Thursday 30 January 2014

npower’s Wayne Mitchell’s blog

What do new EU energy targets mean for UK business?

Last week, the European Commission finally revealed the new EU framework on climate and energy for 2030. As you’ll no doubt have seen, headline proposals include committing to a substantial EU-wide reduction in greenhouse gas emissions of 40% below 1990 levels, and a more modest binding target of at least 27% for renewable energy. It’s hoped these measures will be ratified by the end of the year, in time for the conclusion of a new international climate change agreement to succeed Kyoto in 2015.

The good news is that the Commission intends to delegate decisions on how to meet climate emission reductions back to Member States. While this move has been met with consternation in some quarters, allowing individual nations the freedom to tailor their actions to specific national resources and technologies represents an opportunity for diversification of energy supplies – and with that comes greater security of energy supply.

It also enables the various Member States the chance to seek out the most cost-effective mechanisms and technologies to achieve our collective climate change goals. This aspect is critical if we are to maintain European, and UK, economic competitiveness. By allowing individual nations to take the least-cost route to achieving climate goals, we have a better chance of minimising the impact these vital policy decisions will inevitably have on industrial and commercial, as well as individual, consumers.

Also included in the framework are plans to strengthen the EU Emissions Trading System (ETS). Proposals include a market stability reserve starting in 2021, together with a ramp in the annual reduction rate on the emissions cap from 1.74% to 2.2% after 2020. For UK businesses, efforts to bolster the ailing carbon price are likely to be welcome (as discussed in my recent carbon prices blog [add link]) – as well as news that industry could continue to receive free allowances until 2020.

Reviewing EU energy prices
Along with the 2030 framework, the Commission also issued a report – Energy Economic Development in Europe – looking at energy prices and costs, which assesses the key drivers and compares EU prices with those of its main trading partners.
Unsurprisingly, this report notes that energy prices have risen in nearly every Member State since 2008, mainly because of taxes and levies – but also higher network costs – with fossil fuels the key drivers of electricity and natural gas prices in Europe. For example, European gas prices have largely followed crude, given that a significant chunk of EU gas trade is still pegged to oil-indexed contracts.

They report’s authors also highlight rising price differentials, notably US gas prices in comparison with European gas prices, which, they warn, could undermine competitiveness, particularly for energy intensive industries.

This isn’t news to us. As I’ve written before, many have already voiced concerns that, while the UK is in a better position than most of its neighbours on energy costs, the region is nonetheless progressively falling out of step with the countries it trades with.

The report agrees that “high energy prices in Europe remain a concern”. But suggests that “rising energy prices can be partly offset by cost effective energy and climate policies, competitive energy markets and improved energy efficiency measures, such as using more energy-efficient products.” It then proposes that to remain competitive: “European industry's energy efficiency efforts may need to go even further...”

This is relevant as energy efficiency policies are noticeably absent from the new EU framework. While the Commission hopes its raft of measures will renew ‘ambition’ for energy efficiency, it’s deferred considering the role it plays until later this year, when a review of the Energy Efficiency Directive is due to conclude. It also says that national energy plans will have to cover energy efficiency.

Many key industrial players have voiced concerns that without binding energy efficiency targets, the 2030 package does not provide the long-term signal needed for continued investment. However, strengthening the ETS will provide significant incentives for those industries covered to improve their energy usage.

The European Commission says its aim with the 2030 plan is to ensure regulatory certainty for investors, as well as a coordinated approach among Member States to deliver progress towards a low-carbon economy and a competitive and secure energy system. But before we can see if it will deliver, we first have the hurdle of getting the framework approved and in place. With EU elections to come in May, followed by a break before the new Commission is formed, we may have to wait a while.