The New Economic Rationale
for an Ambitious EU Climate
and Energy Framework
TABLE OF
CONTENTS
Power Upgrade 2030
The key messages
5
5
1. The need for investing in a new energy system
Protecting the climate
Modernising an ageing energy system and securing energy supply
2. The new reality of cost efficiency
Choosing the most cost-efficient solutions
The greatest return on investment
Strengthening competitiveness
Turning costs into investments and enhancing energy security
Defining a new job agenda for Europe
Promoting know-how and innovation
4.
The most efficient and effective policy mix
Strengthening the ETS
Reducing the cost of financing
Using diversification to lower overall system costs
5. The people´s voice
Acting in line with Europe's citizens
References
Imprint
Published by
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11
11
3.
7
7
9
13
13
15
17
19
21
21
23
25
27
27
28
2020
KEY MESSAGES | 5
POWER UPGRADE 2030
THE KEY MESSAGES
1. The upcoming decision on the 2030 climate and energy
framework means the EU is on the verge of setting the
course that will determine its future competitiveness.
Finding a compromise between the diverging interests
involved will allow Europe to send an important signal to
the international climate negotiations in Paris.
2. Member States have different starting points, resources
and preferences. At the same time, Europe has to invest in
modernising its energy system:
•
With the existing energy system, Europe is set to fail to
achieve its long-term goal of reducing greenhouse gas
(GHG) emissions by 80-95 % by 2050.
•
Over 70 % of Europe’s conventional power plants are
more than 30 years old.
•
Europe is more dependent on imported fossil fuels
than most industrialised regions, and its dependency is
even likely to increase.
3. This puts Europe at a crossroads. The 2030 framework
should choose the most cost-efficient pathway that offers
the highest return on investment. Renewable energy and
energy efficiency offer much better prospects in this regard today than they did in 2007, the year Europe decided
on the 2020 framework:
•
•
Energy efficiency and renewable energy have become
the most cost-efficient options with respect to new low
carbon investments. Facilitating the necessary learning
curves came at high costs, but these are costs of the
past. Europe now needs to take advantage of efforts
being made.
Setting three targets that aim for a 40 % GHG reduction, 30 % energy efficiency and a 30 % share of renewable energy would create 568,000 more jobs and save
€ 260 billion more on fossil fuel imports than a single
target that aims only for a 40 % GHG reduction.
4. The Energy Roadmap 2050 has identified energy efficiency and renewable energy as “no-regret” options. Energy
efficiency and the share of renewable energy both need to
rise significantly in all scenarios in all Member States by
2030 and beyond. Postponing these investments will lead
to higher costs in the long run and less time to adapt.
5. With this in mind, Europe should take advantage of the
synergies offered by a framework that promotes energy
efficiency and renewable energy. The question is: what
would be the most cost-efficient framework for doing so?
6. The Emissions Trading Scheme (ETS), which is the EU’s
main climate policy instrument, must be urgently
strengthened and reformed to provide continuous overall
decarbonisation signals. Effective measures preventing
carbon leakage affecting especially energy-intensive
industries also remain key.
7. The ETS is most efficient and effective if complemented
by tailored measures. This is because the ETS alone
cannot overcome the non-economic barriers to exploiting large energy efficiency potentials. Moreover, it is not
currently designed to attract early investments in new,
innovative technologies. Most importantly, the risks associated with fluctuating certificate prices can significantly
increase the cost of capital.
8. A combined and well-balanced approach of three targets,
together with a strengthened ETS and tailored instruments will send clear market signals for investing early in
innovative technologies. It will provide predictability for
all actors and improve consistency between instruments
at the EU and Member State level. In turn, this will raise
investor certainty and greatly reduce the costs of capital
and thus overall system costs.
9. In line with this, new analyses from PRIMES and Fraunhofer show that an EU framework with ambitious targets
for GHG reduction, renewable energy and energy efficiency can be as cost-efficient as, or even more cost-efficient
than, a GHG-only approach.
10. Increasing challenges, different starting points, and
variations in energy mix priorities among Member States
all call for more flexibility. The 2030 framework thus has
to find the right balance between responding to this need
and ensuring sufficient reliability to reduce investor risk.
6 | NEW REALIT Y
NEW REALIT Y | 7
Efficiency gains, fuel switching and renewable energy have already reduced Europe’s CO2 emissions
Estimated impact on CO2 emissions savings in electricity and heat production from 1990 to 2011, EU-15 in million tonnes
Mt
1,500
1.
1,200
900
600
THE NEED FOR INVESTING
IN A NEW ENERGY SYSTEM
Protecting the climate
300
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Actual CO2 emissions
Change due to efficiency improvement
Change due to renewable energy share (incl. biomass)
Change due to fossil fuel switching
Real emissions trend
Source: EEA, 2013a
However, with its current policy, the EU will fail to meet its 80-95% emission reduction goal
Emission reduction pathways by sector vs. trend based on current policies until 2050
100%
100%
90%
90%
Power sector
80%
Current policy
70%
Residential & tertiary
60%
The energy system remains the single largest source of
emissions in the EU. It produces around 80 % of GHG
emissions, with the energy sector itself taking the largest
share (31 % of all emissions) followed by transport (22 %),
industry (11 %), and heating for housing (11 %). Most of the
energy emissions are CO2 emissions, which account for
83 % of all EU emissions.
80%
70%
60%
50%
50%
Industry
40%
40%
30%
30%
Transport
20%
20%
10%
Non-CO2 agriculture
10%
0%
Other non-CO2 sectors
0%
1990
2000
2010
2020
2030
2040
2050
Each of the past three decades has been warmer than the
previous one. Twelve of the 14 warmest years on record
since 1880 have occurred since the year 2000. In order
to prevent irreversible climate change, the international
community has committed itself to limiting the global
temperature increase to 2 °C above preindustrial levels.
In line with this objective, the EU has set itself the target
of reducing greenhouse gas (GHG) emissions by 80–95 %
by 2050. This requires early action: today's emissions will
irreversibly lead to further global warming.
Source: European Commission, 2011b
If the EU is to reduce its GHG emissions by 80–95 % by
2050, it will have to put particular emphasis on changing
its energy system. Staying with its existing energy system
would prevent it from achieving its long-term climate
goals. Current investment frameworks and policies are
projected to help reduce emissions by about 20 % by 2020,
30 % by 2030 and around 40 % by 2050 [European Commission, 2011a]. In view of the long lifetimes and investment
cycles of energy assets, the International Energy Agency
(IEA) has warned on various occasions that early investments in low carbon technologies are needed.
8 | NEW REALIT Y
NEW REALIT Y | 9
Half of Europe's power capacity is overaged
Europe has a € 420 billion energy trade deficit
Age of European power generation capacities in Europe in 2013
Europe's trade deficit by energy resource from 2000 to 2012
MW
bn €
250,000
500
200,000
400
150,000
300
100,000
200
50,000
100
Coal
Petroleum
Gas
Others
1.
THE NEED FOR INVESTING
IN A NEW ENERGY SYSTEM
Modernising an ageing energy system and securing energy supply
0
<10
11-20
20-30
30-40
Renewable energy
(including hydro)
Nuclear
40-50
Gas
Oil
Coal
>50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Years
Source: European Commission, 2014a
Source: Platts, 2014
The European Union has an ageing energy system: 45 %
of its total power generation capacity and over 70 % of
its conventional power fleet are more than 30 years old
[Platts, 2014; Eurelectric, 2012]. An increasing number of
power plants – about 3 to 5 gigawatts (GW) annually – are
reaching an age where it makes more economic sense for
operators to decommission their assets than to invest in
refurbishing them.
Europe faces growing dependency on fossil fuel imports
Net oil and gas import/export shares in 2011, and projection for 2035
Net gas importer, net oil exporter
Net gas and oil importer
+100%
According to the European Commission, some 350 GW of
new power capacity needs to be built in the coming years.
This is mainly to replace retired plants, though it will also
help meet rising electricity demand. The 350 GW corresponds to 39 % of current installed capacity [European
Commission, 2011a].
Japan & Korea
80%
54%
EU
50%
China
India
Brazil
0%
This puts Europe at a crossroads. Investments in new power plants will define Europe’s carbon footprint for decades
to come. They will either set the course for achieving the
long-term climate goals in an economically sound and
beneficial way, or lock Europe into a high carbon economy
that will make it impossible to stay below the 2 °C limit.
The EU’s 2030 framework for climate and energy is key to
determining investment decisions taken today.
Middle East
USA
SE Asia
Russia
-50%
Caspian
Indonesia
Africa
-100%
Net gas and oil exporter
-100%
-50%
Net gas exporter, net oil importer
0%
50%
2011
2035
+100%
Sources: Eurostat, 2014c; IEA, 2013
Issues connected to energy security and the stability of energy prices have also become increasingly important. With
the exception of Japan and Korea, Europe is more dependent on imported fossil fuels than any other industrialised
country or region. This makes it highly vulnerable to price
increases, price fluctuations and political instability in
the exporting regions. Its dependency is also expected to
increase in the coming years. Projections see it growing
from about 54 % today to 80 % in 2035 if no further action
is taken on fuel switching to renewable energy and on
increasing energy efficiency [Eurostat, 2014c; IEA, 2013].
The growing need for fossil fuel imports is reflected in
Europe’s trade deficit in energy products. Standing at € 150
billion in 2004, the deficit nearly tripled to reach a record
high of € 421 billion in 2012. This cost every European citizen over € 2 per day and represented 3.3 % of the region’s
GDP [European Commission, 2014a]. Furthermore, as globally traded, finite commodities, fossil fuels are linked to
uncertain, fluctuating prices that can have a major impact
on societal costs. Crises such as those in Ukraine and the
Middle East add to the uncertainty. High investment risks
and high capital costs are the result.
10 | NE W RE AL I T Y
NEW RE AL I T Y | 11
Renewable energy has become the most cost-efficient new low-carbon option
Levelised cost of electricity ranges for new power capacities in Europe in 2014, 2020 and 2030 in € cents/kWh
Solar CSP
Concentrated solar power
€ cents/kWh
26.0
25
Solar PV
23.2
20.3
20
Onshore wind
15
13.7 13.1
19.8
Offshore wind
14.7 14.5
12.5
16.3
Biogas
19.5 19.8 20.0
19.8 19.6
25
19.4
Hydropower
17.9
14.3
13.4
Biomass
15 15 15
15.9
11.1 11.4 11.7
5
5.8 5.5 5.1
2014
2020
15
13.6
10
8.0 7.9
7.0
20
8.7
7.4
10
8.4 8.2 8.0
6.6
2030
Range for CCS and nuclear (2014–2030)
5
Range for fossil fuels without CCS (2014–2030)
PV system costs have fallen by up to 70% in six years
Cost of offshore wind could halve within a decade
Development of PV system costs in the main markets in $/Watt
Levelised cost of electricity at point of final investment decision,
including grid connection to shore in € cents/kWh
Average sub-10kW German system cost
Average California residential system cost
Japanese residential system cost average
Chinese multicrystalline silicon module price
16.8
9.0
Scenario 1: 12 GW in UK, 31 GW in Europe
2011
8.0
Scenario 2: 17 GW in UK, 36 GW in Europe
Scenario 3: 23 GW in UK, 43 GW in Europe
7.0
16.1
6.0
13.8
14.2
5.0
13.8
4.0
12
10.7
3.0
2.0
1.0
2017
0.0
2010
2011
2012
2020
2013
Source: Bloomberg New Energy Finance, 2013
Given the large amount of investment needed to modernise Europe’s energy system, the EU 2030 framework should
set the signals for the most cost-efficient and effective
pathway for achieving the 80–95 % emission reduction target by 2050. Europe cannot achieve its goals for the climate
and energy security solely by improving the efficiency of
existing coal power plants; the focus has to be on new, safe
and sustainable low carbon solutions.
Thanks to the structural and technological changes unfolding in the global economy, and the numerous opportunities for improving economic efficiency, it is now possible
to achieve growth with better climate outcomes.
$/W (DC)
2009
Choosing the most cost-efficient solutions
2.6 2.6 2.6
Source: Fraunhofer ISI, 2014a
2008
2.
THE NEW REALITY
OF COST EFFICIENCY
In terms of technology costs for new investments, Europe
is in a much better position today than it was in 2007
when deciding on the current 2020 climate and energy
framework. The levelised cost of electricity (LCOE) for
renewable energy technologies, and the costs associated
with energy efficiency have decreased significantly over
the last few years.
Of all renewable energy technologies, photovoltaic (PV)
has seen the sharpest decline in costs, with module prices
falling 80 % since 2008 [IEA, 2014a]. This has made it possible
for countries across Europe to significantly reduce their
support for PV deployment. In Germany, the cost of PV
support has fallen from between € 0.43 and € 0.32/kWh to
between € 0.13 and € 0.09/kWh in less than five years. This
is developing into a global trend, with, for instance, PV
systems on commercial buildings becoming competitive
with retail electricity prices in several countries.
Source: The Crown Estate, 2012
Certainly, facilitating these technology learning curves has
come at a high cost – both in terms of the efforts required
to help the technology take off, and with regard to lessons
learned in designing and adapting policy instruments. The
result is the currently high renewable energy support surcharges in several EU countries, which are the main reason
for Member States` sensitivity to setting new targets.
However, the current surcharge levels reflect the financial
efforts of the past. Europe is now facing a new reality of
cost efficiency: energy efficiency and renewable energy
have become the most cost-efficient of the new low carbon
investments. LCOE for new onshore wind is now between
€ 0.058/kWh and € 0.137/kWh, while nuclear comes in at
between € 0.083/kWh and € 0.112/kWh [Fraunhofer ISI,
2014a].
Further reductions in costs for renewable energy and energy efficiency measures are expected in the coming years.
Studies show, for instance, that a balanced policy mix can
achieve cost competitiveness for offshore wind as early
as within the next decade [Prognos/Fichtner, 2013; The
Crown Estate, 2012]. In contrast, costs for fossil fuels and
nuclear energy are expected to increase over the next few
years, particularly in the case of new investments. By 2030,
LCOE for PV is expected to be between € 0.066/kWh and
€ 0.143/kWh, while costs for CCS will be between € 0.077/
kWh and € 0.177/kWh [Fraunhofer ISI, 2014a].
Europe should now take advantage of the technology
learning curve that all Member States have already
financed in the framework of the 2020 climate and
energy package.
1 2 | G R E AT E S T R E T U R N
G R E AT E S T R E T U R N | 1 3
Europe’s industry remains competitive despite increasing energy costs
Real unit energy costs as % of value added in the manufacturing sector
Europe shows steady growth with reduced energy consumption
Decoupling of GDP, energy consumption, energy intensity and CO2 emissions since 1990
%
Index 1990 = 100
70
140
60
GDP at 2000 market prices
130
50
3.
120
40
Gross inland energy consumption
110
30
100
20
CO2 intensity
90
10
1999
2001
Europe
2003
2005
Japan
2007
Russia
2009
China
2011
Strengthening competitiveness
80
1990
United States
1995
2000
Source: European Commission, 2014a
2005
2010
Sources: EEA, 2013b; European Commission, 2014j
Power exchange prices have been steadily declining
Mid-month data for EEX spot market and derivatives market in €/MWh, share of renewable energy in German gross electricity consumption
%
€/MWh
100
100
90
High 82.8
80
Derivatives market price
88.3 High
90
Spot market price
80
Renewable energy share in Germany
70
70
60
60
50
50
40
34.1 Low
40
30
30
20
25.9 Low
20
10
10
0
0
Jan 07
Jun 07
Jan 08
Jun 08
Jan 09
Jun 09
Jan 10
Jun 10
Jan 11
Jun 11
Jan 12
Jun 12
Jan 13
Jun 13
Jan 14
Jun 14
Sources: BMWi, 2014a, 2014b; AGEB 2014
Renewable energy surcharge and spot market prices
Europe's wind industry surplus is growing
Exports and imports of wind components from outside EU
Average spot price and EEG surcharge in Germany since 2010
bn €
€ cents/kWh
Spot price
EEG surcharge
3.0
9
3.78
6
5.11
Exports to non-EU
2.0
4.27
4.47
1.0
3
0
2.05
3.53
3.59
5.28
Imports from non-EU
0.0
2010
2011
2012
2013
Source: BMWi, 2014
THE GREATEST RETURN
ON INVESTMENT
2000
2002
2004
2006
2008
2010
2012
Source: European Commission, 2014a
In the past 20 years, the EU has successfully decoupled economic growth from energy consumption and GHG emissions. While its gross domestic product (GDP) has grown by
roughly 45 %, actual energy consumption has risen by just
3.2 % and GHG emissions have fallen by 17 %. This has led to
a 25 % drop in the energy intensity of the European economy.
European businesses have been instrumental in making
Europe one of the world’s most energy efficient regions.
Their contribution was early supported by EU initiatives
[European Commission, 2000]. Today, various sectors of
industry produce more efficiently than their competitors
in other regions. EU industry improved its energy intensity
by almost 19 % between 2001 and 2011, compared with just
9 % in the US [European Commission, 2014e]. Despite higher
energy prices, five EU countries currently rank among the
world’s ten most competitive economies [WEF, 2014].
Furthermore, the increasing share of renewable energy
in the power sector has put downward pressure on spot
market prices for electricity. Renewable energy technologies
involve high capital expenditure (CAPEX) but low operating
expenditure (OPEX). As a result they are replacing highOPEX fossil fuel generation on the energy-only market
(merit-order effect). This financial benefit starts to pay off
for consumers in Europe. The trend is supposed to increase
even further with the removal of regulated prices and with
electricity markets adjusting to the new system flexibility
required [European Commission, 2014d].
Higher energy efficiency and well-balanced, targeted
exemptions for industry from carbon pricing and renewable support surcharges have been and will continue to be
necessary to keep Europe’s industry highly competitive,
especially since global fuel costs have increased steadily
[European Commission, 2014a]. Although various factors
influence spot market prices, the downward pressure from
the growing share of renewable energy has helped industrial
competitiveness and may do so increasingly in the future.
As energy costs will increasingly determine future compet-
itiveness, Europe will increasingly benefit if it can reduce
its energy bills by bringing down energy demand and using
generation technologies with a very low OPEX.
European and national policies, including the 2020 climate
and energy framework, helped Europe specialise early on in
innovative energy efficiency and renewable energy technologies. This made it a frontrunner in these fields. EU firms
are playing a leading role in the global energy efficiency
market, which was worth € 720 billion in 2010. This segment
is by far the largest in the overall market for clean-tech and
resource efficiency, and is expected to increase by 3.9 %
per year to € 1,240 billion by 2025 [BMU, 2012]. At the same
time, the renewable energy industry contributes € 92 billion
per year, which equates to 0.8 % of European GDP [Fraunhofer ISI, 2014c]. This is more than the clothing industry
(0.62 %) and comparable to the furniture industry (0.99 %)
[Eurostat, 2014d].
Obviously, in a globalised world, this pattern of job creation
and business expansion is replicated further afield and benefits other actors and regions. This is especially true of new
production sites for renewable energy technologies in Asia,
which can produce technologies and components at competitive prices. However, this has accelerated the technology
learning curve through economies of scale and has helped
to reduce support expenditures in Europe, too.
However, if the EU does not provide an attractive investment framework and retain its position as a key market for
renewable energy and energy efficiency, then capital and
companies will move to other regions in the world where
demand is rising and markets are growing [UNEP, BNEF,
2014]. For Europe’s growth prospects and future competitiveness it therefore remains crucial to keep the momentum
it built up as the cradle of innovation in renewable energy
and energy efficiency.
14 | G R E AT E S T R E T U R N
G R E AT E S T R E T U R N | 1 5
Renewable energy and energy efficiency reduce Europe's fossil fuel costs
Total energy import costs and avoided costs via renewable energy use and efficiency measures in 2010*
385
3.
100
2010
30
0 bn €
10 bn €
20 bn €
Total energy import costs
30 bn €
40 bn €
50 bn €
Avoided costs by renewable energy
60 bn €
70 bn €
80 bn €
90 bn €
100 bn €
Turning costs into investments and enhancing energy security
Avoided costs by energy efficiency
* 2010 figures for renewable energy, average annual savings until 2020 for energy efficiency
Sources: Eurostat, 2014a; European Commission, 2006, 2014a
260 bn €
2030
Additional savings of fossil fuel imports, related to 30% renewable energy and
30% energy efficiency in 2030, achievable in 2011–2030
= 13 bn € per year
Youth unemployment in the EU
Invest in youth employment instead of energy imports
21 bn €
7.5 million (<25)
Estimated annual cost of setting up Youth Guarantees for
7.5 million young people in the EU Member States
are not employed, not in education
and not in training
153 bn €
Estimated annual cost of having
7.5 million young people in the EU
out of work, education and training
Source: ILO, 2012
European employment and education initiatives
6 bn €
Budget of the European Youth
Employment Initiative (2014-2020)
Source: European Commission, 2014h
Source: European Commission, 2014h
Source: Eurofound, 2012
Erasmus Programme
15 bn €
Budget of Erasmus+: EU programme for
education, training, youth and sport, which aims to give
4 million people access to a traineeship (2014-2020)
THE GREATEST RETURN
ON INVESTMENT
4 million
3 million
5 bn €
participants expected in 2014-2020
participants since 1988
Budget of Erasmus since 1988
Source: European Commission, 2012, 2014h, 2014i
Making efficiency improvements to coal-fired power
plants is currently one of the most cost-efficient CO2
mitigation options. However, focusing only on short-term
cost efficiency comprises the risk of failing to invest in the
new technologies that are needed for achieving long-term
decarbonisation. In its Energy Roadmap 2050, the European Commission thus describes renewable energy, energy
efficiency and infrastructure as “no-regret” options – they
are critical components of every scenario already up to
2030 and especially for the long-term decarbonisation of
Europe´s economy up to 2050.
The European Commission’s 2030 Impact Assessment
found that the GHG40 scenario, which reduces GHG emissions by 40 % and leads to a 27 % share for renewable energy and energy savings of 25 %, would reduce gas imports
by just 9 % and save € 190 billion on fossil fuel imports. In
contrast, it found that the scenario with a 30 % renewable
energy target and more ambitious efficiency policies
achieving a 30 % decline in energy consumption would reduce gas imports by 26 % and achieve an extra € 260 billion
in fossil fuel savings, thus saving a total of € 450 billion by
2030 [European Commission, 2014c].
Postponing investments in new energy technologies will
lead to higher costs because the whole energy system will
have to be adapted in a shorter timeframe (building renovations, more flexibility, grid reinforcement, storage, etc.).
It also creates the risk of sunk costs and stranded investments in fossil fuels and in high carbon assets.
The EU economy can channel the resources it would have
spent on fossil fuels into more innovation, more technology learning, new assets and grid modernisation. It
could also use the funds to tackle youth unemployment.
To give an example: the additional € 260 billion of savings
is 43 times higher than the EU’s current spending on the
Youth Employment Initiative (total budget of € 6 billion in
2014–2020) [European Commission, 2014h].
In addition, Europe can significantly reduce the amount it
spends on fossil fuels by improving energy efficiency and
increasing the share of renewable energy. Both of these
measures are already saving the economy billions, with
avoided fuel costs amounting to some € 130 billion per year
at the European level. Renewable energy alone avoided € 30
billion in imported fossil fuel in 2010 [European Commission, 2014a]. IEA estimates indicate that the support costs
for renewable energy in the EU were € 26 billion the same
year, which means they were offset by the avoided costs of
importing fossil fuels [IEA, 2011b].
1 6 | G R E AT E S T R E T U R N
G R E AT E S T R E T U R N | 1 7
Energy efficiency and renewable energy will increase innovative jobs in Europe
Projected impacts on employment for 2030, compared to reference and GHG-only scenario
+ 568,000
Total employment
in Europe in 2030
in persons
i.e.
1,246,000
Construction
182,000 jobs
3.
THE GREATEST RETURN
ON INVESTMENT
Defining a new job agenda for Europe
Distribution & retail
678,000
Reference
231,701,000
Engineering
GHG 32, EE 21, RES 24
GHG 40, EE 25, RES 27
104,000 jobs
62,000 jobs
GHG 40, EE 30, RES 30
Source: European Commission, 2014c
Renewable energy is labour intensive
No of people who can work for one year for 10 gigawatt hours of electricity
5.5
Biomass
Geothermal
2.1
2.5
Small hydropower
2.7
Solar
1.7
1.1
1.1
Wind
Coal
Gas
Source: Wei et al., 2010
How renewable energy promotes jobs in Europe's power sector
Job development trends, based on the Energy Roadmap 2050, RES scenario
2020
Total renewable energy
1,342,000
1,806,000
2030
2050
Total renewable energy
4,717,000
Total renewable energy
2,106,000
2,442,000
In 2011 about 40% of all employees in the European power
sector worked in jobs related to renewable energy.
5,045,000
Biomass
Small hydropower
Solar
Wind power
Solids, Gas, Nuclear
Source: CEPS, 2014
Improvements in energy efficiency and the deployment of
renewable energy have helped build a whole new industry
and have created numerous jobs throughout Europe. Some
two million people work in the various branches and related sub-branches of the renewable energy industry, making
Europe the second biggest renewable energy employer in
the world [IRENA, 2014].
The European Commission’s Impact Assessment shows
that dedicated energy efficiency policies corresponding to
a 30% reduction in energy demand and a renewable energy
target of 30 % would result in 568,000 more jobs across the
EU than with the scenario that envisages achieving energy
savings of 25 % and proposes a 27 % share for renewable
energy [European Commission, 2014c].
Given that renewable energy technologies are typically
more labour intensive than fossil-based ones, they can
create more jobs per unit of generation capacity [Wei et.al,
2010; CEPS, 2014]. Energy efficiency measures are also
labour intensive, especially in the buildings sector, where
implementing them requires local capacities and so creates
new jobs at the local level. On average, 17 jobs are created
for every € 1 million invested [Ürge-Vorsatz, 2010].
In view of the unsustainably high levels of unemployment
in many European countries, particularly among young
people, the job-creation potential of energy efficiency and
renewable energy must be a key driver of the EU’s 2030
framework.
1 8 | G R E AT E S T R E T U R N
G R E AT E S T R E T U R N | 1 9
Promoting education in Europe
5
University courses on renewable energy and energy efficiency in Europe
20
33
8
21
27
121
11
3
23
10
19
16
7
61
Promoting know-how and innovation
19
30
3
Source: Budig et al., 2014
Europe is number 1 for renewable energy patent applications
Share of worldwide annual patent applications for wind, solar and geothermal from 2000 to 2011
%
55%
Overall economy
50
Renewable energy
Solar
Wind power
39%
40
33%
30
34%
29%
32%
26%
24%
20
17%
15%
10
4%
EU-27
USA
4%
2%
17%
9%
5%
China
Japan
Source: European Commission, 2014a
Number of renewable energy patent applications is constantly growing
Worldwide annual patent applications for wind, solar and geothermal technologies
Applications
Solar
30,000
Wind power
Geothermal
30,198
26,820
25,000
22,682
20,000
17,282
15,000
10,000
5,000
3,528
3,734
4,172
4,513
5,128
1995
1996
1997
1998
1999
6,606
2000
8,062
8,633
8,050
2001
2002
2003
12,998
12,199
2005
2006
14,392
9,599
2004
THE GREATEST RETURN
ON INVESTMENT
26
10
30
18
18
61
368
1
3.
16
8
2007
2008
2009
2010
2011
Source: WIPO, 2013
Transforming Europe’s energy system into one that is
clean, safe and sustainable is not merely about producing
and deploying new technologies. Promoting know-how
and innovation for a complete system change will enhance competitiveness throughout the entire value chain.
Modernising the energy system will lead to a new “system intelligence” based on innovative, smart technology
solutions and their flexible and intelligent interaction
throughout the supply and demand chain. This will generate significant innovation spillover effects in forward
and backward linked sectors. There is growing evidence
that research and development (R&D) of clean-tech has
particularly high spillover benefits that are comparable
to those created by robotics, information technology and
nanotechnologies [Dechezleprêtre et al. 2013].
Statistics from the OECD and the World Intellectual Property Organization (WIPO) already prove that the energy
transition has enormous potential for innovation. Annual
patent applications for renewable energy, energy efficiency
and climate change mitigation technologies have doubled
within ten years, with global figures climbing from 87,000
in 1999 to 170,000 in 2010 [OECD, 2014].
Japan used to be the leading nation for renewable energy
patents, with most of them focusing on solar technologies.
However, Europe began strengthening its position in 2000
and has since become an innovation leader. As a result, Europe now files the most patent applications for renewable
energy, and wind is the dominant technology [European
Commission, 2014a].
The rapid increase in applications connected to energy
efficiency and renewable energy has also transformed the
education system. More than 1,000 study programmes on
renewable energy and energy efficiency are now available
across Europe, with Germany and the UK leading the field
[Budig et.al, 2014]. There is still a need for more courses,
though, to meet the increasing demand for highly skilled
engineers. These training and innovation hubs will form
the bedrock of Europe’s future competitiveness.
20 | POL IC Y MI X
P OL IC Y MI X | 21
How the ETS needs to be complemented to be most cost-efficient
Stylised curve of emission reduction measures
1
ETS complemented by tailored instruments for energy efficiency and innovative technologies
Abatement cost
4.
€ per tCO2e
Highly economic energy efficiency measures
Measures addressable by ETS
CO2 price
Innovative and immature technologies
MtCO2
Emission
reduction target
Quantity
2
CO2 price set by marginal abatement option
Strengthening the ETS
Over-subsidisation
ETS without energy efficiency policies
Abatement cost
€ per tCO2e
CO2 price
MtCO2
Emission
reduction target
Quantity
3
THE MOST EFFICIENT AND EFFECTIVE
POLICY MIX
If ETS-prices should attract innovative technologies
Abatement cost
€ per tCO2e
CO2 price
The EU Emissions Trading Scheme (ETS) is the EU’s main
climate policy instrument and the most cost-efficient
approach to incentivising short-term decarbonisation
options in particular. It also provides the necessary overall
innovation signal for low carbon investments in Europe.
alone [European Commission, 2014f]. It should also be
noted that the ETS only covers part of the economy. It does
not include emissions from small-scale heating plants and
the transport sector, where there is a great deal of scope for
increasing energy efficiency.
However, since the surplus of allowances has brought
down prices, the ETS cannot send the signals needed to
encourage investment in further decarbonisation. Therefore, the proposed Market Stability Reserve (MSR) is an
important step towards providing a robust and continuous
carbon price signal. However, the MSR should already be
introduced in 2017 so that it can have an early effect on
the carbon market and avoid a steep rise in CO2 prices at a
later stage. For the same reason, the backloading allowances (900 Mt of CO2) should be transferred directly into the
reserve.
Moreover, as the ETS incentivises the most cost-efficient
short-term mitigation options, it is not designed to attract
early investments in innovative technologies. These investments are, however, crucial to long-term cost-efficient
decarbonisation. Their technology learning curves should
start early so that they can benefit from cost reductions
before they need to be deployed on a large scale [European
Commission, 2011a]. Furthermore, discussions about a
possible new market design illustrate that changing the
complex energy system of one of the most industrialised
regions in the world cannot be achieved overnight. Predictability and continuity are essential to ensuring that all
actors have sufficient time to adapt.
Preventing carbon leakage
Emission
reduction target
MtCO2
Quantity
4
Required CO2 price per tonne for fuel switching
Effective provisions that prevent carbon leakage are also
key to ensuring Europe’s competitiveness during the
decarbonisation process. As long as other major economies
do not undertake comparable efforts to reduce emissions,
adequate carbon leakage measures for energy-intensive
industries that compete on the global stage will be needed
to ensure a level playing field. Therefore, the existing rules
designed to avoid carbon leakage, which address both the
direct and indirect costs of the ETS, should be adequately
continued post-2020.
Complementing needs
Steam coal
15-25 €/tonne
Lignite
30-40 €/tonne
Lignite
40-50 €/tonne
Steam coal
50-60 €/tonne
Conventional
60+ €/tonne
CCGT
For the ETS to be most effective and efficient, it needs
to be complemented by a well-balanced mix of tailored
instruments.
CCGT
Lignite CCS
Steam coal CCS
Wind, PV
Source: IEA, 2011a; Prognos, 2014
Non-economic barriers, such as administrative procedures and planning and building requirements, which
are particularly relevant to exploiting Europe’s energy
efficiency potential, cannot be tackled by carbon pricing
If the ETS was designed to stimulate today the whole range
from the most cost-efficient measures to new, innovative
technologies, the result would be significantly higher
carbon prices. This would also lead to windfall profits for
the most cost-efficient abatement options, since in the ETS
the marginal technology sets the price for all abatement
options.
Most importantly, the fluctuations inherent in the price
of ETS allowances would lead to higher risk premiums
for investors, higher financing costs, and may ultimately
result in considerably higher system costs in an ETS-only
approach.
22 | POL IC Y MI X
POL IC Y MI X | 23
A three-target approach is cost-efficient
Estimated average annual energy system cost* in Europe (2011–2030) for various scenarios and using different assumptions on risks and financing costs, in bn €
Average annual energy system cost
Cost calculation in the European Commission’s Impact Assessment
Cost calculation in the new studies, assuming lower risks
2,089
4
1
0
2,069
16.5
2,069
4.
THE MOST EFFICIENT AND EFFECTIVE
POLICY MIX
Reducing the cost of financing
2,056.5
2,047.6
22
GHG 40
PRIMES
GHG 40, EE 30, RES 30
PRIMES
Impact range of renewable energy target
GHG 40, EE 30, RES 30, MSR
PRIMES
Impact range of energy efficiency target
GHG 40, EE 30, RES 30
Fraunhofer
*Average annual system cost includes capital costs (for energy installations,
energy infrastructure, and energy-using equipment, appliances and vehicles),
energy purchase costs and direct efficiency investment costs.
Sources: European Commission, 2014c; PRIMES, 2014; Fraunhofer ISI, 2014a
How different support schemes increase investor risk
Changes in levelised cost of electricity for utility-scale PV in southern Germany for various support schemes and differing weighted average capital costs (WACC)
WACC 5%
WACC add-on of up to 2 percentage points
WACC 5% + x%
8.7 cents
/kWh
Feed-in with
sliding premium
Feed-in with
fixed premium
Tender scheme
Quota system
(certificates)
ETS-only
Source: Prognos, 2013
An overarching, enabling policy framework, including
dedicated GHG, renewable energy and energy efficiency
targets and accompanied by a set of tailored instruments,
can reduce investment risks significantly while also allowing for important innovation signals from the market (e.g.
market premiums). It ensures predictability and increases
confidence for all market actors. In turn, this reduces the
cost of capital and helps to unlock private investments,
which is particularly important for financing innovative,
capital intensive technologies.
With a single GHG target and an ETS-only approach, the
cost of capital for renewable energy is estimated to be 2 %
higher than in a market premium approach [Prognos,
2014]. Cost reductions for new and innovative technologies
can thus be achieved in a much more cost-efficient way
with a tailored instrument than with carbon pricing only
[Imperial College, 2012].
In line with this, a new PRIMES scenario based on the
European Commission’s 2030 Impact Assessment assumes
that dedicated targets and tailored measures will result in
significantly lower financing risk and cost of capital than
a single GHG target and an ETS-only approach [PRIMES,
2014]. This new scenario thus differs from the 2030
scenarios in the Impact Assessment, in that it assumes significantly lower risk premiums and costs of capital for renewable energy and energy efficiency. In the new PRIMES
scenario, which sets a GHG target of 40 % and a 30 % target
for both renewable energy and energy efficiency, total system costs are € 20 billion lower than in the GHG40/RES30/
EE30 scenario in the European Commission's 2030 Impact
Assessment. Notably, the total system costs are the same
as the European Commission’s most cost-efficient GHG40
scenario, which leads to a renewable energy share of 27 %
and increases energy efficiency by 25 %. Overall electricity
expenditures for final consumers are even lower in this
new scenario than in all other scenarios, due to increased
energy efficiency and reduced cost of capital.
This finding is supported by a new Fraunhofer study,
which found that combining a 40 % GHG target with a
30 % energy efficiency target and a 30 % renewable energy target could reduce total energy system costs by up to
€ 21 billion per year in 2030 in comparison to a GHG40
approach [Fraunhofer ISI, 2014a]. The main reasons for this
finding are, again, lower risk premiums and cost of capital,
as well as broader technology diffusion across Europe.
In addition to the new PRIMES scenario, the Fraunhofer
study provides a more detailed analysis of potentials for
renewable energy (e.g. available cost-efficient wind sites
across Europe) and energy efficiency.
24 | P O L I C Y M I X
POL IC Y MI X | 25
Diversified wind power development reduces fluctuation
Full load hours from producing wind power capacity in individual markets and the EU-27
% available capacity*
100
4.
90
80
70
60
THE MOST EFFICIENT AND EFFECTIVE
POLICY MIX
Using diversification to lower overall system costs
50
40
30
A well-balanced, target-led policy mix that includes
dedicated policies for GHG mitigation, renewable energy
and energy efficiency will facilitate greater coordination,
diversification of technology deployment and increased
market integration between EU Member States and thus
help reduce overall system costs even further.
20
10
0
Full load
hours
2,000
4,000
6,000
8,000
Germany: 4,690
With a GHG-only approach only those renewable energy
sites would be developed that are most cost-efficient with
respect to their LCOE. However, with a growing share of
variable electricity generation from renewable energy, a
diversified deployment of renewable energy across Europe
becomes increasingly important.
UK, IE & DK: 6,626
EU-27: 7,840
* difference to 100% is due to outages for service and maintenance
Full load hours at 20-80% of total producing capacity
Germany
UK, IE & DK
EU-27
Source: Fraunhofer ISI, 2014a
Large balancing area halves need for back-up capacity
Save billions through improved market integration
Modelling results for western United States
Annual cost savings range in integration services in 2030 with 66% electricity from
renewable energy in Europe in bn €
Reserve requirement (GW)
bn €
9
45
8
40
7
35
6
30
5
25
4
20
3
15
2
10
1
5
37.4
41.4
37.8
32.9
18.5
12.8
13.4
8.1
Firstly, there is less need for grid reinforcement when
renewable energy technologies are deployed across Europe
in a diversified manner [EWI, 2011].
Secondly, a diversified deployment of renewable energy at
many sites across Europe would make the system less vulnerable to weather conditions and variability since wind
availability is much more balanced across the whole of
Europe. If, for instance, wind technology is deployed across
multiple sites, the share of electricity generation that can
be regarded as secured available capacity increases from
9 % to over 14 % [TradeWind, 2009]. An analysis of operating hours at 20 % to 80 % of total generation capacity shows
that aggregating wind power at the European level results
in many more operating hours (7,840) than at the national
(4,690) or regional (6,626) level [Fraunhofer ISI, 2014a]. Adding solar technologies in multiple locations across Europe
will make the overall generation capacity available from
renewable energy even more balanced [IEA, 2014b].
0
0
Small area
10/10*
Medium area
10/30*
30/30*
Large area
60/10*
30/40*
Fully integrated market, but only 50% of optimal new transmission capacity built
40/60*
*The first number refers to the length of dispatch interval; the second refers to the forecast
lead time in minutes.
Source: IEA, 2014b
Fully integrated market with optimal level of transmission capacity
Fully integrated market with more cross-border balancing
Fully integrated market with demand-side reduction
Source: Booz & Co, 2013
Thirdly, integrating renewable energy into large areas is
also key to making the most efficient use of flexibility options across Europe. Higher transmission capacity, which
would increase cross-border balancing and market integration, can save about € 38–€ 41 billion on annual system
service costs [Booz & Co, 2013].
Moreover, a balanced EU framework with clear targets will
improve the coordination of Member State policies. It will
create a predictable deployment corridor for the whole of
the EU – something that has become particularly important for the overall system change in the electricity sector,
both from the perspective of private investors and operators and in terms of coordination between neighbouring
countries.
Furthermore, a coordinated EU framework will also have
a key role to play in energy efficiency measures, by helping
to avoid barriers to market entry, e.g. different efficiency
requirements for products and industries in different
European countries.
26 | PEOPLE’S VOICE
PEOPLE’ S VOICE | 27
50% of Europeans think that climate change is one of the most serious problems in the world.
50%
90% of Europeans want national renewable energy targets.
90%
92% of Europeans are in favour of national efficiency measures.
92%
Question: How important do you think it is that your national government sets targets
to increase the amount of renewable energy used, such as wind or solar power, by 2030?
5.
THE PEOPLE’S
VOICE
Acting in line with Europe's citizens
%
50
Very important
Fairly important
The European Commission has been conducting surveys
on people’s attitudes to climate change, renewable energy
and energy efficiency in all EU Member States since 2008.
Not very important
Not at all important
40
30
Don‘t know
The most recent survey asked in total more than 27,900
Europeans in all 28 Member States about their attitudes to
the 2030 climate and energy framework [European Commission, 2014g].
Question: How important do you think it is that your national government provides
support for improving energy efficiency by 2030?
%
20
50
Very important
Fairly important
Not very important
10
40
0
30
Not at all important
Don‘t know
20
10
0
Source: European Commission, 2014g
Ninety percent of respondents feel it is important that
their national government sets targets for increasing the
share of renewable energy, with around half (49 %) saying
that it is “very important”. Only a small minority (8 %)
think it is not important for their government to set such
targets.
More than nine out of ten respondents (92 %) say that support from national governments for improving energy efficiency is important, with half (51 %) saying that it is “very
important”. Only a very small minority (6 %) think it is not
important for their government to provide such support.
Overall, the findings of the most recent survey clearly
show that four out of five Europeans (80 %) believe efforts
to fight climate change can help boost growth and jobs
within the EU. In other words, while most Europeans see
the economy as a more immediate concern, the majority
agrees that tackling climate issues, reducing fossil fuel
imports, increasing the share of renewable energy and
improving energy efficiency can bring important economic benefits.
28 | REFERENCE S
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30 | NOTES
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