stations, based on the results of pilot projects (paragraph 63).

210.  Gas has an important role as a transitional fuel, in moderating the cost of energy while larger renewable resources are further developed, and in balancing the system as the scale of intermittent inputs rises. However, further gas investment also carries a risk of 'lock-in' to carbon-based plant and infrastructure. Regulation, indicated well in advance, may be required in order to manage the transition to further decarbonisation, whether by CCS or by moving beyond gas (paragraph 68).

211.  We agree that a regulatory structure for the exploitation of shale gas in the EU should be developed. We caution, however, that fundamental structural differences (including population density, geology, planning and legal factors) make it highly questionable that the EU could repeat the US experience. The EU is unlikely to compete on the basis of cheap fossil fuels. Creation of such a false hope would undermine the policy stability required to attract investment. We therefore conclude that there is some uncertainty about the likely extent of EU-produced shale gas. The EU must take into account the further exploitation of shale gas in neighbouring regions and the implications of this for EU energy policy (paragraph 75).

212.  We note with concern the resurgence of coal in the EU. While significant closures are expected to take place as a result of EU environmental Directives, we observe that new plants compliant with those Directives are in preparation. We warn that, if the price of carbon under the ETS languishes for long, its credibility as a deterrent to new coal investment will be lost. The further development of coal in circumstances where CCS is not a proven technology would carry a high risk, not only in terms of climate change (and EU credibility), but also economic risk of stranded assets (paragraph 82).

213.  There are a range of renewable energy technologies at various stages of development. A number of onshore renewable resources, including wind, could be close to cost-competitive with present fossil fuel prices if the carbon price was more robust, but they are impeded in particular by public opposition as well as strategic uncertainties about energy prices and policy (paragraph 88).

214.  For much of northern Europe, including the UK, offshore renewable energy will require sustained investment, including by way of support schemes, to bring down costs. We would not support harmonisation of national support schemes but welcome work by the Commission to identify examples of best practice. We agree that support schemes should be temporary and phased out as a technology progresses towards commercial viability (paragraph 89).

215.  We accept that the increasing development of renewable energy has implications for the continuity of supply due to the intermittent nature of some renewable energy generation. This challenge should not be underestimated, but nor need it be an obstacle to the further development of renewable energy. It can be overcome through demand-side response, interconnection, storage and gas generation, although the necessity for gas to play this role should recede over the medium-to long-term (paragraph 90).

216.  We conclude from the German energy transformation thus far that, in practice, the safe and reliable introduction of high levels of renewable power requires coordination with neighbouring Member States (paragraph 91).

217.  There is not, and there never has been, consensus among Member States with regard to the role of nuclear energy. In the UK and elsewhere, financing remains problematic, both in terms of securing investment and with costs overrunning. Nuclear remains a low carbon option, but its future is uncertain in the EU. Important issues relating to state aid, liability and waste remain to be resolved and must be addressed by Member States and the Commission. Failure to agree the terms of significant new nuclear investment will inevitably increase reliance on alternative energy sources (paragraph 98).

Chapter 4: Delivering policy clarity—2030 framework

218.  Member States must be under no illusion: failure to agree a 2030 framework will restrict investment, with subsequent implications for energy costs, climate change ambitions and energy security. A comprehensive framework must be underpinned by a greenhouse gas reduction target set at the suggested level of 40% compared to 1990 levels, and in line with at least an 80% reduction by 2050 (paragraph 103).

219.  The recession and other factors have made the ETS marginal in terms of driving emissions reduction. Its history and current design render it ineffective at achieving its other goals. Experience has demonstrated the extreme sensitivity of the ETS to unanticipated developments (paragraph 113).

220.  We support the backloading proposal to amend the ETS in the short-term but we agree with some of our witnesses that it will be ineffectual without a commitment to a timetable for longer-term structural reform. This should be agreed by 2015 in advance of the Paris international climate change negotiations (paragraph 114).

221.  The dominant options for rejuvenating the ETS include tightening the cap and setting a floor price. The uncertainty in revenues makes it impossible for governments to budget effective use of ETS revenues, and the price collapse has reduced the major source of expected EU finance for CCS. We therefore conclude that a floor price would simultaneously increase investor confidence and help to stabilise possible financing for infrastructure, low carbon innovation and related applications (paragraph 115).

222.  A combination of both tightening the cap and introducing a floor price, seen as part of a package to attract new investment and support efficiency and innovation, may help to alleviate some of the political opposition to both options. Structural reform is important to restore credibility and meet the multiple goals of the ETS, but a clear trajectory for a reduction in the cap over the period to 2030 would remain important (paragraph 116).

223.  A strengthened and more effective ETS can provide a broad underpinning for the most cost-effective low carbon technologies, but it cannot support all of the necessary transformations. An EU-wide renewable energy target beyond 2020 is desirable, and so we therefore support a renewable energy target up to 2030. Failing that, a 2030 decarbonisation target at the EU level for the power sector should be set. Member States could then set their own specific renewable energy targets, which should be reported to the Commission (paragraph 121).

224.  The EU has adopted the EED which needs to be implemented across Member States. We would support further consideration as to the introduction of binding EU-level targets on energy consumption by 2030, consideration which should be informed by the Commission's assessment in 2014 of the implementation of the EED (paragraph 126).

225.  There are important helpful technologies, such as community heating systems and CHP, which must be further developed. The potential 'rebound effect' reinforces the need for energy efficiency policy to be complemented by measures to price carbon appropriately (paragraph 127).

226.  We agree that energy costs have a disproportionate impact on a small number of energy-intensive industries and that this is an issue to be addressed in the post-2020 framework. In order to make a full evidence-based position for that framework possible, we recommend that the Commission explore urgently the various options, such as: free allocation of allowances under the ETS; global sectoral agreements; and any global trade-compatible measure that could equalise costs between domestic and third country producers. Some income derived from the auctioning of allowances under an ETS with a floor price could be offered to assist energy-intensive industries to develop and adopt innovative energy efficient technologies (paragraph 133).

227.  We conclude that the future framework can and should be seen and articulated as an economic opportunity for all Member States. It must overhaul the ETS as an instrument for supporting strategic investment both by industry and, through revenues raised, for supporting innovation (for example, in CCS and offshore turbines), European infrastructure investment and energy efficiency. Provisions on the ETS must form part of a package along with policies on renewable energy and associated infrastructure, energy efficiency, and energy-intensive industries. We note that the unanimous support of all Member States may not be required, as any future agreement could be reached with a qualified majority (paragraph 138).

Chapter 5: Research and innovation

228.  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. (paragraph 144).

229.  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. (paragraph 156).

230.  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 (paragraph 157).

231.  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 (paragraph 158).

232.  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 (paragraph 159).

233.  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 (paragraph 160).

Chapter 6: Interconnectivity and energy security

234.  It is cost-efficient and urgent to develop electricity interconnections between Member States in order to support both the further deployment of renewable energies and attempts to secure the EU's energy supplies. We conclude that the full benefits of interconnection will be derived only from greater deployment of HVDC lines, allowing electricity to be transported over a long distance at an economical cost (paragraph 168).

235.  We agree with our witnesses that an increasingly interconnected grid will need to be developed incrementally, rather than on the basis of a top-down grand plan. Nevertheless a stronger element of network planning—nationally and regionally—could be very beneficial in the transition to a more renewable-based and secure system. The move to greater interconnection is not incompatible with the development of distributed generation, but the potential offered by distributed generation must be recognised more clearly in energy strategies (paragraph 173).

236.  We welcome recent agreement on the trans-European Energy Infrastructure Regulation, which identifies PCIs and establishes common rules on permit granting procedures. The Regulation must now be implemented with urgency (paragraph 175).

237.  We acknowledge that public concerns can be a significant obstacle to the development of interconnections. In that context, the public awareness dimension of EU energy policy becomes pivotal: a local decision can have significant pan-European implications in terms of energy cost and energy security. The Commission must consider as part of its future policy framework how it and Member States can work together to communicate effectively the benefits of cross-border energy connections. We agree that providing a clear indication that a project is part of a strategic transition towards an increasingly interconnected grid could help overcome local objections to projects. Early engagement and consultation with the public and other interest groups is similarly important. The Renewables Grid Initiative, involving environmental NGOs and TSOs, is a welcome attempt to tackle the public awareness issue. (paragraph 178).

238.  There remain economic and regulatory obstacles to integrated interconnection and transmission, which are crucial to the completion of the internal energy market. We encourage Member States to support regulators, through ACER, and TSOs, through ENTSO-E, in their efforts to overcome those obstacles. A review of budgetary support to ACER in particular would be helpful to ensure that it has a sufficient budget to allow it to deliver its important role. The ultimate goal of more effective regulatory cooperation must be a pan-EU energy market, working for the benefit of EU consumers (paragraph 182).

239.  There are considerable financial and political uncertainties as to the sources and costs of future gas supply. It is clear that a range of sources and methods of transportation are critical. We support the Commission's attempts to improve efficiency in gas pipeline capacity. We urge the UK Government to examine the potential for a regulatory framework to increase gas storage. (paragraph 188).

240.  In the short-term, we accept the need to introduce legislative powers for a capacity mechanism that seeks to ensure domestic security of energy supply, whether in the UK or elsewhere. The issue will be particularly acute after 2015, as more coal plants are retired under the Large Combustion Plant and Industrial Emissions Directives (paragraph 195).

241.  We are concerned that excessive reliance by large numbers of Member States on capacity mechanisms designed to support fossil fuel power station investment will add costs to electricity and may exacerbate the risk of fossil fuel 'lock-in'. For this reason, we consider it important that any capacity mechanism gives at least equal weight, and potentially should prefer, the inclusion of interconnection and of active demand-side response measures as alternate or additional ways of ensuring security of supply (paragraph 196).

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