European energy and industrial policy realigned – Risk or opportunity for EU’s eco-innovation strategy?

Author: Thomas Sattich

Abstract:

Europe’s eco-innovation strategy fuses industrial, energy and environmental policy together in a concept for sustainable economic growth in the 21st century. The latest debate about high energy prices and their impact on energy intensive industry shows, however, that the emphasis among the three policies shifted over the years. Some adjustments seem therefore to be necessary in order to reduce evolving inconsistencies. This policy brief hence describes the different dimensions of EU’s industrial policy, and assesses what options policy makers have at their disposal in order to increase competitiveness of energy intensive sectors without compromising the eco-innovation and sustainability agenda. If several key principles of the European sustainability agenda stay unchanged, strategic development can be the possible outcome.

Introduction: Energy, industry and eco-innovation

In its latest Communication on energy prices and costs in Europe (COM(2014) 21), the European Commission describes an unfavourable development of energy prices in the EU, which seems to compromise the competitiveness of the continent’s energy intensive industry. In view of this assessment, the question arises, what actually could be done in order to realign the different elements of the European eco-innovation strategy (i.e. environmental, energy and industrial policy), in a manner that suits energy intensive sectors. How do industrial and energy policies go together, and what options do policy makers actually have to ensure consistency?

The question how could energy policy be organised to support the performance of energy intensive sectors in Europe is of course a tricky one given the attempt to finalise the energy market as a level playing field, and EU targets in the field of sustainability. It is therefore vital to assess the role, level and nature of public intervention in energy markets. Given the European low-carbon and sustainability objectives, one has furthermore to ask how could European energy and industrial policy be realigned in a manner that conforms with the overarching EU eco-innovation and sustainability strategy.

The following sections hence attempt to square the circle. Understanding energy policy as a means for industrial policy, the text assesses whether a consistent and simultaneous adjustment to the needs of energy intensive industries, and better support for European green growth strategies is conceivable. After identifying the dimensions of industrial policy, I ask where policy makers could intervene in order to foster industrial competitiveness in the energy intensive segment of the European economy, and what consequences such an intervention implies for the European green growth and sustainability agenda.

European energy policy and the different dimensions of industrial policy

In its latest Communication on energy prices and costs in Europe (COM(2014) 21), the European Commission describes an unfavourable development of energy prices in the EU, which seems to compromise the competitiveness of the continent’s energy intensive industry. In view of this assessment, the question arises, what actually could be done in order to realign the different elements of the European eco-innovation strategy (i.e. environmental, energy and industrial policy), in a manner that suits energy intensive sectors. How do industrial and energy policies go together, and what options do policy makers actually have to ensure consistency?

The question how could energy policy be organised to support the performance of energy intensive sectors in Europe is of course a tricky one given the attempt to finalise the energy market as a level playing field, and EU targets in the field of sustainability. It is therefore vital to assess the role, level and nature of public intervention in energy markets. Given the European low-carbon and sustainability objectives, one has furthermore to ask how could European energy and industrial policy be realigned in a manner that conforms with the overarching EU eco-innovation and sustainability strategy.

The following sections hence attempt to square the circle. Understanding energy policy as a means for industrial policy, the text assesses whether a consistent and simultaneous adjustment to the needs of energy intensive industries, and better support for European green growth strategies is conceivable. After identifying the dimensions of industrial policy, I ask where policy makers could intervene in order to foster industrial competitiveness in the energy intensive segment of the European economy, and what consequences such an intervention implies for the European green growth and sustainability agenda.

European energy policy and the different dimensions of industrial policy

The incorporation of industrial policy into the Maastricht Treaty in 1992 represents the watershed between national and supranational predominance on this field. Since Maastricht, the Internal Market constitutes the core of industrial policy in Europe, binds national policies and excludes measures that distort competition. Member States are committed to its functioning, its dynamics and the eventually resulting structural changes. Yet the transfer of competence from Member States to the EU was not followed by a working concept for this complex and multi-dimensional policy field, resulting in constant struggles between Member States with different national perspectives and interests.

While some Member States prefer the improvement of Europe’s competitiveness by means of favourable economic framework conditions, others underline the problems and challenges of individual industries and sectors. These differences impeded the development of a coherent, integrated European approach to industrial policy. European measures therefore tend to represent a compromise between the principles of a free market approach on the one hand, and state interventionism on the other. Unanimity decision-making rules further complicated decision making until the Treaty of Amsterdam, resulting in scattered and fragmented measures without a sound, overarching framework. In order to illustrate the difficulties for EU level action, three different dimensions of (European) industrial policy can be identified: framework conditions, horizontal measures and sectorial measures.

Framework conditions

European industrial policy has its roots in the Internal Market agenda principle of the widest possible non-interference with market operation. Consequently, when it comes to a common European approach, the European Commission defined the Internal Market as “industrial policy par excellence” (COM(90) 556 final). The Internal Market rationale therefore can be considered as the foundation for any European policy on industry related issues. Negative market integration measures such as tariffs reduction, the abolishment of non-tariff trade barriers and the limitation of subsidies eventually altered the framework under which European industry operates.

With the completion of the Internal Market, its proper functioning became the core of European industrial policy. Further harmonisation, common regulation and mutual recognition is regarded as necessary in order to overcome and prevent ever new varieties of market failures. The EU’s active competition policy, including state aid prohibition and antitrust policy, falls under the same category. Furthermore, transport and infrastructure measures have been initialised in order to overcome non-tariff trade barriers that distort the free movements of goods and services in Europe.

Horizontal industrial policy

Furthermore, after formal completion of the Internal Market, the European Union shifted towards a new approach in industrial policy, with optimal resource allocation and the provision of a favourable business environment as its central elements. While underlining the responsibility of private firms for their own business development, the European Commission proposed developing new measures and market institutions. With the Lisbon strategy, the horizontal approach to industry policy was systematised, resulting in a set of Communications that examined ways to adjust EU’s industry to global competition (COM(2004) 274 final; COM(2005) 24 final; COM(2005) 474 final).

These documents emphasise two priorities: 1.) The improvement of the regulatory framework, and 2.) synergies between different Community policies. While the first priority aims at the simplification and improvement of the regulations determining the environment for private enterprises, the second priority aims to maximise synergies between individual, interrelated Community policies. With regard to the latter, five main areas can be identified: 1.) The coordination of European and national R&D, innovation and training policies; 2.) The further optimisation of the functioning of the Internal Market; 3.) Putting cohesion policy at the service of industrial and structural change; 4.) The promotion of sustainability, particularly sustainable production; 5.) Facilitation of access to markets outside the EU.

Sectorial industrial policy

In the early 2000s, global competition, high unemployment rates and low growth rates caused a renewed interest in sectorial industrial policy. With China developing rapidly and the Eastern enlargement on the doorstep, fears of de-industrialisation and de-localisation were widespread. Moreover, economists pointed out the fact that horizontal measures taken by the EU had varying effects on individual sectors and industries in Europe. The European Commission therefore cautiously emphasised the need to tailor industrial policy to the needs of individual sectors/industries.

This type of industrial policy potentially works in two ways: Either it supports older, sunset industries (in an interventionist fashion), preventing structural adjustment in order to avoid high unemployment rates, or it supports new, sunrise firms and technologies that potentially lead to structural change and modernisation. Both forms imply the specific risks of state intervention. Whereas the first approach risks preserving timeworn industries and slowing down the modernisation process for the sake of short-term benefits, the latter could channel scarce resources into sectors, industries and technologies that may never generate added value.

Eco-innovation as the new leitmotif for sectorial industrial policy

The recent emphasis on support for individual sectors of Europe’s economy is rooted in the Europe 2020 strategy (European Commission, 2010a), which promotes the development of green industries in order to preserve and develop Europe’s world leadership in environmentally friendly production, goods, technologies and processes. Following the financial crisis of 2008, this eco-innovation concept found its way to the core of European policy, as the European Council proposed to jumpstart the economy with investments in infrastructure, green technology, energy efficiency and innovation to accelerate the transition to a knowledge-based, low-carbon society.

The overall concept is described in greater detail in the Eco-innovation Action Plan (COM(2011) 899 final), which states that growing environmental challenges and resource constraints worldwide will increase the demand for green technologies, products and services. According to the Commission, the EU’s environmental policy therefore is key to advance Europe’s traditionally resource intensive industry towards environmentally friendly production and eco-services. European policies that aim to decouple growth from energy use or emission-reduction commitments are therefore regarded as tools to stimulate innovation in fields that are believed to be the key markets of tomorrow’s resource-constrained, low-carbon world.

Energy as a tool for industrial policy

With the Commission’s latest publication on energy prices (COM(2014) 21), it is timely to return to the issue of how energy policy could better be aligned with industrial policy, while avoiding any compromise of the overarching eco-innovation strategy. Along the different dimensions of industrial policy elaborated above, the following sections therefore analyse European energy policy as a tool in support of European (energy intensive) industry.

Energy as framework condition for industrial policy

There is still insufficient competition on energy markets to drive energy costs down to a level that would provide energy intensive industries with cost effective and predictable prices. With energy markets still largely national, and free generation capacities distributed unevenly over Europe, one important element of energy policy should therefore be to build an EU-wide market based on physical interconnection between member states and wider regions. New interconnectors, and more effective use of existing infrastructure is needed to increase competition and the availability of generation capacity. Additionally, the deployment of sufficient generation capacity is crucial. The construction of new generation capacities also entail risks, however. Given the challenges for energy intensive industries to access sufficient generation capacity, it is questionable whether adequate risk sharing instruments are available.

In other words, the Internal Energy Market needs to assure investors about the recovery of their costs, hence guaranteeing enough investments in generation and transmission capacity and thereby providing more stable and lower prices, as well as increased security of supply for consumers. Several member states are implementing national policies to ensure generation adequacy at all times in order to align growing power demand with increasing supply. These policies, however, involve the typical risks of any state intervention in the operation of (energy) markets, which – if poorly designed – may exceed the given risk of market failure. In view of the finalisation of the Internal Electricity Market by the end of 2014 and the fact that there is no European approach to these capacity mechanisms, the European Commission therefore is investigating these policies.

Energy on the horizontal dimension of industrial policy

According to the latest Commission Communication on energy prices and costs in Europe (ref), high energy costs are related to a number of EU-specific market conditions. Regulatory inconsistencies should therefore be reduced. Legislation should not constitute a disincentive for investments in the energy sector. This would facilitate access to finance for required investments in generation capacity. The role of public authorities in this context hence would be to set a long-term vision for energy policy in order to reduce uncertainty for the regulatory environment and the energy mix choices, and to avoid erratic changes.

But as EU’s regulatory framework attempts to ensure that externalities are taken into account as far as possible, energy will probably remain more expensive in Europe than in other parts of the world. Yet it is global energy and resource prices that determine competitiveness. These do not take externalities into account. Further improvement is therefore needed regarding energy and resource efficiency. Advanced energy conservation technologies are needed, and any barrier within the single market to these emerging technologies needs to be removed. Standards are considered to be the key tool to facilitate the development of lead markets.

Energy and sectorial industrial policy

Energy intensive industries are not homogenous, however, and large variations exist in and between sectors. Not all plants apply the latest available technologies and therefore do not operate at their maximal potential. While there is little scope left for improvement within the boundaries of the available technologies for some enterprises, there still is potential for others. Tailor-made measures for individual industries and technologies (such as the SET-Plan and in the context of Horizon 2020) may be helpful in this regard, as a risk avoidance culture and lack of understanding of the opportunities of efficiency measures hamper innovation at some points, a problem which could be addressed by information programmes.

Moreover, front-runners should be rewarded through the stimulation of markets for their more sustainable ways of production. A range of instruments is conceivable, including, soft schemes such as logos and labels, and fiscal measures such as incentives, subsidies, state aid and purchasing practices of industries and government agencies that use these products or influence their use. Any direct or indirect state aid should however be restricted to cases of clear market failure, where subsidies prove to be the appropriate instrument for meeting a clearly defined common interest, and where it does not distort competition or harm the environment.

Specific measures and instruments for particular industries are also conceivable when it comes to direct energy prices. Current economic trends move the energy sector away from wholesale spot markets and towards fixed-price contracts. Long term contracts for a limited number of industries and partnerships between customers and energy suppliers, e.g. risk sharing, consortiums and price risk management options, have been identified as a means to secure adequate generation capacities. Among energy intensive industries, the demand for these long-term contracts is particularly high, but due to the volatile environment in the energy sector and concerns that such agreements might prevent the creation of a full and successful internal market, supply is limited. Commission guidance on the compatibility of long term supply contracts with competition law seems necessary in order to limit market distortions to an absolute minimum.

Energy and industry policy realigned: A chance for EUs eco-innovation strategy

The realignment of European energy policy to the needs of energy intensive industries in Europe seems to imply several risks for EU’s eco-innovation strategy, as it threatens to undermine the effort to take into account the externalities of energy consumption. Yet if policy makers adhere to several key principles of the European sustainability agenda, strategic development could be the possible outcome of the current debate about energy prices and the competitiveness of European industry. As discussed below, there are several options that should allow the realignment of energy policy to the needs of industry without compromising the overarching eco-innovation concept. Yet the realignment should be based on three key elements of the European sustainability concept: 1.) The development of an interconnected European energy system; 2.) The increase of renewables; 3.) And energy/resource efficiency. These three policy objectives should remain unchanged, yet selective adjustments are possible in order to foster the competitiveness of European industry.

The increase of physical interconnection in the still fragmented European energy market has been identified as a means to increase the competitiveness of industry in Europe. Existing gaps in the physical cross-border infrastructure result in weak competition, and therefore still constitute a major impediment for cost-effective manufacturing in Europe. Policy and decision makers should therefore be aware of the potential efficiency gains of a pan-European approach to energy policy. Investing in physical interconnection not only increases security of supply, but also leads to stronger competition, lower prices, less misallocation of generation capacity and a more efficient equilibrium in the energy sector in general. Moreover, this approach aligns well with the European eco-innovation strategy that provides investments in energy infrastructure. Since renewables can operate best in large and flexible systems, a wide network of energy transmission infrastructure would allow for an increase in the generation capacity of renewables.

Since new generation capacities are needed for the competitive operation of energy intensive industries, growing numbers of renewables can also be regarded as a potential key element for the realignment of energy policy to the needs of energy intensive industries, and even more so as their deployment results in lower wholesale prices. In order to bear the risks of the corresponding investments, risk-sharing instruments such as long-term, fixed price contracts and consortiums between suppliers and customers have been discussed as a means to secure adequate generation capacities. But despite strong demand from energy intensive industries, these were in short supply due to concerns over their compatibility with Internal Market rules, and due to strong uncertainties in the energy sector in general. Regulatory clarification on this seems to be necessary. Policy makers should therefore reduce uncertainty in the energy sector and the regulatory environment regarding supply contracts, while maintaining the European long-term aim to increase the use of renewables.

Energy and resource efficient technologies are considered another option. Efficiency measures could limit the energy bill despite rising prices, whereas recycling helps to retain as much energy intensive material as possible. The regulatory framework should therefore guarantee that the most advanced energy conservation and recycling technologies do not encounter barriers within the single market. Moreover, the use of these technologies should actively be encouraged by standards and minimum requirements on the one hand, and the development of lead markets through information, logos and fiscal as well as purchasing practices on the other. These measures should, moreover, reward front-runners through the stimulation of markets for their more sustainable ways of production. Any direct or indirect state aid should however be restricted to cases of market failures that delay the adoption of energy efficient technologies.

 

The 2007/2008 RES negotiations in perspective

Cluster analysis

of 123 actors active during the revision of the European framework for the promotion of renewable energies in the EU with negative, positive, and no positions (N/A) on the following topics:

1. Vertical dimension: Centralisation, Harmonisation, Effort sharing, Subsidiarity principle

2. Regulative dimension: European market for renewable energies, Tradeable certificates, Feed-in tariffs, National RES-markets

Pink bar = actors from the new EU member states; pink framework = umbrella organisation with big membership of EU memberstates disproportionate to population.
Pink bar = actors from the new EU member states; pink framework = umbrella organisation with membership of EU memberstates disproportionate to population

The 2007/2008 ETS negotiations in perspective

Cluster analysis

of 161 actors active during the revision of the European Emission Trading System, with negative, positive, and no positions (N/A) on the following topics:

1. Vertical dimension: Centralisation of the ETS, Harmonisation, Effort sharing, Subsidiarity principle

2. Regulative dimension: European market for emission certificates, Auctioning, Free allocation of emission certificates

Clusteranalyse 2009_29_EG vertikale, regulative Dimension [Ablehnung 2, neutral:keine Daten 1, Zustimmung 0]
Pink bar = actors from the new EU member states; pink framework = umbrella organisation with membership of EU memberstates disproportionate to population

Electricity generation capacity in Europe – The Brussels perspective (Abstract/Draft)

Author: Thomas Sattich

Abstract:

The term capacity is on everybody’s lips these days regarding the dynamics in the power sector. In order to guarantee security of supply, several EU member states are currently developing and implementing mechanisms to assure generation adequacy. These mechanisms involve the typical risks of state intervention in the operation of (electricity) markets. Moreover, regarding the common aim of finalising the European Internal Electricity Market, and hypothetically large generation overcapacities in Europe, it is doubtful whether these national mechanisms are truly a move in the right direction. The article develops an overview over the current debate and provides the reader with several statistics and figures on installed, available, and excess capacity. As an alternative to the current trend to national capacity mechanisms it suggests the shared use of generation capacity in the finalised Internal Electricity Market. Comparing the existing excess generation capacities with Net Transfer Capacities by means of statistical and network analysis, the article concludes that a European approach to generation capacity would result in a more economical allocation of generation capacities, but observes that the necessary cross-border infrastructure is not yet in place at many boundaries. The latter should therefore remain in the focus of European policy makers

1. Introduction

With the electricity sector in transition, Europe’s energy map is changing: While central power utilities – nuclear or fossil – go offline, decentralized renewables have been on the rise for a number of years now and represent the sector’s fastest growing segment. But the political decisions on the European and national level to promote electricity generation from renewable sources did not only lead to a sharp increase of wind and solar power (whose operation in the existing power system is demanding), but increased the need for subsequent adaptations of all levels of the power system – generation, transmission, consumption.

Among the necessary steps for a working energy transition, the need for flexible power plants stands out, as these provide the vital backup for the operation of wind and solar power. Since several member states are implementing national policies to ensure generation adequacy at all times, the term capacity is on everyone’s lips these days. These national policies do not only include the planning of new generation capacity, but the implementation of capacity mechanisms in order to ensure that the growing demand is actually met. These policies involve the typical risks of any state intervention in the operation of (electricity) markets, which – if poorly designed – may exceed the given risk of market failure.

In view of the finalisation of the Internal Electricity Market (IEM) by this year and the fact, that there is no European approach to these capacity mechanisms, the European Commission therefore currently is probing into these policies, pointing out that incompatible capacity mechanisms could distort trade, production and investment decisions in the IEM [1]. What generally is not so well-known is the fact, that capacity as such is not the problem: in theory there is plenty of.  In the European Union (including Switzerland and Norway) it amounts to 923,603 GW[2] (Fig. 1), 133,32 GW[3] (or 29.79 per cent[4]) of which may be considered as reserve capacity in the annual average. What therefore is needed is a European approach how to make the best use of it.

The article intends to broaden the discussions about capacity mechanisms by adding a European perspective. In order to do so, it assesses the existing generation capacities in Europe and evaluates whether more cross-border use of these would result in a more efficient European energy system. Based on this evaluation the article identifies measures to achieve a better economic mix in the European power sector with less overcapacities and more security of supply at load peaks. It concludes with a discussion  of the policy options which derive from this analysis.

2. Materials and methods

In order to estimate free generation capacities in Europe, several data sets are analysed by a variety of quantitative, statistical methods: Generation capacity data from Eurelectric (2010) provides a first overview over the installed and available capacities in the European Union; according to Ofgem data on availability factors it is assumed that 65.2 per cent of installed capacity is available at all times. Hourly load values (2010) from Entso-e serve for the identification of monthly peak demand in the EU member states; together, available capacity and peak load data allows to estimate the monthly and annual average reserve capacity (in per cent of peak load) in member states and the European Union. The annual average shows free reserve capacities in most – but not all – member states.

Peak load data from January 2010, an unusually cold winter month, serves as the starting point for a more detailed analysis of free reserve and missing capacities: By a comparison of free generation capacities in the EU member states and Net Transfer Capacities of grid interconnections (winter 2009/2010, Entso-e), the capability of the individual EU members is assessed to put their free generation capacities to use for power export, or, where there generation capacity is short, to cover the winter peak load by power import. The results show large variations between grid integration of EU member states and their capability to import/export electricity.

Some member states seem to stay below the necessary grid integration threshold for an effective cross-border use of generation capacities in Europe. Network analysis offers further information on generation capacities and grid interconnections: Computed with Gephi graph visualisation software, using the Force Atlas algorithm which simulates attraction between interconnected, and repulsion between non-interconnected knots, the analysis provides a detailed overview over the European power system. Free and needed generation capacity is represented, as well as the capability of making use of the existing infrastructure. The resulting graph shows imbalances in the European power system: Generation overcapacities and shortages on the one hand, bottlenecks in the power transmission infrastructure on the other.

3. The European perspective on capacity

If one takes the European perspective, scarcity of generation capacity is much less of an issue; in this view it is rather reserve and excess capacity on the national level, which is noticable; the same is true for the uneven distribution of these reserve generation capacities: While a margin of 15 per cent of reserve generation capacity is adequate,[5] many member states largely exceed that number; the respective countries hence exhibit large overcapacities, even at peak hours. Others however have difficulties to meet demand on all days of the year. But this latter group is a minority, as – overall – electricity generation capacity is anything but scarce (Fig. 2).

However, reserve capacity varies largely over the year (Fig. 3): During winter times, when demand is highest and climatic conditions are harshest, reserves fall slightly below the above mentioned 15 per cent margin. This hits the North particularly hard, as winters there are coldest and darkest, and hydropower is scarce due to freeze. More southern regions on the other hand reach the limit of their reserves during summer times, when air conditioning is in use and cooling water is scarce. Even though reserve capacity in the European Union is free at any times, some countries hence touch the limits of their available electricity generation units, therefore being in danger of winter or summer brownouts[6].

More cross-border electricity transmission capacity between member states could bring about a better economic mix: better interconnection would help making more efficient use of generation units in place and would therefore allow to reduce excess generation capacities on the one hand, and increase security of supply on the other. Yet the availability of interconnection capacity differs largely along European borders: According to Net Transfer Capacity values[7], many interconnectors allow only for limited cross-border use of existing reserve capacities  (Fig. 4). For instance, existing power transmission infrastructure allows to cover only 4.3 per cent of the existing French winter shortage of capacity by Spanish power plants, even though the Iberian Peninsula exhibits large generation overcapacities (Fig. 5).

Increasing transmission capacity at the boundaries with underdeveloped interconnectors would hence highly increase security of supply. Apart from that, more interconnection capacity would also result in a more efficient allocation of power generation units, as the IEM’s[8] market forces would reduce capital-intensive excess capacities to a minimum, thereby saving large financial means for other investments. But the state of today’s power transmission infrastructure in Europe rather prevents the coming into effect of market forces at many borders. Existing gaps in the infrastructure therefore largely subvert the overall aims of European policy makers behind the attempt to finalise the Internal Electricity Market by this year.

Increasing the ability to use existing overcapacities in a more efficient way by increasing transmission capacities therefore is not only vital for security of supply, but also from an economic point of view. Hence policy makers should refrain from purely national solutions regarding capacity markets, and follow an European approach which allows the shared use of existing overcapacities: In contrast to national capacity markets such a policy would not only help to have generation capacity available at every time, but also correspond with the aims of the Internal Electricity Market, thereby helping to avoid redundant investments. Regarding the stagnation of Europe’s economy there should be better use for the financial resources which are now bonded in existing overcapacities.

Beyond, a policy of deeper integration of the power system would also help a to reach the EU’s goals with regard to renewables in two different ways: on the one hand volatile renewables such as wind and solar need flexible backup and bigger power systems to follow the ups and downs in grid frequency caused by their operation; the bigger, more diverse and more flexible the surrounding Verbundsystem[9] is, the better the integration of these forms of electricity generation can work. On the other hand the low generator availability of wind and solar power (due to the varying weather conditions) could be counterbalanced by  generators in countries, which do not put these forms of electricity production to the centre of their national policies.

A European approach therefore would help to cover peak demand in times of low electricity generation from renewables and to avoid investments into expensive capacities which are offline most of the time. But apparently intermittent renewables and generation capacities free for renewables backup are allocated differently in Europe, and the on-going transformation of the electricity sector will cause further decommissioning and relocation of generation means (mainly to less populated areas), resulting in larger, more volatile power flows over larger distances. In order to guarantee failure-free operation of the power system, both, renewables and backup capacity, therefore need to get closer together.

4. Grid capacity

Yet as suggested above, bottlenecks in today’s cross-border power transmission infrastructure hamper the symbiotic interaction of different elements of Europe’s power system. According to ENTSO-E’s 2020 scenario[10], about 80 per cent of these bottlenecks are directly or indirectly related to the integration of renewable energies. Rather than building up purely national reserve capacities, policy makers therefore should become aware of the existing free generation capacities in Europe and need for new cross-border power lines as the necessary interconnection, which amount to over 100 transmission projects of European significance or 50.000 km of new power lines to be built over the following ten years, according to ENTSO-E.

With the 320.000 Volt power line between France and Spain one major link is – after years of negotiations – finally under construction. Another step would be to bring the Nordic power system closer to continental Europe; interconnections with Norway (such as NorNed between the Netherlands and Norway) and Sweden (such as the Baltic Cable between Germany and Sweden, or SwePol between Sweden and Poland) can be regarded as first steps in this direction, possibly followed by power lines between Norway and Great Britain. Geography is of course an issue in this regard, but with High-voltage direct current technology (HVDC) the relatively large distances are bridgeable.

In continental Europe, where distances are shorter, a better integration of the Eastern EU member states would be a promising step, as this group of countries is still somewhat isolated from the older EU members. Besides the better integration of the Baltic countries with Poland, Finland and Sweden, Bulgaria and Hungary should also increase their cross-border networks according to the European Commission.[11] Moreover, due to its weakly developed interconnectors and internal bottlenecks, Italy still constitutes a relatively isolated energy island, which demands better integration. And while Germany is pushing its Energiewende forward, France is holding on to its nuclear programme, which raises the question how wind and solar power on one bank of the Rhine, and mainly atomic energy on the other go together, and how these could be organised in a mutually beneficial manner.

5. Conclusions: Making shared use of generation capacity

Instead of seeing generation capacities and mechanism to ensure security of supply at all times as a purely national endeavour, policy makers in Europe should be aware of the fact that the power system has a growing pan-European dimension. Admittedly, the relevant markets and the task of security of supply still have a strong national basis; but the overall development does not only suggest a growing importance of the European level when it comes the power system, but – if Europeans manage to use their electricity generation capacity more efficiently and in a concerted manner – also promises to make free economic means for investments in other sectors.

Given the commissioning of new power transmission infrastructure according to existing plannings and the finalisation of the European Internal Electricity Market, existing overcapacities could be reduced and the build-up of – possibly unnecessary – new ones prevented. In view of the stagnation of Europe’s economy, such a truly European approach of making shared and therefore most economic use of existing and to be commissioned generation capacity is vital in order to prevent redundant investments in the energy sector – money Europeans could make better use of.

6. Policy Implications: Investing in Europe’s future

But of course he European approach would certainly not be cost free: On the contrary,  according to ENTSO-E the likely costs of the necessary grid development will amount to more than 104 billion EUR. Yet not only would the long-term result be beneficial, but be a welcome stimulus for Europe’s manufacturing base. Moreover, in return for a policy which makes the shared use of generation capacity the norm and underlines the dynamics of the Internal Electricity Market, Europe would not only get a power supply that is advanced, secure and low-carbon, but which would literally bind its citizens together in one system, thereby creating common interest and a sense of community.

A European approach to the use of generation capacity in one continental power system, to the transformation of the power sector, the future allocation of electricity generation and the relocation of generation units therefore could be one of the cornerstones of getting the European Union post-crisis. But as the example of the Nordic power system demonstrates, such an undertaking requires a high level of mutual trust, since a shared use of generation capacities implies the dependency on your neighbours. Unilateral steps in energy policy undermine this vital element for any progress in European energy policy, and should therefore be avoided.

References

Commission (2012). Commission Staff Working Document. Investment projects in energy infrastructure. SWD(2012) 367. Brussels: European Commission.

Commission (2012). Consultation Paper on generation adequacy, capacity mechanisms and the internal market in electricity. Brussels: European Commission.   http://ec.europa.eu/energy/gas_electricity/consultations/doc/20130207_generation_adequacy_consultation_document.pdf Accessed: 14 January 2014.

ENTSO-E (2009). NTC Values Winter 2009-2010. Brussels: European Network of Transmission System Operators. https://www.entsoe.eu/fileadmin/user_upload/_library/ntc/archive/NTC-Values-Winter-2009-2010.pdf Accessed: 14 January 2014.

ENTSO-E (2012). 10-Year Network Development Plan 2012. Brussels: European Network of Transmission System Operators.

Eurelectric (2012). Electricity capacity (Power Statistics 2012). Brussels: Eurelectric. http://www2.eurelectric.org/DocShareNoFrame/Docs/4/NLILLADCFCPHELGMEPEEBHOO51HLVTQLQOVCS919S6VB/Eurelectric/docs/DLS/Electricity_capacity_Power_Statistics_2012-2011-912-0003-03-E.xls Accessed: 14 January 2014.

ENTSO-E (2014). Hourly load values for all countries for a specific month (in MW). Brussels: European Network of Transmission System Operators. https://www.entsoe.eu/db-query/consumption/mhlv-all-countries-for-a-specific-month/ Accessed 14 January 2014.

Neuhoff, Karsten et al. (2013). Energiewende und Versorgungssicherheit: Deutschland braucht keinen Kapazitätsmarkt. Berlin: DIW (Wochenbericht Nr. 48).

OFGEM (2012). Electricity Capacity Assessment. Ofgem report to the government. London: OFGEM.

Wissenschaftlicher Beirat beim Bundesministerium für Wirtschaft und Technologie (2013). Langfristige Steuerung der Versorgungssicherheit im Stromsektor. Berlin: BMWi.  http://www.bmwi.de/BMWi/Redaktion/PDF/Publikationen/Studien/wissenschaftlicher-beirat-langfristige-steuerung-der-versorgungssicherheit-im-stromsektor,property=pdf,bereich=bmwi2012,sprache=de,rwb=true.pdf Accessed: 14. January 2014.


[1] See European Commission Consultation Paper on generation adequacy, capacity mechanisms and the internal market in electricity.

[2] In 2010; source: Eurelectric.

[3] Computed with a 65.2 per cent available capacity minus the monthly peak load of EU member states in 2010 (see Ofgem report, p. 27); 133,32 GW = roughly the installed capacity of IT and NL (133,125).

[4] Average free capacity of all member states (+ CH and NO) for 2010.

[6] Power shortage.

[7] Winter 2010, source: ENTSO-E.

[8] EU’s Internal Electricity Market.

[9] Interconnected system.

[10] Ten-Year Network Development Plan 2012, p. 56.

[11] See Commission Staff Working Document SWD(2012) 367.

Fig. 1: Installed capacity in the EU, NO and CH (2010, in GW)
Fig. 1: Installed capacity in the EU, NO and CH (2010, in GW)
Fig. 2: Average annual reserve capacity in the EU, NO and CH (2010; in per cent of peak load)
Fig. 2: Average annual reserve capacity in the EU, NO and CH (2010; in per cent of peak load)
Fig. 3: Accumulated reserve capacity of the EU, NO and CH in 2010 (in per cent of peak load; summer and winter lows in January, July and December)
Fig. 3: Accumulated reserve capacity of the EU, NO and CH in 2010 (in per cent of peak load; summer and winter lows in January, July and December)
Fig. 4: Reserve capacity (vertical, in per cent of national peak load) vs interconnection (horizontal, accumulated Net Transfer Capacity/reserve capacity) January 2010. Warning: Accumulated NTC values are hypothetical, this graph therefore is indicative, values may not be generalised!
Fig. 4: Reserve capacity (vertical, in per cent of national peak load) vs interconnection (horizontal, accumulated Net Transfer Capacity/reserve capacity) January 2010. Warning: Accumulated NTC values are hypothetical, this graph therefore is indicative, values may not be generalised!
Fig. 5: The grid and reserve generatin capacities (Net Transfer Capacity vs reserve capacity): knot size indicates unused (blue)/needed (pink) generation capacity (in GW), edges thickness indicates the ability of making use of existing reserve generation capacity for export via cross-border transmission infrastructure (blue) or compensating for missing generation capacity (pink)
Fig. 5: The grid and reserve generation capacities (Net Transfer Capacity vs reserve capacity): knot size indicates unused (blue)/needed (pink) generation capacity (in GW), edges thickness indicates the ability of making use of existing reserve generation capacity for export via cross-border transmission infrastructure (blue) or compensating for missing generation capacity (pink)