A brief historical background

In 1951 six European countries decided to join forces in two key sectors of the economy, coal and steel, thus creating a Community that would replace conflict with cooperation and animosity with prosperity. The European Coal and Steel Community (ECSC) was formed and a cross jurisdictional control on the energy resources was applied paving the way for greater economic cooperation in general. At the same time however, it was recognized that coal would not be the driver of economic growth but would be replaced by nuclear energy as the center of the economy in order to cover the need for abundant low cost energy. As a result the European Atomic Energy Community Treaty (Euratom) was introduced in 1957, aiming to guarantee the safety and control of radioactive materials and promote the development of nuclear energy for peaceful purposes.

Different visions between Member States led to a focus on a national state level in the 1960s as most West European governments were promoting nuclear power development as a substitute to their increased dependency on imports of oil, coal and/or natural gas. Renewable Energy (RE), with the exception of hydro-power in countries having significant potential, attracted very little interest, as their initial cost was deemed too high. A push for a common energy policy was triggered in the early 1970s as a consequence of the 1973 oil and in the 1974 Copenhagen summit meeting, Member States agreed to a declaration on energy policy, adopting guidelines concerning energy supply and demand. The Single European Act (1986), the Maastricht Treaty (1992) and then the Amsterdam Treaty (1997) widened the focus of energy related matters with security of supply as a main issue. Although energy market deregulation, environmental protection and climate change problems became more prominent, they did not translate into a European legislation, especially as climate change was not yet high on the agenda. The first assessment report of the Intergovernmental Panel on Climate Change (IPCC) in 1990 together with the adoption of the Kyoto protocol in 1997 led the EU′s executive body (the European Commission—EC) in the early 2000s to develop a common position regarding important strategic issues for climate change and energy security.

After many years of limited success, legislation in the area of energy policy, a mandatory concept of energy policy was approved at the meeting of the European Council on October 27, 2005 in London.

In 2007 the EC′s “An energy policy for Europe”1 strategy marked the beginning of an action plan that laid out the three major challenges for European energy policy, forming the core of the common energy policy up to now: sustainability, security of supply, and competitiveness. In order to reach these goals, the EC also laid out quantifiable targets, the famous 20/20/20 targets up to 2020. The action plan was complemented with changes in legislation shortly afterwards with the Lisbon Treaty (2007) finally including specific provision on energy.

European policy development, legal and options

Energy policies are introduced through European legislation, (directives, regulations and decisions) which is based on EU Treaties, since the creation of the Union. Before the Lisbon Treaty in 2009, the founding Treaties of the EU did not include a specific provision on EU intervention in the field of energy and the legal basis for energy-related legislation was structured on: Environment (Art 175); Approximation of laws (Art 81–97); Trans-European networks (Art 154); Difficulties in the supply of products (Art 100); Research (Art 166); and External relations (various articles). The Lisbon Treaty introduced a specific legal basis for the field of energy with the creation of Article 194. In a spirit of solidarity between Member States, this policy aimed to establish and ensure the functioning of the EU′s energy market its security of supply; to promote energy efficiency and saving, to develop renewable energy infrastructure and interconnect existing energy networks.

Renewable Energy

Back in 1986 a Council resolution highlighted the promotion of RE as one of the Community′s energy objectives. In the 1995 White Paper the main objectives for improved competitiveness, security of supply and protection of the environment were identified and RE was recognised as a factor to help achieve these objectives. In the 1997 White Paper an indicative target of a 12% share of Renewable Energy Sources (RES) in total final energy consumption by 2010 was set. At the end of 2001 the Directive 2001/77/EC on electricity production from RES set an indicative target of 22.1% of total EU-15 electricity gross consumption from RES for 2010. On April 2003, with the Accession Treaty, national targets were adopted for the ten countries that formally became EU Member States in 2004. Gross renewable electricity target for EU-25 was 21% of overall electricity consumption by 2010 and indicative targets for the share of renewable electricity production per EU Member State were set.

 

EU renewable energy
EU Member States share of renewable energy

Member States should set national indicative targets to raise the share of biofuels in their transport fuel market, based on the reference value of a 2% increase by 2005 and of 5,75% by 2010 in the share of biofuels for transport purposes calculated on the basis of energy content. Continued policy support from a large number of Member States and the Commission led to significant progress on RE since 1990. However the framework established from the first RES directives was proven too loose to help towards the achievement of the 2010 renewable electricity and biofuels targets (European Commission (EC), 2007). In 2007, EU adopted a binding target of 20% RE in final energy consumption by 2020. In early 2008, the EC presented a draft directive on the promotion of the use of energy from RES in order to help the 20% target become a reality, leading to the RES Directive 2009/28/EC.

As mentioned above, up to 2009 targets were indicative. Each Member State had its own target for RE share in electricity and all had an overall 5.75% share target of biofuels and other renewable fuels in transport by 2010. Following Directive 2009/28/EC, there are binding national targets for RE shares in each Member State′s final energy consumption up to 2020, (including a 10% share of renewables in the transportation sector for all Member States): these are calculated on the basis of the 2005 share of each country plus both a flat rate increase of 5.5% per Member State as well as a GDP-weighted additional increase.

Member State mechanisms

Cooperation mechanisms were introduced in 2009 and can be used by Member States in order to reach their RE targets. They are allowed to make arrangements for the statistical transfer of a specified amount of RES from RES one Member to another. Cooperation between two or more Members and also with one or more third countries is allowed, on all types of joint projects regarding electricity production, heating or cooling from RES. Private operators can also be involved (European Commission (EC), 2009a). The basic idea of the cooperation mechanisms is to fulfil part of a Member′s RES target in another country by providing financial support, with the potential advantage of accessing cheaper RE production in other countries.

Support schemes

There are various categories of support instruments in the EU. Feed-in tariff is a fixed and guaranteed price paid to eligible producers of RES electricity. Feed-in tariff systems have proved to be, the main instruments of support in the EU. They are used in France, Germany, Spain, Greece, Ireland, Luxembourg, Austria, Hungary, Portugal, Bulgaria, Cyprus, Malta, Lithuania, Latvia and Slovakia. The advantage of tariffs lies in the long- term certainty of receiving a fixed level support, which lowers investment risks considerably. Capital costs for RES investments observed in countries with established tariff systems have proven to be significantly lower than in countries with other instruments that involve higher risks of future returns on investments. In a feed-in premium system, a guaranteed premium is paid in addition to the income producers receive for the electricity from RES that is being sold on the electricity market.

Feed-in premium systems have gained ground over the last years and are used as main support instruments in Denmark and the Netherlands. In some countries premiums exist in parallel to the tariff system while in general there are different designs from country to country. They provide a secure additional return for producers, while on the same time exposing them to the electricity price risk. Quota obligations have been introduced in Belgium, Italy, Sweden, UK, Poland and Romania, where governments impose minimum shares of renewable electricity on suppliers (or consumers and producers) that increase over time. If obligations are not met, financial penalties are to be paid. Penalties are recycled back to the suppliers in proportion to how much renewable electricity they have supplied. Obligations are combined with Renewable Obligation Certificates (ROCs) that can be traded. Hence, ROCs provide support in addition to the electricity price and are used as proof of compliance. Uncertainty about the current and future price of certificates increases financial risks as the risk of the certificate market is added to the risk of the electricity market.

Investments grants for electricity and heating and cooling are available in several Member States and are often devised to stimulate less mature technologies. In Finland, investment grants and subsidies are the only support available on a national level. Tax incentives or exemptions often complement other types of RES incentive programs. They are powerful and highly flexible policy tools that can be targeted to encourage specific RES technologies and to impact selected RE market participants, especially when used in combination with other policy instruments. A wide range of tax incentives are present in the EU. Some Member States (Spain, Netherlands, Finland and Greece) provide tax incentives related to investments while others (Latvia, Poland, Slovakia, Sweden and UK), have devised production tax incentives that provide income tax deduction or credits at a set rate per unit of produced renewable energy, thereby reducing operational costs. Investment and production tax exemptions are most prominently present in the EU. The fiscal incentives include soft or low-interest loans. On a national level, soft-loans are available in Germany, Netherlands, Bulgaria, Estonia, Malta and Poland. Finally, tenders are used for larger-scale projects in the Netherlands, UK, Denmark and Spain. Its advantages include the amount of attention it draws towards RE investment opportunities and the competitive element incorporated in its design.

Environmental protection and climate change

EC′s Fourth Environmental Action Program (EAP) covering the period 1987–1992 was the first time that climate change was addressed. When the Fifth EAP for the period 1993–2000 was passed, climate change was identified as one of the seven priority areas for the Community′s environmental policy and since then actions regarding climate change and environmental protection have gained momentum. In 2002 the Kyoto Protocol was ratified and a commitment for an 8% reduction of greenhouse gas emissions during the commitment period 2008–2012, compared to base-year emissions, which vary between Member States was made. This target was distributed among EU-15 through a burden-sharing agreement in 2002. The latest EU-12 are not subject to the burden-sharing agreement but instead have to fulfil their targets as signatories of the Protocol.

Until 2005, the Commission pursued climate change policy solely as a co-operative exercise within the Kyoto framework. In the short period up to the date of expiry of this framework by 2013 and because of a perceived lack of urgency on the part of international partners, a policy change took place. As a consequence, in 2007 EU agreed to pursue unilateral greenhouse gas emissions reductions of 20% by 2020, while offering to step these up to 30% in the case of a new global agreement

EU emissions trading scheme

The EU ETS is the first and biggest international scheme for the trading of greenhouse gas emission allowances operating in 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and Norway). It covers approximately 45% of the EU’s CO2 emissions from about 11.500 installations such as power stations, combustion plants, oil refineries and iron and steel works, as well as factories making cement, glass, lime, bricks, ceramics, pulp, paper and board. NOX emissions from certain processes are also covered.

The system operates through the allocation and trading of greenhouse gas emission allowances throughout the EU. One allowance represents one tone of CO2 equivalent. A ‘cap’ is set by each member state on the total amount of emissions allowed from the installations covered by the system. The allowances are then distributed by Member States to the installations in the system. Operators of all these installations are then free to trade in allowances.

The system was launched in 2005, its first phase ended in 2008 and its second phase ended in 2012. In the short term it works as a statistical transfer mechanism between power stations and industrial plants. Year by year, the number of allowances is reduced so that total emissions fall with the aim to be 21% lower in 2020 than of 2005 levels.

December 16 EUA price (EUR)
December 16 EUA price (EUR)

National Allocation Plans

National Allocation Plans (NAPs) are plans that set out each member state′s allocation of CO2 emission allowances under the EU ETS.  NAPs fix both the total of emission allocations available in each member state and the allocation made to each installation covered by the scheme. Large combustion plants whose thermal input is equal to or greater than 50 MW, irrespective of the type of fuel used, have to
comply with limit values for SO2, NOX and dust. These values are fixed in the Directive 2001/80/EC (European Commission (EC), 2001) which aims to reduce emissions of acidifying pollutants, particles, and ozone precursors.

Conclusions

The Union′s energy policy started with the first steps of the European integration and the first initiatives took place in order to address the security of the Community′s supply. It took few decades since 1950s for a common energy policy with ambiguous targets to be achieved, because of Member States′ differing interests. Energy-related issues such as environmental protection and energy efficiency gradually gained in importance, therefore the need for a common EU position and concrete action grew stronger and finally led to the shift of energy policy from an entirely national matter to a supranational policy initiative. From 2005 onwards, the EC is developing and driving a strong energy policy at EU level. It recognizes the increasingly pressing challenges of growing imports of energy, while addressing the environmental impact of energy production and use. The development of this strategy is built upon three intrinsically linked elements: sustainable low-carbon development, actions to achieve the goal of a single energy market in order to lower energy costs and promote competitiveness, and energy security and external relations. These closely interlinked challenges are very difficult to resolve.

While the overall policy development is commendable, there is room for improvement in the policy making of the Commission. The combination of energy policy with climate policy objectives has led to a suite of measures (notably the ‘20/20/20 energy and climate package’) that has been criticised for not passing the cost–benefit test; and the contradiction between climate policies and internal energy market initiatives may endanger the competitiveness of the European economy. Therefore, the EU energy policy should be reassessed in order to reconcile the basic priorities mentioned above, taking account of recent global events such as the financial crisis, the negotiations on climate policy agreements and the technological advances in fossil fuel exploration and renewable technologies.

References
  1. European energy policy—A review (Kanellakis, Martinopoulos, & Zachariadis, 2013)

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