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* EU's climate package not compatible with liberalisation
* Intermittent renewables make thermal plants intermittent
* Suspending feed-in tariffs while power prices are negative
* UK returns role of state in energy policy in hybrid model
By Geert De Clercq
PARIS, Jan 28 Europe's attempt to combine an
ambitious climate policy with the liberalisation of electricity
markets has largely failed, and the continent needs to rethink
its subsidies for renewable energy, a French government study
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
"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 liberalisation 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
He added that the overall impact has been to render
investments in almost anything other than government-subsidised
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
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
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 liberalised 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 liberalisation,
policymakers at the same time distorted markets by regulating
retail prices and subsidising 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
"Liberalisation is a great catalyst for empowerment,
especially for a decentralised 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 renationalisation but instead a market in which the state
takes back its prerogative of coordinating investments," Roques
(Editing by Dale Hudson and Jane Baird)