Too high and too low: The problems with energy prices in the EU. OSW Commentary No. 122, 03.12.2013

On 11 October, the top executives of ten European energy companies, which jointly own about half of the European Union’s electricity generating capacity, warned that “energy security is no longer guaranteed” and once again called for changes to EU energy policy. Due to persistent adverse conditions in the energy market (linked to, for example, the exceptionally low wholesale energy prices) more and more conventional power plants are being closed down. According to sector representatives, this could lead to energy shortages being seen as early as this winter. Meanwhile, in an interview with The Daily Telegraph published in September of this year, the European industry commissioner Antonio Tajani warned – in a rather alarmist tone – of the disastrous consequences the rising energy prices could have on European industry. Amongst the reasons for the high prices of energy, Tajani mentioned the overambitious pace and methods used to increase the share of renewables in the sector. In a similar vein, EU President Herman Van Rompuy has highlighted the need to reduce energy costs as a top priority for EU energy policy1. The price of energy has become one of the central issues in the current EU energy debate. The high consumer price of energy – which has been rising steadily over the past several years – poses a serious challenge to both household and industrial users. Meanwhile, the declining wholesale prices are affecting the cost-effectiveness of energy production and the profits of energy companies. The current difficulties, however, are first and foremost a symptom of much wider problems related to the functioning of both the EU energy market as well as to the EU’s climate and energy policies.

Germany's energy transformation: difficult beginnings. OSW Report, March 2013

Initiated in May 2011, several months after the Fukushima nuclear disaster, Germany’s energy transformation (Energiewende) has been presented as an irrevocable plan, and – due to the speed of change required – it represents a new quality in Germany’s energy strategy. Its main objectives include: nuclear energy being phased out by 2022, the development of renewable energy sources (OZE), the expansion of transmission networks, the construction of new conventional power plants and an improvement in energy efficiency.The cornerstone of the strategy is the development of renewable energy. Under Germany's amended renewable energy law, the proportion of renewable energy in electricity generation is supposed to increase steadily from the current level of around 20% to approximately 38% in 2020. In 2030, renewable energy is expected to account for 50% of electricity generation. This is expected to increase to 65% in 2040 and to as much as 80% in 2050. The impact of the Energiewende is not limited to the sphere of energy supplies. In the medium and long term, it will change not only to the way the German economy operates, but also the functioning of German society and the state. Facing difficulties with the expansion of transmission networks, the excessive cost of building wind farms, and problems with the stability of electricity supplies, especially during particularly cold winters, the federal government has so far tended to centralise power and limit the independence of the German federal states with regard to their respective energy policies, justifying this with the need for greater co-ordination. The Energiewende may also become the beginning of a "third industrial revolution", i.e. a transition to a green economy and a society based on sustainable development. This will require a new "social contract" that will redefine the relations between the state, society and the economy. Negotiating such a contract will be one of the greatest challenges for German policy in the coming years.

The expensive energy revolution in Germany. The implementation of the Energiewende is behind schedule. OSW Commentary No. 77, 2012-05-10

One year after the events of Fukushima the implementation of the new German energy strategy adopted in the summer of 2011 is being verified. Business circles, experts and publicists are sounding the alarm. The tempo at which the German economy is being rearranged in order that it uses renewable energy sources is so that it has turned out to be an extremely difficult and expensive task. The implementation of the key guidelines of the new strategy, such as the development of the transmission networks and the construction of new conventional power plants, is meeting increasing resistance in the form of economic and legal difficulties. The development of the green technologies sector is also posing problems. The solar energy industry, for example, is excessively subsidised, whereas the subsidies for the construction of maritime wind farms are too low. At present, only those guidelines of the strategy which are evaluated as economically feasible by investors or which receive adequate financial support from the state have a chance of being carried through. The strategy may also turn out to be unsuccessful due to the lack of a comprehensive coordination of its implementation and the financial burden its introduction entails for both the public and the economy. In the immediate future, the German government will make efforts not only to revise its internal regulations in order to enable the realisation of the energy transformation; it is also likely to undertake a number of measures at the EU forum which will facilitate this realisation. One should expect that the German government will actively support the financing of both the development of the energy networks in EU member states and the development of renewable energy sources in the energy sector.

Renewables: The great uncertainty of the EU energy strategy. Egmont Paper No. 71, November 2014

Summary. For more than two decades, the development of renewable energy sources (RES) has been an important aim of EU energy policy. It accelerated with the adoption of a 1997 White Paper and the setting a decade later of a 20% renewable energy target, to be reached by 2020. The EU counts on renewable energy for multiple purposes: to diversify its energy supply; to increase its security of supply; and to create new industries, jobs, economic growth and export opportunities, while at the same time reducing greenhouse gas (GHG) emissions. Many expectations rest on its development. Fossil fuels have been critical to the development of industrial nations, including EU Member States, which are now deeply reliant upon coal, oil and gas for nearly every aspect of their existence. Faced with some hard truths, however, the Member States have begun to shelve fossil fuel. These hard truths are as follows: firstly, fossil fuels are a finite resource, sometimes difficult to extract. This means that, at some point, fossil fuels are going to be more difficult to access in Europe or too expensive to use.1 The problem is that you cannot just stop using fossil fuels when they become too expensive; the existing infrastructure is profoundly reliant on fossil fuels. It is thus almost normal that a fierce resistance to change exists. Secondly, fossil fuels contribute to climate change. They emit GHG, which contribute greatly to climate change. As a consequence, their use needs to be drastically reduced. Thirdly, Member States are currently suffering a decline in their own fossil fuel production. This increases their dependence on increasingly costly fossil fuel imports from increasingly unstable countries. This problem is compounded by global developments: the growing share of emerging economies in global energy demand (in particular China and India but also the Middle East) and the development of unconventional oil and gas production in the United States. All these elements endanger the competitiveness of Member States’ economies and their security of supply. Therefore, new indigenous sources of energy and a diversification of energy suppliers and routes to convey energy need to be found. To solve all these challenges, in 2008 the EU put in place a strategy based on three objectives: sustainability (reduction of GHG), competitiveness and security of supply. The adoption of a renewable energy policy was considered essential for reaching these three strategic objectives. The adoption of the 20% renewable energy target has undeniably had a positive effect in the EU on the growth in renewables, with the result that renewable energy sources are steadily increasing their presence in the EU energy mix. They are now, it can be said, an integral part of the EU energy system. However, the necessity of reaching this 20% renewable energy target in 2020, combined with other circumstances, has also engendered in many Member States a certain number of difficulties, creating uncertainties for investors and postponing benefits for consumers. The electricity sector is the clearest example of this downside. Subsidies have become extremely abundant and vary from one Member State to another, compromising both fair competition and single market. Networks encountered many difficulties to develop and adapt. With technological progress these subsidies have also become quite excessive. The growing impact of renewable electricity fluctuations has made some traditional power plants unprofitable and created disincentives for new investments. The EU does clearly need to reassess its strategy. If it repeats the 2008 measures it will risk to provoke increased instability and costs.

The nuclear safety framework in the European Union after Fukushima. Egmont Paper No. 73, December 2014

Summary. On 11 March 2011, a devastating earthquake struck Japan and caused a major nuclear accident at the Fukushima Daiichi nuclear plant. The disaster confirmed that nuclear reactors must be protected even against accidents that have been assessed as highly unlikely. It also revealed a well-known catalogue of problems: faulty design, insufficient back-up systems, human error, inadequate contingency plans, and poor communications. The catastrophe triggered the rapid launch of a major re-examination of nuclear reactor security in Europe. It also stopped in its tracks what had appeared to be a ‘nuclear renaissance’, both in Europe and globally, especially in the emerging countries. Under the accumulated pressure of rising demand and climate warming, many new nuclear projects had been proposed. Since 2011 there has been more ambivalence, especially in Europe. Some Member States have even decided to abandon the nuclear sector altogether. This Egmont Paper aims to examine the reactions of the EU regarding nuclear safety since 2011. Firstly, a general description of the nuclear sector in Europe is provided. The nuclear production of electricity currently employs around 500,000 people, including those working in the supply chain. It generates approximately €70 billion per year. It provides roughly 30% of the electricity consumed in the EU. At the end of 2013, there were 131 nuclear power reactors active in the EU, located in 14 countries. Four new reactors are under construction in France, Slovakia and Finland. Secondly, this paper will present the Euratom legal framework regarding nuclear safety. The European Atomic Energy Community (EAEC or Euratom) Treaty was signed in 1957, and somewhat obscured by the European Economic Community (EEC) Treaty. It was a more classical treaty, establishing institutions with limited powers. Its development remained relatively modest until the Chernobyl catastrophe, which provoked many initiatives. The most important was the final adoption of the Nuclear Safety Directive 2009/71. Thirdly, the general symbiosis between Euratom and the International Atomic Energy Agency (IAEA) will be explained. Fourthly, the paper analyses the initiatives taken by the EU in the wake of the Fukushima catastrophe. These initiatives are centred around the famous ‘stress tests’. Fifthly, the most important legal change brought about by this event was the revision of Directive 2009/71. Directive 2014/87 has been adopted quite rapidly, and has deepened in various ways the role of the EU in nuclear safety. It has reinforced the role and effective independence of the national regulatory authorities. It has enhanced transparency on nuclear safety matters. It has strengthened principles, and introduced new general nuclear safety objectives and requirements, addressing specific technical issues across the entire life cycle of nuclear installations, and in particular, nuclear power plants. It has extended monitoring and the exchange of experiences by establishing a European system of peer reviews. Finally, it has established a mechanism for developing EU-wide harmonized nuclear safety guidelines. In spite of these various improvements, Directive 2014/87 Euratom still reflects the ambiguity of the Euratom system in general, and especially in the field of nuclear safety. The use of nuclear energy remains controversial among Member States. Some of them remain adamantly in favour, others against or ambivalent. The intervention of the EAEC institutions remains sensitive. The use of the traditional Community method remains limited. The peer review method remains a very peculiar mechanism that deserves more attention.

Consensus, contradiction, and conciliation of interests: the geo-economics of the Energy Union. EPC Policy Brief, 8 July 2015

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% 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.

The uncertain future of the coal energy industry in Germany. OSW COMMENTARY #188, 2015-10-20

Germany’s current energy strategy, known as the “energy transition”, or Energiewende, involves an accelerated withdrawal from the use of nuclear power plants and the development of renewable energy sources (RES). According to the government’s plans, the share of RES in electricity production will gradually increase from its present rate of 26% to 80% in 2050. Greenhouse gas emissions are expected to fall by 80–95% by 2050 when compared to 1990 levels. However, coal power plants still predominate in Germany’s energy mix – they produced 44% of electricity in 2014 (26% from lignite and 18% from hard coal). This makes it difficult to meet the emission reduction objectives, lignite combustion causes the highest levels of greenhouse gas emissions. In order to reach the emission reduction goals, the government launched the process of accelerating the reduction of coal consumption. On 2 July, the Federal Ministry for Economic Affairs and Energy published a plan to reform the German energy market which will be implemented during the present term of government. Emission reduction from coal power plants is the most important issue. This problem has been extensively discussed over the past year and has transformed into a conflict between the government and the coal lobby. The dispute reached its peak when lignite miners took to the streets in Berlin. As the government admits, in order to reach the long-term emission reduction objectives, it is necessary to completely liquidate the coal energy industry in Germany. This is expected to take place within 25 to 30 years. However, since the decision to decommission nuclear power plants was passed, the German ecological movement and the Green Party have shifted their attention to coal power plants, demanding that these be decommissioned by 2030 at the latest.

System Costs of Variable Renewable Energy in the European Union. Bruges European Economic Policy (BEEP) Briefings 37/2015

To shift to a low-carbon economy, the EU has been encouraging the deployment of variable renewable energy sources (VRE). However, VRE lack of competitiveness and their technical specificities have substantially raised the cost of the transition. Economic evaluations show that VRE life-cycle costs of electricity generation are still today higher than those of conventional thermal power plants. Member States have consequently adopted dedicated policies to support them. In addition, Ueckerdt et al. (2013) show that when integrated to the power system, VRE induce supplementary not-accounted-for costs. This paper first exposes the rationale of EU renewables goals, the EU targets and current deployment. It then explains why the LCOE metric is not appropriate to compute VRE costs by describing integration costs, their magnitude and their implications. Finally, it analyses the consequences for the power system and policy options. The paper shows that the EU has greatly underestimated VRE direct and indirect costs and that policymakers have failed to take into account the burden caused by renewable energy and the return of State support policies. Indeed, induced market distortions have been shattering the whole power system and have undermined competition in the Internal Energy Market. EU policymakers can nonetheless take full account of this negative trend and reverse it by relying on competition rules, setting-up a framework to collect robust EU-wide data, redesigning the architecture of the electricity system and relying on EU regulators.

The shadow of Chornobyl. Ukraine thirty years after the disaster. OSW COMMENTARY NUMBER 210/22.04.2016

Thirty years after the Chornobyl nuclear power plant disaster, its aftermath and consequences are still a permanent element of the economic, environmental and social situation of Ukraine, Belarus and some regions of Russia. Ukraine, to which the scope of this text is limited, experienced the most severe shock because, among other factors, the plant where the accident took place was located just 100 km away from Kyiv. Its consequences have affected the course of political developments in the country, and have become part of the newly-shaped national identity of independent Ukraine. The country bore the huge cost of the clean-up effort but did not give up on nuclear energy, and today nuclear power plants generate more than half of its electricity. The system of social benefits for people recognised as disaster survivors, which was put in place by the Soviet government, has become a huge burden on the country’s budget; if implemented fully, it would account for more than 10% of total public spending, and is therefore being implemented to only a partial extent. This system has reinforced the Ukrainian people’s sense of helplessness and dependence on the state. The disaster has also become part of the ‘victim nation’ blueprint of the Ukrainian national myth, which it has further solidified. The technological and environmental consequences of the disaster, and hence also its economic costs, will persist for centuries, while the social consequences will dissipate as the affected generation passes away. In any case, Chornobyl will remain an important part of the life of the Ukrainian state and society.

Big business in the Russian economy and politics under Putin's rule; The Russian power industry shortly before reforms; Ukrainian metallurgy: the economic link in the oligarchical system. OSW Study 5/2002

Big business in Russia: The pace of ownership transfer in the Russian economy has speeded up considerably over the last year. There has been a significant rise in the number of acquisitions of whole enterprises, and large blocks of shares in individual firms and plants. Similarly the number of mergers, bankruptcies and take-overs of failing firms by their strongest competitors has grown. The Russian power industry: This study is an overview of the current condition and principles on which the Russian power sector has been functioning so far. This analysis has been carried out against the background of the changes that have been taking place in the sector since the beginning of the 1990s. This text also contains a description of guidelines and progress made so far in implementing the reform of the Russian power industry, the draft of which was adopted by the government of the Russian Federation in summer 2001. However, the purpose of this study is not an economic analysis of the draft, but an attempt to present the political conditions and possible consequences of the transformations carried out in the Russian power sector. The final part attempts to evaluate the possibilities and threats related to the implementation of the reform in its present shape. Ukrainian metallurgy: The metallurgic sector, like the east-west transit of energy raw materials, is a strategic source of revenue for Ukraine. Over the last ten years, this sector has become Kiev's most important source of foreign currency inflows, accounting for over 40 per cent of its total export revenues. The growth of metallurgic production, which has continued almost without interruption since the mid-1990s, has contributed considerably to the increase in GDP which Ukraine showed in 2000, for the first time in its independent history.

Gas demand for power generation peaked as early as 2010. CEPS Commentary, 12 February 2016

The outlook for natural gas demand is often considered bright, especially for gas used to generate electricity. This is because gas is the cleanest of all fossil fuels. The carbon intensity of modern gas-fired power stations is less than 50% that of modern coal plants. Moreover, gas-fired units are well-suited to follow rapid swings in supply and demand due to their flexibility. In the future, these balancing tasks will become more and more important given the intermittent character of the supply of wind and solar power. Gas seems to hold out the promise of being a key pillar of the energy transition and the perfect partner of renewables. Given the EU’s long-term climate policy goals, however, there is strong evidence that demand for gas for purposes of power generation peaked as early as 2010.