Download the Executive Summary
The new IHS CERA Special Report, Sound Energy Policy for Europe: Pragmatic Pathways to a Low-Carbon Economy highlights critical policy reform needed if the European Union is to be successful in moving toward a competitive low-carbon economy.
While several technical studies suggest that realization of a decarbonized power sector is possible by 2050, IHS CERA believes that the current market set-up is unlikely to produce the necessary investments. Radical policy measures are needed if these investments in power generation and related activities are to be put in place, the report finds.
Sound Energy Policy for Europe identifies two issues—reform of power and carbon markets and encouragement of natural gas investments—as especially critical.
Power
and carbon markets need to be reformed to provide stronger signals for
investment:
- Power markets need to reward availability and flexibility as well as generation. Without movement in this direction, it is unlikely that the investment in flexible conventional power plants necessary to complement renewables will be made, which could threaten reliability of supply.
- The European carbon market risks being side-stepped by measures in support of clean technologies and efficiency. This could result in higher costs of abatement. Although strengthening the cap would provide a stronger price signal, this would be insufficient. IHS CERA believes that a more structural reform of the European Emissions Trading System (ETS) is needed to provide investors with more confidence in the long term price trajectory of carbon and facilitate investment in clean technologies.
Natural gas investments need to be encouraged:
- Natural
gas-fired power generation is a proven, cost competitive, clean technology that
has already played, and can continue to play, a key role in reducing carbon
emissions. Natural gas-fired power can provide Europe with a reliable power
generation platform which can serve
either as lower carbon base power production or provide flexible back-up
for intermittent renewable energies as and when they can be successfully ramped
up. Natural gas represents a necessary and low regret strategy that provides
optionality.
- Policy also needs to recognize the greater abundance and flexibility of natural gas given recent global developments in liquefied natural gas (LNG) and in shale gas. These developments should help mitigate concerns about inevitable rising prices for fossil fuels and risks to security of supply. .
Overall, the report identifies five important specific enablers that need to feature in the Commission’s 2050 Energy Roadmap:
- Reform of power
market design:
capacity mechanisms should be introduced in conjunction with a reform of
ancillary services to remunerate plants and demand side response that provide
flexibility to the system.
- Carbon market reform: the carbon price
signal should be strengthened through a structural reform of the ETS
introducing some form of active supply side management to provide more
stability and predictability in the long term to carbon prices.
- Clean technology
support:
clean technology support costs—assessed by IHS CERA in terms of necessary
subsidy support for renewables penetration in the European power sector—could
rise by nearly four times to €45-60 billion each year by the mid-2020s and are
unlikely to fall below today’s levels until 2035 at the earliest. In order to optimize the value of such
support a coordinated policy is needed across all EU Member States and clear
and consistent thresholds for subsidy withdrawal and transition to market
competition need to be established technology by technology.
- A strong role for
natural gas:
the role of natural gas needs to be enshrined with policy that encourages
investment in a new platform of gas combined cycle power generation plant that
can provide reliable low cost, low carbon power until such time as zero-carbon
sources prove capable of cost-effectively underpinning the generation system –
at which stage the gas plants will provide an economic, largely amortized,
flexible back-up capability for intermittent renewable.
- Carbon capture technologies: carbon capture and storage technologies must be given an opportunity to demonstrate whether they can become a safe, cost-effective mechanism to prolong the benefits of low cost fossil energy through carbon abatement. They should be considered for gas, biomass and coal sources of CO2 abatement, and prioritized based on economics and possibly storage needs. Deployment of carbon dioxide, as well as storage, merits a greater research focus.
Sound Energy Policy
for Europe: Pragmatic Pathways to a Low-Carbon Economy is the product of
the IHS CERA European Policy Dialogue, which brings together key stakeholders to advance thinking and
research regarding long-term European energy policy. The Dialogue was
specifically arranged to accommodate and complement the European Commission’s
timetable for policy formation under the Roadmap 2050 initiative. The Dialogue
process provides pragmatic policy choices for achieving a lower-carbon and more
competitive EU economy by 2050, as well as viable medium-term goals.
The executive summary of the report is available. Click to Download.
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