Momentum for climate action is building as the Paris Summit approaches. Europe has traditionally led efforts to tackle climate change, and has lessons to offer others. Several European countries – including Germany, the UK and France –have implemented new regulatory instruments to facilitate the transition to a low carbon economy. Focusing on the power sector, this new CERRE Energy & Climate study reviews the early experiences in those three Member States and provides practical guidance for other countries and regions. The report is co-authored by a team of distinguished academics, led by Natalia Fabra and including Felix Matthes, David Newbery, Andreas Rüdinger, Michel Colombier, and Mathilde Mathieu.
The report notes that the Energy Transition is a lengthy process that requires strong political support, not least because of the often-conflicting interests that arise when technologies, social norms, and institutions change. In the face of large and diverse risks, regulation should seek to intervene efficiently to minimise overall costs, both for firms and for consumers. This calls for the use by regulators of long-term contracts for new investments (both in renewables and in back-up capacity), as the reduced risk exposure for investors should translate into lower risk premia. Evidence also shows that the current regulatory arrangements in power markets are not well suited to induce the required investments in capital-intensive assets, or to set prices in renewables-dominated systems. The authors therefore recommend that a future-proof electricity market should rest on three pillars:
- Competition in the market should be progressively replaced by competition for the market
- Long-term Contracts for Differences for renewables and for back-up capacity, (referenced to the spot energy price), should be used by regulators to de-risk investments, and
- A liquid wholesale energy market should be preserved.
The authors of the CERRE study urge national governments to put in place, without delay, targets and policies leading to an almost carbon-free power sector by 2050.
Bruno Liebhaberg, Director General of CERRE, says: “Each and every recommendation made by Natalia Fabra and her co-authors in their indisputably valuable contribution will not necessarily be shared by all stakeholders. One can, however, not challenge this fact: Europe’s climate and energy policies are an important complement to, but not a substitute for, national policies”. The road ahead is long and windy, but the stakes are high.
What sponsoring CERRE members say about this report:
Walter Boltz, Executive Director, E-Control Austria: “This CERRE report constitutes an important contribution to the on-going discussions on a future design for electricity markets. It highlights clearly some crucial elements of that design, i.e. flexibility and liquid energy markets across borders. It also reinforces my view that carefulness will be needed if and when moving to a regulatory framework based on competition for markets. Account will have to be taken of the risk for such framework to be used for other purposes, such as market foreclosure and indirect subsidies for incumbent industries under economic stress. Based on practical case studies, this CERRE study makes timely recommendations on potential remedies and solutions to the challenges we are facing today.”
Michel Matheu, Head, EU Strategy, EDF: “EDF welcomes the new CERRE’s report which characterizes and assesses quite clearly some of the main European transition models. In EDF’s view, however, and without prejudice to the academic robustness of the report, the latter underestimates both the short- and long-term costs of the German reform and the track record of the French decarbonisation strategy, i.e. 91% carbon free power generation and low prices. In addition, we do not share the author’s recommendations regarding market design. In our view, there are indeed good reasons to support competitive energy, capacity and carbon markets rather than a regime outside of common law for mature renewables”.
Simone Mori, Head of European Affairs, Enel: “This study provides a clear, accurate and unbiased understanding of the different decarbonisation policies implemented around Europe in recent years. Of the recommendations that conclude the report’s comprehensive analysis, I fully agree with the need to increase the role of long-term contracts in the delivering of stable signals to the market, which will in turn guide the industry’s investment decisions. This measure will be key in allowing energy players to reach the decarbonisation goals through competitive costs, while enabling both the integration of the European market and the conditions for an effective energy transition.”