PARIS Europe's attempt to combine an ambitious climate policy with the liberalization of electricity markets has largely failed, and the continent needs to rethink its subsidies for renewable energy, a French government study said.
The study, based on reports by leading European energy academics, said Europe must decide on the trade-offs between affordability, sustainability and security on setting its energy policy.
"This is an ambitious policy that has not reached its targets," said Jean Pisani-Ferry, head of the French prime minister's policy planning unit, CGSP.
In December 2008, EU leaders approved the climate change package with three targets for 2020: cut greenhouse gas emissions by 20 percent, produce 20 percent of EU energy from renewable resources and improve energy efficiency by 20 percent.
The climate package conflicted with the EU policy, in place since the mid-1990s, of trying to lower electricity prices by opening up power markets to competition, the report found.
Even though the economic crisis had just started, EU leaders said green policies would not interfere with liberalization and introduced major subsidy schemes for renewable energy.
Five years later, renewables have grown dramatically. At the end of 2012, the share of renewable energy in gross final EU energy consumption was on average 14.4 percent, and when the sun shines and the wind blows, Germany's 65 gigawatts of renewable capacity can provide 100 percent of its power needs.
But with its intermittent nature, zero marginal costs and priority grid access, renewable energy has wreaked havoc on utilities' traditional power plants.
"By displacing other technologies, the intermittency of renewables causes everything else to become liable to intermittency too," Oxford University's Dieter Helm wrote in the report.
He added that the overall impact has been to render investments in almost anything other than government-subsidized power generation technologies uneconomic.
Retail power prices are now higher than ever, while utilities are in crisis and security of supply is threatened by a lack of investment. Even the climate plan has failed as polluting coal-fired generation has grown in lockstep with renewables.
The study proposes a series of fixes to EU energy policy:
- introduce intraday power markets that cope better with intermittent wind and solar than today's day-ahead markets;
- boost interconnections between countries to better balance demand and supply over a wider geographic area;
- intervene in the EU carbon emissions trading market and create a carbon central bank;
- suspend subsidies for renewables when wholesale prices turn negative, i.e. when suppliers have to pay to offload it, due to oversupply.
"During these periods, the renewable producer would have 'free' energy in excess, which could be stored for further use and would encourage investment in storage capacity," the study said.
The report admitted there was no consensus on whether those changes would be enough to revive EU energy investment and to ensure security of supply.
Some economists said an even more liberalized power market is the answer, while others advocated a return of some state intervention, notably via capacity mechanisms that reward utilities for keeping capacity on standby.
Cologne University's Marc Oliver Bettzuge said that if power markets no longer function well, market players' actions must be centrally coordinated, notably by state-owned or state-regulated monopolies as was the case in many EU states before 1998.
"There is a fundamental choice of approach to be made: coordination by competitive prices versus coordination by a central authority, e.g., by a monopolist," Bettzuge said.
He added that while the EU opted for liberalization, policymakers at the same time distorted markets by regulating retail prices and subsidizing renewables.
Initially the effect of these distortions was minor, but as their impact increased, they required more market intervention.
"Such a spiral of state intervention into the workings of the price process will ultimately pave the way to central planning," Bettzuge wrote.
At the presentation of the study in Paris, Bettzuge said that this view did not mean Europe should revert back to monopolies.
"Liberalization is a great catalyst for empowerment, especially for a decentralized and renewable energy system. We should care for it, not go back to the old system," he said.
Paris Dauphine energy professor Fabien Roques said some EU countries are moving to a mixed model with a larger role for the state, while keeping a role for markets and private enterprise.
Britain's Electricity Market Reform will introduce the "Contracts for Difference" scheme, which offers price guarantees for low-carbon energies, and in October the UK agreed to give price guarantees in a nuclear deal with France's EDF.
"The UK is the pioneer for this hybrid market format. There is no renationalization but instead a market in which the state takes back its prerogative of coordinating investments," Roques said.
(Editing by Dale Hudson and Jane Baird)