December 13, 2016
The 2016 Winter Package is the most important deliverable of the European Commission’s Energy Union project, contributing to all its dimensions: Energy security, integrated energy market, energy efficiency, decarbonisation and R&D and innovation. Its size (1000 pages of core text) is as impressive as its ambition. This package aims at nothing less than creating the framework for an energy system that is able to deliver the post COP21 energy transition and cope with the fundamental shifts in energy generation and consumption. Among the highlights of the so-called ‘Clean Energy Package’, the proposals aspire to deliver on the European Commission’s promise of putting the consumer at the heart of the European energy market as well as the move towards a system based on decentralised generation of renewable energy and a 30% binding energy efficiency target by 2030 at EU level.
To achieve these ambitions the European Commission (EC) has published a package of eight legislative proposals mainly covering energy efficiency, renewable energy and electricity market design. In order to ensure effective implementation and oversight of the package the EC has also published a Governance proposal, that puts in place a system of reporting and review for the whole Energy Union project.
In particular, the new rules on electricity market design are critical to ensuring the proper functioning of the energy market overall. It addresses the different drivers of the energy system such as market forces, market intervention, the role of the consumer and the overarching ambition to make the EU a leader in renewable energy and energy efficiency. Altogether the EC adopted a technology neutral approach in which it is mainly left to the market to pick the winners, a preference for electric vehicles and diminished support for first generation biofuels being the exceptions.
Getting this all right will be a formidable challenge for the EC and co-legislators in the European Parliament and the Member States. Green stakeholders and civil society already began damning the package before it was even published. However, when presenting the package on 30 November Commission VP for Energy Union Maroš Šefčovič and Commissioner for Energy Arias Cañete, could take out some steam by countering some of the strongest arguments with several important changes compared to the many drafts that were leaked some weeks ago.
The fact that the different proposals are interlinked is a strength of the package but also makes it particularly complex. In order to understand the EC’s plans and how they should work the proposals need to be seen in conjunction with each other.
– Directive on common rules for the internal market in electricity (recast)
– Regulation on the electricity market (recast)
– Directive on the promotion of the use of energy from renewable sources (recast)
– Regulation on the Governance of the Energy Union
– Regulation on risk-preparedness in the electricity sector
– Directive on Energy Efficiency
– Directive on Energy Performance in Buildings
The proposals for the new electricity market design are supposed to create a market based framework that supports the overall objectives of decarbonisation, energy efficiency and leadership in renewables while preventing market distortions. Not an easy task considering the major shift from a centralised energy system mainly based on fossil and nuclear energy. The new electricity market design is poised to rely more on renewable energy sources, energy efficiency measures and decentralization. To make the plans work the framework needs to incentivize the necessary investments, not only in renewable generation but also in infrastructure development and storage capacities. These needs are enormous and ultimately the measure of success will be determined by the profitability of the business models that encourage these investments in addition to their functionality.
The vision of the EC is a flexible energy market that allows trading on spot market prices. Consequently, price signals would drive the market to react to shifting energy demands and fluctuating renewable energy generation. Price caps for the wholesale market will be removed so that prices reflect the real value of electricity.
The consumer will have a critical role. The framework will allow consumers to adapt consumption to price signals and even to generate income by simply consuming or saving energy at the right time (demand response). In addition consumers are encouraged to generate their own energy which they can then sell on to the grid.
There is no doubt that the role of consumers is considerably strengthened. Many provisions empower and encourage consumers to become active participants in the market. Contracts need to meet high standards of consumer protection, consumers will have the right for flexible supply contracts that reflect spot market prices, and have the possibility to switch suppliers without punitive costs. Consumers also have the right to obtain accurate data about their consumption and production and to have access to comparison tools. Active consumers will have the right to generate, store, consume and sell self-generated electricity without being subject to undue procedures or charges – thus becoming producers as well as consumers (prosumers). In addition local energy communities will be entitled to establish community networks, manage them and purchase and sell electricity.
“Having led the global climate action in recent years, Europe is now showing example by creating the conditions for sustainable jobs, growth and investment.” – Maroš Šefčovič, Vice-President Energy Union
In order to protect vulnerable customers and address energy poverty, Member States will still be able to interfere in price setting but only for the supply of vulnerable households.
Aggregators will be important players. They participate in the market by combining the electricity load of multiple customers and offer them for sale, purchase or auction in the market. They are practically an intermediary between customers and the electricity market, making it less complicated for the customers to profit from the electricity system. The position of aggregators is also strengthened considerably through the proposal.
In order to enable the market to deal with shifting energy consumption and generation, demand response is a further critical element. Through demand response customers are incentivized financially to lower or shift their electricity use at peak times. The framework provides rules for market participants that offer demand side response services.
The proposal takes an important step in empowering the consumer, however it must be taken into account that not all consumers will be willing or able to adapt to that more demanding role. It will be a challenge to get the full support of consumers and make them understand the potential benefits for them.
All these schemes could not work if there is no real time data on supply and demand. This requires smart meters with specific functionalities, but also management of that data as well as a system that allows for fair access to the consumer data while respecting data protection rules. Having access to the data is a pre-requisite for participating in the market.
Consumers can demand the installation of smart meters if there is no systematic and planned roll-out. Member States need to name eligible parties that have access to the data of the final customers with their explicit consent. Third parties e.g. aggregators need to get access to this data in a non-discriminatory manner.
In order to ensure that consumers are supportive of the framework they must trust the system and how their data is dealt with. That is why Member States need to choose eligible parties and cannot leave it to the market alone.
Distribution System Operators (DSOs) will have an important role in the overall system, ensuring that infrastructure requirements are met. The grids need to connect new generation capacity, enable spot market trading, demand side response, participation of the prosumers etc. Moreover, the grids also need to accommodate electric mobility and charging points. To this end DSOs need to present network development plans to regulatory authorities with planned investments for the next 5-10 years. In order to guarantee competition, DSOs will not be allowed to own, develop, manage or operate energy storage facilities. DSO services are to be transparent, non-discriminatory and market-based ensuring effective participation of all market participants including renewable energy sources, aggregators and demand response. In order to guarantee an efficient use of the grid DSOs need to cooperate with Transmission System Operators (TSOs). The EC also recognises the importance of electricity storage and the EC and ACER will develop binding guidelines and network codes.
In order to keep the base load at the right levels, generated energy needs to be dispatched or curtailed, depending on whether the load in the grid is too high or too low. TSOs, that are responsible for maintaining base load, must dispatch in a non-discriminatory manner but must give priority to small installations using renewable energy, high efficiency co-generation or emerging technologies. Existing installations using renewable energy or high efficiency co-generation will continue to benefit from priority dispatch. This provision is very controversial as it arguably favours a move away from a market based approach and technology neutrality. Renewable advocates on the other hand argue that renewables need to enjoy full priority dispatch in order to incentivise investments. Indeed it will be critical to find a balanced solution that does not cause market distortions with unwanted side effects, such as making the most efficient gas power stations unprofitable.
The electricity market design seeks to overcome a fundamental flaw of the internal energy market: the lack of cross border electricity trade. Efficient interconnection could solve many issues: TSOs could tap into a far wider electricity network to ensure security of electricity supply. There would be more competition and energy consumers, including large companies, would have access to renewable energy from neighbouring countries to buy and sell electricity. However, there are still many obstacles. First of all the interconnectors have to be built, to that end the EU has a 15% interconnection target in place, but this would just be the beginning. The national markets have to be interoperable and therefore the proposal obliges national authorities as well as TSOs and DSOs to cooperate and develop common rules. A novelty will be a DSO entity at European level to achieve better cooperation. The proposal also encourages cross-border bidding zones. Bidding zones are geographical areas in which electricity can be traded without capacity allocation. In addition TSOs have to establish regional operational centres. The region for which each operational centre is responsible should be defined according to the circumstances that allow the most optimal trade within that region e.g. level of interconnection, interdependency of power systems etc. The tasks of the regional operational centres include coordinating capacity allocation and security of supply analyses.
Capacity mechanisms are among the most controversial issues of the proposal. Under such a mechanism the owner of the capacity is remunerated only for making electricity generation capacity available and not for the consumed electricity. It is argued that these mechanisms are necessary to ensure that sufficient capacity is available in cases of shortfalls. On the other hand, these capacity mechanisms can distort the market to the advantage of fossil fuel generated electricity that is ideal for covering supply gaps given the proven technology. Therefore, the Commission proposes strict conditionality on capacity mechanisms to ensure that they are only used as a last resort. In addition by setting a 550gr of CO2 per Kw/H emissions ceiling for installations for which a final investment decision has been made after entry into force of the Regulation the EC aims to ensure that only efficient power stations fall under the scheme in the future.
The objective of the Renewables Directive is to ensure that the EU meets its 27% target by 2030. While the purpose of electricity market design is to accelerate the integration of renewables into the electricity market, the Renewables Directive provides the rules and criteria for their support.
Member States may support renewable energy financially, but in doing so should mitigate market distortions. The EU Guidelines on State Aid for Environmental Protection and Energy provide important guidance on how to meet these criteria. Accordingly, the EC considers auctions as the least distortive instruments, followed by feed-in premiums. Feed-in tariffs should be avoided where possible and support schemes should be reviewed every four years.
Support schemes should be increasingly opened to suppliers from other Member States and in 2030 at least 15% of newly supported capacity should be open to installations located in other Member States. The cross border participation can take the form of joint tenders, open certificate schemes or joint support schemes. Any retro-active changes to the disadvantage of investors are prohibited.
Member States should also continue streamlining the administrative procedures for the authorisation and licensing for renewables capacity. In order to increase predictability for investors Member States should publish an allocation plan for renewable capacity for the following three years. Member States shall also establish single administrative contact points to coordinate the entire permit granting process. Notification procedures are also to be simplified.
Guarantees of Origin (GoO) certify that power is generated from renewable sources; one certificate represents the generation of 1 Megawatt hour of electricity. GoOs can be traded independently from the electricity and a buyer of a GoO can claim to have consumed renewable electricity. Member States can issue and auction the GoOs and use the revenues to offset the costs of renewable support. The fact that the proposal includes GoOs for renewable gases shows that the power-to-gas discussion is gaining steam. Consumer and environmental organisations are attacking GoO as greenwashing and that they don’t enable the consumer to know the footprint of the electricity they purchase. On the other hand GoO are making the market more flexible and allow renewable investments also if it is not possible to actually purchase renewable electricity. The measure of success will again be whether GoOs can spur investments.
Mirroring the strong focus of the consumer in the proposal on the electricity market design, the Renewable Directive gives to renewable self-consumers the rights to consume and sell their generated electricity including through power purchase agreement without any undue obstacles. They will maintain their rights as consumers and are not to be considered as energy suppliers if the electricity they feed into the grid does not exceed 10MWh for households and 500 MWh for legal persons on an annual basis. This should encourage non-energy players to generate renewable electricity, for example tech companies that can sell excess electricity from their RES production for data centres.
The Directive also encourages the electricity generation by energy communities, giving them the status of an SME or a not-for-profit organisation.
The Directive aims to reach an annual increase of renewable energy for heating and cooling of 1%. Member States may identify and publish the measures that shall contribute to the objective. Possible measures include incorporation of renewable energy in fuel supplied for heating and cooling and direct installation measures such as the installation of highly efficient heating and cooling systems.
Biofuels has turned out to be one of the most controversial areas of renewable support. Environmental NGOs have campaigned strongly against first generation biofuels i.e. produced from food or food crops because of their potential impact on biodiversity and in some instances relatively high carbon intensity.
The EC has reduced the current 7% limit of first generation biofuels in transport to 3.8% in 2030. Instead the EC wants to support advanced biofuels, i.e. produced from residues and waste, by obliging Member States to require fuel suppliers to include a minimum share of those biofuels which shall be at least 1.5% by 2021 and at least 6.8% by 2030. The Directive also supports the production of gaseous transport fuels e.g. hydrogen, if renewable energy is used for their production.
Already in the first Renewables Directive, biofuels could only be considered a renewable energy source if they comply with certain sustainability criteria, in particular a sufficient greenhouse saving potential and no damage to biodiversity. The new Renewables Directive also includes sustainability criteria for biomass that are used for heating and cooling and electricity generation. Wood pellets are the most relevant form. Biomass from forest must be harvested in countries that have appropriate laws to ensure a minimum standard of sustainability. If the country of origin has no such laws in place the producer must prove a management system that provides the same level of sustainability. This could be particularly challenging for producers in the US, the largest supplier of wood pellets, as the forests are mostly managed privately.
The changes to the Energy Efficiency Directive (EED) introduce the overall EU target of 30% by 2030. The Member States shall set indicative national energy efficiency targets, taking into account the EU 2030 target. The EC will assess the national targets and evaluate the progress towards those targets. There will be strong resistance against the 30% target from Member States but the EC is confident that the overall benefits will win them over.
“I’m particularly proud of the binding 30% energy efficiency target, as it will reduce our dependency on energy imports, create jobs and cut more emissions.” – Miguel Arias Cañete, Commissioner for Energy and Climate
Member States shall aim to achieve a saving of 1.5 % of annual energy sales to final customers and continue to do so for the ten year periods post 2030. One of the main tools to achieve the savings are energy efficiency obligations, which require energy companies to achieve the savings of annual sales to the final customers. In order to reach this target, companies have to carry out measures which help final consumers improve energy efficiency. However, the updated Directive makes clear that Member States can also fulfil their obligations through alternative measures which are not further specified.
The position of consumers is also strengthened under the EED, for example they need to be provided with competitively priced meters and have a strengthened right to clear and accurate information regarding their heating and hot water consumption.
This Directive aims to benefit of the energy saving potential of smart technologies in buildings. A long-term renovation strategy to be submitted by Member States should set out milestones and measures to deliver on the 2050 goal to decarbonise the national building stock. Furthermore, the Directive aims to incentivise and guide investment into the building sector by aggregating projects, de-risking energy efficiency operations and using public funding to leverage additional private investments.
Maybe the most striking provision is that all non-residential buildings that are either new or undergo major renovations and have more than ten parking spaces need to be equipped with charging points for electric cars. New residential buildings with at least ten parking spots need to be equipped with the necessary pre-cabling to enable charging points. The EC calculates that this measure should lead to 6m charging points by 2030.
The Directive also introduces a “smartness indicator” for buildings. The indicator should cover all aspects that enable energy savings and the ability of occupants to take part in demand response.
Finally, the Directive contains provisions for large non-residential and residential buildings to assess the efficiency of equipment such as boilers and air conditioning. Alternatively non-residential buildings can be equipped with building automation and control systems.
The package also includes the Eco-Design Working Plan that includes a list of new product groups (building automation and control systems, electric kettles, lifts, refrigerated containers, hand dryers, high pressure cleaners and photovoltaic systems) and how ecodesign will contribute to circular economy objectives such as re-usability, reparability and recyclability of products. For the ambitions of the clean energy package the new minimum energy efficiency requirements for air heating and cooling products are essential.
The ambitions of the package are only achievable with important technological advances and a broad adoption of smart energy technologies. All this will require huge investments from both the private and the public sector.
The Commission proposal on the revision of the EU Emission Trading System (ETS) is putting forward an Innovation Fund (InnovFin) as a successor to the current NER 300 facility. Swift implementation of the Innovation Fund should support investments into highly innovative low-carbon technologies for energy-intensive industries, as well as for renewable energy and carbon capture, storage and use.
The EC and the European Investment Bank will also set up a Cleaner Transport Facility to support the deployment of alternative energy transport solutions. Projects may also be eligible for the Connecting Europe Facility or the European Fund for Strategic Investment guarantee, while EIB financial products and advisory services will be made available to public and private entities.
The EC is working towards at least doubling the budget of the InnovFin Energy Demonstration Projects schemes for first-of-a-kind low-carbon technologies in renewables and hydrogen fuel cells.
Finally, the Commission intends to deploy more than EUR 2 billion from the Horizon 2020 program for the following four objectives:
– Decarbonising the EU building stock
– Strengthening EU leadership on renewables
– Developing affordable and integrated energy storage solutions
– Electro-mobility and a more integrated urban transport system
To bring this myriad of proposals together, the EC has put forward a regulation on Governance. The EC contends that the majority of energy and climate challenges facing the Union cannot be met through uncoordinated national action. To achieve a fundamental transformation of the energy system, the EU Energy Union needs strong Governance ensuring that policies and measures at various levels (national, local, regional, EU level) are coherent, complementary and sufficiently ambitious with respect to five pillars of energy union (energy security, internal energy market, energy efficiency, decarbonisation, research innovation and competitiveness). For this reason, the EC believes that an overarching legal governance framework is necessary to ensure that Member States live up to the commitments agreed in Paris and also with respect to the EU 2030 climate and energy targets.
Through a governance framework, the EC hopes to create a sense of accountability on the part of Member States by monitoring their activity and progress. Theoretically, should the installation of a functioning, coordinated and effective governance framework be successful, industry can be reassured of more business certainty as it pertains to receiving signals from the EU and Member States on where to invest – as policy objectives at EU and national level should be aligned and going in the same direction across the continent, at least in the long term.
The key instrument to ensure alignment and coherence will be the National Energy and Climate Plans that the Member States need to produce for ten year periods with the first plan to be published by 2019 for the period 2021-2030.
In the plans Member States have to outline national objectives, targets and contributions for each of the five dimensions of the Energy Union and the measures they use to achieve those.
The Regulation specifies minimum reporting standards for each of the five dimensions and also the reporting format. For the climate targets the Regulation requires every two years an Integrated National Energy and Climate Progress Report to inform about policies and progress towards the climate targets.
As of 2021 the EC will assess the progress towards the energy and climate targets, at EU and also at Member State level on a bi-annual basis. If appropriate the EC will issue recommendations to Member States to ensure the achievement of the objectives of the Energy Union. The annual State of the Energy Union Report will remain the central reporting instrument of the EC to publish its assessment and recommendations regarding the Member States’ progress towards the Energy Union objectives.
Whether this package goes too far or not far enough depends on the perspective from which one approaches the proposals put forward. However, regardless of perspective, this is by far the most far reaching and ambitious reform package of the European energy system tabled to date.
The energy industry and the relevant parts of the EC have been under intense scrutiny following the landmark Paris agreement to present a package that matched the ambition of the COP21 agreement. The package could be dubbed too ambitious in that it departs from the previous more balanced EC language on EU energy policy. In particular, it remains to be seen whether the EC has done enough to marry renewables and natural gas or whether the proposals are putting them at odds with each other. Gas is an important transitional fuel and the perfect back up to intermittent renewables. We see gas as a bridging fuel, but we mustn’t cut off the bridge after we’ve built it.
With regards to the governance framework: in a way, it could be argued that the Commission has found a neat way to get Member States on board with binding targets for renewables and energy efficiency – even if binding targets are rejected in the relevant policy proposals. Through national plans Member States do have more flexibility in setting these targets, but the Council agreement to reduce emissions by 80-95% by 2050 remains the same.
The approach to develop the many interlinking elements as one package seems appropriate in order to avoid that the overall system becomes incoherent. It will also force co-legislators to consider the pieces together and avoid contradicting measures. Inevitably, co-legislators have a mammoth task ahead of them. Also industry should take the holistic nature of the package into account in order to give weight to its arguments.
On the other hand there is the risk of overlapping provisions, and the existing conflict between the ETS, the renewables and the energy efficiency target has not been addressed.
Without a doubt, negotiations will be vigorous and the diverse stakeholder reactions that came after the publication of the package gives us a taste of the debates ahead of us. However, altogether the package is relatively balanced – giving a clear direction towards a decarbonised and consumer centred energy system without triggering extreme disruptions.
As Maroš Šefčovič put it, “2016 was the year of delivery of Energy Union. Next year will be even more difficult as it will be the first year of implementation!” The key challenge will be to ensure that the package is implemented coherently without causing unwanted side effects and uncertainty. In the end the vision can only work if there are sufficient investments in infrastructure, technologies and R&D. If the package enables a market in electricity that incentivises the necessary investments it can be called a success.
The Clean Energy Package provides for the opportunity to build a true European energy market. An ambition the EU has worked on for many years. And it is even more than that – it is a project with an obvious and clear European added value that can benefit every citizen and every Member state. There will be a passionate debate about the package, but hopefully it will be a thorough and constructive one with a successful outcome in mind.