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
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
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 clarity2030
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
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
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
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
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 planningnationally and regionallycould
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.
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).