EU Energy Policy Blog

Three interrelated developments in the world’s energy system and energy-related emissions should be recognized as critical signals regarding international action on climate change: (1) coal has been the fastest growing fossil fuel for the past 7 years; (2) the carbon intensity of the world’s total primary energy supply has been increasing in the past decade; (3) previous emissions reduction efforts have fallen short and emissions have been (and still are) rising in almost all countries in the world.
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The American natural gas sector has undergone a ‘quiet revolution’ in recent years spearheaded by new innovative drilling techniques. These have given greater access to unconventional gas supplies, particularly so-called shale gas. With these new supplies the American gas market has soared; shale gas is now responsible for about 20 per cent of total US gas production while back in 2000 it was still in single-digits.

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Climate negotiators recognize that, at root, the climate problem is a free-rider problem. Each country would prefer that the others do more. But the free-rider problem is not immutable, and that has been overlooked. The design of agreements can exacerbate it or alleviate it. Instead, the implicit assumption has been that it must be overcome by moral suasion and scientific argument, both of which are weak instruments when dealing with national self-interest. Because of this oversight, both Kyoto and Copenhagen negotiations followed a global cap-and-trade framework, which has proven ineffective. We find that adopting cap-and-trade rules polarizes the free-rider incentive and discourages cooperation.
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The UK energy and climate change policy is failing, and failing at a high cost. Electricity bills are going up as consumers are asked to pay for ever increasing subsidies to renewable energy, the deployment of which does nothing to reduce greenhouse gas emissions. The situation will get worse as other low-carbon technologies ask for, and obtain, specific subsidy schemes based on the argument that they, too, are ‘needed’ to de-carbonise the economy.
These patchworks of support mechanisms are destroying the electricity market, creating unmanageable uncertainty for non-subsidised investments. The claim that ‘the market cannot deliver’ is a self-fulfilling prophecy: ill thought-out interventions destroy economic mechanisms, leading to major uncertainty and underinvestment, leading to more intervention.

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Mention nuclear power and most people think big, a 1,000 to 1,400 MW reactor, or a cluster of reactors, on a gigantic site quietly humming and feeding juice through massive transmission towers to the grid. This has been the traditional business model to capture the full economies of scale of nuclear power. Since it takes massive amounts of investment and many years to build them, why not build them big and make them last? Over the years, nuclear reactors have grown bigger, more expensive and more complex.
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The logic behind the question in the title is straightforward. Iran is a country with very large reserves of natural gas, a lot of it relatively low-cost. With the right investment it could become an exporter of global significance in about a decade. Europe is one of the largest gas markets in the world. Its combination of liberalised electricity markets and ambitious environmental policies favour gas in power generation, at least in the mid-term. Russia’s position in the European gas market raises concerns of market power and politicisation. The EU supports new gas pipeline projects from Central Asia and the Middle East through Turkey and the availability of Iranian gas could be essential to the success of this diversification strategy. Russia, on the other hand, should want to prevent or delay the emergence of Iran as a large gas exporter.
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In late May, Citigroup released a report titled New Nuclear – the Economics and Politics concluding that prospects for equity investors has further deteriorated.
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Electrons passing through international electricity networks follow the complicated physics of meshed alternating-current grids and do not respect price-zone borders. Correspondingly, scheduling power plants on the basis of national prices without taking into account the real physical networks within and between countries makes it necessary for the system operator to take non-market measures to ensure system stability . This is illustrated by two obvious inefficiencies. First, cross-border transmission lines are rarely fully utilised despite persisting price differentials. Second, electricity very often flows from high- to low-price areas . Overall, the current system is light years away from the theoretically optimal use of European power plants and transmission lines that would characterise a fully functioning single energy market.
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A recurrent theme in the EU security of supply debate is the need to diversify natural gas imports, and to reduce the EU’s dependence on a few large suppliers. Continue reading »

The past two decades have witnessed efforts throughout the world to deregulate electricity markets. The world´s main economies have carried out schemes to put in place efficient and competitive wholesale markets for electricity within the framework of globalization and liberalization. Yet the physical peculiarities of electricity make it a rather complex commodity, and frequent inefficiencies and position abuses by major market players have clearly established that completely free electricity markets are simply not possible. Electricity deregulation instead requires careful monitoring by ad hoc authorities and, rather paradoxically, a whole new regulatory framework.
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