A combined solution can usually bring some advantages compared to the multiplication of individual lines. Indeed, it typically requires fewer physical components, but has higher power capacity, which is commonly beneficial due to the economies of scale present in transmission systems. This has also been the case onshore with the development of the transmission grid, where a combined solution approach has been favored for a long time now, especially since the introduction of both technology and operational standards in the previous century.

However, the development of a combined solution offshore is still unpredictable due to the existing uncertainties regarding necessary technological developments. In fact, most developments offshore use a less-known technological system for which standards do not yet exist, i.e. it is based on Direct Current (DC) instead of Alternating Current (AC) systems; and an integrated solution offshore would require some technology components that are still not available today. Moreover, there are also strong costs uncertainties, not only due to the referenced uncertainties in technology development, but also due to the unclear role of a future offshore grid. Indeed, there are different visions on the possible role of an offshore grid in the future; while some envisioned a regional grid whose main role is to integrate offshore wind from Northern Europe, others envisioned an infrastructure which is integrated into a more global grid (covering EU and neighboring countries).

In a recent Think report to the European Commission (DG Energy), we based our recommendations in distinguishing these two different types of offshore grid developments.

Standalone lines
From our analysis of common regulatory practices as well as specific case-studies of regulatory procedures in different member states, it is clear that the frames that are applied to the investment in standalone lines are not economically sound: they are not aligned with the common guiding principles of an economically sound frame (i.e. planning, competition, and beneficiaries pay). Nonetheless, there are already some pioneering member states (e.g. the UK) that are beginning to follow a better economic approach.
In the case of standalone lines, there is no need for a specific EU intervention because the possible negative economic effects are mainly local, and for the issues that do require an EU intervention, we consider that the same intervention should be applied to standalone lines as to onshore transmission investments. Still, it is important to continue the policy actions that are ongoing for grids, onshore as well as offshore.
At the EU level, there are important policy actions in place: the implementation of the third package is indeed ongoing, and an infrastructure package has recently been proposed by the European Commission. At national level, it is also important to continue the experimentation with novel regulatory frames (e.g. Germany, UK and Sweden) that have been fine-tuned for the connection of offshore wind farms. Note that the EU could add value by supporting this learning process, for instance, by benchmarking existing practices.

Combined solutions

Our analysis of ongoing combined solution projects (e.g. Kriegers Flak, COBRA cable and Murray Firth HVDC Hub) illustrates that the difficulties faced by these projects under the current regulatory frames are tremendous. Therefore, the offshore grid development is currently distorted towards a multiplication of standalone lines, even if there might already be an economic case for combined solutions in some projects.
In the report, we identify five key difficulties that are distorting the development of offshore grids, as well as the respective remedies. They are summarized in the below table:

We consider that there could be either a soft or a stronger type of EU involvement in the implementation of these remedies. Based on this analysis of the possible role of the EU, we concluded that the EU should support the national and/or regional policy implementation of the remedies with a soft EU intervention; and, where a regional solution is not viable, a stronger EU involvement is already recommended today:

Leonardo Meeus (Think), Isabel Azevedo (Think), Jean-Michel Glachant (Florence School of Regulation), François Lévêque (Mines-ParisTech) and Marcelo Saguan (Microeconomix)

The Rio Earth Summit (1992)

The U.N. Framework Convention on Climate Change, adopted at the U.N. Conference on Environment and Development (the first “Earth Summit”) in Rio de Janeiro, Brazil, in 1992, contains what was to become a crucial passage. The first “principle” in Article 3 of the Convention reads as follows: “The Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country Parties should take the lead in combating climate change and the adverse effects thereof.” [emphasis added] The countries considered to be “developed country Parties” were listed in an appendix to the 1992 Convention ­– Annex I.

The phrase – common but differentiated responsibilities – has been repeated countless numbers of times since 1992, but what does it really mean? The official answer was provided three years after the Earth Summit by the first decision adopted by the first Conference of the Parties (COP-1) of the U.N. Framework Convention, in Berlin, Germany, April 7, 1995 ­­– the Berlin Mandate.

The Berlin Mandate (1995)

The Berlin Mandate interpreted the principle of “common but differentiated responsibilities” as:

(1) launching a process to commit (by 1997) the Annex I countries to quantified greenhouse gas emissions reductions within specified time periods (targets and timetables); and

(2) stating unambiguously that the process should “not introduce any new commitments for Parties not included in Annex I.”

Thus, the Berlin Mandate established the dichotomous distinction whereby the Annex I countries are to take on emissions-reductions responsibilities, and the non-Annex I countries are to have no such responsibilities whatsoever.

The Kyoto Protocol (1997)

It was in direct response to this Mandate that the U.S. Senate subsequently passed unanimously (95-0) the Byrd-Hagel Resolution in August of 1997 (Senate Resolution 98, 105th Congress, 1st Session) stating that:

“It is the sense of the Senate that the United States should not be a signatory to any protocol to, or other agreement regarding, the United Nations Framework Convention on Climate Change of 1992, at negotiations in Kyoto in December 1997, or thereafter, which would mandate new commitments to limit or reduce greenhouse gas emissions for the Annex I Parties, unless the protocol or other agreement also mandates new specific scheduled commitments to limit or reduce greenhouse gas emissions for Developing Country Parties within the same compliance period.”

So, in a very real sense, the Berlin Mandate brought about sustained bi-partisan opposition in the United States to the international climate regime and the Kyoto Protocol. This sealed the Protocol’s fate in terms of ever being ratified by the U.S. Senate. President Clinton did not submit the Protocol to the Senate for ratification, nor would Al Gore have done so had he been elected to succeed Clinton. Likewise, Senator John Kerry was explicit about his opposition to Kyoto when he ran for President against George W. Bush, and President Bush was subsequently more than explicit about his lack of support for the Protocol and, for that matter, the UNFCCC process. When Barack Obama ran against John McCain for President in 2008, one thing on which they agreed was their opposition to the Kyoto Protocol.

Beyond those decisive impacts on U.S. climate politics, the Berlin Mandate had wide-ranging and worldwide normative consequences, because it became the anchor that prevented and has – until very recently – continued to prevent real progress in international climate negotiations. With 50 non-Annex I countries having greater per capita income than the poorest of the Annex I countries, the distinction is clearly out of whack. But, more important than that, this dichotomous distinction means that:

(a) half of global emissions soon will be from nations without constraints;

(b) the world’s largest emitter – China – is unconstrained;

(c) aggregate compliance costs are driven up to be four times their cost-effective level, because many opportunities for low-cost emissions abatement in emerging economies are taken off the table; and

(d) an institutional structure is perpetuated that makes change and progress virtually impossible.

Fast Forward to Copenhagen (2009) and Cancun (2010)

The dichotomous Annex I/non-Annex I distinction remained a central – indeed, the central – feature of international climate negotiations ever since COP-1 in Berlin in 1995. Then, at COP-15 in 2009, there were hints of possible change.

The Copenhagen Accord (2009) and the Cancun Agreements (2010) began a process of blurring the Annex I/non-Annex I distinction. However, this blurring was only in the context of the interim pledge-and-review system established at COP-15 in Copenhagen and certified at COP-16 in Cancun, not in the context of an eventual successor to the Kyoto Protocol. Thus, the Berlin Mandate retained its centrality.

Finally, We Arrive in Durban (2011)

The Durban Platform for Enhanced Action – completely eliminates the Annex I/non-Annex I (or industrialized/developing country) distinction. In the Durban Platform, the delegates reached a non-binding agreement to reach an agreement by 2015 that will bring all countries under the same legal regime by 2020. That’s a strange and confusing sentence, but it’s what happened, and it’s potentially important.

Rather than adopting the Annex I/non-Annex I (or industrialized/developing country) distinction, the Durban Platform focuses instead on the (admittedly non-binding) pledge to create a system of greenhouse gas reductions including all Parties (that is, all key countries) by 2015 that will come into force (after ratification) by 2020. Nowhere in the text of the decision will one find phrases such as “Annex I,” “common but differentiated responsibilities,” “distributional equity,” “historical responsibility,” all of which had long since become code words for targets for the richest countries and blank checks for all others.

A Dramatic Departure

Thus, in a dramatic departure from some seventeen years of U.N. hosted international negotiations on climate change, the 17th Conference of the Parties in Durban turned away from the Annex I/non-Annex I distinction, which had been the centerpiece of international climate policy and negotiations since it was adopted at the 1st Conference of the Parties in Berlin in 1995.

Because of this, the international law scholar, Daniel Bodansky, has labeled “the Durban Platform a complete departure from the Berlin Mandate.” Likewise, Indian professor of international law, Lavanya Rajamani says that Durban delivered a “new process and with it, a clean slate on differentiation.” And Elliot Diringer of the Center for Climate and Energy Solutions, finds the overall Durban deal to be “delicately poised between two eras – the fading age of Kyoto, and a new phase … with developed and developing countries presumably on a more equal footing.”

This is of vast potential importance, but – of course – only “potential” importance, because just as it was the Kyoto Protocol’s numerical targets and timetables that fulfilled the Berlin Mandate’s promise, it remains for the delegates to the UNFCCC to meet this Durban mandate with a new post-Kyoto agreement by 2015 (to come into force by 2020). Only time will tell whether the Durban Platform delivers on its promise, or turns out to be another “Bali Roadmap,” leading nowhere.

An Unambiguous Outcome: The Platform Opens a Window

The Durban Platform – by replacing the Berlin Mandate – has opened an important window. It is this. The national delegations from around the world now have a challenging task before them: to identify a new international climate policy architecture that is consistent with the process, pathway, and principles laid out in the Durban Platform, namely to find a way to include all key countries (such as the 20 largest national and regional economies that together account for upwards of 80% of global carbon dioxide emissions) in a structure that brings about meaningful emissions reductions on an appropriate timetable at acceptable cost.

Having broken the old mold, a new one must be forged. There is a mandate for change. Governments around the world now need fresh, outside-of-the-box ideas from the best thinkers, and they need those ideas over the next few years. This is a time for new proposals for future international climate policy architecture, not for incremental adjustments to the old pathway. I trust that this call will be heard by a diverse set of universities, think tanks, and – for that matter – advocacy and interest groups around the world. With 48 research initiatives in Australia, China, Europe, India, Japan, and the United States, the Harvard Project on Climate Agreements is prepared to contribute to this effort. Please stay tuned.

Robert Stavins, John F. Kennedy School of Government, Harvard University

PS See my blog on the economics of environment here

There is little doubt that new transmission lines crossing long distances to connect the areas where renewable sources abound with densely populated regions are one of the pillars of strategies aimed at decarbonising the energy sector. But it is still unclear who will pay for them, which technologies should be deployed and how planning and authorization procedures should be organized. According to many observers and stakeholders, the latter issue is particularly daunting. In 2011 both the EC and the FERC have tackled it. Let us briefly consider each proposal in turn.

In October 2011 the EC issued its Infrastructure Package, including a proposal for a regulation on planning and authorization procedures for cross-border infrastructures. Within the Priority Corridors indentified in the proposal (4 in the electricity sector, 4 in the gas sector, 1 in the oil sector), regional expert groups will select Projects of Common Interest (PCIs). These PCIs must be included in the ten year network development plans drafted by the networks of transmission operators (ENTSO-E and ENTSO-G). After approval by the interested Member States and consultation with the Agency for coordination of energy regulators (ACER), the list of PCIs will be submitted to the Commission. TSOs will recover costs through network tariffs and incentives granted by national regulators. Costs will be allocated according to a common methodology to be developed by ENTSO-E and ENTSO-G. PCIs not commercially viable will be eligible for EU funding between the 50% and 80% of their costs through the proposed Connecting Europe Facility (another piece of the Infrastructure Package). PCIs will be implemented at national level with streamlined authorization procedures, to be completed within three years. The Commission, ACER and national authorities are granted the power to intervene when there are delays on commissioning or authorization, or disagreements on cost allocation.

In July 2011 the FERC issued Order No. 1000 to mandate regional planning for transmission power lines. Planning procedures shall comply with nine principles and account for public policy requirements (e.g. on development of renewable energy sources). Rights of first refusal for incumbent TSOs are removed and the adoption of non-discriminatory procedures for selecting projects is required. The Order also establishes default principles for allocating the costs of intraregional and interregional facilities in a maner which is roughly commensurate with the distribution of benefits (but not necessarily uniform across regions). The FERC will have the power to solve disagreements on cost allocation, but not disagreements about projects and their implementation.

Are the EU Infrastructure Package and the US Order No. 1000 effective in reducing regulatory uncertainty for investing in cross-border transmission lines? The problems they address resemble an anticommons, that is a situation where many right-holders (regulators) hold the power to veto a project. Anticommons become tragic when the lack of coordination among right-holders leads to under-exploitation or underinvestment in a resource. For transmission lines, the tragedy of the anticommons would mean a regulatory framework that is unable to overcome delay or opposition.

To assess whether European and American measures are an effective answer to anticommons, let us identify the four reasons that make them so troublesome:
1) complementarity: if the consent of all regulators is needed, coordination costs increase;
2) sequentiality: when the decisions of regulators are not simultaneous, there is the danger that preferences of first-movers and late-movers are not aligned, so again coordination costs may increase;
3) fragmentation: the higher the number of regulators (or levels of decision-making) involved, the higher the probability of disagreements;
4) bargaining: agreements among regulators will be more difficult when they display heterogeneous preferences or pursue different missions. Equally relevant is the availability of an authority of last resort.

Neither EU nor US measures offer satisfactory answers to these four problems (see the table below). Complementarity is to some extent addressed by the European regional expert groups and the American regional mandatory planning. However, coordination costs will be reduced only if the cost allocation methodologies will be widely shared (something which cannot be taken for granted today). Moreover, the new measures create additional decision-making levels. This choice increases fragmentation and may well dampen the benefits of enhanced collaboration in the planning phase. Finally, bargaining is not going to become smoother in the new regulatory frameworks. Only the EU proposed regulation provides explicitly for mechanisms aimed at overcoming strategic opposition or bureaucratic delays.

The EU proposed regulation shall be approved by the European Parliament and the European Council, while FERC will probably grant rehearing on its Order. How can they be improved?
Two proposals may reduce the coordination costs accompanying anticommons:
a) make room for overlapping jurisdictions: regulatory frameworks should not establish just one mandatory planning and authorization procedure, but at least two. They will compete among themselves, with priority given to the first able to start and come to final approval of the project. Of course, multiplying procedures is costly, but they would reduce strategic opposition, inertia and delay;
b) provide for alternative jurisdictions, that is mechanisms which can overcome disagreements when there is a bargaining impasse. The EU proposed regulation already goes in this direction.

Giuseppe Bellantuono, Associate professor of Comparative Law at University of Trento

P.S. For a more extended analysis you may wish to read my paper The Regulatory Anticommons of Green Infrastructures

There are a host of other arguments, which to varying degrees, favor renewable generation technologies, including energy security and protection against fuel price volatility. Renewables provide secure, non-exhaustible domestic energy unaffected by rising or falling price of oil, natural gas, etc. There are also arguments for job creation and remaining competitive in a growing industry.

The proponents also argue, with some justification, that the subsidies can be reduced and eventually phased-out entirely as the nascent industry grows in size and becomes cost-competitive. Both wind and photovoltaic energy generation, for example, exhibit considerable improvements in price and performance over the past decade and by some estimates are approaching grid parity, at least in some high-cost regions.

Numerous studies have examined these benefits trying to determine if renewables are worth the subsidies they generally receive, be it in the form of feed-in-tariffs (FITs), production tax credits (PTCs), loan guarantees or mandatory requirements such as renewable portfolio standards (RPS) that obliges distribution companies to meet certain minimum renewable content requirements.

An analysis by Benjamin Zycher after close examination of the various arguments concluded that most did not hold much water, either because they were inconclusive or could be summarily dismissed. In a recent paper, Severin Borenstein, a Professor at Energy Institute at Haas at University of California, Berkeley, reaches somewhat similar results.

Borenstein focuses on the un-priced pollution externalities avoided when renewable generation displaces conventional technologies using fossil fuels. Figuring how much these avoided externalities may be worth, however, is not an easy task depending on what fuel and generation are displaced. If, for example, renewables are reducing emissions from coal-fired plants, that is one thing. If, on the other hand, it is natural gas plants that are being displaced, the gains may not be as pronounced, partly because more gas-fired back-up generation is generally needed to offset the intermittency of renewables.

Professor Ross Baldick at University of Texas at Austin, for example, suggests that greenhouse gas emission reductions associated with the installation of over 10 GW of wind capacity in Texas has been negligible due to a number of operational and reliability reasons. In other words, installing a 1 MW of wind does not necessarily result in displacement of 1 MW of coal. It is far more complicated.

Borenstein concurs. He says, “The most important market failure in energy markets is almost certainly environmental externalities and the single most efficient policy would be to price those externalities appropriately,” by including a carbon tax or something along those lines. He adds, “Yet, the policy makers often find pricing externalities to be very restricted or impossible politically. If that is the case, then the second-best discussion is over which, if any, alternative policy interventions are likely to do the most good, or at least do more good than harm.”

The arguments for and against renewable subsidies are nothing new, but have become more heated during these pressing fiscal times. Many commentators are aghast at the estimated $14.7 billion going toward subsidizing renewable energy. While generation is increasing and costs are falling, renewables currently generate relatively little in absolute terms compared to more conventional technologies using fossil fuels and nuclear energy.

Proponents point out that nuclear and fossil fuels have benefited from generous subsidies over the years – which explains why they account for a significant portion of current electricity generation. Renewables, they claim, can reach much higher levels if they are equally supported.

While researchers and academics like Zycher, Baldick and Borenstein question the often-claimed benefits of renewables, politicians find it easier to hang on to their favorite arguments – green jobs, energy security, and less pollution. Few would wish to address the real problem by taxing carbon emissions.

F.P. Shioshansi

This post is extracted from EEnergy Informer, November 2011 issue.

The European Union’s imposition of mandatory CO2 emissions trading started with NAPs (national CO2 allocation plans) in March 2004, and market trading in 2005 (ETS), followed by increasingly complex but diffuse carbon reduction commitments (CRCs) and energy transport and trading arrangements (including ENTSO-E and -G). These measures, and others, were further bundled together by the December 2008 climate-energy package. This set formal and very high goals for the role of low carbon energy in Europe by 2020 – in many ways similar to goals of the USA’s December 2007 EISA (Energy Security and Independence Act), which is today heavily criticized in the US, notably because of its costs, lack of transparency, unsustainability and irrationality.

Bundling and unbundling

Upstream energy, climate and environment policy, in Europe today, remains committed to low carbon but this is increasingly criticized, and confronted by a rising number of major challenges. These do not only exist at the political decision making and Europe-wide coordination level, but also concern basic energy infrastructures and resources, energy project and programme financing and, in general, the sustainability of the industrial, commercial, financial and energy regulatory strategies that have been set and have emerged for achieving Europe’s present official goals for energy transition.

For energy regulations and trading, the keyword “unbundling” describes the European Commission’s (EC’s) attempts at creating a so-called continental energy space for electricity and gas. This would require energy supplying companies and government energy agencies to separate – or unbundle – the distribution of electricity and gas from production and import supply. This would supposedly increase competition, reduce energy prices, and increase energy exchanges between EU countries.

Utilising the appealing notion of liberalizing energy supplies by preventing pipelines, transmission lines and power stations being controlled by one company or entity, making it easier for small businesses to get a foothold in the market, this concept extends to favouring the development and growth of cross-border energy networks, in a process where green low carbon energy would command an increasingly leading role. These are of course interesting notions for trade and market organisation of non-essential goods or services, but for a continental energy system using sometimes entirely new, capital intensive, technologically complex, and industrially unproven energy sources and processes, with new and unproven regulatory agencies, there are credible challenges to this free trade notion over and above the spotty evidence of state monopoly breakup necessarily leading to lower consumer prices.

It is important to understand the EU27 energy transition programme is currently the most massive ever proposed outside war-time conditions with all the challenges, costs and risks that are implied by this.

On the one hand using very intense but new and unproven market regulation and control – notably the NAPs, ETS and CRCs – and preaching free market principles on the other, the most immediate risk is of achieving neither a transparent and competitive European energy market with many small “players”, nor the hoped for interconnection and interoperability of gas and power grids. In the case of gas these are already relatively high capacity, dense, and are mostly interoperable without new regulations and requirements set by the EC, national governments, new European energy regulatory agencies, or would-be agencies, some of them with as yet undefined status and powers. Staying with gas, we can add that more and complex “unbundling” arrangements, regulations, and trading schemes are rather unlikely to reduce gas prices, whereas European development of in situ European shale gas and coal seam gas resources would rather certainly reduce natural gas prices.

Overall and in general we find there are recurring, hard-edged and increasingly self-defeating results on the ground for Europe’s green energy transition, firstly due to costs, but also due to resource, technology and industrial factors and issues, commercial factors, and others. One clear result is that political commitment to European energy transition is declining. Current goals are unrealistic, and many of the proposed means for achieving these goals are both inappropriate and unrealistic – with an emerging context in many ways similar to the US situation and context, relative to the similarly unrealistic EISA.

Major but unanticipated limits

In particular, the common European policy of levering up renewable energy’s part in the energy mix to achieve the goal set in Dec 2008 of achieving 20 percent of all energy supply from renewable, alternate and low carbon sources and systems focuses electric power, because most new and renewable energy sources only produce electricity. Total EU27 gross primary energy consumption was around 1785 million tons oil equivalent in 2010 (over 1800 Mtoe in 2008), and final end-use energy consumption was about 1000 Mtoe. Of this, about 275 Mtoe (3.21 million GWh) was electricity.

Relative to gross primary energy consumption, European electricity demand in 2010 therefore stood at only about 15 percent of the total, but was more than 27 percent of final energy consumption. Windpower, the largest and recently fastest growing new and renewable low carbon source of electricity covered about 9 percent of EU27 electricity consumption in 2010.
Goals in the electric power domain go as high as producing 25 percent or more of all EU27 electricity, mostly from windpower (and other low carbon sources) by 2020, aided by necessarily optimistic forecasts of slowing demand growth for electricity. Here we can note that EU27 electricity demand, in the household sector, increased by 70 percent through 1990-2008, and national electricity demand in east and southeast European EU27 countries has sharply grown since adhesion through 2004-2007.

Windpower, although receiving the lowest subsidies by way of so-called “feed-in tariffs” for low carbon electricity, reaching more than 20 euro cents per kWh for solar electricity in several EU27 countries – but now being sharply cut – has received the highest total state subsidies. Taking only the case of Spain, overall subsidy payments to windmill manufacturers and windfarm operators are estimated to have exceeded 18 billion euro for the period 2000-2010. As a direct result and despite the very weak job generation of the industry, in 2010 employing about 105 000 persons across Europe (about 0.025 percent of the EU27′s total active population) Europe boasted some 80 GW or 44 percent of world total installed windpower capacity, but as noted above the output from this only covered 9 percent of European electricity demand for the year 2010.

The high goals for windpower, reaching 25 percent or more of total European electricity demand by 2020, is increasingly likely to be scaled back, simply because of cost, siting, power infrastructure and poor job generation issues. In particular this concerns the hoped-for but extremely high cost and long-term development of offshore windfarms, and the need for equally costly and lengthy reinforcement of capacities and interconnection of European electric power transmission systems, needed because of the intermittency of renewable energy-based electric power supply.

Because these large scale power transport infrastructures and capabilities do not exist, we are already confronted by effective overcapacity of windpower generation at times of peak output coinciding with low demand, in several countries with large windfarm capacities (particularly Germany, Denmark, Spain). The simple result is power shedding, in other words the total loss of the effectively unusable power. On paper and in policy documents, it is of course easy to propose large scale high capacity power grids linking Europe’s present and hoped-for future wind farms and solar power stations, and “bringing the power to market” with increased electricity trading, but the needed civil and public works would be massive and lengthy, and suited to war-time emergency conditions not Enron-type trading, or any other type of trading.

Taking the case of European biofuels production, in the 3 years since the December 2008 adoption by the European Parliament of the “climate-energy package”, the hoped-for target of covering 10 percent of European motor fuels demand in 2020, with biofuels produced in Europe and imported from other countries, has already been cut back to 5.6 percent. The earlier goal for replacing imported petroleum fuels with imported biofuels and European-produced biofuels, of 10 percent by 2020, would have needed the sourcing of at least 0.8 Mbd of oil-substitute fuels by 2020, assuming of course there was zero growth of EU27 transport fuel consumption through 2011-2020 ! The new and more modest target is set at the suspiciously exact figure of 5.6 percent of European transport fuel (about 0.44 Mbd on current transport basis) being sourced from biofuels produced inside Europe, or imported, by 2020.

This new 0.44 Mbd target might seem modest, and is very modest relative to the growth of Chinese oil consumption (with a trend growth rate of about 0.4 Mbd every year) but in fact may be hard to meet. This is recognized by the European Commission, describing the reduced goal as less “borderline sustainable” than the 10 percent target of less than 3 years ago, but nevertheless challenging, notably if large amounts of biodiesel fuel or palm oil for biodiesel production is imported from Indonesia, and sugar cane ethanol is imported from Brazil. This would encourage or force these countries to further clear their rainforests and drain peat bogs – with huge emissions of CO2. The EC does not underline that imported biofuel pricing will certainly be oil indexed, if only because producing biofuels is oil intensive and completely oil dependent. In what way, if any, imported biofuel supply is more secure than imported non-renewable petroleum is rarely discussed in EC documentation concerning the unrealistic European biofuels plan and programme.

We can be almost sure, unless there is either long term and deep economic recession or very large change of social values and behaviour favouring car sharing, that European car fleet number growth will outweigh per-car fuel economy improvements, making the outline target of 0,44 Mbd even less impressive, and lower than 5.6 percent of European motor fuel demand by the year 2020. The basic framework for forecasting assumes continued dominance of conventional fossil energy-based transport, and due to this, the even less rational or “perverse solution”, of rapidly expanding electric car and vehicle fleets is now advanced by the leaderships of a few larger EU27 countries, with major car industries, as the only way to achieve Europe’s energy transition goals. This is a classic case of one bad policy – forced and rapid green energy development including biofuels – engendering another, even more unrealistic policy goal.

Electric cars and windmills do not mix

Rather little penetration of electric vehicles (EVs) in Europe’s car fleet would in fact be needed to make the goal of raising the role of renewable energy in electric power production and final end-user consumption even more completely unreal and impossible to achieve. At a penetration rate of 7 percent of Europe’s current 210 million car fleet, replaced by EVs each typically needing 5 kW charge for around 5 hours, up to 7 times a week, peak electric power demand in Europe could easily rise by 50 000 MW at certain times of the week, such as Sunday evenings, when EV charging would be intense.

At typical offshore windfarm or EPR nuclear capital costs of around 5000 – 6500 euro per kilowatt installed, it is easy to calculate the cost implications of some 7 percent of the current EU27 car fleet “going electric” and being recharged by “green low carbon” electricity. The costs would likely exceed 300 billion euro for the new generating capacity, excluding the costs of power grid development and strengthening, that would also be needed. The possibility of this financing being achieved through taxing and “marketizing” the current and projected range of instruments for European carbon finance, such as NPAs, ETS, CRCs, present and possible future regulatory instruments, and other cash-raising schemes – notably raising electricity prices by 30 to 50 percent – is evidently low or unsure.

Government financing would almost certainly be obligatory.

This simple but stark example underlines the strange lack of realism and coherence of present European energy transition policy and programming, and enables us to outline the real options available, which need to be ranked by their technological, industrial, energy economic, economic, financial, social and political feasibility.

These options notably include the abandonment of electric car development; the abandonment of offshore windfarm development; the abandonment of European electric power system interconnection and transport capacity raising; and the abandonment of “unbundling energy” and increasing free-for-all market plays in a single, continent-wide European energy space.
Due to abandonment being the recurring and most basic rational option, alternate strategies are obviously an urgent need.

Momentum effects: freewheeling to failure

Today however, in Europe, we have policy drift or momentum driving the green energy quest, with rapidly rising criticism fed by simple examples of the incoherence and lack of realism of its goals and implied massive energy sector development requirements, such as the example above. This “frozen dynamic” may explain the market and trading tropism that has replaced rational energy strategy debate and discussion, shown by the obsessional attention which goes to regulatory and trading arrangements for electricity (and also gas). Focusing electricity (and gas) trading helps shield policy makers, commentators and analysts from the first and basic need – of physically and technically enabling large scale electric power transport, after which the desired trading and its claimed result of reducing final consumer prices for energy, would at least be possible.

Much less than for gas, electric power transport capacities are in fact quite low at present. The reason is very simple: cross-border and in-country long distance electricity transport is expensive and inevitably incurs losses, often above 10 percent (power sent/power received) in the best managed and most heavily developed systems. Large scale electricity storage, we can note, is even more expensive and typically has system loss rates of at least 25 percent, but would be needed when or if intermittent renewable-source electricity supply was irrationally ramped up to a high level in Europe’s supply mix.

In turn, the cost and technology barriers to large scale power transport explains why European electric power transport system integration, with coordinating bodies such as the UCTE (now organized into the ENTSO-E with 34 national TSOs to date, and private entities such as EPTDA), is effectively restricted to “system balancing” movements of electric power, rather than large scale and continuous international electrical energy supply. To be sure, coordinating entities could or might be created for market trading of electricity across the 4.3 million square kilometres of the EU27, but evidently it is first necessary to build the infrastructures enabling 24/7 power exchanges with permanent “smart” metering and tariff modifcation capabilities, in turn enabling traders to make their market plays using an exciting range of derived and related financial instruments !

What we find is that the cost and resource, science, technology and industrial limits and barriers for scaling up alternate low carbon power sources in Europe are impossible to ignore, but when they are honestly and openly debated this causes a “reality shock” for European energy policy makers.

The negative results of Europe’s unsustainable and chaotic green energy policy and programmes are now accelerating. They include the downsizing or abandonment of outline plans for biofuels production in Europe (especially food crop based bioethanol), reduced plans for massive offshore windfarm development, lowered plans for large scale European electricity grid development and interconnection, and delays or abandonment of so-called “smart” grid plans and projects – and even of plans for lower cost but economically unsure strategies, like “smart” metering across wide area power market areas. It is very likely this trend will accelerate.

Nuclear power is also not sustainable

The direct challenges to the credibility of the early (Dec 2008) goals for European biofuels, windpower development and electric power system integration, as well as solar PV (electric power) production, and other much smaller green energy alternatives (such as landfill biogas recovery) notably concerns their industrial, commercial and financial sustainability.

The challenge of sustainability is especially clear in that which concerns nuclear power. Firstly, it is difficult or impossible to call nuclear power “green”, unless we forget or ignore its dependence on uranium mining and shipping of this mostly imported, mineral and non-renewable fuel. EU27 import dependence on non-European exporters is currently about 98 percent, although uranium mining may be started or restarted in several countries, including Bulgaria, the Czech Republic and Denmark (Greenland). Taking the complete “fuel cycle”, from uranium mining, transport, processing and fuel fabrication through reprocessing and waste disposal, this is almost totally dependent on oil, gas and coal (as well as renewable energy !).

The costs of nuclear power are now better known, as Europe’s ageing reactor fleet (146 civil reactors as of early 2011) moves towards end of life decommissioning, at extreme high per-reactor costs. Including the official German and Swiss plans for the total phase out of nuclear power by 2022, and also due to the age profile of reactors in Europe, nuclear power in Europe is confronted by a wall of worry and extreme high near term costs, focusing public attention on the real costs of nuclear power.

Exactly as for present and unsustainable green energy plans and programmes, large amounts of government financing will inevitably be needed for reactor decommissioning, because nuclear power plant operators will always have the option of simply declaring themselves bankrupt or demanding protection from creditors during deliberately lengthy “restructuring”.

Most important for European energy transition, we find that energy, environment and climate policy cannot be divorced from basic democratic pressure. It cannot ignore public opinion, or European economic policy, and management of the troubled and crisis-wracked European economy.
In Europe, since March 2011, there is a de facto move away from so-called “climate friendly” atomic energy, because the Fukushima disaster has changed both public and political perception of nuclear power. A similar changed perception of Europe’s green energy plans and programmes is also certain, and this is only a question of time.

The common factor is that Europe’s very serious financial, fiscal and monetary difficulties and the threat of Eurozone disaggregation or break up, focuses attention on public spending with increasing intensity. In this context, the luxury of “vanity tech” spending is no longer acceptable, whether it concerns expensive and dangerous nuclear energy, or expensive and irrational green energy.

Alternate strategies

We can take the relatively simple case of transport fuels, where the role of electricity supply, either nuclear or non-nuclear, fossil or renewable, has little significance and importance until and unless electric cars and vehicles are “ramped up” to represent a sizeable part of the European vehicle fleet.

Current road transport fuel demand in Europe (2010) is around 6.15 million barrels per day (Mbd) on a total of 7.8 Mbd for all transport including air, rail, water and off-road transport, especially agricultural, making transport the biggest single user category of oil. Transport, in Europe, consumes nearly one-half of total oil demand.

While the published estimates for European (and other world regions) shale gas resources and potential exploitable reserves, by agencies including the IEA and the US EIA may well be optimistic, they are nevertheless very large, extending to around 150 billion barrels oil equivalent for the EU27.

Today, in the USA, about 18 percent of total gas supplies are shale-origin, and growing, with a dramatic impact on traded natural gas prices, which in the USA are now as much as 60 percent lower than typical European gas prices. While gas is a fossil fuel, producing CO2 as well as energy, its “carbon footprint” is much lower than either coal or oil, and its supply security risks, health and safety risks, waste disposal costs and environmental impacts are much lower than for nuclear power.

In particular, gas is highly suited to utilisation in road and off-road transport, unlike electricity. Certain national road transport fleets, for various reasons including national resource availability, as well as basic economics, including the road fleets of Holland, South Korea and Pakistan already have large numbers of gas powered vehicles. While the mass introduction of electric cars and other vehicles would produce enormous challenges for European electric power production and transport systems, conversion of European vehicle fleets to natural gas provides a robust, rapid and economical solution to sourcing non-oil energy sources for transport.

The “gas bridge” may in fact be one of the prime resource-driven movers for reform and modification of current European low carbon goals and strategies, but other factors as mentioned already in this article will exercise a growing influence. In particular we can note the many energy-economic parameters and factors that are currently given little role and importance in the setting of goals and strategies for energy transition. Among these, we can briefly identify the potential role of energy intensity and EROI (energy input/output and net energy balances) in setting criteria for energy conservation and efficiency raising, in all sectors of the economy and society.

Using these criteria, which are easily derived from CO2 intensity criteria and data, reform and modification of current goals and strategies can be set on a coherent and rational basis, rather than be subject to transient political and media attention and appreciation – as applies to the supposed “inevitable” mass development of electric car fleets, offshore windfarms, solar power plants, new and massive Smart Grids, and other vanity tech, which is impossible whenever rational criteria are applied.

To sum up, European Energy Transition is itself in transition.

The policy set driving Europe’s green energy transition plan and programmes is incoherent, relying heavily on unsure claims that global warming is a crisis, as well as energy security, job creation and environmental concerns.

Current goals and strategies are in most cases neither sustainable nor rational, as shown by growing political criticism and the loss of broad support amongst the public for what are perceived as expensive and unnecessary, irrational or perverse goals and strategies.

Resource issues, already powerful in forcing a rapid reduction in the December 2008 goal for European biofuels production and utilisation, will also be powerful – in the reverse sense – regarding the case of natural gas produced in Europe, from European coal seam and shale gas resources. European gas can easily and cheaply substitute and replace oil in all forms of transport except air, and can be used for economically generating electricity and heat, in localized and distributed CHP programmes.

Energy-economic factors, currently receiving little appreciation and having a low role in deciding the more rational and more economic alternate energy sources and systems, will necessarily command a more significant role in shaping energy policy, deciding corporate and public energy sector investment strategies, and influence both private and public financing of the energy sector.

Presently we have a lose-lose context for all players except financial, and for them and as ever, this is short term gain only. Overall costs for achieving any specific level of green energy development are massively raised by this lose-lose context, which can only drive a general loss of credibility for green energy. One thing is sure: the present outlook for green energy transition in Europe is not sustainable and will change.

Andrew MacKillop, former Expert-Policy & Programming, DG XVII Energy, European Commission

A mere 5 years ago, there was not a single Chinese wind turbine maker among the top 10 global players. By 2010, there were 4, including #2 Sinovel, closing on the #1 Vestas of Denmark, and already ahead of America’s GE Wind and Germany’s Enercon (see pie chart), according to BTM-Consult, a market research firm. If this growth pattern continues, Chinese can be expected to dominate the manufacturing of wind turbines, reducing their Western rivals to secondary niche players.

This would not be a big deal if it were not for the fact that the market for wind is projected to grow at double digit rates over the coming decades in a number of key countries. Chinese manufacturers are thus poised to gain a growing slice of a rapidly growing pie.

For example, European turbine manufacturers, who currently enjoy 89% of the European, 32% of the US and 37% of the global market, according to the European Wind Energy Association (EWEA), may end up losing considerable market share to Chinese, Indian and other low-cost rivals.

Henrik Stiesdal, Siemens Wind Power’s Chief Technology Officer was quoted in an article in the Financial Times (29 Aug 2011) saying, in part, “… you have to take the challenge from China and other low-cost countries seriously,” an understatement given the recent experience with PV manufacturing.

China’s state-owned banks, who follow official government policies, have deep pockets and can be patient investors while their Western counterparts are accountable to impatient private investors. It is not just low wages.

The same fate awaits GE, currently the dominant player in the US where India’s Suzlon has established a foothold, despite sporadic quality problems.

Advanced technology and know-how still matters but Western manufacturers simply cannot compete with the developing world’s low wages, and that is not going to change unless their wages rises to the Western levels – or God forbid – the Western wages drop down to theirs.

F.P. Shioshansi

This post is extracted from EEnergy Informer, October 2011 issue.

Among the direct effects considered, state additional revenues from carbon pricing clearly dominate the additional expenditures dedicated to RD&D targeting low-carbon technologies. Net public revenues in the year 2020 directly generated by climate policies applied in the Baseline scenario range between €52 and 123bn for the EU-27 as a whole depending on the level of carbon abatement cost. Net incremental public revenues directly stemming from the application of new policies in an Enhanced Policy scenario range from €71bn (0.55% in terms of the EU-27 GDP) in the case of high abatement costs, to a negative value of -€10bn (-0.06% of GDP) if abatement costs are low.

Within the indirect effects of the policies applied in the Enhanced Policy scenario, the most relevant ones are the decrease in excise tax revenues from fossil fuels and the decrease in tax revenues related to the impact of these policies on GDP. Changes in state revenues associated with changes in GDP probably are the main factor driving differences among countries. The overall net indirect impact of new policies ranges from a decrease in net public revenues in the EU-27 equivalent to 0.03% of the EU GDP (for low carbon abatement costs) to a decrease equivalent of 0.23% (for high abatement costs).

Given the assumptions made, all considered direct and indirect effects of new climate policies amount to a net increase in the public revenues of the EU-27 in 2020 of about €12.6bn (0.09% in terms of EU-27 GDP) for medium abatement costs. This makes a non-negligible impact which is nevertheless much lower than the impact of changes in main macroeconomic variables over time.

The impact of new climate policies on state budgets varies widely across countries (see Figure 1). Countries most significantly affected, both positively and negatively, are among the “new” Member States. Notably Bulgaria and Estonia are the two countries that, given our assumptions, could experience a decrease in net public revenues larger than 0.5% of their GDP in some of the scenarios considered. Both are countries with a small and highly carbon-intensive economy and a low GDP-per-capita. Thus, implementing ambitious climate policies in these countries may require external support. “New” Member States whose public accounts may be most positively affected by the implementation of new climate policy measures in any scenario are Hungary, Latvia, Lithuania, and Romania. If abatement costs are high, these countries could experience an increase in their net state revenues representing more than 1% of their GDP. The economies of these countries are also carbon-intensive and their GDP-per-capita is low. Thus, extra state revenues could be employed to their own country benefits instead of supporting the “losers” in the decarbonization process.

In contrast, the impact of new climate policy instruments on large economies from the EU-15 is expected to be relatively small, generally positive, and typically in line with average EU values. Given the asymmetric expected impact, authorities may consider the option of sharing among all EU countries, taking into account their economic strength, part of the economic burden that the transition to a low-carbon economy may represent for those countries most negatively affected.

Finally, the new climate policies have to be financed in a context of substantial budget adjustments necessary to correct large short-term deficits and to avoid an explosion of debt in the long-term. Therefore public finance variables like the fragility of state budgets, the level of fiscal pressure and the expected growth of economies may affect the implementation of climate policies. The higher the financial fragility of a country, the more difficult the implementation of expensive climate policies may be, while stronger expected growth rates could provide more room for the latter.

Luis Olmos, Sophia Ruester, Pippo Ranci, and Jean-Michel Glachant

N.B. This post is derived from report n° 4 of the project THINK funded under the EU’s 7th Framework Programme.

US energy-related – not just from electric generation – CO2 emissions are projected to increase under the business-as-usual case, having dropped in 2008-2010 time frame due to the recession, unless new measures are put in place, the line labeled as extended policies in the accompanying graph. The likelihood of such policies being enacted do not look good at the present in Washington.

Second, to use a religious metaphor, our energy future is not preordained. It can be influenced, adjusted and modified, but only if we act and act decisively. How much energy we consume, for example, will depend on how we use energy. An obvious fact that is frequently overlooked at our own peril.

Markets, if left on their own, will not necessarily deliver a sufficient dose of energy efficiency, clean energy, or a desired mix of energy. Appliance manufacturers, for example, will be tempted to manufacture the cheapest front cost units that the prevailing standards permit, since consumers will bear the extra cost of electricity through the long life of the devices.

Likewise, residential and commercial property developers will build the lowest cost buildings that meet the minimum building codes, with some exceptions for the high end of the market. There are some empirical evidence to support such conclusions.

The topic is controversial, with some economists arguing that consumers select what is best for them and should be left to fend off for themselves. Others say if government, regulators, standard setting bodies, and those in charge of building codes do not intervene, consumers may end up with inefficient appliances and cars, poorly insulated homes, and that implies social costs for everyone.

The interventionists point to regulations such as smoking restrictions, drinking and driving regulations, seat belt laws and other restrictions and claim similar measures are needed to reduce wasteful energy consumption. The arguments are never ending.

Clearly, decisions made today will determine where we end up in the future. The extended policies scenario examined in the 2011 Outlook, for example, will result in an estimated additional spending on $11 billion per year in 2009 dollars over the period 2011-2035. That amounts to an extra $264 billion cost burden on the society.

It would not be a politically popular scheme. But spending a little more on more efficient equipment, appliances, building shell and distributed generation will result in average annual savings of $29 billion – a real bargain with a benefit-to-cost ratio of nearly 3. Who would be against such policies?

The Outlook provides a useful discussion of the role of appliance efficiency standards and building codes. The good news is that average US electricity prices are projected to be lower under extended policies scenario, reinforcing the notion that investing in energy efficiency pays despite its initial costs.

Per capita energy/electricity consumption, often used as an important yardstick for international and regional comparisons, can be adjusted based on adjustments in the efficiency of end-use appliances and devices as well as the building shell’s thermal and insulation properties, as shown in the graph on top right for the US residential sector.

The EIA, like others who have examined the trends, projects growth in electricity consumption in both the residential and commercial sector – unless there are additional improvements in efficiency of major appliances and devices.

Regarding future capacity additions, EIA’s message in unequivocal. Moving forward, the overwhelming new generation will be relatively low-carbon natural gas and renewable.

The EIA’s projections are, of course, critically dependent on assumptions about relative fuel costs, but also uncertainties about the prices and/or projected price volatility. Coal and nuclear do not look favorable compared to the alternatives in terms of levelized costs – regulatory uncertainties including potential carbon prices and/or more stringent air quality regulations disfavors coal. Nuclear has its own set of issues, making private investors nervous.

Across the globe, the main driver for growth of renewables is mandates and/or subsidies – not necessarily lower prices – even though renewable costs have been on the decline.

The underlying drivers of the Outlook, of course, are 3 key assumptions about abundant supplies of non-conventional gas at reasonable prices, continued upward pressure on oil prices, and no change in US policy towards greenhouse gas emissions. As everyone knows, the only constant in energy business is change and these assumptions may be subject to change without notice.

F.P. Shioshansi

P.S. This post is extracted from EEnergy Informer, June 2011 issue.

All of terms such as politically and historically correct, refer mainly to the set of ideas that any reasonable citizen of western societies must believe. I make an intentional remark on the term must. And what is this set of ideas? Apparently a simple answer: whatever that is defined like to be the truth by a small group of intellectuals with enough fortune for getting easy access to the mass media, which possess immense power of influence in our overmediatized world. Mass media takes such ideas and transform them in another chic and very democratic term: public opinion, then an article of faith has been born and any normal person is expected to adhere to it.

I started my reflection on “energetically correct” while listening at a former IEA officer talking about climate change. He said that during the 1992 Rio de Janeiro first earth summit, climate change due to the effect of green house gases was not such evident like it is at these days. He made the same assessment talking about ten years ago environment perception. By contrast, for my generation, climate change due to “green house gases” (mainly the villainous CO2) is not anymore a theory that should be discussed and validated but an established fact. There is not need to be a professional in public opinion for stating that he is absolutely right. A survey among my university colleagues easily shows that an immense majority of them firmly believe that we are running and fast to environmental catastrophe. This perception is confirmed by formal polls: a 2009 Eurobarometer survey titled “Europeans’ Attitude Toward Climate Change” notes that 87% of Europeans consider climate change to be a “very serious” or “serious” problem, while 10% “do not consider it a serious problem”.

This assumption could be validated by an immense, high quality scientific research work. Its rational logic could be impeccable. Even though, we can wonder with legitimacy how has it become an unquestionable popular belief? After all, the complexities of the problem and the approach to explain it escape largely to the understanding of most of the population, the same if they are brilliant engineering students.

My suggestion is that climate change theory is largely backed up by the giant media machine, the very expensive international institutions declarations and summits and of course, the very sophisticated scientific studies. I would not like to confuse the reader, I am not climatosceptic (the rival intellectual camp, stating that climate change is just an imposture). It is just that after going more deeply into the question, contrary to my expectations, more questions than answers have risen up. Being by nature a devil’s avocat, I find at last suspicious when someone tells me that a scientific theory is a FACT. Of course, the same someone could ask me: what about all the scientific studies and models? Well, after studying some of them (right, within the limits of my understanding), I could answer: “Yes, they are right, IF, and only IF, all the hundreds even thousands of assumptions and hypothesis, they are base on, also are right. If one part of them is not or the way they interact each other is not, then the results in real life could be widely different, for good or for evil”.

And what about the scientific consensus expressed within the IPCC? Well, amazingly enough, such consensus is not as large and solid like we could think, with increasing quantity of voices calling for more moderation in the debate. In fact, multiple theories coexist: there are those scientists who without denying the global warming affirm that the IPCCs projections are not quite accurate like Richard Lindzen from the MIT; others like Sallie Baliunas from the Harvard-Smithsonian Center for Astrophysics make of solar radiation and not human activity like the main responsible, so establishing that global warming is a natural process; there are the straightly deniers like Claude Allègre from the Parisian Institute of Geophysics and yet those who say that global warming rather will have positive consequences like Craig D. Idso from the Arizona State University. Like usual, interpretation has a large part in making science.

Climate change due to anthropogenic green house gases is just one possible explication to weather´s phenomenon, from which we are not even sure if they are “unnatural” or “abnormal”: yes, the poles are defrosting, so what? The earth has gone through two ice ages and the “little ice age” between the end of the middle age and just before the beginning of the industrialization period. Nothing says that they will not refreeze in the future. It would not be first time in history that “scientific consensus” ends by being just a brilliant but false idea. During the 70´s decade “global cooling” and not “global warming” was the danger. And after all, is not dissension the base of scientific debate and progress? Other powerful argument: the UN, EU, OECD and company strongly pushing the governments to fight climate change. Will they be acting like that if they would not believe sincerely in the imminent danger that humanity is facing? Probably not. But they are political institutions, so then, they have their own political agenda. The UN has acted in this issue, like in others, with great inefficacy. The unfortunate Copenhagen summit really could be summarized like a bilateral meeting between two countries: the US and China. Of course international system is a complex game of interest and visions.

But, why if the danger is so imminent the UN continue to cling to the idea that a huge, almost two hundred countries meeting will achieve any feasible progress? 90% of such countries do not have anything to say about the point. This might be not politically correct but it is the reality. Cancun’s summit might have gotten good compromises in the paper. In the reality, many of the promised millions of dollars never will be out pocketed. We can make an extend list of the all the great UN dealings with similar destiny. The G8 and G20? Well, they are not really interested in the topic, despite Europeans. In honor to the truth, just the EU has taken effective action with concrete directives and objectives for its members. But the European Union is becoming more and more isolated as no other important region of the world appears to be pressed on this matter. Reading between lines, the political leadership is not buying the climate change idea, they make solemn public declarations, saying whatever people want to hear, but they are just buying time.

This is very normal in politicians, above all in western democracies where they under the constant pressing of public opinion. In the meantime, the IEA adopting a completely factional position continues to produce catastrophic scenarios, whose utility is questionable if not for generating panic. Reality is that China is building one carbon electricity central every week and has no intention of stopping to do so. So it could be expected of the main international energy information source to have a more equilibrated and realistic position.

In regarding the whole picture, we can see the usual gambling of interest from all sides. There are a lot of economic interests in the climate change lobby, just like in the demonized oil industrial lobby. There is a lot of political calculus in the ecological ONGs, just like in the international institutions and nationals governments. Before hurting anybody sensibility, I would like to state that I am not demonizing whoever. Probably, everybody has good intentions. Just like European citizens have good intentions in doing anti-american imperialism protests, with not suspicion that in the origin of their prosperity it is the international security American system.

The fact is that common citizen has a really hard time to see through this foggy environment. Then, he or she is easily manipulated (of course, mass media has its own agenda too). Fortunately, time always put the things in their right place. We will discover if the “energetically correct” approach: fossil energy is dirty and bad, renewable energy is clean and good, survives the taste of time or perishes like many others present and past “correctness”. Probably the truth is just in the middle. But whatever it comes, I am very sure that we will face and survive it, just like we have been doing since the beginning.

Luis Ramirez, Mines ParisTech

The EU’s SET Plan is a response to the evident need to stimulate research and development in low-C technologies. However, technologies to be developed within the SET Plan and the associated priority actions have been selected without directly considering the limited availability of public financial resources. Projects to be publicly supported should be carefully chosen to achieve energy policy objectives. A balanced portfolio of innovation activities comprising research, development and demonstration will support (i) the acceleration of decarbonization to reach mid-term 2020 EU climate objectives and (ii) the development of a diversified technology mix enabling the achievement of long-term 2050 objectives.

How to build this balanced portfolio? Project selection needs to be based on the expected contribution of innovation activities to CO2 emission reduction in 2020 and 2050 per euro of support provided to them. This should balance the importance of reaching the 2020 targets at least cost against the need to support immature technologies that hold greater promise for the longer term.

More mature technologies with a large expected potential need to be brought to competitiveness quickly. The allocation of funds should be based on detailed quantitative cost-benefit analyses building on objective estimates of technology success probabilities and CO2 saving potentials. Regular updates of the allocation of available funds within allocation periods, taking into account knowledge gains, are important. As the probability of success increases, funds should be more concentrated and competition among alternative research paths becomes less relevant.

Immature technologies, which have to play an important role in the future technology mix to achieve 2050 climate objectives, require persistence in the research strategy. Project evaluation typically will be based on ordinal rankings according to the expected project contribution to CO2 emission reduction taking into account that early research mainly generates options for new low C technologies. Very high predicted CO2 savings potential in the case of successful innovation can support the acceptance of very low success probabilities and/or delays in the achievement of technological milestones. The lower the projects’ success probabilities, the more research path options should be investigated in parallel.

Cooperation among innovators can facilitate the realization of higher-cost projects that otherwise would not be undertaken. For projects whose returns are subject to very high uncertainty, which involve large investments and address low-maturity technologies, joint programming of RD&D activities among Member States and between them and the EU is highly recommended. An agreed and committed centralized research strategy can provide the necessary assurance of long-term funding for R&D and the capturing of knowledge spillovers.

Support programmes are hardly coordinated currently – neither between different Member States, nor between them and the EU. This restricts knowledge sharing, increases the likelihood of costly duplication of similar research and fails to exploit potential benefits from economies of scale and scope via a pooling of resources and active networking. To achieve the SET Plan objectives, cooperation and coordination among Member State and EU support policies have to be improved. The initiation of European Energy Research Alliances – aimed at conducting pan-European RD&D by pooling and integrating activities and resources, combining national and EU sources – is a step into the right direction. Their successful implementation should be fostered and progress monitored.

The form of direct public support needs to be tailored to the features of each innovation project and to the type of entity best placed to undertake the respective RD&D. The Box below illustrates the process of selection of the funding instruments. Public loans are well suited to finance lower cost innovations with well quantifiable future market prospects carried out by large companies. They become especially relevant if the liquidity of the capital market is low. They are also attractive in recessions when private credit markets’ appetite for risk is unduly depressed. Publicly owned equity is suitable to finance risky, potentially highly profitable, innovation preferably undertaken by small entities. These investments should be of modest size, though they may be used to marginally fund expensive innovation to signal that it has a high potential. Subsidies in the form of technology prizes shall fund early low-cost innovation preferably undertaken by universities and research institutes. Tax credits and other benefits related to RD&D investments are best suited to supporting near-market, incremental innovation conducted by large companies, as well as to innovation conducted within regulated entities. Grants and contracts – on the one hand the most attractive form of support from the innovators’ perspective but on the other the most expensive instrument – should only be awarded to socially desirable clean energy innovation that would not be undertaken otherwise and where all other instruments would fail. This is clearly the case for most early-stage, capital-intensive processes as well as for many other pre-deployment RD&D activities including a significant fraction of innovation in regulated entities.

Financing instruments need to be implemented in a way that encourages efficiency while not discouraging participation by the private sector. This implies that, first, competition for funds should be used whenever possible to set incentives for high efficiency in RD&D and minimize public intervention. The public sector should, if possible, avoid having to identify ‘winning technological options’ and instead leave these decisions to the industry. Second, public funding should be output-driven whenever this is compatible with the engagement of innovators in the RD&D addressed. This involves making the release of funds and their amount conditional on the achievement of some minimum objectives.

However, the presence of high project costs may require releasing at least part of the funding up-front. For low-risk projects this could be done under the condition that funds have to be returned if the project is not undertaken as agreed. Support to projects whose probability of failure is high may probably have not to be linked to performance in order to attract private investment, which is especially relevant for capital-intensive innovation in technologies of low maturity.

Finally, the institutions set up to allocate funds to clean energy RD&D should be lean and flexible enough to avoid institutional inertia and lock-in, which make it hard to reallocate funds when it becomes clear that the original projects turned out to be less promising than expected and other projects now look more promising.

Luis Olmos, Sophia Ruester, Siok Jen Liong, and Jean-Michel Glachant (Florence School of Regulation (European University Institute)

Note: This post is derived from a THINK project report (funded by EU’s 7th framework program).