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1. Overview of related reports & publications
On November 30th, the European Commission published its sizable 'Clean Energy for All Europeans’ Package, including eleven legislative proposals on the medium to long-term fate of the European energy sector. Lost in the flurry of activity surrounding big files, such as those on renewable energy and energy efficiency, were some smaller pieces of the package which went under the radar of European stakeholders. And quite conveniently it would seem.
Summary of EU reports
A number of pieces published by the European Commission on November expose the persistence of fossil fuel subsidies and the obstructions they cause to Europe’s clean energy transition. Below, we lay out these various files which bring in the financial and market elements to Europe’s energy sector, which unlock the potential for a more ambitious pursuit of renewable energy and energy efficiency:
- The European Commission’s report on energy prices & costs
- The Commission Communication on accelerating clean energy innovation
- The Communication entitled "Clean Energy for All Europeans"
- The Annex that accompanies that Communication - "Action to boost the clean energy transition"
The various papers published by the European Commission clearly point out a serious problem that we face: while the European Union wants to be a leader in the renewable energy revolution, fossil fuel subsidies are still persistent across the EU and its Member States. The inconvenient truth for European decision makers is that these subsidies distort the energy market by primarily benefiting a handful of energy-intensive and large polluting industry, and that public money is still being used to obstruct the EU’s transition to clean, renewable-based energy.
The energy prices & costs report re-affirms its findings from research conducted in 2014 that approximately €17.2billion was given as direct fossil fuel subsidies to electricity and heating in 2012, support for fossil fuels for transport were separately estimated at €24.7 billion. If ‘external costs’ like air pollution and health costs of fossil fuel combustion are counted in, fossil-fuel subsidies rise to €300 billion a year in the EU (Energy prices and costs in Europe {SWD(2016) 420 final}, page 17). This compares to twice the total annual EU budget.
For civil society and environmental organisations the admission of the harmful and egregious nature of fossil fuel subsidies has been obvious for years. But the recent assertions made by the European Commission mark an important indication that policy makers and political actors are finally waking up to the detrimental nature of fossil fuel subsidies. The reports suggest that these subsidies should no longer be an elusive and hidden issue dodged by decision-makers and political actors across the EU, but that they should be front and centre of the debate on transforming Europe’s economy to be 100% renewable and fully energy efficient.
The publications acknowledge the significant distortive impact fossil fuel subsidies have on markets, prices and the clean energy transition, yet the European Commission itself went surprisingly quiet on the topic when promoting its ‘Clean Energy Package’. While the Commission claims that “The EU is committed to removing fossil fuel and environmentally harmful subsidies”, the responsibility to act is tacitly placed on Member States. This stems from the assumption that much of the necessary effort falls under Member State competences rather than those of core European Union institutions.
Our expectations of the EU
It is true that government led action is necessary, but EU institutions including the European Commission also need to be torch bearers for phasing out fossil fuel subsidies. Through its policies and processes – such as the Emissions Trading Scheme, capacity mechanisms and state aid guidelines, and funding instruments – the European Commission should put itself forward for greater ambition and action to ensure that no public money in the EU is going to polluting industry. Similarly the EU budget with its European infrastructure and regional development funds, as well as the much lauded European Fund for Strategic Investments should be at the forefront of the clean energy transition, pledging to halt any current or potential financial support for the fossil fuel sector.
The problem of fossil fuel subsidies is laid bare, but so too are the opportunities to phase them out. European countries should take advantage of the low energy prices, which allow them to remove harmful subsidies without incurring any social or economic consequences for their citizens. Alongside these measures, governments should make use of European policies and financial instruments to prioritise clean energy alternatives.
2. Capacity Payments – what is behind the techy term?
Adding more reading to our long list of papers is the Communication on Energy Market Design which was also included in the so-called “Winter package”. This paper includes provisions concerning capacity payments. Capacity payments are support schemes that remunerate generation availability, in addition to any revenue already gained from selling generated electricity on the market, they have been already introduced in some EU countries eg. UK and France.
Capacity payments are especially critical to deal with fluctuating renewable power — to step in when the wind stops blowing or the sun isn’t shining. These plants often have to be subsidized, and in many cases are coal- or gas-fired power plants. Brussels plans to allow EU countries to continue using these payments, but only as a last resort.
The new rules on capacity payments will complement existing state aid guidelines by creating a European framework and imposing concrete rules. Draft Electricity Market regulation includes principles for capacity mechanisms i.a. :
- Member States shall monitor resource adequacy within their territory based on the European resource adequacy assessment, and also taking into account storage, demand-side and energy efficiency measures;
- If the European resource adequacy assessment has not identified a resource adequacy concern, Member States shall not introduce capacity mechanisms;
- Member States willing to introduce a capacity mechanism shall consult on the proposed mechanism at least with its electrically connected neighbouring Member States.
- Capacity mechanisms must be open to participation of all resources, including storage and demand side management. However generation capacity emitting more than 550 gr CO2/kWh cannot be committed in capacity mechanisms 5 years after the regulation comes into force. And new capacities exceeding 550 gr CO2/kWh standard would be ineligible as well.
However, these so called Emission Performance Standards still allow for fossil fuel based backup capacity, thus the Commission “proposes to keep the gate open for more money to be poured into coal power plants,” said Jean-François Fauconnier from Climate Action Network. “With such proposals the EU would miss a historic opportunity to revamp market rules which until now favor large, polluting fossil fuel and nuclear power plants.”
3. Next Steps
Following this big package of proposals and reports, CAN Europe is preparing a number of briefings and position papers surrounding those that will be negotiated with Members of the European Parliament and EU governments. That includes issues such as capacity mechanisms.
We will do specific follow up with the European Commission on the avenues for changing the game on subsidies that have been highlighted in the various publications:
- Energy governance and reporting required by Member States in their National Energy & Climate Plans (NECPs). Part of this planning and monitoring mechanism member states have to explain the financing behind their plans, i.e. how much public funds (national and EU) they are going to invest on the various sectors and technologies. And they also should report on the phase-out of fossil fuel subsidies.
- Taxation: whether the reference to evaluating the EU’s framework on energy taxation will be plausible opportunity to influence Member States on subsidies through taxation.
- Reviewing State Aid guidelines as a means to stimulate innovation in renewable energy technologies in EU Member States.
4. Conclusion
The benefits of phasing out fossil fuel subsidies are manifold. It will facilitate the allocation of more support to research and innovation in clean technologies such as energy efficiency, renewable energy and storage. It will also contribute to enhancing European and international climate action, healthier and cleaner local environments, and easing government budgets.
With these two publications, the Commission has put the writing on the wall, clearly indicating that the convenient silence surrounding fossil fuel subsidies needs to be broken. The EU and its leaders cannot shy away from the evidence provided by its own institutions. Fossil fuel subsidies need to become a thing of the past if we are to achieve a meaningful energy transition and avoid dangerous climate change.
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