Liebreich: Europe Risks Losing the High Ground on Clean Energy

By Michael Liebreich
Chief Executive
Bloomberg New Energy Finance
Twitter: @MLiebreich

Download the PDF here.

Last month, without knowing the programme, I accepted an invitation to join a group of friends at London’s Royal Albert Hall for an evening of classical music. Imagine my excitement when I discovered the highlight of the concert would be Beethoven’s choral 9th Symphony, otherwise known as the Ode to Joy – adopted by Brussels as the very soundtrack to the dream of Ever Closer Union. It was, of course, sublime.

The next day, I left on an extended tour of Asia, stopping in South Korea, Japan, China and Hong Kong, and meeting around two hundred senior lawmakers, investors, energy companies and technology providers.

In 2012, Asia took over from Europe as the leading region of the world for renewable energy, with investment of $102.1bn against a shrunken $79.9bn in Europe, as can be seen in the definitive Global Trends in Renewable Energy Investment 2013, which we published this month in conjunction with UNEP and the Frankfurt School. Back in 2004, when we first started tracking investment, deal-by-deal, Europe invested $19.6bn, against $11.7bn in Asia and Oceania, and the gap remained wide for the next few years.

This got me wondering how Europe can be getting its energy and climate policy so badly wrong. Europe – the first region to take seriously the promise of clean energy. Europe – the first region to acknowledge the risk posed by climate change. Europe – the first region to implement a cap-and-trade system. Europe – first to impose region-wide targets not just for carbon, but also for renewable energy and energy efficiency.

In the first few years of New Energy Finance’s existence, the mid-2000s, it was an article of faith that Europe was leading the world towards a low-carbon, clean energy future, and that other regions could do no better than to imitate it. Europe basked in the attention, touting the virtues of its great policy innovations, cap-and-trade and feed-in tariff. Even as late as 2009, Europe accounted for 43% of world investment in clean energy, more than twice the Chinese share and two and a half times the US slice. Europa’s Bull’s had his tail in the air.

But if 2009 saw the high point for European leadership, it also saw the low point: the disastrous Copenhagen climate talks, vested with so much hope, descended into chaos and disappointment. Europe’s climate idealism was sobered up by the cold shock of realism. Her unilateral commitments were left unmatched by the other great industrial powers. Her model of centralised, statist market interventions was rejected. Emerging market power-brokers and the free-market US were doing closed-door deals, not even paying lip-service to their European hosts.

The signs had been there all along, of course. This was, after all, also the Europe of the Lisbon Strategy: the unilateral pronouncement in the year 2000 that within a decade Europe would be “the most dynamic, knowledge-based economy in the world”. This would be achieved not through reforms to labour law and intellectual protection, low taxes, breaking up national monopolies and investing in infrastructure and research, but in some never-to-be-explained way through unmatched social protection, centralised management of innovation, and stonewalling the Doha trade liberalisation talks.

EUROPEAN ENERGY POLICY

Any discussion of European energy policy would come at an interesting point in European history. The coalition government in the UK, led by David Cameron, has promised to try to renegotiate the terms of the UK’s membership, followed by a referendum on so-called Brexit – leaving the Union. The euro member nations, so the thinking goes, need to reopen some of the EU’s founding treaties in order to create the institutions of a functioning currency zone, creating an opportunity for the UK to demand repatriation of sufficient powers for the British public to vote for continued membership. If successful, in practice this would lead to a two-tier Europe consisting of an inner Eurozone, and an outer free trade zone.

As the Europe debate rages in the UK, energy is the policy dog that has not barked. Among the discussion of red line issues on immigration, food labelling, labour law and human rights – the right to sell crooked bananas in pounds and ounces, to deport firebrand Islamists and to turn Romanian labourers back at Dover – there has been no real debate about the correct role of Europe in the UK’s energy policy.

The right of the Tory Party and the UK Independence Party (newly popular with those sick of both Cameron and the EU) have certainly expressed unconditional love for nuclear power and fracking, and their hatred of wind farms, but they can’t decide whether Britain’s commitment to clean energy is the responsibility of the Liberal Democrats (with whom the Tories share coalition government), or of Europe, which is forcing the closure of Britain’s most polluting and unpopular coal-fired power stations.

If they blamed Europe, they might have a point. After all, what does European Union energy commissioner Gunther Oettinger know about the UK’s energy system that the country’s own lawmakers don’t? It is quite appropriate for the EU to step in on cross-border issues like air and water quality. And yes, EU members have given sole authority to the EU to negotiate trade and climate deals. But when it comes to deciding whether the UK should meet its international commitments by building wind farms or by insulating its woeful building stock, by dashing for gas or by rolling out carbon capture and storage, why is that the business of Brussels, rather than Westminster – or Edinburgh, for that matter?

We already have a European Renewable Energy Target of 20% by 2020. Now the European Parliament is pushing for a more ambitious figure by 2030. Is this really the battle on which the European Commission should be spending its limited political capital? The UK coalition, among others, is pushing back, pointing out that how European countries meet their decarbonisation commitments should be up to them.

There is no shortage of areas in which the EU’s involvement is needed. The area of technology standards: ensuring that as we roll out smart grids, electric vehicle charging networks and hydrogen refuelling stations – or just the prosaic question of ensuring appliance work across borders – we have the greatest interoperability between countries and the largest possible markets. The area of energy security: ensuring that Europe’s grid and fuel distribution systems are resilient, with sufficient storage and interconnection to ensure Europe can withstand a supply shock, without each nation over-investing. The area of data protection: as Europe’s infrastructure becomes digital, it is vital that Europe’s consumers own their own data, in whichever country it happens to reside, and that they have easy, standardised access to it so that they can make informed choices.

Most important of all, Europe needs to refocus on the stalled progress towards a single energy market: the ability to sell energy and the full range of energy-related services from anywhere to anywhere within Europe.

Mauricio Tolmasquim, the Brazilian energy regulator and designer of the reverse auctions that resulted in wind bidding in to the Brazilian energy market at the lowest price of any energy sources in the world, explains Brazil’s secret weapon: a grid which, if superposed on Europe, would allow a Portuguese wind farm to sell its electricity to a client in Moscow. It makes one almost laugh to hear talk of European supergrids, and Desertec, when European policy-makers cannot even create the conditions for Portuguese power producers to sell electricity in France.

The fact is that the drive to force countries to unbundle their power sector into generators, transmission and distribution operators, and customer-facing utilities, has ground to an almost complete halt. The push for a power infrastructure and a policy framework enabling large-scale Europe-wide trade in electricity has not just stalled, it is going backwards.

Remember the European airline industry in the 1980s? Airlines as vehicles of national pride and aspiration. Rhetoric about glamorous travel for the masses, contrasting with the reality of high prices and low innovation. New entrants excluded by a range of legal and illegal means from landing slots and routes. Attempts at reform blocked and mocked. Yet somehow private companies – charter flight providers – were able to eke out an impoverished existence on the margins of the system, hinting at vast wells of untapped demand.

POWER MARKET DEREGULATION

If Europe wants to lead on clean energy, it is time it got serious about power market deregulation. Where is the easyJet of European energy, or the Virgin Atlantic? Where are the regional airports, promoted by dynamic mayors? Where are the independent leasing companies, the maintenance and catering providers? Where are the joint ventures with tour operators, car rental companies and hotel chains? Where are the wholesalers, the resellers, the discounters? Where are the online booking services, the mobile apps?

Instead we have the UK government mired in a negotiation with one company over a 35-year, fixed price deal for new nuclear power. We have Poland complaining about German “loop flows” instead of seeing an opportunity to sell transmission services to the German grid. We have France and Spain stalemated over adding significant trans-Pyrenean power transmission. We see proposals for national capacity markets which would advantage domestic back-up gas generation over demand management or power storage, which would exclude power from neighbouring countries, let alone, God forbid, demand management capacity offered from across the border.

Only by releasing a maelstrom of entrepreneurial and competitive activity throughout its energy system will Europe be able to achieve a clean energy system without driving costs to uncompetitive levels. Ask Germany’s large energy consumers. The issue of competitiveness has become particularly urgent in the light of the US’s shale gas revolution. Higher carbon prices might stop the EU from switching out of gas and into cheap US coal, but they will do nothing for Europe’s industrial base.

EU-ETS

Which brings us to the EU-ETS. Europe’s economy is now nearly 15% below the trend growth line up to 2007, and showing every sign of remaining ex-growth for the foreseeable future. Yet the EU-ETS is a system designed around a fixed volume target irrespective of economic growth, or lack of it. A system designed to push Europe’s industry and utilities to switch out of coal, delivering a carbon price so low that Europe saw an 11% surge in coal-fired generation last year. A system is so inflexible that it requires unanimity to reform it.

Deep reform is needed. The discussion about backloading is a distraction. Holding back some credits for a few years is not going to address the structural weakness of the system: if you fix volume and let price float, you have to accept price volatility.

If you want a higher and more stable carbon price – one that would drive infrastructure investors, rather than one of interest only to commodity markets and hedge funds – then you have to move to price targeting. That means creating an independent Carbon Central Bank, with powers to undertake open market operations and to create and cancel credits. You charge the chief of the Carbon Central Bank with maintaining a certain price – say EUR 20 for the next five years – plus or minus a fixed trading range. And you fire her if she doesn’t succeed. In other words, you manage carbon credits the exact same way as you manage that other great synthetic financial instrument – a currency. If you succeed, you have a system sufficiently stable to drive infrastructure investors, and you can do away with other layers of intervention currently stifling innovation.

If, on the other hand you want to stick with volume targeting, there too there is good model for how to do it: Bitcoin. You set up the rules with utter and complete clarity, and you disappear into the ether like its founder Satoshi Nakamoto, or Keyser Soze. You do not launch other major initiatives on renewable energy and energy efficiency which discard the principles of subsidiarity and interfere in member nations’ legitimate energy policy decisions, and which undermine the stability of your cap-and-trade system. You do not sit around in committee rooms, discussing arbitrary interventions because you don’t like the price produced by the system you designed. You most certainly do not engage in protracted, messy and potentially unsuccessful political processes to enact minor, probably ineffective, price support exercises.

Infrastructure investors who see an arbitrary intervention one year to push up prices will fear that next year’s arbitrary intervention might aim to push down prices, perhaps as a sop to Europe’s energy consumers. And investors, in case European policy-makers haven’t noticed, are allergic to arbitrary rule changes.

We were among the first to argue that the European FiTs of the mid-to-late 2000s – while successful for a while in delivering MW on the ground – were economically unsustainable and therefore fraught with risk (see VIP Comment Feed-in tariffs: solution or time bomb?, September 2009). This line did not win us many friends at the time. We pointed out that in 2008 alone, Spain’s solar programme had created an off-balance sheet future liability for of EUR 26 billion, 8% of its national debt at the time (Japan today should take notice of the liabilities it is loading on its energy consumers).

Spain’s announcement at the end of 2010 that it was making retroactive changes to the programme sent shockwaves that continue to reverberate today through the clean energy investment community. Spain was followed by the Czech Republic, Bulgaria and now, it seems, Romania, all of which enacted cuts in revenue on existing projects. Even Belgium got in on the act, imposing a retroactive charge for grid access on PV system operators. Amazingly, the Conservative Spanish government continues to impose new taxes on existing clean energy projects, despite ongoing lawsuits by clean energy investors.

Set aside the fact that investors in no other heavily regulated sector – aviation, telecoms and extractive industries come to mind – have been treated in the same way as clean energy investors. But did these countries ever think through the consequences of reneging on what were effectively sovereign commitments?

On this trip around Asia I have spoken to large number of debt investors. One of them – one of the leading providers of debt to infrastructure projects worldwide – summed up the sentiment: “We are not doing any deals in Southern Europe at the moment. None, not in any sector. Country risk we can handle, but not retroactive policy changes.” And Asian debt providers are not the only investors who have red-lined investment in southern Europe. This month saw cross-border lending within Europe fall to lows not seen since the first months after the creation of the euro in 1999.

What has been the European Commission’s response to retroactive policy changes by member countries? A joint letter from the Energy and Climate Commissioners, a statement by a spokesperson. A tut-tut here and a tut-tut there. The Acquis Communautaire, the cumulative body of EU legislation, legal acts and court decisions, has much to say about abattoirs and the fat content of milk, but is silent on the retroactive penalisation of investors. The Energy Charter Treaty, to which the EU belongs, is better on the subject, but leaves much to the discretion of member countries and generally defers to EU law.

POLICY INSTABILITY

Even in countries where there has been no retroactive policy change, there is a pervasive sense of instability in Europe’s energy policy.

The UK’s Electricity Market Reform has been bouncing around the machinery of government for nearly two years. It is meant to transform the sector from the third quarter of 2014 – but developers still do not know what the all-important contract-for-difference strike prices will be for electricity generated from wind, solar or biomass generation. Until they do, it is almost impossible for investors to go ahead with projects that will take several years to build. Announce the price already! What could possibly take so long? Or move immediately to reverse auctioning, and earn the gratitude of those concerned about utility bills.

FRANCE

In France, onshore wind development has been stymied for several years by a legal case initiated by anti-wind group Le Vent de Colore, challenging the legal basis for the feed-in tariff established in 2008. This imbroglio, which has now reached the European Court of Justice, has obstructed investment, even though the country has a clear direction under the presidency of Francois Hollande of reducing its dependence on nuclear and increasing its emphasis on renewables.

Banning fracking is not a policy substitute for clear investment frameworks for renewable energy and energy efficiency.

GERMANY

In Germany, a debate is raging – not about whether to continue with the “Energiewende”, or energy transition – but about how its costs should be shared between consumers and industry, those installing solar roofs and those not. The debate is needed, as German power prices have been soaring. With 26% renewable electricity, Germany is entering uncharted territory for a major economy. Echoes of the debate are reaching the US and the UK, where it is inaccurately portrayed as the collapse of Germany’s commitment to clean energy, and even Asia, where it is worrying investors and policy-makers. Meanwhile protracted arguments over who will pay for offshore wind grid connections have slowed investment in its part of the North Sea.

POLAND

In Poland, legislation to introduce incentives to spur wind and solar development has been on a slow boat through the country’s governmental machinery ever since December 2011, and its final enactment is not now expected until 2014 at the earliest.
Instead of using its political capital to press these countries to resolve their policy debates and eliminate uncertainty for investors, Europe has chosen to retreat into protectionism. In May, the European Commission proposed swingeing anti-dumping duties of up to 68% on Chinese-made PV panels.

Interim imposts are being imposed that risk raising the levelised cost of electricity for European PV systems by some 5%, making marginal projects uneconomic. These moves, unless reversed by diplomatic efforts, are likely to dampen investment, provide a windfall for Taiwanese, Korean and Japanese PV manufacturers, and open the way to Chinese retaliation against European-made clean energy products and other items, including French ethanol – otherwise known as wine.

But enough. The poet Schiller’s lyrics to the Ode to Joy begin thus:
“O friends, no more these sounds!
Let us sing more cheerful songs,
more full of joy!”

I set out in this article, not to praise European energy policy, but not bury it either. The rest of the world has much to thank Europe for, in terms of its record in pioneering large-scale clean energy deployment, and in terms of its unceasing advocacy for action on climate change. A lot of great work is still being done.

I merely wanted to make the case that Europe’s leaders need to act decisively if they want the continent to retain the leadership in clean energy it is in the process of losing. In particular they have to clear up the unnecessary and corrosive uncertainty currently facing investors.

I very much hope they are up to the task. If they are, our hearts will soon be lifted again by the strains of Ode to the Joy of European Clean Energy Investment. With music, perhaps, by Oettinger, but lyrics firmly by Cameron.

Download the PDF here.

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