FT Energy Source Comment: Why a single energy market is critical to Europe’s renewables goals

Guest post by Omar Abbosh

Europe has long been in the vanguard of the world’s response to climate change, as its 20/20/20 targets demonstrate. But as we head towards December’s Copenhagen climate talks, it is clear that Europe is not only failing to meet its own targets, but that its failure to introduce a true single energy market is undermining its ambitions to lead the post-Kyoto world.

Europe must generate well over 30 per cent of its electricity from renewables to meet its 2020 goals. That is more than triple today’s levels. Judging from the investment plans of Europe’s largest energy companies, we will undershoot that target by 40 per cent.

In a perfect single energy market, renewables investment should gravitate to the most cost effective locations, where most power can be generated at the lowest cost and with the least need for ‘base load’ back up from conventional fuel sources.  These locations are where the sources are in greatest abundance. Solar power would be concentrated in the Mediterranean and wind would be turning more turbines in the UK than anywhere else.

But no such single market exists and finite funds are being drawn to less productive, more costly regions by national subsidies. The difference in local industrial policies and incentives helps to explains why, at over 22,000 MW, Germany has ten times the wind power capacity of the UK, and at 3,800 MW 30, times the solar power capacity of Italy.

We calculate that, if all Germany’s planned investments in wind power between now and 2020 were located in the UK instead, the natural availability of wind would bring down its cost by 20 per cent. If all Germany’s additional solar power was placed in sunny Spain, it would be 40 per cent more cost effective. Overall, the continent’s consumers would save €110bn by 2020. Taxpayers could also save an additional €70bn in subsidy payments – such as Germany’s feed in tariffs – which contribute to today’s distortion of the renewables market.

To reach our renewable targets more cost effectively, Europe must implement a consistent policy framework to drive renewable generation to those areas with greatest natural advantage. Options include centrally coordinated carbon contracts and feed in tariffs. However, we advocate the introduction of European Renewable Energy Certificates (RECs).

Under a European RECs system, each nation would agree to levels of electricity generation from renewables, based on the availability of the natural resource in question.  Certificates would be allocated to renewables generators, who would then sell them on an EU-wide trading platform to suppliers unable to meet their obligations. The policy would require local subsides to at least align with the volume agreements or, preferably, be abolished over time as the price of certificates gradually rises.  As a market-based approach, European RECs would be compatible with the EU’s existing Energy Trading System (ETS).

European RECS would have greatest impact if Europe built more physical interconnectors. Ireland generates only 6% of its consumption from wind, given that its lack of connection to other markets prevents would-be investors maximising their return by selling excess energy elsewhere. Interconnectors would also allow regions dependent on intermittent renewables to import conventional base load energy should the sun not shine or the wind not blow.  Already well established in Scandinavia, these physical interconnectors are urgently required in other parts of Europe.

Energy players must also do their part. To make a success of European RECs, energy providers need to acquire specialist renewables players, land and other assets in lowest cost areas to ensure they can meet their obligations. And if we are to have a network of interconnectors, utilities will have to address their exposure to intermittent renewable sources through investment in trading, forecasting and balancing capabilities.

Europe has stepped cautiously towards a single energy market. But we still have a lack of centrally coordinated incentives and infrastructures.  Without an EU-wide framework, finite funds are chasing subsidies, forcing investments to the least productive areas and raising costs for all.

Europe has rightly claimed it can maximise its global influence by acting as one. But as the US radically revises its energy policy and China commits vast resources to low carbon technologies, Europe’s inability to deliver its targets effectively through a single energy market could undermine its authority in international climate change negotiations. Only by replacing distorting national subsides with a coordinated and consistent policy can Europe achieve its renewables targets and continue to lead the climate change debate.

Omar Abbosh is Managing Director, Accenture’s Resources division, UK and Ireland.