GG2022 - Connecting Systems: EU’s Internal Energy Market and Future Cooperation with MENA
Despite the economic crisis and political instability in either region, GG2022 fellow Fabian Wigand maps out a strategy for future European and MENA energy cooperation.
Europe commits to decarbonize the power sector
Reduce greenhouse gas emissions in energy by 95%! When the European delegations travelled to the Copenhagen climate summit, they had the commitment in their luggage to decarbonize the energy system by 2050. Unfortunately, the summit’s lack of binding targets was disappointing. It was followed by the deepening of the economic crisis and the realization that decarbonization would require an unprecedented transformation from a national system with reliable but polluting fossil fuel plants to an integrated system with fluctuating but clean renewable energy. Trapped between ambitious long-term goals and short-term system needs, EU member states nowadays revert to unilateralism. Renewable energy policy and market reforms occur abruptly on national level, thereby distorting the EU internal energy market and destabilizing the system. EU member states should do the opposite – further integrate their systems, coordinate their policies and cooperate with non-EU neighbors. The result would be more sustainable, secure and affordable energy.
Regulatory risk deters investments
Investors need regulatory certainty, particularly in the power industry where investment cycles are long. The decarbonization of the power sector will require more renewable energy, better grids and storage, reliable climate frameworks and a functioning internal energy market. Europe has however still not agreed on its post-2020 climate and renewable energy framework. With the economic crisis still dominating national policy agendas, there is now less enthusiasm among some member states to commit to an ambitious 2030 carbon and renewable energy target.
The EU internal energy market, the implementation of internal market law and competition rules for an efficient, interconnected and transparent European market, is set to be concluded next year. It is set to provide lower consumer prices through more competition and increase energy security. While the EU guides market integration and climate policies, member states can still unilaterally decide on their energy mix. With Spain retroactively slashing its renewable energy support, the UK changing its market system and Germany struggling with its energy transition, unilateral state action is distorting the internal market. Cross-border electricity grid construction is needed to enable electricity transport and trade in the internal market, but entails a complex multi-stakeholder process that is progressing slowly.
Investors are tired of the frequent policy reversals. The International Energy Agency (IEA) expects investment needs in the EU power sector to reach $ 3 trillion by 2035. The lack of liquidity in the European financial system makes it already difficult to mobilize infrastructure investments. Yet according to a recent survey, executives from utilities believe that only half of the required investments could happen under the current conditions, stating regulatory risk as the major hurdle. The EU’s clean tech industry is particularly vulnerable to the rapid policy reversals especially when considering that the renewable sector alone employed 1.4 million people in 2005.
The benefits of large electricity systems
Despite the setbacks Europe should not forget the enormous potential that lies in its energy system integration. As Philip Lowe, Director-General for Energy at the European Commission puts it: “The physical interconnection and integration of markets reduces the need to find expensive national-level solutions because there is such a variation in weather conditions and technologies. You are spreading the risks and getting a stable system." Larger electricity systems can better cope with diverging demand profiles and fluctuating renewables production. They are also more secure and economic than smaller, national systems. Electricity system integration requires infrastructure (grid interconnections between countries) and rules to regulate the infrastructure (standards on non-discriminatory third party access for generators and binding European technical rules). In integrated electricity systems national interventions strongly affect neighboring countries. This is why interventions need to occur less abruptly, e.g. through a stability pact, and at EU level, e.g. through more coordinated renewable energy policy. Europe should seize the opportunity through closer political coordination.
Coordinate for system integration
Success in integrating the system will depend on multilateral policies to provide regulatory certainty and progress with the EU internal energy market. EU member states need to develop a reliable post-2020 climate and renewable energy framework. Ambitious carbon and renewable energy targets will bring the energy sector on track towards the 2050 decarbonization goal and provide increased investor security. The decarbonization of the power sector will require substantial financial resources and Europe will need to manage this transformation in a cost-effective way. While the 2020 renewable energy targets have been largely successful in promoting national renewables build-up, they have failed to mobilize Cooperation Mechanisms from the EU’s Renewable Energy Directive. These policy instruments integrate the system through incentivizing the use of the best and most economic wind and solar resources. They enable member states to support renewable energy projects in other EU and neighbor countries (if the energy is imported to the EU) and count them towards their national targets. Here, Norway and Sweden have set a positive example by introducing a joint renewable energy support scheme. The EU should to take a more active stance in coordinating such initiatives. Reliable long-term carbon reduction targets and a reformed allocation of emissions rights would help fixing the EU Emission Trading Scheme, incentivize gas over coal generation and drive the development of carbon capture and storage.
The EU also needs to make a significant push forward with its internal market integration. First, the EU should further develop the demand-side management and cross-border storage solutions as intermittent renewable energy continues to grow. Second, if back-up capacity markets were to be introduced, they would need to be Europe-wide to limit price distortions. Third, although the decarbonization of the power sector requires intervention, renewable energy support schemes should become more market oriented, incentivize demand-oriented production and drive cost reductions. Finally electricity grid interconnections between member states and with EU neighboring countries need to be strengthened to facilitate physical market connections. The Ten-Year-Network-Development-Plans of the association of European transmission system operators (ENTSO-E) provides a positive outlook on European transmission coordination. Nonetheless, sufficient funding and facilitating administrative procedures need to be in place to ensure that such plans are implemented.
North Africa and the Middle East have large renewable energy potentials
The decarbonization of the continent’s power sector can be achieved at lower costs if Europe strengthens its partnership with neighbor countries, particularly with North Africa and the Middle East (MENA) with its vast renewable energy potentials.
The Arab Spring has thrown the MENA region into turmoil. However, the situation in the region also presents an unequaled opportunity to enhance cooperation and Europe has already committed itself to support the transformation process through its EuroMed partnership. Challenges in the MENA power sector such as strong demand growth and expensive fossil fuel subsidies are a key obstacle to regional economic growth that the partnership should tackle.
The MENA region offers excellent and virtually unlimited solar and wind conditions – sufficient for the growing demand in MENA and sufficient for renewable energy exports to Europe. For Europe this offers an attractive, cost-effective opportunity to diversify and achieve parts of its long-term climate objectives with renewable energy imports. Such cooperation would also assist MENA governments with industrial development, technology-transfer and much needed job creation opportunities during the region’s difficult political transformation phase. By supporting MENA governments in their energy transition Europe would also provide an attractive market for its industry - alone Saudi Arabia plans to invest $ 109 billion in renewable energy projects until 2032.
Support better framework conditions in MENA
Europe should support the development of renewable energy in MENA by deepening its multilateral cooperation. The Mediterranean Solar Plan of the Union for the Mediterranean, a flagship project between EU and MENA countries, aims to catalyze 20 Gigawatt of renewable energy projects in the Southern Mediterranean by 2020. Few projects have materialized so far and the regulatory framework conditions need to be improved. This is where EU-MENA associations such as MEDREG and MED-TSO are working to enable the regulation and grid infrastructure. Initiatives such as Dii, an international multi-sector industry initiative working to create a market for desert power, are crucial forums for the relevant stakeholders. Creating a level playing field for renewable energy in MENA should be the focus by phasing out fossil fuel subsidies on the generation side, ensuring renewable energy grid access and allowing for independent power producers. In the medium-term, liberalizing the energy market could provide MENA countries with the opportunity to join the Energy Community. Europe should also support first electricity export projects in MENA with the use of Cooperation Mechanisms.
System integration allows for sustainable, secure and affordable energy
The economic crisis in Europe and the political instability in MENA set a difficult climate for closer energy cooperation. The turmoil, however, also provides an opportunity for Europe to reflect on the internal market and the relations with its southern neighbors and send a strong message. Integration in energy will deliver sustainable, secure and affordable electricity and bring about further cooperation in technology, education and the economy – it is high time for Europe to take action on this.
Fabian Wigand is a fellow of the GG2022 program and a Strategy Analyst at Dii, a private industry initiative with partners from 17 countries dedicated to realize the Desertec vision and create a market for desert power in MENA. The views expressed in this column are those of the author and do not necessarily represent the views of, and should not be attributed to, the Dii.