Europe’s Energy Policy Flawed: Consultants 1

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Monday, October 27th, 2014
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Two senior consultants at one of the world’s leading advisory groups have lashed out at Europe’s energy policies, claiming rules both within individual countries and across the continent as a whole have created structurally distorted pricing and dysfunctional markets.

Boston Consulting Group senior partner and managing director Christopher Brognaux and principal Patrick Herhold say energy policy-making throughout the continent suffers from an excessive focus on the micro level without taking into account the impact upon the broader power system, inadequate recognition of the broader economic impact of policy changes, an ineffective and expensive array of programs intended to bolster renewable energy and constantly shifting market dynamics which create uncertainty across the value chain.

The consultants have called on policy makers to let markets determine power prices but say companies should adapt strategies to account for permanent regulatory burdens and uncertainty.

“The energy policies of Europe as a whole and of individual European countries have created a seriously flawed power market,” Brognaux and Herhold said.

“Across the board, well-intentioned initiatives have led to pricing and market distortions that pose significant challenges to industry players and consumers alike. Efforts aimed at achieving the best of all possible worlds—market liberalisation, reduction of carbon-dioxide emissions, and affordability have resulted in policies whose outcomes fail to meet most of their intended objectives.”

The consultants cite a number of examples of what it says are unintended problems created by poorly thought out rules.

Subsidies for solar photovoltaic and wind energy, for example, crowd out necessary conventional backup-generation capacity in existing power markets and in turn necessitate additional support for conventional power plants to ensure the security of supply, they say. Meanwhile, feed-in tariffs and net metering which ensures anyone who owns, for instance, rooftop solar-photovoltaic system earns a set rate from the utility for all the electricity that system generates and feeds into the grid leaves fewer customers to pay the cost of maintaining the grid.

Another example surrounds the closure of nuclear power plants without adequate consideration of how this impacts energy prices and industrial competitiveness.

The consultants’ views come amid reports that EU energy and environment ministers are working to reach a deal for policy plans and goals for the year 2030 before a planned summit on October 23-24, which is said to include a binding goal to cut greenhouse gases by 40 per cent by 2030, boost the EU wide share of renewables in energy consumption to 27 per cent and extend targeted energy savings of 20 per cent by 2020 to 30 per cent by 2030.

While many environmentalists would no doubt support some or all of these measures, some measures have drawn criticism even from those in the science field.

Earlier this year, Harvard Environmental and Economics Program Business and Government director Robert N. Starvins wrote in a blog post that the renewable energy target were actually harmful for both the economy and the environment due to conflicts with other policies such as the Emissions Trading Scheme, as it caused the cap for the ETS to be achieved at a higher cost than would otherwise be the case. He added that it also inhibits greater incentives for climate friendly technological change.

Brognaux and Herhold have called for a market-based system under which payments received by all generators, including renewable energy generators, are tied directly to the market price. Under this system, producers of intermittent sources of renewable energy who are exposed to the market have to hedge to compensate for the low prices they will receive when they produce lots of electricity as well as for the fact that they may not receive any revenues when the sun is not shining and the wind is not blowing.

Still, they are not optimistic about anything like this happening.

“We expect no major shift in policy making as long as security of supply is somehow maintained and the lights stay on,” they wrote. “Such a significant shift would require Europe to acknowledge that its deregulation strategy has been flawed.”

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  1. Ray Del Colle

    A tax on carbon is long overdue. Switching to renewable energy will create jobs, stimulate the economy, save money and clean up the environment. "America has the natural resources to meet its energy demand with clean, renewable energy. It's time to harness that full potential."