Dirty fights for Europe’s Blue Banana. Geoeconomics in European affairs

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Economically, the European Union (EU) is a giant: it sits at the heart of a geographical space of 80 countries that depend on it for trade and investment, and even align themselves with its currency; moreover, the EU has the world’s largest single market; most multinational companies, therefore, depend on access to the region – which means complying with EU standards. With its regulatory powers, the EU should, therefore, profit widely from globalization. However, overlapping crisis such as the financial turmoil starting in 2008, the refugee crisis of 2015, and Britain’s recent decision to leave the Union, put Europe’s internal coherence into question. Apparently, the national grip on various policy areas remains a weighty obstacle for the pooling of the EU’s ample resources behind common policies.

Hence, the question remains whether the European Union is capable of reaching the internal cohesion necessary to organize Europe’s economic space effectively. To evaluate this question, the concept of geoeconomics in intra-European affairs is an interesting one, as it combines two strands of political theory: First, geoeconomics are based on the complex notion of strong reciprocal intersections between the economic and the political sphere; as a consequence, geoeconomics assumes that (some, not all) governments are guided by weighty companies, while (some) others guide large companies for their own geoeconomic purposes. Second, geoeconomics is rooted in realist IR theory, thus encompassing organized actions by governments to change their external environment in general, or the policies and actions of other states in particular so as to achieve the objectives that have been set by policy makers.

Essentially, geoeconomics, therefore, means states leveraging power via economic means to get other states to do what they would not do otherwise.

This idea of nation-states deploying economic weapons in international power struggles, e.g. productivity, trade balances and foreign investment – is not new. However, throughout the twentieth century the balance of power among nations was typically viewed through the lens of geopolitics, and only recently geoeconomics has (re-) emerged. In (Western-) Europe after 1945 on the other hand, geopolitical thought has been largely replaced by integration theories which see Europe as having developed beyond the anarchy of the international system.

Yet given that the European Union does not represent a fully unified political entity, it is unlikely that geoeconomics, this form of power politics through economic means, is completely contained by the (nevertheless dense) system of supranational institutions on the EU-level. Depending on the specific policy area or section of the Internal Market that are concerned, at least parts of the toolbox of geoeconomic statecraft can therefore be assumed of being available to national policy makers in Europe. And where such instruments are available, it appears rather likely that they are also in use. Geoeconomically motivated statecraft should hence (still) play a (more or less strong) role in the relations between European countries.

Moreover, Member States’ reluctance to transfer powers to supranational bodies is growing, and the EU is increasingly characterized by policy co-ordination between MS (as opposed to deeper Europeanization). In other words, politics on the European level have become somewhat deracinated from the supranationalist dynamics and the legislative framework that characterized supranational governance beyond the nation-state.

Of course entities such as the EU will not being replaced by nation states exerting influence through economic instruments, and neither can Europeanization of politics and business (e.g. lobbying) be ignored. But EU-level policy making can be assumed to happen increasingly under the absence of the Community method, that is based on decision-making logic/procedures characterized by voluntary and informal policy coordination between national governments and national representatives with an increasingly strong national rational.

Open power politics may still be unthinkable in this kind of European framework, but the importance of regional integration as a strategy to gain power by increasing market size and economic opportunities is losing its longstanding attractiveness, while government-company relations are intact on the national level. The decreasing inclination of national governments to govern Europe collectively through the various forms of European governance, should therefore be paralleled with a growing importance of geoeconomics for the behavior of individual EU Members vis-à-vis their neighbors.

Consensus, contradiction, and conciliation of interests: The geo-economics of the Energy Union

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Authors:

Thomas Sattich

Daniel Scholten, Assistant Professor, Delft University of Technology

Inga Ydersbond, Ph.D fellow/student, University of Oslo

Tor Håkon Inderberg, Senior Research Fellow, Fridtjof Nansen Institute

Introduction

European Union energy policy calls for nothing less than a profound transformation of the EU’s energy system: by 2050 decarbonised electricity generation with 80-95 per cent fewer greenhouse gas emissions, increased use of renewables, more energy efficiency, a functioning energy market and increased security of supply are to be achieved. Different EU policies (e.g., EU climate and energy package for 2020) are intended to create the political and regulatory framework for this transformation. The sectorial dynamics resulting from these EU policies already affect the systems of electricity generation, transportation and storage in Europe, and the more effective the implementation of new measures the more the structure of Europe’s power system will change in the years to come. Recent initiatives such as the 2030 climate/energy package and the Energy Union are supposed to keep this dynamic up.

Setting new EU targets, however, is not necessarily the same as meeting them. The impact of EU energy policy is likely to have considerable geo-economic implications for individual member states: with increasing market integration come new competitors; coal and gas power plants face new renewable challengers domestically and abroad; and diversification towards new suppliers will result in new trade routes, entry points and infrastructure. Where these implications are at odds with powerful national interests, any member state may point to Article 194, 2 of the Lisbon Treaty and argue that the EU’s energy policy agenda interferes with its given right to determine the conditions for exploiting its energy resources, the choice between different energy sources and the general structure of its energy supply.

The implementation of new policy initiatives therefore involves intense negotiations to conciliate contradicting interests, something that traditionally has been far from easy to achieve. In areas where this process runs into difficulties, the transfer of sovereignty to the European level is usually to be found amongst the suggested solutions. Pooling sovereignty on a new level, however, does not automatically result in a consensus, i.e., conciliate contradicting interests. Rather than focussing on the right level of decision making, European policy makers need to face the (inconvenient truth of) geo-economical frictions within the Union that make it difficult to come to an arrangement. The reminder of this text explains these latter, more structural and sector-related challenges for European energy policy in more detail, and develops some concrete steps towards a political and regulatory framework necessary to overcome them.

Background

Despite some areas with well-integrated power systems (e.g., Scandinavia), European electricity supply still has a largely national (e.g., French), or sub-national (e.g., Bavarian) basis. This, however, does not imply that there is no integration: interconnections exist between most neighbouring countries and regions, and in some of these areas the power transmission infrastructure has significant exchange capacity (e.g., Germany and the Netherlands). In sum, the power system in Europe can be described as a heterogenic patchwork of semi-integrated and non-integrated regional, national and sub-national power systems. Power generation, transmission, distribution and consumption in Europe can thus only partly be described as European.

On various dimensions, EU energy policy aims at breaking the still prevalent national rationale in the energy sector, and at convincing actors that the exchange and trade of electricity within national boundaries is no longer an adequate option. Following these EU policies the system of power generation, transmission and consumption in Europe would take steps towards becoming a European one. The basic assumption behind these policies is that the structure of today’s European power system is sub-optimal and further integration development of the European grid infrastructure is expected to create economies of scale and utilise more of the technical capacity seen from a European level. EU energy policy is therefore expected to result in a more efficient power system with less overcapacity but greater security of supply and lower electricity prices. Moreover, it is widely believed that a deeper integrated system is crucial for the integration of more renewables.

Historically, the involvement of the European Community on the field of energy developed only recently. Due to long investment cycles and permitting processes, and interest structures in the power sectors, the European Union could only partly achieve stronger integration. The Energy Union and the 2030 climate and energy package therefore have to be understood as the latest steps of a continuous effort to accomplish deeper integration of power systems in Europe. The successful implementation of these latest initiatives may, however, run into difficulties, as they – just as earlier initiatives – imply a change in location of generation capacity beyond national borders, thereby altering the topography of the existing power system:

  • Market integration, which is the gradual creation of a Europe-wide market for electricity by means of grid integration and common market rules, implies that new competitors to domestic producers emerge, and that electricity companies which are not efficient enough to withstand competition in a European market will get into trouble, while other utilities (including foreign) will be able to strengthen their market position. Moreover, a European power market implies that the interconnection capacity (shortage) along borders will cease to protect domestic markets from foreign competition; a successful EU market integration policy thus increases the likeliness of generation capacity to migrate beyond national borders.
  • Promotion of renewables implies three important changes to the European power system: first, some countries are better qualified to become competitive producers of renewable energy than others. Countries may also offer better incentives for expanding capacity. Second, most new renewable generation capacity will be of an intermittent nature. Increasing the use of this form of power generation in one part of Europe therefore also implies potential growing balancing costs elsewhere. Third, renewable electricity implies distributed generation, and hence allows for a business model that brings together a larger number of smaller generation units dispersed over larger territories. National authorities may therefore decide to keep power systems decentralised in order to protect particular industries from the competitive pressures of European markets.
  • Supply diversification implies two distinct impacts on energy systems in Europe: First, diversification will lead to altered entry points to the European energy system, for example new LNG terminal capacity (e.g., in Central and Eastern Europe) some member states might perceive a risk of losing power generation to regions closer to new entry points, and are likely to oppose further steps in such a direction. Second, stimulating the construction of inter-member state transmission infrastructure is a main part of the EU’s supply diversification strategy, as outlined in the Energy Union communication. Yet increased interconnection capacity would not only increase the ability to secure and stabilise power supplies, but (as in the case of market integration) also contribute to shifts in power generation capacity.

State of play: a European catch-22

Each of the above-mentioned policies has distinct implications for the power sector of individual member states and thus the geo-economic balance in Europe. To protect their (national) economic assets, each member state will assess the impact of these elements of European energy policy on its national power sector; organised interests within the national energy sector on the other hand will analyse the impact of the three policies on their businesses and start to influence the bargaining position developed by their national governments. Implicitly or explicitly, both sides of the still-existing tight state-company relationships will define a position to be taken in EU-level negotiations towards other European governments and the diverse set of actors on the European level. The resulting frictions at the EU-level would be negligible if the balance between winners and losers was approximately equal across member states, and if the regulatory framework established a level playing field and net gains for all market players; yet, not every country or energy company is likely to benefit equally from the changes involved with new EU policies on the field of energy.

If implemented and effective, EU energy policy may increase dependency on the goodwill and the capability of (power and grid companies in) neighbouring states to uphold electricity supply in another. Europe is hence confronted with a ‘catch-22’: on the one hand are the advantages of European energy policy, but on the other the potentially painful adaptations of power generation, distribution and consumption imply risks for the national (power) industry. Existing or future instruments of EU energy policy will have to overcome reluctance to integrate power systems; where these instruments will be needed, and what form they will have to take, largely depends on  variations in member states’ benefits and costs involved with adapting the national energy sector to the ends of EU energy policy.

Taking stock of the various characteristics of national energy systems in Europe is imperative before new EU policies can be negotiated effectively. Moreover, strongly differing political positions on energy-related matters (e.g., renewables, shale gas and nuclear power) between member states need to be identified and systematically analysed. Both the analysis of national energy systems and policies will allow the identification of latent conflicts of interests between member states and options to settle them by means of existing or new instruments of European Union energy policy. Such an analysis of the state of play will ideally help in finding an EU-level energy policy framework capable of overcoming the geo-economic antagonisms that otherwise might constitute a major impediment for the negotiation and/or implementation of new measures and more integration, responding to the questions above. Currently, therefore, three questions need to be addressed:

1.)   Which countries, regions and companies are likely to benefit or lose from the energy transition that follows the EU agenda in the field of energy policy, and in what ways?

2.)   How will these geo-economic consequences affect patterns of consensus, cooperation and conflict between member states at the European level of energy policy?

3.)   Does the European Union have the necessary instruments at its disposal to overcome conflicts of interest, and if not, what instruments could be developed to achieve this?

Prospects

If policy makers at the European level are to successfully negotiate and implement the Energy Union and the 2030 climate and energy package, they need to find a way to balance the geo-economic frictions between member states caused by EU energy policy. A regulatory framework is needed that is capable of easing geo-economic concerns through transparent governance structures such as co-ownership of grid assets or co-decision making of grid operations, whether between two or more countries or at the EU level. Moreover, at the business level clear contractual agreements between parties regarding energy and cash flows are another means to avoid potential conflict and handle eventualities. Hence, addressing the root causes of conflicting interests is necessary in order to provide institutional means to handle outcomes of EU energy policy that otherwise could be labelled unfair.

The latest developments in the field of EU energy policy do, however, still resemble an eclectic process: the goals are clear, but as of today there is no clearly formulated and fundamental analysis of those geo-economic factors and interests which partly foster, and partly contradict, the implementation of new measures to reach these goals. Issues like the unfinished unbundling process (i.e., of long-established and poorly transparent structures of command and control) or the insecurities surrounding price formation in the renewables sector persist; as a result, the EU’s efforts to stimulate the construction of new (renewable) generation capacity and new interconnectors between member states simultaneously fall short of the possible. Hence, before discussing new EU policies, the will to address those factors that contradict the goals of EU energy policy is imperative. Only then can a fitting framework of measures, instruments and regulations be found that conciliates interests that do not consent.

Thus, in order to reach to reach the goals of EU 2030 and the Energy Union, the will to openly identify and address economic antagonisms caused by EU energy policy is needed. Addressing the three above-mentioned questions is crucial in this regard; however, they have not yet been discussed in full depth by European policy makers and EU-level analysts. In order to come to a binding political agreement, these questions should hence serve as the basis of a systematic and transparent exploration of potential benefits and losses for individual member states resulting from today’s EU energy policy. Only on the basis of such a discussion can the necessary instruments to conciliate various multi-dimensional and more-or-less contradictory private and national interests be identified. Therefore, a high-level group should be initiated that brings together representatives of governments and the energy sector to openly discuss these issues.

Energy Transition in China and the European Union: Plan vs. Incentives?

An event wrap-up with the speakers

Authors:

Dr. Thomas Sattich

Dr. Steffi Weil

Duncan Freeman

Energy drives economic development. But it is a scarce and thus contested resource. In the struggle for secure energy supplies renewables appear to have become a strategic element, because every country or region, including those with few conventional energy sources, has access to at least some form and amount of renewable energy sources. Renewables thus could be a potential game changer in the struggle for energy resources. Yet some countries are better qualified to become competitive producers than others, because renewable energy sources are denser at certain locations, and the technological and economical capabilities for their exploitation differ.

November 8, 2014, a Policy Forum at the Institute for European Studies explored the role of renewables in the struggle for secure energy supply, and set out to compare the approach of two leading powers in their development: China and the European Union. Renewables are key political issues in the two regions, and both have developed and implemented policies to encourage the use of renewables, hoping that this form of energy will reduce import dependency on fossil fuels and the environmental dangers resulting from their use. The year 2020 is an important landmark in this regard: While policy makers in China recently opened the process towards the next five year plan (2016-2020), the European Union set itself the goal to increase renewables to 20 per cent of energy use by that point.

General knowledge about the topic stops here, and a structured comparison of the issue is largely missing. It is therefore unclear how similar or different the two policies are, and what both regions could learn from each other. In view of the differences between the socio-economic systems of China and the EU, it is, however, evident that the approach chosen for this ‘energy transition’ will differ. It is thus time to compare and discuss the similarities and differences between the approach China and the EU chose for the transformation of their energy sector towards the stronger use of renewables. We therefore set up this event to discuss and compare the approach and the mechanisms both regions chose for the promotion of renewable forms of energy in the energy mix.

In order to contribute to the discussion, the Policy Forum looked at the following topics:

·      What support regimes for renewables have been adopted, and why?

·      What is the role of public authorities on different levels of the political system?

·      What role do leading companies play, and what is their relationship with the government?

·      Are there preferences for certain forms of renewables, and why?

·      Do the targets and outcomes differ, and why do they differ?

·      What are the domestic and global impacts of both policies?

Three renowned experts presented their views on the topic:

·      Dr. Dörthe Fouquet, Energy Lawyer and partner at Becker Büttner Held, and member of a number of umbrella organizations of the renewable energy industry.

·      Dr. Steffi Weil, Assistant Professor and Head of China relations at Vesalius college.

·      Duncan Freeman, Senior Research Fellow at the Brussels Institute for Contemporary China Studies.

Renewables in Europe

As a point of reference for the discussion, Dr. Fouquet’s provided an overview of the complex set of support regimes for renewables in the European Union: Individual member states have different renewable energy potentials and operate different support schemes at the national level. In this environment the European Union developed a framework to coordinate (not harmonise) national efforts with a common EU framework. The most important element in this regard is the Renewable Energy Directive 2009/28/EC. This Directive includes common rules for different levels of the political system (national, cooperation between member states, the European Union, and cooperation with third countries) and achieves a considerable level of coordination, yet it also gives member states a relatively broad leeway in their approach to renewables. Each member state can hence still decide what renewables to support (e.g. wind power in Portugal, biomass in Sweden, hydropower in Austria), and choose support mechanisms.

Directive 2009/28/EC provides a binding overall EU target of 20 per cent renewable energy in final consumption (previous Directive: non-binding), and translates this target into binding national targets. National Renewable Action Plans which list pathways and instruments to reach targets are to be submitted; the European Commission considers these plans as binding and needs to be informed about changes. Moreover there are reporting and monitoring obligations in place in order to control progress. However, the Directive allows member states to design effective national measures for target compliance, which in turn enables member states to control the effect and costs of their national support schemes. The European Commission on the other hand has little means for “enforcement”. Recently the European Court of Justice confirmed this level of discretion (Ålands  Vindkraft and Essent case).

The Directive also allows member states to determine if and to what extent their national support schemes apply to energy from renewable sources produced in other member states and cooperation mechanisms provided for in the Directive. These flexibility mechanisms include statistical transfer between member states (which do not include the physical transfer of energy), and joint renewable energy projects and support schemes between member states. In the latter case coordination with the European Commission is necessary. Joint projects with non-EU members (e.g. pilot projects in Morocco) are equally possible; in this case it needs to be assured that the energy produced reaches the territory of the European Union.

In the member states renewable energy law is made through the parliamentary legislative process, which implies a strong role at the national level. In some cases such as Belgium or Sweden there are, however, differences within different regions as regards for example administrative procedures. Moreover, the involvement of ministries and agencies in the preparation of regulations, and the role of energy regulators varies between member states. When it comes to the energy sector, one can observe that 80 per cent of renewables deployment is in the hands of independent power producers (e.g. farms), using local resources to meet local energy demand. These local energy companies are small and widely distributed. Regardless of the fact that bigger projects such as offshore wind farms are in the hands of big utilities, renewables thus counter the historical trend to a centralised energy industry and (together and parallel with unbundling, i.e. the separation of the power grid and power supply) brought new competition into energy markets.

Is this framework suited for reaching the EU’s goals to increase the use of renewables in the energy sector? Most important in this regard is the confidence of investors to regain their investments. This confidence seems, however, to have received a serious blow in recent years in several EU member countries such as Spain. Six EU members therefore are not on track with their National Renewable Action Plans. With regard to the indicative targets (2011/12) for the different forms of renewable energy it is however noticeable, that many countries overachieved with regard to electricity and heating/cooling, whereas most countries underachieved with regard to renewables in the transport sector. In total the European Union therefore exceeded its 2012 goal of 12.87 overall share of renewables by 1.2 per cent points (14.07 per cent).

Renewables in China

With regard to Chines policy on renewables Dr. Steffi Weil presented some first insights on the politico-economic complex of the People’s Republic of China. Obviously there are differences with the European Union. But whereas conventional wisdom suggests that China’s policy-making process is a monolithic top-down process, quite the contrary can be observed in China’s political system. China’s policy procedure is open to a number of actors, and policy formulation and implementation differs depending on type of legislation. Experimental, decentralized policy making for example describes a process in which the Party centre asks local officials to experiment with new ways of problem solving. Subsequently, if the policy proves positive, it is implemented nationwide. Examples of this can be found in China’s gradual market opening, the promotion of private business, state-sector restructuring and stock market regulation.

But the Chinese Communist Party (CCP) relies not only on an experimental policy-making procedure. Instead governmental institutions function as policy venues. As such the CCP, as policyholder, assigns much of its policy making power to government at lower levels. To use economic terms, the relationship between the Party and governments can be described as a principal-agent relationship with the Party as the principal and the government functioning as the agent. As a result the Party and the government engage in political bargaining not only between the political centre and the next lower levels, but also between the party and the government on multiple political layers.

The ‘Opening Up the West’ policy is one example of how actors at central, provincial and local levels bargained for their goals. Other examples are China’s gradual market opening, the promotion of private business, and state-sector restructuring and stock market regulation. The policy outcome embraced multiple interests of departmental and regional institutions. Provincial interests were conveyed by personal representatives in the central leadership and through institutionalized channels such as national working conferences, the National People’s Congress as well as the Chinese Political Consultative Conference.  China’s political power is thus fragmented, resulting in a decision making process in which the policy initiative rests upon the political centre, yet for some legislation or regulation the implementation is completed at the lower levels. To be more precise, China is organized into provinces, autonomous regions and municipalities.

The administrative levels are further diversified. Rather than being subordinate directly to the centre, each administrative levels receive orders form the next level above meaning that provinces and autonomous regions can give orders to the next lower level, the autonomous prefectures, followed by counties, autonomous counties and cities. As a consequence, national laws or directives are broadly drafted at the central level and the regional and local levels have some degree of freedom to implement them and thus levels below the party centre hold a certain degree of policy-making power. Policy-makers hence pursue their own goals mainly motivated by economic incentives.

All of these motives lead to competition and conflict among different levels of government, which in turn provides entry points for political bargaining. As a result outside actors are able to engage in the policy-making process and shape results on their behalf. However political fragmentation also enables the local officials at such non-institutionalized entry points to shape public policy together with actors such as interest groups, foreign enterprises and capitalists engaging in the process in their attempt to influence policy. It is, however, crucial to note that political bargaining in China is not observable in the open. Prime targets for Chinese actors to exert influence over are governmental officials in the executive branch rather than the legislative branch.

A great number of Chinese associations prefer face-to-face contact with local governments while the majority of those have never interacted with the National People’s Congress or Chinese People’s Political Consultative Conference. Rather than openly confronting the government, business and government mutually empower each other (Shue, 1994). Thus instead of opposing the government there is a dialectical relationship between the government and the entrepreneurs. Chinese entrepreneurs are closely intertwined within party structures. Contrary to Chinese actors, Western capital aims to influence Chinese policies with Western lobbying tools such as letter writing, policy papers, white and position papers, personal meetings, events and grassroots mobilization.  Besides non-institutionalized entry points, China’s policy procedure also includes institutionalized access in form of non-binding public hearings or calls for comments.

Based on this institutional framework, the People’s Republic of China developed a programme to foster the use of renewables in the energy sector. As Mr Duncan Freeman explained during his presentation, the Chinese government has supported the renewable sector since the 1980s. In the early days, much of this support went to R&D and experimental demonstration projects, but from the late 1990s there has been a shift to industrialization and deployment of renewables. The 2006 Renewable Energy Law is central for the latest developments, as it set out the broad principles for development of the sector in China and at least in theory gave them legal force. It requires that utilities purchase all electricity generated from renewable sources, pay the full price for energy from renewable sources, and offer a discount to consumers. Moreover, the Medium- and Long-Term Renewable Energy Development Plan of 2007 set out targets for renewable energy, and also outlined how they were to be achieved. It required, for instance, that bigger power generating companies must have 3 per cent of their generating capacity from non-hydro renewables by 2010, and 8 per cent by 2020.

As a result China’s renewable sector has expanded enormously in recent years: China is now both a major producer of solar panels and also wind turbines. But not only the production of equipment, also the installation of power generation facilities has expanded quickly during the past decade, and actually exceeded installation targets. Yet while China’s market for wind power has been the largest in the world for a number of years (in 2013 China accounted for 45.6 per cent of new installations, followed by Germany 9.2 per cent), solar PV market in China (30 per cent of net installations in 2013, Japan 18 per cent, US 13 per cent, Germany 9 per cent) has been insignificant until recently.

Thus, although central government policy in theory supported all renewables, in reality this was not the case. The differences between wind power and photovoltaic in China can largely be explained by government policy at the central and local level: The Chinese government made a decision to give preference to wind over solar PV power on the grounds that it was more technologically mature and had greater potential for large-scale application. This resulted in strong central government support to the wind power sector for both supply (manufacturing and deployment) and demand. The Wind Power Generating Equipment Industrialization Special Fund, for example, provided for a subsidy of RMB 600 per kilowatt for the first 50 units of new turbines with a capacity of 1.5 MW or more (only available for Chinese –owned or controlled companies). Moreover a fund to provide financial support for off-shore wind, and a Feed-in Tariff (FiT) system were created for wind power. The latter divided China into several sub-regions, with pricing depending on wind resources in the respective areas. At the same time, the central government provided large subsidies for wind power installation and generation. These measures were so effective, that public authorities like the NDRC had to control entry to the sector in order to limit overcapacity in both manufacturing and also installations.

The solar PV sector on the other hand received no or only very limited support from the central government for manufacturing and deployment, and insignificant support on the demand side until 2011. National programmes such as the Golden Sun Programme for demonstration projects had only small impact in creating demand in China. However, in absence of central government policies to support solar PV, many local governments stepped in to provide support to create local solar PV manufacturing industries. The result of this was creation of a huge manufacturing industry, but very small domestic demand. Thus – differently from what is generally expected – China developed a solar PV industry that dominates global markets without much central steering. Since 2011 there is, however, a Feed-in Tariff system in place for solar PV which set at RMB 1.15 per kilowatt of electricity, and in 2012 the support for solar farm demonstration projects has been increased. Moreover, measures to expand the domestic market through subsidies and huge increases in targets for domestic installation of solar PV have been introduced. More recently the share of support for solar PV in the Renewable Energy Fund which provides subsidies to installation and generation in the sector rose to 8 per cent in 2012 and 16 per cent in 2013.

Conclusions

The European regime to support the use of renewable energies is characterised by a high degree of flexibility for the individual member states. Even though there are examples for bilateral cooperation, measures to support renewables are hence largely formulated and implemented on the national level (that is mostly through national legislation). The European level of the political system provides a coordinative framework and common (European) targets (as well as individual goals for each member states); yet Member states control the effect and costs of their individual national support schemes, and the European level has little leverage for “enforcement”.

That said, it has to be noted that in contrast to policy-making in the EU, China’s policy-making system remains a top-down process, with permanent exchange between political institutions and the party centre. Moreover, unlike in Europe, where conflict within society is the primary assumption in shaping public policy, in China, at least in theory, conflict is not seen as being an inherent part of society let alone policy. As such, policy debates are often held behind closed doors and society is informed only after a consensus is reached. Due to the fact that conflict is perceived as negative, issues are rarely contested in the open. For some policy issues, open discussion is taboo. While economic issues may be debated more publicly, sensitive national security issues never are. This weakens awareness of possible other viewpoints on the issue at hand.

But beyond the centralized policy making process China has – and that may come as a  surprise for non-experts – a number of ways to formulate and implement policies: In the experimental procedure, policies must have proven positive results before being implemented nation-wide. At times, the CCP assigns much of its policy-work to the government, leaving ministries and governmental officials with significant policy-making power. In addition, China’s political power is fragmented allowing multiple actors to shape public policy. Hence, even though China’s policy-making process remains distinctly centralist in theory, there are possibilities to engage with actors at different political levels. Moreover, even national measures allow for local variation,  as in the case of Feed-in Tariffs for wind power, which have a regional dimension reflecting the varying conditions of this big country.

The policies China adopted at the different levels of the political system resulted in very different outcomes, one of which was the creation of market for wind power in China, but not for solar PV. Unintended consequences such as overcapacity in both manufacturing and generating have also frequently resulted from policy supports for renewables in China. Comparable to the European approach to the support of renewables, and despite the traditionally strong top-down logic of the Chinese system, a complex set of central and local government policies is behind these results. The interaction of different levels of government and management is hence not only key to understanding the domestic development of the renewable sector in Europe, but also in China. Given the international impacts of Chinese and European policies on the field of renewables, and the limited knowledge about Chinese “multi-level governance”, a better understanding of the regional-national (China) and the national-European (EU) complex is thus imperative. Linked to this question is the cooperation with third parties, for example in cross-border grid integration projects, which – according to the discussion during the Policy Forum – seem to have huge potential in Europe and Asia alike.

 

 

EU policy to develop the European power grid: From market integration to decarbonisation

Author: Thomas Sattich

Large scale integration of intermittent renewables beyond today’s levels requires the consecutive integration and common management of the still largely national power pools (Battaglini et al. 2009). So as to assure that decarbonisation of Europe’s power sector can continue, the EU is hence confronted with the challenge of implementing a policy to develop and integrate the European grid. The discussion of such a European approach to the power grid is older than one might think: Already since the 1920s a dualism can be observed between a top-down, supranational approach, and a gradual, bottom-up approach to the development of the cross-border power transmission infrastructure (Lagendijk 2008:80ff).

So far, however, the economic rational of utilities and the national perspective of policy makers obstructed initiatives to Europeanise grid development; in post-World War II Europe the gradual, case-to-case approach therefore largely prevailed over the idea of a top-down implemented European grid (Van der Vleuten&Lagendijk 2010:2045).

From the integration of power markets…

Only with the Single Market Program of the 1980s the European Community started to take a more assertive stance on energy related issues, and pursued a policy aiming at deeper integration of power markets and the development of a common carrier system for electricity (Commission 1988:72). One landmark in this regard is the Commission Working Document of 1988 (Commission 1988) which proposed to declare certain large-scale energy infrastructures as being of Community interest and hence entitled for special treatment. Since then a number of policy initiatives aimed at the development of a power transmission infrastructure that is functionally adequate for the creation/finalisation of a pan-European electricity market.

Understood as support for renewables, electricity transmission infrastructure had, however, only little prominence during the first years of EU involvement with this issue (Commission 2008:8; Lauber 2005:4). With the EU’s growing ambitions in climate policy and the growing numbers of renewables in the system, the question, how to reconcile the community’s environmental policy with the goal of creating an Internal Energy Market, and how the increase of renewables affects that market, became, however, a central one (Glachant et al. 2013:68-70).

…to the integration of renewables

Towards the end of the 1990s the Commission addressed this problem with a number of papers (Commission 1997, Commission 1998). These concluded that power transmission capacity was indeed insufficient (Eikeland 2011:20); the existing gaps were, however, still mainly regarded as barriers to cross country trade of electricity, not the integration of renewables. Given the low penetration of the power system with intermittent renewables at that time, and the generally low targets for their increase, the reason for this lack of technical analysis is obvious: Mechanisms for the support of renewables were perceived as support for the increase of RES generation capacity.

The environment, in which these renewables operate, was, however, largely neglected. Understood as the necessary prerequisite for the operation of renewables, power grids therefore had only low priority (see Fouquet&Johansson 2008; Haas et al. 2004). Only with regard to the most obvious cases such as far-off wind parks, these papers point out the need for the adaptation of power networks to the particularities of renewables and the additional costs for the installation and/or operation of renewables at specific sites (Commission 1997:29). Where the relation of electricity networks and renewables was discussed, it was mainly the free mandatory access to the grid (Commission 1998:8) at fair prices (Commission 1997:14).

Since the European Union set out for 12 per cent of electricity from renewable sources by 2010 (EWIS 2010:146), the promotion of RES has, however, gradually moved up the European agenda (Nilson, Nilsson & Ericsson 2009:4454): The existing gap between the importance of the power grid for the operation of renewables on the one hand, and the focus on economic support mechanisms for new (renewable) generation capacity on the other, started therefore to close in the following years (Commission 2000:48), and questions concerning the electricity transmission infrastructure such as the conditions for grid access, grid reinforcement, and charges to RES generators for use of networks obtained more attention (Jansen&Uyterlinde 2004:93):

A technology-specific approach for the support of renewables in general (Boasson&Wettestad 2010), and energy transmission infrastructure in particular, became hence an important element for the discussions how to integrate renewables (Jansen&Uyterlinde 2004:95). The Commission Green Paper on energy security from the year 2000 is a good example for this new emphasis. So are the two Directives 2001/77/EC and 2009/28/EC on the promotion of renewable energies, which clearly reflect the growing importance of the grid issue for renewables, and provide measures to improve the situation.

Finally, the Europe 2020 strategy (European Council 2010) and the Energy Roadmap 2050 (Commission 2011b) moved the focus of EU energy policy further towards sustainability and decarbonisation. In order to evaluate, whether these latest developments of EU energy policy and on electricity transmission infrastructure evolved to a consistent body of instruments which is suited to reach the decarbonisation of the power sector, a closer look at particular programmes is necessary.

EU instruments to develop the European electricity grid

Author: Thomas Sattich

European ambitions on the field of sustainability grew considerably during the last 15 years, finally culminating in the plan for (nearly) full decarbonisation. The development of energy systems technology did, however, not keep up with the growing ambitions. Neither did the deployment of new electricity transmission infrastructure in Europe. But no decarbonisation without the necessary electricity transmission infrastructure. Thus, in order to match technological developments and the deployment of new infrastructure with the ambitious sustainability and decarbonisation targets, the EU implemented a number of programmes to accelerate grid development.

In order to determine whether these measures are sufficient to achieve decarbonisation, this post describes and analyses in more detail what policies the EU implemented: Programmes which aim at better framework conditions for universal grid development, and instruments which aim at the development of specific parts of the European network are treated separately in this analysis. In order to identify gaps between what the sector needs to achieve decarbonisation, and the given EU policy, the overall approach of the European Union towards universal and specific grid development is discussed.

Instruments for universal grid development

In 20th century Europe vertically integrated power companies conducted the planning of the transmission infrastructure. The market position of these companies widely converged with the power transmission infrastructure. In an attempt to increase competition and to stimulate grid and market development, the European Commission therefore proposed full unbundling of network and generation/supply interests (Commission 2007c:6); this would guarantee the independence of transmission systems operators (Eikeland 2011:32), and hence provide new stimuli for grid development in a European, not national or regional context.

More cross-border interconnections and the integration of electricity markets were supposed to be the result (Von Koppenfels 2010:84). Unlike the proposal, the third legislative package for an internal (gas and) electricity market does, however, not provide full ownership unbundling, but offers different models which do not necessarily change the ownership, but only the management and supervision of transmission networks (Eikeland 2011:24-25). Whether these provisions indeed ensure the independence of transmission networks from supply interests remains hence to be seen (Dupont&Primova 2011:11; Helm 2014:30).

Yet unbundling is not the only European policy to develop favourable framework conditions for the development of the power grid: Several EU programmes aim at the exploration of new energy technologies, their market-maturity, and the stimulation of their (potential) markets. Together, these programmes can roughly be categorized in two groups: Top-down demand pull instruments that pull industry towards investments in innovative products, and bottom-up technology push instruments which push European industry towards European targets (Sattich 2014a).

Top-down demand pull

The two Directives on the promotion of renewables are important elements of European policy to stimulate demand for new infrastructure, because they provide that new installations producing electricity from renewable energy sources (should) have priority status in the power system. The passage from the 2001 Directive to the one from 2009 marks an important step in this regard: Whereas the obligation of TSOs to grant RES priority access and priority dispatch remained facultative in Directive 2001/77/EC (Article 7(1); EWIS 2010:146), priority access, dispatch, transmission and distribution became mandatory in Directive 2009/28/EC (Futterlieb&Mohns 2009:24).

The RES Directive from 2009 hence marks a veritable milestone regarding the legally binding commitment for grid development. Regarding the financing of infrastructure projects, the two RES Directives are equally important: Directive 2001/77/EC called member states to implement cost sharing mechanisms for the necessary grid reinforcements, including a mechanism that requires transmission system operators to bear part of the adaptation costs (Directive 2001/77/EC:Article 7(2); Jansen&Uyterlinde 2004:99); the same applies for Directive 2009/28/EC which provides that Member States shall require TSOs to ensure that appropriate grid measures to minimise the curtailment of electricity produced from renewable energy sources are taken (EWIS 2010:154).

Bottom-up technology push

With EU energy technology development programmes such as Intelligent Energy Europe I (IEE 2003-2006), II (IEE 2007-2013), and Horizon 2020 Secure, Clean and Efficient Energy (2014-2020), the European Union also attempts to foster the development of new energy technologies. Main focus of these programmes lies on (market) barriers that hamper the development of new and renewable energy technology, and the transition from demonstration projects to marketing (Decision No 1230/2003/EC). With a multiannual budget of originally 200 million EUR, the Intelligent Energy programme was, however, rather small and supported only a limited number of grid projects .

Yet, in view of the issue’s growing importance, the European Union stepped up its energy technology policy over the past years: Horizon 2020 disposes over an increased budget for energy related projects, and with the Institute for Energy and Transport the European Union also provides its own R&D infrastructure. Moreover, with the Strategic Energy Technology Plan (SET-Plan, see Commission 2006b) the European Union brought the two until then isolated elements of its energy technology policy – market up-take measures and support for basic research – together in one encompassing programme (Commission 2006a:5).

General aim of this SET-Plan is to reinforce international cooperation and the coherence between national, European and international energy research (Commission 2007d:9-11). The European Electricity Grid Initiative is one of the programme’s subcomponents and aims at the creation of an integrated R&D and demonstration network, so as to develop, demonstrate and validate the technologies to enable the transmission and distribution of up to 35 per cent of electricity from renewable sources by 2020, and to make electricity production completely decarbonised by 2050 (European Union 2010:4).

With an estimated multiannual budget of 2 billion EUR, the Grid Initiative is considerably bigger than other European instruments on the field. Due to a lack of coordination and a general lack of practical arrangements to foster interaction between the different research areas, the implementation of the SET-Plan remained, however, below expectations. Missing coordination between the Grid Initiatives and other areas seems to be particularly puzzling (Commission 2013b:8-9). Given these shortcomings, better coordination, financing and commitment of member states is under discussion.

Instruments for specific grid development

With the Priority Interconnection Plan (PIP) of 2007 the European Union reaffirmed its focus on the development of particular parts of the grid (Commission 2007b). This Plan sets out five priorities:

1) Identifying the most significant missing infrastructure and ensuring pan-European political support to fill the gaps;
2) appointing four European co-ordinators to pursue the most important priority projects;
3) agreeing a maximum of 5 years within which planning and approval procedures must be completed for projects of European interest;
4) examining the need to increase funding for European networks;
5) establishing a new Community mechanism and structure for co-ordinated network planning.

Debates about the need for new cross-border electricity exchange capacity in specific bottlenecks of the European grid, are, however, much older than the PIP: First policy papers addressed the issue already in 1988 (Commission 1988:28), and shortly after the signature of the Maastricht Treaty a limited number high priority trans-European projects have been endorsed and asked for rapid implementation (European Council 1994). It remained, however, unclear, how investments in these projects could be stimulated. Thus a debate began about the best lever for public intervention (see Commission 1993:79; and European Council 1994:27), and about the relative importance of two main obstacles for private sector investments in energy networks: Administrative constrains and market conditions.

In order to create favourable framework conditions for grid development in selected parts of the European network, member states agreed on a mix of measures on both issues (Decision No 1254/96/EC). This trans-European energy network programme (TEN-E) has a strong focus on market integration; cross-border power interconnection projects that contribute to the integration of renewables, and the transmission of the generated electricity to major consumption centres and storage sites are, however, also included (Regulation No 347/2013:Article 4). Moreover, TEN-E supports projects to integrate far-off and/or intermittent renewables (Regulation No 347/2013:Annex IV). The priority status for certain infrastructure projects hence does not only apply for interconnection projects necessary for market integration; projects necessary for the integration of renewables are equally entitled for TEN-E support.

TEN-E goes well beyond instruments such as market liberalisation and competition policy which to that date characterised the toolkit of European energy policy: Drawing on Lisbon treaty article 194 which requires member-states to interconnect energy networks, the EU concluded that new support measures for grid development were needed; the TEN-E programme hence does not only include a list of four Priority Electricity Corridors in different parts of the European continent (Regulation No 347/2013:Annex I), but provides particular projects in these corridors with priority status that entitles them for administrative and financial support.

Top-down administrative and market measures

In order to ensure rapid deployment of specific projects, the TEN-E guidelines aim at the reduction of administrative burdens (Justice and Environment 2013:2). One of the starting points in this regard is permit granting: In order to guarantee a process of three years and six months only (Regulation No 347/2013:Article 10(2)), member states are obliged to establish a competent authority responsible for all permit granting processes in a so called one-stop shop (Regulation No 347/2013:Article 8(1)). Moreover, projects of common interest shall be provided with the highest national significance (Regulation No 347/2013:Article 7).

In order to facilitate and speed up coordination between the various parties involved in the implementation of particular projects, the programme guidelines also provide for close cooperation between all relevant groups such as member states, national regulatory authorities, transmission systems operators, the European Commission etc. in regional groups (Justice and Environment 2013:3). Where a project of European interest encounters significant delays or implementation difficulties, the intervention of European coordinators is possible (Regulation No 347/2013:Article 6).

As an additional measure selected TEN-E projects are also entitled for financial support by the European Union (Meeus, Purchala & Belmans 2005:31): For projects which are not viable under the existing regulatory framework and the given market conditions, the TEN-E programme provides a yearly budget of 25 million EUR for tailor-made support in form of grants and financial instruments (Regulation No 347/2013:Article 14(1)), 20 million EUR of which are generally intended for the co-financing of feasibility studies. In this regard it is noteworthy that the TEN-E is increasingly guided by the idea that only projects of ‘European interest’ should get public support (Agt 2011:29).

Bottom-up market regulation

Such financial assistance is, however, exceptional and may not lead to any distortion of competition: According to the TEN-E guidelines market principles have the priority. In fact, TEN-E attempts to limit distortion of competition to a minimum; instead it focuses on regulatory disincentives to invest (THINK 2011:32-33), and the question, how to so organise the market for grid investments that investors can have confidence in the recovery of their costs (Helm 2014:31). Joint system development planning and the allocation of costs and risks of increasing cross-border interconnection are the answers of TEN-E (Commission 2007a:17).

The programme guidelines hence provide the development of a harmonised energy-system wide cost-benefit analysis as the basis for the allocation of investment costs related to particular projects that are not covered by tariffs for network users (Regulation No 347/2013:Article 12(1)). Moreover, where the investment in new cross-border interconnectors involves high primary risks (e.g. non-use and future) such that the investment would not take place, a number of (time-limited) exemptions provide project owners with a certain independence from the regulatory framework (Regulation No 714/2009:Article 17). TEN-E thus gives investors greater control over cash flow (Cuomo&Glachant 2013:18).

With better financing towards decarbonisation?

A densely interconnected European power grid is the necessary backbone of a decarbonised European power system. The European Union hence attempted to create a supportive environment for the development of a power transmission infrastructure which is capable of integrating renewables. Despite these efforts there seems, however, still much work left to do (Monti 2010:48): To this day the various EU programmes seem not to be yet powerful enough to stimulate the development of a power transmission system suitable for the aims of European energy policy (Agt 2011:30). The question therefore is, whether the efforts to develop a complex set of grid development programmes indeed resulted in a consistent and viable mix of instruments.

Some authors blame the Commission’s repeated focuses on specific projects on a bottom-up basis for the limited progress. Given the unbundling efforts of the past years, one might come to this conclusion; moreover it is true that the European Union historically preferred a bottom-up approach to energy policy. Yet unbundling concerns universal, not specific grid development. In view of the largely varying need for interconnection, increasing the interconnection capacity at specific chokepoints is one of the obvious starting points. EU policy towards such single projects changed, however, largely over the past years, and seems to be on the way towards a top-down approach; TEN-E in particular is characterised by a distinct top-down approach (Agt 2011:28-29).

According to Helm (Helm 2014:30-31), grid development does also suffer from the open question how to so organise markets in a way that investors can have confidence that costs will be recovered. The European Commission came to the same conclusion and thus called for a new approach to the planning, construction and operation of electricity transmission infrastructure (Commission 2010b). In its work programme the EU therefore sets out to analyse the optimum balance between public and private financing for projects of European interest which have no or poor commercial viability, and to develop innovative funding mechanisms for the coverage of main risks that improve the investment climate (Commission 2010b).

The EU is hence increasingly inclined to (co-) finance or guarantee the finance of infrastructure projects of European interest (Agt 2011:29). With the European Energy Programme for Recovery, for example, the European Union channelled financial resources from the EU budget directly to selected energy infrastructure projects (Commission 2013b). The connection and integration of renewable energy resources is among the five objectives of this programme (Regulation No 663/2009:Article 4). With a budget of 904 million EUR for grid interconnection measures and 565 million EUR for offshore wind energy , the integration of invested sums are considerable compared to the financial resources of the TEN-E programme.

Compared to the overall investment needs of about 400 billion EUR for distribution networks and smart grids and EUR 200 billion for transmission networks and storage (Tagliapietra 2013), this sum can, however, also be interpreted as limited support (depending on the point of view). Under the Europe 2020 flagship initiative on resource efficiency (Commission 2011a), the European Union therefore developed the Energy 2020 strategy: Support for energy infrastructure projects and the upgrade of Europe’s networks for the integration of renewables have a high priority in this strategy. Increasing certainty for investment and innovation (in grids) is one oft he key elements of this initiative (Commission 2011a).

The Connecting Europe Facility (CEF) is the result of this new reasoning on the support for European energy infrastructure (Regulation 1316/2013). With a multiannual budget of 5.85 billion EUR this new institution supports implementation of energy infrastructure projects defined as common interest (Regulation 1316/2013:Article 5). This support will mostly be granted in form of so called risk sharing instruments for project companies (Annex I, Part 2). The Connecting Europe Facility hence aims at reducing the financial risks for certain infrastructure projects. Greenhouse gas reduction is one of two general objectives in this regard (Article 3); more precisely, the CEF aims at increasing the amount of renewable electricity transmitted from generator to consumption centres/storage sites, and at avoiding curtailment of (intermittent) RES; moreover, the programme includes support for the deployment of smart grids (Article 4).

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