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Last chance for energy markets - Member states’ support key to its success
The Confederation of European Paper Industries (CEPI) strongly welcomes the Energy Union Package published today by the European Commission. CEPI especially welcomes the emphasis put on delivering competitive energy prices, investing in the bioeconomy and establishing synergies between the energy efficiency, resource efficiency and circular economy policies.
“This package is the last chance to make energy markets in Europe work”, says Marco Mensink, CEPI Director General. The success of the Energy Union no longer depends on the Commission, but on member states’ willingness to “walk the talk”. CEPI expects national governments to urgently give their support to make the package a reality. A strong EU energy regulator is part of the solution. “In this case, ‘more Europe’ is the answer to the industry and consumers’ need for affordable and competitive energy,” he added.
The package not only recognises that energy costs for industry in Europe are uncompetitive, it also acknowledges that the root of the problem lies in the levies, taxes and additional costs energy consumers are charged for by the member states. If no measures are taken, the need for capacity payments will add yet another layer of costs, affecting all European energy consumers.
CEPI has great expectations for a number of key elements to be later defined in the package proposal. The Commission indicates renewable support schemes would need to be rationalised. The system of subsidies for burning wood for energy can no longer be sustained. Furthermore, establishing an EU biomass supply policy is urgently needed. In addition, energy recovery from waste should be limited to non-recyclable fractions, in line with the waste hierarchy and the requirements for separate collection.
Among the first proposed actions, the Emission Trading System reform offers the possibility to turn the ETS into a tool that rewards investments in low-carbon technologies, while ensuring industrial competitiveness. Engaging industry in this process is crucial. Moreover, the Energy Union should support industrial co-generation, recognising its role in delivering demand side flexibility. This should be part of the combined initiative on the internal energy market, together with the review of the Energy Efficiency Directive and the Guidelines on State Aid for Environmental Protection and Energy.
For more information, please contact Annie Xystouris at firstname.lastname@example.org, mobile: +32(0)486 243 642.
Note to the author:
European Commission: Energy Union: http://ec.europa.eu/priorities/energy-union/index_en.htm
The Alliance of Energy Intensive Industries (AEII) has published an open letter to the heads of State and Governments of the EU Member States, the European Parliament, the Council of the European Union and the European Commission on carbon leakage. CEPI is part of this alliance.
The 2030 climate and energy framework must guarantee predictability for industry by setting the principles for measures against carbon and investment leakage now.
The undersigned manufacturing industries are the foundation of Europe’s economic fabric, drivers of jobs and growth in Europe. We represent over 30 000 companies in the EU with more than 4 million direct jobs, and around 30 million jobs in our manufacturing value chains.
The EU should focus on promoting recovery and growth of industrial production in Europe, in line with the objective to reinstate industry’s share of EU GDP to 20% by 20201. European industries need a stable and long term legislative framework that effectively combines EU climate ambition with EU industrial competiveness.
Current carbon leakage provisions under the EU Emissions Trading Directive, if not revised rapidly, will result in a huge shortage in free allowances and increasing direct and indirect costs (the pass-through of carbon costs into power prices) for even the most efficient installations in Europe. In the period from 2021 to 2030, when the provisions against carbon leakage and free allocation would be phased out, our industries are expected to face hundreds of billions of Euros in direct costs and costs passed through in electricity prices.2 The impact on energy intensive industries will simply be overwhelming.
Knowing that the Commission will be looking at “an improved system of free allocation of allowances with a better focus” for 2021-2030 is not enough. Industry needs a clear outline of policy measures to effectively prevent the risk of carbon and investment leakage.
The Commission’s legislative proposals currently only cover EU ETS structural reforms, which increase both carbon prices as well as the unilateral burden on EU industry, and expose EU jobs and growth to aggravated carbon leakage risk. Unfortunately, the Commission intends to publish proposals to prevent carbon leakage only at a later stage.
This is contrary to the guidance resulting from the March 2014 European Council, instructing the Commission “to rapidly develop measures to prevent potential carbon leakage in order to ensure the competitiveness of Europe's energy-intensive industries”, and this to provide by October 2014 “the necessary stability and predictability for its economic operators”.
The European Parliament stressed in February 2014 “that the 2030 climate and energy policy targets must be technically and economically feasible for EU industries and that best performers should have no direct or indirect additional costs resulting from climate policies; [that] the provisions for carbon leakage should provide 100% free allocation of technically achievable benchmarks, with no reduction factor for carbon leakage sectors.” 3
We therefore urge the European Council to give guidance at its summit on 23/24 October confirming that carbon leakage measures will be continued after 2020, as well as outlining the principles for the level of protection in order to safeguard predictability, investment certainty, jobs and growth in Europe:
Until a global agreement on climate change provides for a level playing field for energy intensive sectors at risk of carbon and investment leakage, best performers should not be penalised by direct or indirect additional costs resulting from the framework. This implies:
- Truly 100% free allocation based on technically and economically achievable benchmarks (including heat and fuel based benchmarks), reflecting recent production, and without a correction factor.
- Harmonized off-setting of all CO2 costs passed through into electricity prices in all Member States.
The Market Stability Reserve must only be considered in conjunction with the above measures, instead of through piecemeal approach.
The undersigned energy intensive industries are all at risk of carbon and investment leakage and therefore must be safeguarded through the above measures.
These measures provide the essential signal towards industry for predictability and investment certainty, and secure an environmentally and economically sound EU ETS which does not distort the market. We strongly believe that these measures, together with strong innovation funds to support breakthrough innovation in industrial technologies and processes, will offer a win-win situation for the global climate and the European economy.4
1 European Commission Communication "For a European Industrial Renaissance", COM(2014) 14/2
2 The Commission expects a price of €40/tCO2 in 2030, modelling presented by Point Carbon expects ca. €48/tCO2 (source: www.ceps.eu/taskforce/review-eu-ets-issues); Climate Economics Chair calculates a price of up €70/tCO2 in a high scenario in its report EU ETS reform in the Climate-Energy Package 2030: First lessons from the ZEPHYR model, Paris 2014.
3 European Parliament resolution of 4 February 2014 on the Action Plan for a competitive and sustainable steel industry in Europe (2013/2177(INI))
4 The agreement on the reform of the EU ETS between the Dutch government, industry and NGOs proves that a compromise and a balanced solution between the pillars of EU sustainable policy – growth, jobs, and environmental protection – is possible by applying an allocation more closely linked to economic reality e.g. a dynamic emissions trading system.
CEPI comments on the draft EU guidelines on environment and energy aid
It is unwise to raise costs for the industry to promote competition in the internal market, by doing so Europe will lose competitiveness in the global market.
CEPI therefore calls the European Commission to urgently modify the proposed draft guidelines on environment and energy aid for 2014-2020, in order to:
• allow 100% aid intensity for cogeneration;
• do not cap exemption from electricity price increases due to support for renewables;
• do not change definition for energy intensive industry.
The Guidelines on environment and energy aid for 2014-2020 will be an essential tool for reaching the ambitious 2020 energy and climate goals in a cost-effective manner. It is therefore important to promote low-carbon investments while preventing distortion of competition.
The European Commission should scrutinise the impact of proposed measures on the overall EU industrial competitiveness. Preventing intra-EU distortion of competition is important. But in a global competitive market, EU industry is faced with costs unmatched by other economies.
CEPI asks the European Commission to urgently correct three main issues.
First, allow 100% aid intensity for cogeneration.
The European Commission cannot adopt interpretative guidelines derogating from EU law. Art. 15 of the Council Directive 2003/96/EC (the so-called “Energy Taxation Directive”) specifically allows Member States “total or partial exemptions or reductions in the level of taxation” for energy used and electricity produced from combined heat and power generation (so-called “cogeneration” or “CHP”). However, the draft guidelines propose restricting investment and operating aid for cogeneration installations (from para. 17 onwards).
Such a restrictive interpretation is not only contrary to EU law, but also to the overarching 2020 energy-climate policies, where promotion of cogeneration is a key element of energy efficiency policies. It is arbitrary, inappropriate and acts as a disincentive for cogeneration, and the promotion of energy efficiency.
Second, do not cap exemption from electricity price increases due to support for renewables.
The draft state aid guidelines propose capping aid for industry at 85% for increased costs to support renewable energy sources (RES). This proposal in unacceptable for two main reasons:
1. From an environmental perspective, there is no link between the additional cost associated to RES promotion and the behavioural change expected by the beneficiary (industry) to achieve this environmental objective. Although RES contribute also – but not exclusively – to the environmental objective, the redistribution of costs within society is a social policy, where competency lies with the Member States;
2. The cost of promoting RES varies across Member States, even for the same technology. The cost depends on geographical conditions and on the way it fits into other cost components in the electricity bill, such as: national energy mix, network charges, other taxes and levies. Tackling just one component of the overall electricity price will not address intra-EU competition. On the contrary, an additional cost promoting RES set at EU level has the potential of further increasing market distortion.
Third, do not change definition for energy intensive industry.
The Energy Taxation Directive clearly defines “energy-intensive business” a business entity “where either the purchases of energy products and electricity amount to at least 3,0 % of the production value or the national energy tax payable amounts to at least 0,5 % of the added value” (Art. 17).
However, the draft state aid guidelines introduce a different definition of energy intensive industry, setting higher thresholds (10% trade intensity and 5% tax costs/gross value added). The new thresholds are based on carbon leakage criteria set in the EU Emission Trading System (ETS).
Such an interpretation is arbitrary and conceptually not correct. The carbon leakage criteria are meant to protect EU industry from unmatched costs from third countries. It looks at global competition. The state aid guidelines look at intra-EU competition. The basis for assessing distortion of competition cannot be the same.
The definition of energy intensive industry in the state aid guidelines needs to match the definition in the Energy Taxation Directive to avoid legal uncertainties distorting the internal market.
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The fact that the 2030 Energy and Climate package includes an analysis of energy costs and was published together with the European Industrial Renaissance Communication is a landmark shift in EU policy. The Confederation of European Paper Industries (CEPI) interprets this as a signal showing the European Commission is starting to take industrial competitiveness seriously. However, there are still important steps to be taken.
In practice, this new package will not change the competitiveness of industry in the short run. The high pile of documents released by the Commission analyses and promises, but at the end it only proposes one legal act – the change of the EU ETS. In this regard, CEPI welcomes the Commission proposal to keep EU ETS unchanged up to 2020 to give the necessary stability for investments in EU industry. But is this enough?
The Commission finally acknowledged energy prices in Europe are uncompetitive, as electricity costs for industry are twice that of US competitors. It also rightfully recognised the way the EU supported renewable energy was unsustainable. It is now up to EU member states to change this. But more is needed. The gas market needs to be reformed. Energy interconnections between EU member states need to increase urgently.
The impact on European competitiveness of a 40% CO2 reduction target by 2030 for the entire EU economy cannot be underestimated either. The suggested changes by the Commission for industrial sectors will require emission reductions of 43% in 2030, 65% in 2040 and 87% in 2050. The European Council in March needs to assess the feasibility of this package in detail and develop tools that support the deployment of innovative low-carbon solutions in industry. This is especially needed, if no further global action is taken and the EU Economy does not improve.
Additionally, the cost of decarbonising the current power sector - a key challenge - is not addressed. This will most likely increase electricity bills, which the European Commission accepted as being too high already. The EU will have to explore new models of decarbonising the power sector, other than via the carbon price alone.
Specifically related to the European pulp and paper industry, CEPI applauds the long awaited recognition of the negative impact of subsidised bioenergy on EU wood markets. And CEPI welcomes the announcement in the 2030 Energy and Climate package to further explore funding tools for breakthrough technologies.
But the bottom line is: policy needs to be put into practice. “We appreciate the refocus on industrial policy. It is a good sign that the Commission recognises again our role in creating jobs and growth for Europe. However, the proposed measures for an effective industrial policy need to be translated into concrete actions as soon as possible”, said Teresa Presas, CEPI Director General.
For more information, please contact Daniela Haiduc at firstname.lastname@example.org, mobile: +32(0)473562936
Note to the Editor
2030 Energy and Climate Package from the European Commission:
Industrial renaissance Communication:
Abstract from CEPI response to CEER public consultation
The Council of European Energy Regulators (CEER) has recently launched the public consultation “C13-PC-71: Regulatory and Market Aspects of Demand-Side Flexibility”.
Below an abstract from the CEPI response to main questions raised by CEER on:
1. main opportunities and benefits for demand-side flexibility;
2. main barriers to the emergence/functioning of demand-side flexibility;
3. most important 'preconditions' necessary for the emergence/functioning of demand-side flexibility
CEER Consultation Questions
1. What do you see as the main opportunities and benefits for demand-side flexibility in existing/future markets and network arrangements? How would you prioritise these?
1.1 Existing markets
The pulp and paper industry has already engaged, where possible, in demand-side programmes.
Mechanical pulping, an electro-intensive process, can be used for “peak shaving” programmes. It can react at reasonably short notice, like as short as 15 minutes and, depending on the frequency and schedule of interruptions, up to one hour. However, these are indicative figures, which need to be carefully assessed at mill level, as they will vary in function of the trade-offs between benefits from balancing the electricity system, the need to meet paper demand, and the overall economic impact that balancing the grid would have on the production process.
In some countries, paper production also participates in “valley filling” programmes: the whole industrial process is shifted to the night or to the weekends to optimise baseload electricity production. Example of this can be found, for instance, in Austria or Belgium. In Norway there are also provisions for flexibility markets where industry can participate. In this case, the transmission operator asks for bids.
The potentials for further exploring “peak shaving” or “valley filling” programmes are however limited. Beside auxiliary processes, the paper making process has little margins of flexibility when it comes to demand-reduction programmes. Moreover, most of the energy required from the sector (steam and electricity) are generated on-site, therefore mostly off the grid.
There is however quite some untapped potential if the market will develop flexible solutions for absorbing excess electricity supply at critical times (see next paragraph).
1.2 Future markets
One of the main criticalities of the electricity system is how to properly integrate electricity generated from “variable”, or “non-programmable” renewable energy sources (NP RES), like wind and solar, at a time of low or no demand. Curtailing these sources is particularly inefficient, as they produce at zero marginal prices. While most of R&D programmes are focussing on energy storage, the pulp and paper industry is in a rather unique position to potentially providing solutions to
- efficiently absorbing excess of electricity supply,
- while creating vale for the EU economy,
Most importantly, all this could be already delivered with current technologies.
To explain how this would be possible, few words on the pulp and paper industry are necessary.
CEPI represents 959 mills located in 18 European countries. According to our latest figures, in 2011 the European pulp and paper industry consumed 111 TWh of electricity, of which 57 TWh (52%) produced on-site via co-generation units. In 2011 the sector also consumed 557 TJ, or 155 TWh-equivalent, of heat, all on-site generated.
Combining the two figures for on-site generation, the sector generated and consumed about 212 TWh of energy in 2011. This is all energy sitting outside the energy system boundaries. To put these figures into context, it is worth noticing that in 2011 total European electricity production from wind and solar was about 223 TWh.
What would happen if, at a time of excess of electricity supply, the sector would ramp up electricity demand by ad-hoc moving form off to on the grid? It would absorb the peak of cheap electricity supply while maintaining the industrial output unchanged. Meaning more value per kWh, less primary energy consumption, less carbon emissions. In one word: a more competitive industry.
In most cases technology is already available and deployable. For instance, it would be sufficient to install an extra, highly-efficient electric boiler. With the support of additional RDI projects, more options could be envisaged in the near future, whereby electro-technologies could be used in the drying process.
The geographical distributions of mills in Europe allows for cost-effective absorption of excess electricity produced by decentralised energy sources, substantially reducing the need to costly investments in grid extensions.
Last but not least, this cost-effective measure will also reduce the need for additional costs to remunerate unused thermal capacity for electricity generation (so-called Capacity Remuneration Mechanisms – CRM), as the impact of NP RES on the running hours of conventional power plants will be largely mitigated.
Regulatory barriers are the main reason for not making this a reality. Without addressing this aspect first, it will be impossible for any mill operator to start any cost-benefit analysis to assess how to adapt a mill operation in a way that would deliver on-site financial benefits.
1.3 Existing network arrangements
In almost all CEPI countries, existing network arrangements act as a barrier against the absorption of excess supply of electricity.
The only exception is Norway. There, already since 1999, the government promoted the installation of electric boilers on industrial sites (although other incentives were already earlier in place). The rationale was to absorb seasonal excess of hydro electricity generated. The boilers are activated in remote by the network operators.
In exchange for this flexibility, industrial operators have a significant reduction in grid charges. While the usual tariff for the transmission grid (Statnett) is 170 NOK/kW (about 20 €/kW) in 2013, the tariff for flexibility load is 43 NOK/kW (about 5 €/kW). In addition there are distribution charge and taxes. Since 2010 the flexibility grid fee is open for all that can offers to decouple the load either by remote control or at 15 minutes or 2 hour notice.
For customers with remote control, the grid operator can move the load from day to night. The grid operators are very satisfied with this system. The possibility to decouple load has proven to save the grid from collapse. The use of flexible load in periods with excess of electricity stabilizes the grid.
We strongly encourage national regulators to urgently use the Norwegian example as a best practice case for promoting and valuing flexibility markets in their own countries.
2. What do you see as the main barriers to the emergence/functioning of demand-side flexibility? How would you prioritise these?
2.1 Legislative barriers/difficulties
In many cases, the industry is subject to stringent energy efficiency targets. In case of demand side flexibility, deliberately stopping CHP units would negatively impact the industry performance.
To promote energy efficiency programmes while incentivising demand side flexibility, it should be clearly stated in the legislation that importing electricity from the grid would be done in order to absorb
the load from NP RES, such as wind and solar. Therefore the electricity imported should be counted as 100% energy efficient.
2.2 Regulatory barriers/difficulties
This is the key barrier for demand-side flexibility in absorbing excess electricity supply from NP RES.
Currently, network tariffs and network charges (including levies and taxes) are set in a way that discourages industries from accessing the grid.
This approach is in principle correct, as it tends to promote stable and predictable demand from big energy users.
However, in this context, the network operator needs a service to balance the network. A service the industry is ready to provide. But here is the paradox: instead of being remunerated for such a service, industry would have to pay for offering it, to the benefit of the network operator.
In Germany, for instance, should a paper mill decide to import electricity from the grid, it would face additional costs up to more than 70 €/MWh.
Moreover, a mill has a very flat power consumption profile, like i.e. 7000 (or 7500 or 8000) full load hours a year. On this basis, it enjoys a reduced grid fee, i.e. in Germany it pays only 20% (or 15% or 10%) of the normal fee. Normal grid fee depends on local grid operator and might be between 5 to 11 €/MWh. When taking additional load from the grid, the profile will no longer be flat and the 7000 hours threshold might not be reached anymore. As a consequence, the mill would have to pay the remaining 80 to 90% of the grid fee.
A proper regulatory framework should incentivise both the “off-the-grid” baseload demand, and the flexibility to bring “on-the-grid” ad hoc electricity demand to help matching the excess of electricity generation from NP RES.
2.3 Market barriers/difficulties
It should be clear that RES balancing is not an industry prerogative. Industry can be part of the solution, and is willing to do so, provided there is a business case supporting it.
Industry lacks crucial information to build a proper business case. There should be some sort of guarantee on the minimum yearly number of hours one should reasonably expect to be called for balancing the market.
This minimum number of hours should be provided by the regulator and/or network operator and should be the founding element of any contractual agreement.
Moreover, commodity prices will have to be extremely low (or even negative) to compensate for the loss of revenues from CHP/green certificates or other support schemes. In fact, if commodity prices
would be on the level of the fuel used normally, it would just be equal costs for steam generation, but no compensation for lost electricity generation.
Energy supply contracts may need to be adapted to incorporate this additional flexibility.
3. For each of the barriers identified above, please describe the most important 'preconditions' necessary for the emergence/functioning of demand-side flexibility
To promote demand side flexibility in absorbing excess of NP RES supply, the following minimum preconditions would be required:
- Removal of regulatory barriers to create extra demand for electricity at a time of need: no extra costs (tariffs, levies, taxes) when participating in DSF programmes
- Maintain current incentives for on-site generation
- DSF to be compatible with energy efficiency targets: 100% energy efficiency for electricity taken from the grid when participating in DSF programmes
- Need for regulators/network operators to guarantee a minimum yearly amount of hours a paper mill should reasonably expect to be called when participating in DSF programmes.
Lastly, participation in DSF programmes would require significant changes in the way industry operates, both from a technological and industrial processes perspective. Support for Research, Development and Innovation would be needed.
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