EU Energy Policy: Good in Parts

They say you should avoid clichés at all costs.  I say “bollocks to that”.  Language evolves through the generalisation of specifics.  The shorthand “machiavellian”, for example, no doubt arose by gradual contraction of phrasing such as: “By Gad, the cunning bounder has stitched me up in the manner of the Prince in the famous work by Niccolò Machiavelli!”.

Why, then, do I imply that the EU energy policy is like – and I hope readers take the trouble to follow this link – Nicholas Parsons‘ egg?

Let’s just take stock of where we are.  The EU countries have agreed greenhouse gas (GHG, sometimes, perhaps even herein, referred to inaccurately as “carbon”) emission targets under the Kyoto Protocol.  What one might have thought the EU would be trying to do would be to provide a framework to support its member countries in achieving the goal of reducing their carbon emissions over the period 2008-12 (and beyond, anticipating further global agreements) relative to the 1990 levels.  And indeed it is, for example, with its Emission Trading Scheme (ETS).  But events have moved swiftly on, the bureaucrats have been hard at work creating employment for themselves, and we’re now all living in Targetland.

2005 saw a rapid – even, I dare say, historic – increase in awareness around the world of the global warming problem.  Since then, it’s been slowly dawning on people that just reducing our GHG emissions over a couple of decades will not be enough.  Rather, we need to move away entirely from fossil-fuel based energy over a time-scale of perhaps half a century.

Al Gore has recently produced a vision of how we can do this.  It’s well worth reading (I’m not putting these links in for fun, you know, it’s bloody tedious), even though Saint Al seems to think creating jobs is an end in itself.  What we actually want to do is produce energy as cheaply as possible, which means the less labour is required the better.  The aim should be to get the price of renewables below that of fossil fuels, in which case there’s no need for FITs, NFFOs, ROCs or any other kind of bureaucratic intervention.  All the civil servants can be sent to the wind turbine and solar panel factories.

Important point: the cost of renewable energy is controlled by the manufacturing dynamic, whereby costs tend to reduce over time; by contrast fossil fuel costs increase over time because of the increasing scarcity of at least easily extracted reserves.  Once renewables cost less than fossil fuels it’s game over for the black stuff.

It seems to me that the simplest way to guarantee the adoption of renewables would be simply to add a substantial cost to fossil fuels to reflect the external costs (GHGs and other pollution).  This is often referred to as a “carbon price”.  The trouble is, frankly, we all want to have our cake and eat it.  We want cheap energy even as we reduce our reliance on fossil fuels.

Rather than put an effective price on carbon, the EU decided to set a separate target for renewables, “20% by 2020” as explained by the House of Lords (pdf).  This makes some sense, I suppose, if government can’t stop itself meddling. After all, it’s equivalent to a very high carbon price (i.e. whatever the penalty is for non-compliance) for 20% of the energy supply.  But the EU’s egg is a little whiffy:

1. Demand vs supply

The EU has conflated the demand for energy with the supply of energy.  This is not just because they’re thick (sorry, I’m thinking more and more that our society will inevitably collapse if we continue to give out so many prizes for stupidity), it’s also because, unlike our friend Al Gore (op cit), they have no vision.  Now, the vision for Europe is not so different to that for US.  We will end up trading energy over a Supergrid.  We will then be able to take advantage of the fact that the wind is always blowing somwhere.  And we’ll be able to deploy solar power facilities where there’s most sun, e.g. in North Africa.

Here’s what their Lordships say (op cit):

“In January 2008, the Commission published the 20 20 by 2020 package. This includes proposals for reducing the EU’s greenhouse gas emissions by 20% and increasing its proportion of final energy consumption from renewable sources to 20%. Both of these targets are to be achieved by 2020. In order to meet the EU renewable energy target each Member State will be given a national target to meet based on their existing renewable generation, their GDP and a flat-rate increase for all. The UK’s proposed target is 15%.”  [My emphasis].

If we’re eventually going to trade energy over a Supergrid, why does it matter where the energy is generated?  Why should countries not all have the same target?  Then we would clearly have a demand-side policy and not a completely muddled mess that doesn’t know whether it’s coming or going, that is, whether it’s a demand-side policy or a supply-side policy.

2. A missed opportunity to create a pan-European renewable energy market

To be fair, the EU Commission has allowed for some trade in energy (UK Lords, op cit, pdf):

“The Commission’s proposals include creating a standardised Guarantee of Origin (GoO) certification scheme for renewable energy. This would allow a market in GoO certificates to be created. Member States could then meet part of their targets by
counting energy generated in another country for which they have bought the GoO certificate. The Commission believes this will create the flexibility needed for Member States to meet their targets.”

Wrong, wrong, wrong.  The Commission is talking about paying someone to generate and use the renewable energy for you – the carbon offsetting logic.  In order to make progress towards the vision, though, we need to trade the energy itself, not offsets.  We need to start building the Supergrid and create a market.  OK, you can’t label individual electrons, but you can, surely, account for flows of electricity from one country to another.

And, worse, this was the UK Lords’ reaction (op cit, pdf):

“We recognise that some flexibility will be necessary, but are concerned that GoO trading has the potential to undermine efforts to increase renewable generation domestically. We recommend that the Government commit to achieving a significant proportion of the UK’s target domestically.” [My emphasis].

OK, this is a fairly logical leap to take when you’re conceiving an offset market rather than an actual market.  Their Lordships seem to be thinking ahead to when we need more than 20% renewables.  When it’s serious, and not just tinkering at the margins.  But they still seem to have a mental block preventing them considering that we could import energy in the future (i.e. after 2020).  Why should I care where energy is generated?  Why pay more for wind power from Scotland than from France (which is nearer, as it happens)?  We’re entirely reliant now for our energy on states that are a hell of a lot less reliable as trading partners than fellow members of the EU.  Why, oh why, do we have to persist with this ridiculous, childish attitude that it is somehow desirable to generate all our energy in the UK?

Not only are we a very densely populated country, we’re not best placed to make a big increase in our renewable generation by 2020 (though we have some serious wind resources that may be very valuable if we can exploit them fully by trading our surplus and buying in power when we’re becalmed).  In the manufacturing dynamic I referred to earlier, production and deployment of a technology typically follows an S curve (measured e.g. by number of units in the field).  When I say “typically”, I mean “always” – I’m a modest, understated sort of fellow.  As a technology is adopted and manufacturing costs come down, growth becomes exponential.  Eventually the market becomes saturated and deployment levels off.  This has happened for radio (particularly rapidly), fridges, film cameras, digital cameras, mobile phones, microwave ovens, hairdryers, the internet… the list is endless.  The point is that it may be a lot easier for Germany (say) to quadruple its electricity production from renewables to 40% (enough for some to be exported) than for the UK to go from 2% to 15%.  Until Germany runs out of wind turbine sites, why shouldn’t they keep expanding their production?  And why should UK consumers buy expensive British wind when they could have a cheaper German variety?

3. A FIT of localism madness

Their Lordships go even further than just UK self-sufficiency.  Apparently now every house – well, at least housing estate – has to be self-sufficient in energy (op cit, pdf, again).  Yes, they’ve decided we need Feed In Tariffs in the UK:

“…we believe that feed-in tariffs have the potential to stimulate generation in some sectors of the renewable market. [No shit, Sherlock! A guaranteed price will increase the supply of a product!  Well, I never!] Although the evidence we received in favour of feed-in tariffs anticipated that micro-generators would benefit most from such a system, we do not believe that the benefit of feed-in tariffs would be limited only to small-scale generation. Single site operators, community developments, affordable housing schemes and farmers will often want generation capacity above the micro-generation level. They are, however, unlikely to want to trade in the ROCs market with large energy companies. Such generators are likely to favour the certainty of a medium term feed-in tariff structure over the uncertainty of the RO. Therefore, we see potential for the RO and a feed-in tariff to work in parallel with generators choosing the most appropriate support scheme for their own needs. [The old duffers are hopelessly confused: FITs are a supply-side subsidy, whereas ROs create a market].  We recommend that a system of feed-in tariffs be created to work alongside the RO.”

Why on Earth should we subsidise these “single site operators, community developments, affordable housing schemes and farmers”????  Let alone microgenerators.  We’d be giving them a guaranteed return on any investment.  If we want to do that why don’t we simply borrow the money from all these people for the same rate of interest (or lower!) and use it to build a larger-scale more efficient renewable energy installation?  I’ll tell you why.  It’s because an irrational ideology – “localism” – has taken hold.  Only The Good Life is really moral, now it seems.  Maybe, just maybe, that’s not true.

4. Nuclear doesn’t count

The really daft thing about the 20% by 2020 target is it doesn’t include nuclear power.  Why shouldn’t countries choose that path if they want to?  This is what happens when summits are used to bounce states into agreements.  Excluding nuclear also makes a mockery of the implication that all countries can or should generate their own energy.  Maybe there’s a country which has little endowment of wind or sunlight from which to produce renewable energy – let’s follow Douglas Adams and call this hypothetical place “Belgium”.  If such a place did exist it would just have to buy in energy to meet its renewables target.

5. But biofuels do

Even though they’re worse than burning fossil fuels.

6. Why does it matter?

Let’s remind ourselves where we want to be by 2020.  By then, I’d hope to see 2 or 3 renewable energy generation technologies price-competitive with fossil-fuels – large-scale wind and concentrated solar power (CSP) are my bets right now, but we shouldn’t try to second-guess the market.  What will make them price-competitive?  Partly fossil-fuel prices reflecting their real cost (i.e. including their polluting effects); partly the scale manufacturing economies of the renewables; and partly the development of ways of transporting and storing renewable energy (probably as electricity, IMHO, but again, I don’t care if I’m proved wrong) so that energy can be generated where it’s cheapest and the inherent problems of intermittency of renewable energy can be overcome.  To achieve this, the EU and member and neighbouring states should simply be (1) putting an appropriate price on carbon and (2) facilitating through creating a Europe-wide energy market, and removing obstacles to the planning of infrastructure such as power-transmission “interconnectors” between states and regions that we’ll eventually think of as a Supergrid.  OK, I’ve conceded that a renewable energy target is a way of putting a price on carbon.  But it’s not a particularly good one.  And there’s too much fiddling for my liking.  Supply-side measures like FITs are good for creating an industry – Germany has no doubt made a good investment, but there’s no need for everyone to make wind-turbines and solar panels – but are inappropriate for a large-scale roll-out.  And there’s way too much ideological localism and not enough sound economics going on.  The benefits of trade and the economies of scale are no longer rocket-science.  If Europe doesn’t exploit them, we’ll be left in the wake of those who do, like US and China.  As usual.