Guest post by Nicola Rega. Nicola is Climate Change & Energy Director at CEPI, the European association representing the forest fibre and paper industry.
In the symphony of climate and energy legislative proposals currently under the radar, there is a thin red line that links a dossier at its sunset to another on its sunrise.
Having monopolised the political battlefield for about for a year and a half, negotiations on the revision on the Emission Trading system are entering their final lap. Among the various issues still on the table, compensation for carbon costs in electricity prices remain a sticky issue where no effective solution will be found.
However, the text in the Council negotiating position (so-called General Approach”) lowers the drawbridge to new discussions with the EU institutions. In the section on compensation for carbon costs in electricity prices, it is mentioned that countries should report on “whether due consideration has been given to other measures to sustainably lower indirect carbon costs in the medium to long term”.
And this leads us directly to the legislative proposals redesigning the internal market for electricity. One of the aims of these proposals is to provide “the right signals and incentives to drive the necessary investments to decarbonise our energy system”. More specifically, “using the advantages of an integrated market, the Directive aims at ensuring affordable energy prices for consumers, a high degree of security of supply and a smooth transition towards a decarbonised energy system” (Art. 1 of the proposed directive on common rules for the internal market in electricity).
Sustainably lowering indirect carbon costs will be key to promoting electricity use in industry, ultimately resulting in lower carbon emissions and more competitive industries. In other words, less carbon leakage and more sustained growth in Europe
So, where is the problem you may ask? Wholesale electricity price is determined by the generation costs of the marginal technology of the most expensive plant needed to meet demand (the merit order principle). And these plants usually use fossil fuels. The impact varies across regional electricity markets, and certainly renewable energy sources have contributed in lowering the running hours of these plants. Nevertheless, as long as there is coal in the energy mix, its carbon content tends to dominate the price setting.
However the real crux of the issue is can the new electricity design be the tool to sustainably lower such costs? How? And that’s where a collective brainstorming exercise would be needed.
Should we get rid of coal-fired power plants for instance? Easier said than done. What would be the impact on electricity prices? How long would it take? Is it a realistic scenario?
Getting rid of the mechanism allowing companies to charge the marginal carbon content in electricity, rather than the real carbon emitted maybe? Easier said than done too. Could this really be done via regulation? If so, what would the consequence be?
Should the regulatory design lead, de facto, to a different price formation? If so, what would be the parameters? And could such design be market-based and stimulate cost-competitive and innovative solutions? What will be the role of energy storage in electricity price formation?
Should the solution be long-term contracts between renewable energy suppliers and industrial customers, as a way to avoid carbon costs in electricity prices? If so, would it be compatible with competition rules? And would it be a viable mass-solution, both in terms of volumes and risk management?
Should we imagine a system that would incentivise electricity companies in lowering the carbon cost passed in final prices? Is competition in the electricity market already delivering, or would it require something else? Like some disclosure on the relevance of carbon costs in the share of the electricity bill? Would that be (a) feasible and (b) effective?
I don’t have the answers – but I hope some (or many) of you have some good ideas. Or maybe you don’t have them either, but maybe you have a friend, a colleague, a neighbour, a stranger randomly met at an event… someone who might know someone else who might have some good ideas to share…
We need to pull together some good ideas. It may sound almost cliché but the time to act is now. Let’s get this collective brainstorming exercise off the ground and bring these ideas to the decision- making table.