With the Paris COP in sight, the Spanish Gas Association (Sedigas) interviewed me on my views about the objectives of the COP, what to expect from that meeting and what the remaining challenges were likely to be. They were especially interested in the role of natural gas in addressing the challenges of climate change, on the prospects for natural gas in Europe and Spain, and on the strategic challenges facing the natural gas industry in the region.
The interview was recently published in Spanish but I thought it would be worth publishing an English version. My answers are slightly different than in the original interview in Spanish, but tell the same story. Paris will only be considered a success if it is able to provide a clear direction for public policy to guide investors around the world. Ideally the COP would require sufficiently ambitious CO2 emission reductions commitments to be consistent with avoiding dangerous levels of climate change this century, as well a means of ensuring compliance. Since neither of these is likely, the emphasis should be to agree on a framework for tightening greenhouse gas emission limits over time, to promote low carbon technology innovation, and to agree a financial package to support the least developed and most vulnerable countries as they address the challenges of climate change. This COP will not solve the free-rider problem and I supports the idea of “low-carbon clubs” comprising countries that are committed to ambitious reductions in greenhouse gases.
Natural gas has a role to play in the decarbonisation process, especially in replacing coal-based generation. However this is unlikely to occur at current coal and gas prices, without policy measures, such as rising CO2 emission prices, withdrawal of public financial support for coal plants, and if those measures are insufficient then direct intervention as we have recently seen in the UK and the US. I see some potential for natural gas to replace oil products in road and maritime transport, as well as in heating. However, if the EU hopes to meet its 2050 targets of reducing CO2 emissions by at least 80% compared to 1990 levels, this could mean lower demand for natural gas in many countries unless technologies such as carbon capture and storage (or use) or direct air capture are developed and can be implemented economically at scale. I also note the declining production of natural gas in the EU and conclude that more thought should be given to what new gas infrastructure is economically justified, who should bear the costs and the risk of underutilisation and how to exploit infrastructure in new ways in a decarbonising energy world.
Electricity utilities used to be able to take their consumers for granted.
Consumers now have increasing freedom to choose whom to buy from, whether to produce their own electricity and how to manage their consumption.
Consumers are able to add value to the electricity system and to participate in electricity markets.
The future for electricity companies is to partner with consumers.
For the traditional utilities, making this transition requires new corporate and regulatory strategies.
Traditional electricity companies are threatened from different directions: liberalisation; policies to combat climate change; falling costs of renewable power and batteries; regulation that encourages auto generation; and the development of smart electricity systems along with digital platforms. These changes are turning once-captive consumers into buyers with many choices, and indeed into potential competitors.
Furthermore, both large and small consumers are now able to offer increasingly valuable services to the electricity system, including flexible demand response to provide backup to intermittent renewables. The new independence of consumers and the value they now bring to the system require electricity companies to rethink their corporate cultures and their corporate and regulatory strategies. There is more value than ever before in collaborating with consumers.
The failure to partner with consumers threatens the demise of the traditional electricity companies, as competitors use new digital technologies and business models to win consumers. On the other hand, it is far from clear that the traditional companies have the right corporate structure, culture and strategy to succeed under these new conditions. They will need to change.
Costs of supply electricity in the EU have risen slowly since 2008, but final electricity prices have risen much faster.
The difference is a “government wedge” that includes taxes and subsidies for a range of public policies, including support for renewable power, cogeneration, fossil fuels, specific industries and consumer groups.
This wedge is becoming important in many EU countries, especially in Spain and Germany.
Small consumers are generally paying the bulk of these extra costs.
In Spain, this government wedge accounted for over 50% of residential tariffs in 2012.
This report compares final electricity prices among EU countries and shows that the government wedge largely explains price trends between 2008 and 2012. The wedge reflects taxes, levies and other charges that governments recover through the electricity tariff and that they use to finance the central budget as well as specific programs, including support for renewable electricity, cogeneration, certain customer categories, specific fossil fuels and other public policies.
While average wholesale prices have not risen and average EU network costs have risen modestly over the period, the average government wedge has increased significantly, and indeed by over 50% in some EU countries. Those countries with the highest prices tend to be the ones with the largest government wedge; this is typically associated with strong support for renewable power, notably in Germany and Spain.
Residential consumers bear most of these extra costs in absolute terms, with the government wedge accounting for more than 50% of a residential consumer's electricity price in Spain in 2012. Industrial consumers in Spain have also seen rapid growth in the wedge, which could be hurting their competitive position.
The report calls for greater transparency over what policy costs are being recovered through tariffs, who is bearing those costs and who is benefiting. It also calls for some of the policy costs to be recovered through central government budgets and through environmental taxes. And it recommends a rethink of EU policy on energy and climate change so as to enable competitive markets, rather than governments, to drive investment decisions.
Link to report (in Spanish)
Brattle report recommends Changes to British and Spanish Power Market Design to Meet Resource Adequacy and Low Carbon Objectives
Great Britain (GB) and Spanish electricity markets both require reforms, even though the UK is short of capacity and Spain has an excess.
The common denominator is that they both need to design electricity sector models that will help them to meet their capacity needs and their carbon reduction targets at minimum cost.
The proposed solution is that both countries introduce resource adequacy markets to ensure that sufficient flexible capacity is available to cope with the growing share of intermittent renewables.
This report by The Brattle Group - prior to the adoption in GB of its electricity market reform - recommends reforms to the British and Spanish power markets that would help to achieve both resource adequacy and government-mandated carbon reduction objectives. The analysis draws on international experience to evaluate how different wholesale market models deal with the dual objectives, and concludes that all market models face a growing challenge to ensure resource adequacy in the presence of low carbon policy objectives.
The authors illustrate their findings by referring to the challenges facing Spain and Great Britain (GB). While Spain is suffering from an excess of capacity, GB may be facing a capacity shortage. However, both markets need to continue building renewables in order to meet their EU targets. The authors recommend that both Spain and GB introduce resource adequacy markets to ensure that sufficient operating reserves (including demand response) are available to cope with an increasing share of intermittent generation – an important issue that was identified in their analyses of low carbon objectives under all market models. Since the report was written, Britain has adopted some of the proposals, including a resource adequacy market.
The paper, "Resource Adequacy and Renewable Energy in Competitive Wholesale Electricity Markets," was written by Brattle principals Serena Hesmondhalgh, Johannes Pfeifenberger and David Robinson.