Europe’s energy future

David Buchan, senior research fellow at the Oxford Institute for Energy Studies, talks to agendaNi about how governments can make energy subsidies more affordable.

Supporting renewables through direct taxation would be better for social justice, according to a leading energy analyst. David Buchan is a senior research fellow at the Oxford Institute for Energy Studies and was previously a writer and analyst with The Economist and The Financial Times in Brussels, Washington and Paris.

His main message to governments, in general, is that they “should look more seriously” at shifting the costs of green energy policy from consumers to all tax-payers. “That would be painful at the moment but I think that, for the long term, it would be more sustainable,” he told agendaNi. “If you put it on general taxation, then you’ve spread the burden more fairly between rich and poor.”

The stability of capacity markets is becoming a major issue as policy-makers are becoming worried about how much power will be available to back up renewables. “I fear that Brussels is being a bit complacent about this because it is a fast-developing problem in some countries, including the UK,” Buchan comments. “If they were to become slow or heavy-handed in using state aid powers – because you need state aid approval for this – then I think they would be making a serious political mistake.”

The European Commission is “caught between two aims” i.e. climate change policy and energy market integration. The same is true, to some extent, for the UK Government.

“We still talk about competition,” he says of British policy. “You do need something of a competitive market but you also have to accept increasing state intervention.

“I don’t think Europe or the UK or the Republic of Ireland [are] about to abandon the climate change ambitions. If that’s your ultimate aim, I think you have to accept increasing state intervention and you have to make compromises to accommodate that.”

Speaking at the Northern Ireland Energy Forum, Buchan explained that affordability and market fragmentation were the key threats to Europe’s climate and energy policies.

The public is, at present, more worried about cost than energy security and climate change and this has a clear political impact. In the most dramatic example, the Bulgarian Government resigned in February after mass protests against high electricity prices.

At the other end of the continent, Spain has frozen subsidies to new renewable projects and is making retroactive subsidy cuts to existing renewable projects. The new German Government also wants to control its large subsidies, now running at €23 billion per year.

Price and policy

Energy policy accounts for 9 per cent of the average energy bill in Great Britain: 5 per cent for energy efficiency and helping poorer households and 4 per cent for supporting renewables. This may rise to 14 per cent by 2020, as the levy control ceiling on green subsidies rises from £3.3 billion to £7.6 billion.

EU energy prices rose sharply between 2005 and 2012, while US prices either declined or only increased slightly (see table). In Buchan’s view, the tax-payer should pay for the feed-in tariffs of smaller projects which tend to benefit individuals. Consumer bills would still include a charge for large-scale generation and infrastructure projects which benefit the whole system.

As renewable projects are capital-intensive with low operating costs, the most logical support mechanism is investment tax credits rather than operating subsidies.

Support for renewables was mainly through public grants and tax credits for R&D until minimum renewable production targets were introduced in the 2000s and made mandatory by the EU in 2009. After then, member states switched mainly to production subsidies paid by consumers.

The UK still has the climate change levy and carbon price floor but Buchan’s general point is that more use could be made of tax, now that the scale of renewables production has grown and the cost of consumer-paid production subsidies has become more politically sensitive.

Buchan would move housing insulation programmes and some of the smaller subsidies to general taxation. The latter subsidises, he points out, often benefit quite wealthy individuals and are, individually, an insignificant part of the overall system.

Renewables and back-up capacity have been supported by national subsidy schemes but this approach risks undermining EU energy policy, which is based on the unification of 28 national markets through liberalisation.

The subsidies are both national and state interventionist while a single energy market would be both international and liberalised. Countries are reluctant to rely on their neighbours for emergency power, which is natural because weather-related shortages of renewable power are likely to affect whole regions.

Commission guidelines, published this autumn, and new state aid rules (due next year) could, if followed by governments, ‘Europeanise’ or at least regionalise subsidy schemes.

The Commission has also admitted three flaws in its 2009 energy and climate package:

• the necessary transmission and distribution infrastructure was not defined;

• the impact of national support on market integration was underestimated; and

• the package did not consider whether the market offered the necessary incentives to invest in generation, distribution and transmission, and storage capacity in a system with more renewable energy.

Buchan appreciates that the 2013 guidelines are not-binding on member states. However, he wants governments to pay attention out of self-interest. The aim is make state intervention as cheap, limited and effective as possible and some guidelines will re-appear in the 2014 state aid rules.

In particular, he is calling on the UK to get state aid approval for its national capacity scheme, as long as this is open to foreign providers of firm back-up capacity i.e. Norwegian hydro-electricity operators.

Price Changes 2005-2012

Source International Energy Agency

The way ahead

The next European Parliament election will take place across Europe on 22-25 May 2014. Buchan predicts increased support for “anti-European” parties but this would only be “a little bit of a threat” to energy policy. “Energy,” he notes, “is not the most unpopular of the policies coming out of Brussels.” Parties such as UKIP are more concerned about immigration, CAP and other issues.

A much more substantial change could come in December 2015, if a new international climate change deal is agreed in Paris: “If there is a success there, I think that will bring energy and climate policies closer together.”