BMI View: As the EU looks to establish a package of measures aimed at tackling energy and climate change through 2030, we believe disagreements between member states over the scope and type of measures that will succeed the current 20-20-20 targets will complicate proceedings significantly. Indeed, we have already seen differences over the type of targets to be implemented start to emerge at the beginning of 2014, with certain countries reportedly favouring the setting of both emissions reduction and strict renewable-generation goals, while others - like the UK - favour a sole greenhouse gas emissions reduction target. With the UK favouring the latter option because it gives it more flexibility when establishing its energy mix, we highlight that negotiations over legislation are likely to be protracted - with some measures likely to be hotly disputed by member states.
Aligning with our view that the setting of new targets to replace the European Union (EU)'s current 2020 goals - which aim to ensure 20% of all electricity is generated from renewables and secure 20% efficiency savings and 20% cuts to emissions (relative to 1990 levels) - has the potential to be a drawn out and fraught affair, differences between member states are already starting to emerge. To this end, Reuters reports that it has seen a letter dated December 23 2013 that was sent to EU commissioner for climate action Connie Hedegaard as well as energy commissioner Guenther Oettinger - emphasising the need for the EU to set a new 2030 goal for renewable energy use.
While the EC is already reported to be considering establishing a 40% emissions reduction target and a 30% renewables goal to 2030 (according to EU sources cited by Reuters), the letter appears to have been sent to highlight the importance to many European countries of establishing both a new renewables target and an emission reduction target - as opposed to just pursuing an emissions reduction target. Notably, the letter was signed by ministers from Austria, Belgium, Denmark, France, Germany, Ireland, Italy and Portugal.
|Targeting Emissions, With Renewables In Play|
|Green House Gas Emissions By Country 2011, ('000 tonnes of CO2 equivalent)|
However, in our view, this letter is problematic with regards to establishing EU energy policy to 2030 because, while many of the aforementioned countries are in favour of new renewables targets, others like the UK, prefer the setting of a single binding emissions reduction target (as opposed to having a renewables target as well). Indeed, UK energy secretary Ed Davey has been a proponent of such a measure, contending that a single target would allow governments more flexibility in how they choose to cut those emissions; for example, by allowing them to focus on energy efficiency measures rather than building new renewables capacity. As such, this difference in opinion hints at the potential for the stalling and derailment of legislation as the legislative process takes place over the next two years.
Indeed, we believe that there is potential for policy stalemate because both the proposed single binding emissions reduction target and a dual target have their advantages. A target for renewable energy would not only help curtail reliance on import-dependent fossil-fuelled electricity generation and in theory help reduce emissions (although we note that this hasn't happened in Germany, where heavily subsidised renewables have indirectly led to an increase in emissions as more cheap coal is utilised), but it would also provide an element of certainty for investors in renewable generation capacity in Europe. This would clearly benefit European renewable energy companies such as Denmark's Vestas and Spain's Acciona.
Equally, in our view, Davey's position is also reasonable and may gain favour with some other countries in the EU. It is notable that the UK has recently moved to bring new nuclear power plants online ( see 'Paying The Price To Secure Nuclear Investment', October 22 2013), a source of power generation that produces no emissions but would not help the UK to meet binding 2030 renewables targets - despite the huge cost of establishing nuclear power. This dynamic, in our view, clearly underscores the UK's desire for the more flexible emissions reduction target.
Fears have also been raised that maintaining more than one target (there are three under the current 20-20-20 green energy goals), could continue to undermine Europe's flagship Emission Trading Scheme (ETS). While the scheme has faltered because of a surplus of permits and falling electricity demand in Europe ( see 'ETS Policy Still A Long Way From Reform', November 14 2013) the argument could be made that a focus on a single emissions reduction target would give the ETS - which would hit coal-fired power capacity particularly hard if the price of carbon credits jumped substantially - added significance.