The European Energy Transition Actors, Factors, Sectors

European Energy Studies

Edited by Susanne Nies Preface by Jacques Delors

LAW PUBLISHING The European Energy Transition: Actors, Factors, Sectors European Energy Studies

Volume 1 A New Architecture for EU Gas Security of Supply Jean- Michel Glachant, Manfred Hafner, Jacques de Jong, Nicole Ahner, Simone Tagliapietra

Volume 2 EU Energy Innovation Policy Towards 2050 Jean-Michel Glachant, Nicole Ahner and Leonardo Meeus

Volume 3 The Geoeconomics of Sovereign Wealth Funds and Renewable Energy Simone Tagliapietra

Volume 4 Security of Oil Supplies: Issues and Remedies Giacomo Luciani

Volume 5 Shale Gas in Europe Cécile Musialski, Matthias Altmann, Stefan Lechtenböhmer and Werner Zittel

Volume 6 The Globalization of Natural Gas Markets Manfred Hafner and Simone Tagliapietra

Volume 7 The European Supergrid Ana Aguada Carnago

Volume 8 The European Energy Union The quest for secure, affordable and sustainable energy Rafael Leal-Arcas

Volume 9 Turkey and the EU – Energy, Transport and Competition Policies Ahmet O. Evin, Emre Hatipoglu and Peter Balazs

Volume 10 The EU ETS and the European Industry Competitiveness: Working Towards Post 2020 Chiara Spinelli

Volume 11 The Security of Europe’s Oil and Gas Supply Giacomo Luciani

Volume 12 EU Energy Law and Policy: A South European Perspective Leigh Hancher and Antonis Metaxas

Volume 14 The European Energy Transition: Actors, Factors, Sectors. Susanne Nies

Volume 15 Transformation of EU and Eastern Mediterranean Energy Networks Leigh Hancher and Antonis Metaxas The European Energy Transition: Actors, Factors, Sectors

Edited by Susanne Nies

Contributors Jacques Delors Philip Lowe Sami Andoura Leonardo Meeus Antonella Battaglini Susanne Nies Klaus-Dieter Borchardt Philipp Offenberg Christian Buchel Jean-Baptiste Paquel Dirk Buschle Diego Pavia Claire Camus Thomas Pellerin-Carlin Alicia Carrasco Alberto Pototschnig Andrzej Ceglarz Konrad Purchała Olivier Corradi Laurent Schmitt Marina Cubedo Vicén Helmut Schmitt van Sydow Jos Delbeke Theresa Schneider Gustav Fredriksson Christian Schülke Christophe Gence-Creux Jesse Scott Dolf Gielen Pierre Serkine Jean-Michel Glachant Konstantin Staschus Simeon Hagspiel Frauke Thies Tom Howes Sonya Twohig Luis Janeiro Peter Vis Pascal Lamy Kirsten Westphal Maria Eugenia Leoz Georg Zachmann Martin-Casallo

ISBN hardcover: 9789077644607 ISBN E-book: 9789077644591

The paper and board used in the production of this book is sourced exclusively from replanted forests.

All rights reserved. This publication, in whole or in part, may not be copied, reproduced nor transmitted in any form without the written permission of the copyright holder and the publisher. Applications to copy, transmit or reproduce any part of this work may be made to the publisher.

Published in 2019 by

Claeys & Casteels Law Publishers Deventer (Netherlands) – Leuven (Belgium)

P.O. Box 2013 7420 AA Deventer Netherlands www.claeys-casteels.com Table of Contents

TABLE OF CONTENTS

Chapter 1 Foreword by Jacques Delors, Founding President of the Jacques Delors Institute...... 21

Chapter 2 42 Authors exploring Europe’s Energy Transition: About this Book...... 25 Susanne Nies

PART 1 – SETTING THE SCENE: CLIMATE, SECURITY OF SUPPLY AND COMPETITIVENESS – INSEPARABLE...... 33

Chapter 3 EU Climate Policy as a Driver of Change ...... 33 Jos Delbeke & Peter Vis

1. Introduction ...... 33 2. International process...... 34 3. EU policy response...... 40 4. Carbon pricing and the EU’s Emissions Trading System...... 43 5. Conclusion...... 47

Chapter 4 Security of Supply: a new Focus on Electricity...... 51 Susanne Nies

1. Risks are changing...... 51 2. Security of supply and the scope of risks Europe is exposed to...... 53 3. The UE institutional and regulatory set up for energy security...... 55 4. Oil ...... 57

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5. Gas: from golden age of gas to bronze and back to gold again?...... 58 5.1 Import Dependency gas: the status quo...... 59 5.2 The role of LNG for security of supply...... 61 5.3 Europe’s regulatory response to import dependency on gas.....62 6. Power: changing electricity paradigm and new risks...... 63 6.1 Europe’s meandering electricity geography...... 64 6.2 European blackouts and challenges since 2003...... 64 6.3 Nuclear risks...... 66 6.4 Traditional risks related to third countries...... 66 7. Always a winning bet: the first fuel energy efficiency...... 69 7.1 Managing risks in a system with variable Renewables...... 69 7.2 New climate risks ...... 70 7.3 New risks: Cybersecurity, power electronics and sector coupling...... 71 7.4 Regulatory response to security of electricity supply risks...... 72 7.5 Recommendations for the incoming EC and EP...... 73

Chapter 5 The Distributional Effects of Climate Policies...... 75 Gustav Fredriksson & Georg Zachmann

1. Introduction ...... 75 2. Assessing the distributional impact of policies...... 76 2.1 Income side...... 76 2.2 Expenditure side...... 77 2.3 Government side...... 78 2.4 Summary...... 79 3. Distributional effects of climate policies...... 80 4. The distributional effects of a real-world climate policy: The EU ETS..83 4.1 Allocation of free allowances...... 84 4.2 Indirect cost compensation for electricity-intensive firms...... 85 4.3 Overall distributional impact of the EU ETS...... 85 5. Non-action...... 86 6. Conclusion and recommendation to the incoming Commission and EP...... 88 7. References...... 90

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Chapter 6 Innovation: a Vital Challenge for the European Energy Transition...... 93 Pascal Lamy & Thomas Pellerin-Carlin

1. Innovation is vital for Europe and for the energy transition...... 95 1.1 Innovating to reduce global greenhouse gas emissions ...... 95 1.2 Innovating for competitiveness ...... 96 1.3 Innovating to enhance Europe’s soft power ...... 96 2. Leading in energy innovation: EU successes and challenges...... 97 2.1 Energy sectors: where the EU leads, lags or falls behind...... 97 2.2 Two cross-sector challenges for the EU ...... 98 2.3 Energy-specific challenges ...... 100 3. The UE has potent tools to boost energy R&I...... 101 3.1 How much does the EU invest in R&I ?...... 101 3.2 H2020: how the EU R&I budget is being invested...... 102 4. How to get it done: proposals to improve the European energy R&I policy...... 102 4.1 Horizon Europe...... 102 4.2 A significantly increased EU R&I budget...... 103 4.3 Designing energy-related innovation « missions »...... 104 4.4 The European Innovation Council...... 105 4.5 Involving citizens to legitimize the EU R&I policy...... 106 5. Conclusion and recommendation to the next European Parliament and next European Commission...... 107 6. References...... 108

Chapter 7 Renewables Driving the Energy Transition: Europe in the Global Context...... 111 Dolf Gielen & Luis Janeiro

1. Introduction...... 111 2. Renewables deployment in the EU: A decade in the balance...... 112 2.1 Renewable electricity: cornerstone of the European energy transition...... 113 2.2 Renewable heat: room for acceleration of the transition...... 115 2.3 Renewables in transport: renewed commitment through electrification...... 116

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3. Prospects of renewables to 2030...... 118 3.1 Impacts of accelerating renewables...... 119 3.2 Implications of the new 2030 targets...... 119 4. Renewables and long-term decarbonization...... 120 4.1 EU decarbonisation milestones...... 120 4.2 Long-term European and global decarbonisation challenges...... 121 4.2.1 Power sector...... 122 4.2.2 End use-sectors...... 122 4.2.3 The decarbonization gap – innovation needs...... 123 5. Moving forward: European global leadership in renewables...... 124 6. References...... 128

PART 2 – INSTITUTIONS FOR THE ENERGY UNION...... 131

Chapter 8 An Introductory Overview on Institutional Change...... 131 Susanne Nies

1. The iser of EU energy policy over seven decades...... 132 2. What institutions?...... 136 3. The democratization of energy in Europe and the expansion of interest groups and institutions, as well as start-ups...... 137 4. European Commission, EP, Council...... 138 5. Regulatory institutions and their architecture...... 139 6. Transmission and distribution system operators and their European faces...... 139 7. Informal forae: Florence Forum, Madrid Forum, Dublin Forum ...... 139 8. The Regional and the Local...... 140 9. Cooperation beyond membership...... 141 10. Standardization architecture- CEN CENELEC...... 141 11. The UE as part of the global energy and climate architecture: incubating phase four of a climate driven institutional setting?...... 142 12. Looking forward and recommendations for Policy makers...... 143

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Chapter 9 The EU, the UK and Energy: not much Shared Ambition post-Brexit...... 145 Sir Philip Lowe

1. Continuing uncertainty over future UK-EU relations…...... 145 2. ... but so far a consensus that Brexit will only have a limited impact at least in the short term...... 145 3. The Withdrawal agreement contains further guidance on the impact on the energy sector ...... 146 4. UK-EU energy cooperation post-Brexit...... 148 5. The ayw forward...... 150

Chapter 10 Regionalisation and Regional Cooperation in the European Electricity Markets...... 153 Klaus-Dieter Borchardt & Maria Eugenia Leoz Martin-Casallo

1. Introduction ...... 153 2. The egionalr approach prior to the Clean Energy for All Europeans Package ...... 154 2.1 From the First Electricity Directive to the Third Energy Package ...... 154 2.2 Third Energy Package and regionalisation in the context of electricity network codes ...... 156 2.3 Regionalisation and regional cooperation in other legislative and non-legislative initiatives ...... 158 3. The egionalr approach in the Clean Energy Package...... 159 3.1 Energy Union Framework Strategy...... 159 3.2 Proposed measures enhancing regionalisation and regional cooperation in the electricity sector...... 160 3.3 Proposals on Regional Operational Centers as a tool to enhance regional TSO cooperation...... 161 3.4 Negotiation of the proposals on ROCs...... 167 3.4.1 The Council’s General Approach ...... 168 3.4.2 The uropeanE Parliament Report...... 168 3.4.3 The political Agreement of the European Co-Legislators...... 169 4. The way forward: key questions yet to be addressed...... 171

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Chapter 11 The ACER Experience...... 175 Alberto Pototschnig

1. An Agency from scratch: the establishment of the Agency and its purpose...... 175 2. Shaping the Internal Energy Market: the Agency’s tasks and responsibilities under the Third Energy Package and the Infrastructure Package...... 178 3. REMIT: venturing into uncharted waters...... 183 4. A unique governance: four bodies and decision-making...... 188 4.1 The Agency’s four bodies...... 188 4.2 Decision-making in the Agency...... 190 4.3 Independence and neutrality...... 192 5. The hreet main challenges: resources, resources and resources...... 194 6. An evaluation of the Agency’s activities...... 199 7. The future of the Agency: the “Clean Energy for All Europeans” Package...... 203 7.1 The role of the Agency in the development of TCMs and, in general, in solving disputes between NRAs ...... 205 7.2 The role of the Agency in the regulatory oversight of EU entities...... 207 7.3 The internal decision-making process in the Agency...... 208

Chapter 12 The ENTSO-E Experience...... 211 Konstantin Staschus

1. Rationale for TSO cooperation...... 211 1.1 Advantages of interconnection...... 211 1.2 European TSO associations: Already a technical success story 1951-2009...... 212 2. The ationaler for ENTSO-E...... 214 2.1 ENTSO-E foundation, tasks and structures: EU, regional and national...... 215 2.2 The establishment of ENTSO-E: The voluntary, early and eager part...... 215 2.3 Tasks and achievements ...... 217 2.3.1 Network Codes: Rules which enable the energy transition...... 217

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2.3.2 TYNDPs and Adequacy Forecasts: Grid planning and reliability warnings for the energy transition...... 220 2.3.3 Efficient, secure and future-proof...... 221 2.4 Context and benefits of the ENTSO-E tasks...... 223 2.5 ENTSO-E organisation and governance: Balance of formality and realism...... 224 2.6 Coordination of national, regional and European levels...... 226 2.7 Global comparisons and influence...... 226 2.8 Digitalisation and TSO/DSO cooperation...... 227 3. The leanC Energy Package and beyond...... 228 4. Conclusion...... 229

Chapter 13 The Changing Role of DSOs and their New Role in the EU Agenda...... 231 Christian Buchel

1. The ransformationt of DSOs: from unbundling to neutral market facilitator...... 232 2. Digital technology as a key factor for smart DSOs and the French case of Enedis...... 234 3. The framework needed to allow European DSOs to serve the energy transition...... 236

Chapter 14 The Energy Community – Ready for the Clean Energy Transition?...243 Dirk Buschle

1. The nergyE Community – mission accomplished?...... 243 1.1 Creating and integrating energy markets...... 244 1.2 Security of supply and the export of European energy law....246 1.3 Sustainability...... 248 2. Governance challenges...... 250 2.1 Enforcement...... 252 2.2 Reciprocity...... 256 2.3 New governance challenges...... 259 3. The nergyE Community and the clean energy transition...... 261 4. Conclusion and recommendations for policy-makers...... 263

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PART 3 – COMPETITIVE ENERGY FOR ALL EUROPEANS...... 265

Chapter 15 A Climate and Energy Union for the Future of Europe: What comes after the « Clean Planet for All » EU strategy?...... 265 Sami Andoura & Philipp Offenberg

1. As the impacts of climate change are becoming more visible, citizens do not tolerate inaction anymore...... 266 2. Climate change is about to become a socially dividing issue...... 267 3. The orldw needs a robust global governance on climate change...... 268 4. Asia is becoming the global centre of clean tech investment and innovation...... 269 5. Europe needs to shift from moral to technological leadership...... 270 6. Europe needs to think more strategically when it comes to investments and access to resources...... 270 7. Can Europe use the energy transition to catch up on the digital revolution?...... 271 8. Europe needs to prepare for the new risks coming with the new energy world...... 272 9. Conclusion...... 273

Chapter 16 EU electricity market: the good, the bad and the ugly...... 275 Konrad Purchała

1. The good...... 275 1.1 No barriers to electricity trade among all European countries...... 275 1.2 Coordinated price formation under European-wide market coupling mechanism ...... 276 2. The bad...... 278 2.1 More market integration and more transmission investments, but cross-zonal capacities remain low...... 278 2.2 Zonal market model leads to decoupled market and system operations ...... 279 2.3 Technically infeasible market outcome requiring large-scale redispatching measures ...... 280

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2.4 The zonal market does not facilitate correct incentives for efficient behavior...... 281 2.5 Insufficient price signals to facilitate generation adequacy.....282 3. The glyu ...... 283 3.1 Course correction is very difficult, if possible at all...... 283 4. Clean Energy Package: the swan song of the zonal market?...... 285 5. The new power system requires new market solutions!...... 286

Chapter 17 The European Electricity Market Integration Process...... 289 Christophe Gence-Creux

1. Introduction...... 289 2. Main achievements in the European electricity market...... 289 3. Completion of European market integration and need for paradigm shift in Eruopean TSO mindset … ...... 297 4. … which might be put into question due to political interferences...... 300

Chapter 18 Vulnerable Customers and Energy Poverty...... 303 Marina Cubedo Vicén

1. Understanding energy poverty and its causes...... 303 2. Energy poverty in Europe...... 304 3. How to address energy poverty: measures and the creation of the EU Energy Poverty Observatory...... 305 4. References...... 310

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PART 4 – SECTURITY OF SUPPLY FOR ALL EUROPEANS...... 313

Chapter 19 What Future for Gas and Gas Infrastructure in the European Energy Transition?...... 313 Christian Schülke

1. Introduction...... 313 2. The oler of gas and the gas infrastructure up to 2030...... 315 3. What can be the role of gas and the gas infrastructure in a 2050 decarbonisation perspective?...... 320 4. The ayw forward...... 323 5. References...... 325

Chapter 20 Russia – EU Relations and the Energy Transition...... 327 Kirsten Westphal

1. Introduction...... 327 2. Quantifying EU-Russia Energy Trade...... 328 3. In retrospective: The development of institutionalized EU-Russian energy relations...... 332 3.1 The first phase till 2000...... 332 3.2 The EU-Russia Energy Dialogue...... 334 3.3 EU’s Energy Union and EU-Russian Energy Relations in times of geopolitical crises since 2014...... 340 4. Conclusions and recommendations...... 342

Chapter 21 The Cybersecurity Challenge...... 345 Sonya Twohig

1. Introduction...... 345 2. How to assess the problem ...... 347 3. Case Study – Grids Under Attack...... 348 3.1 Case Study – Ukraine...... 348 3.2 Case Study – US the Trendsetter?...... 350 4. Risk Preparedness and thee Energy Transition...... 352

14 Table of Contents

5. The Solution?...... 354 5.1 Roles and Responsibilities ...... 355 5.2 Standards, Network Codes & Over-regulation...... 355 5.3 Investment, Incentivization, Prudency of Costs...... 356 5.4 In terms of what are two things a system operator can do now...... 356 6. Conclusion and recommendations...... 357

PART 5 – INNOVATION AND NEW PLAYERS IN THE ENERGY TRANSITION...... 359

Chapter 22 Communicating the Energy Transition...... 359 Claire Camus

1. Definitions...... 359 2. Liberalisation: from ratepayers to rateplayers...... 360 3. The nergye transition: from customer inertia to customer activism...... 362 4. Digitisation: a power system at finger tips?...... 364 5. Communication & power networks – from a nice-to-have to a must-have...... 366 6. What’s next?...... 368

Chapter 23 Digital Energy ...... 373 Jesse Scott

1. What is digital energy?...... 374 2. How should EU decision-makers respond to the digital energy future? ...... 378 2.1 Market liberalisation...... 379 2.2 Decarbonisation...... 382 3. Recommendations...... 384

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Chapter 24 New Digital Grid Architectures and Platforms...... 387 Laurent Schmitt

1. The urrentC Grid transformation paradigm...... 387 2. Evolutions of Grid Systems and technologies at Gridedge...... 389 3. The new Smart City integration layer...... 394

Chapter 25 Thirteen Disruptive Innovations to accelerate New Business Models in the Energy Sector ...... 397 Alicia Carrasco

1. Definition...... 397 2. The nnovationsi ...... 399 2.1 Demand response and consumption side interest...... 399 2.2 Virtualization of metering and production of distributed energy...... 399 2.3 Massive amount of information...... 401 2.4 Digitalization…...... 401 2.5 Energy frameworks and political leadership...... 402 2.6 Private sector and people led clean energy investment ...... 404 2.7 Diversification to decarbonize...... 406 2.8 Cities are shaping our future ...... 406 2.9 Industry development...... 407 2.10 Evolution of stakeholders’ roles and functions...... 408 2.11 Agile innovation scene ...... 409 2.12 Better technology performance at lower cost with data flows adding valuable functions...... 411 2.13 IT layer...... 413 3. Conclusion...... 414

Chapter 26 Tomorrow...... 417 Olivier Corradi

1. Climate change is the most important problem of our time...... 417 2. The need for an ubiquitous carbon signal...... 419 3. How Tomorrow contributes to mitigating climate change...... 421

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Chapter 27 How Innovation Can Accelerate the Energy Transition: Lessons Learnt at KIC InnoEnergy...... 425 Pierre Serkine & Diego Pavia

1. Innovation: an imperative for companies and countries, and the throttle for energy transition...... 426 2. The uropeanE cleantech innovation landscape: what role for the EU?...... 429 3. The 3 inningw cards for value creation innovation: Lessons learnt by KIC InnoEnergy since 2010 ...... 432 3.1 A brief description of KIC InnoEnergy and its track record since 2010...... 432 3.2 The first winning card: A multidimensional approach, not only TRL...... 435 3.3 The second winning card: A “one stop shop” for the innovator...... 438 3.4 The third winning card: A trusted innovation ecosystem.....440 4. Conclusion...... 442

Chapter 28 Managing the New Realities of Decentralised Energy Resources...... 443 Frauke Thies

1. The mperativei of smart energy management...... 444 2. Possible revenue streams for decentralised resources and services...... 445 2.1 On-site optimisation...... 445 2.2 Explicit market participation...... 446 2.3 Implicit market participation...... 446 3. Regulatory conditions to enable decentralised and innovative solutions...... 447 4. The uropeanE Clean Energy Package: opening markets for new technologies and business models...... 448 4.1 The right for self-generation and community ownership of electricity...... 448 4.2 Market access for decentralised resources and service providers...... 448 4.3 Choice of dynamic retail prices...... 449 4.4 The procurement of flexibility at distribution level...... 449 4.5 Relevant data access...... 449

17 Table of Contents

5. The challenge of effective price signals...... 450 5.1 Investment signals at wholesale level...... 450 5.2 Retail price signals...... 451 5.3 Reflection of network realities...... 452 6. The ayw forward? Recommendations for the new European legislative cycle...... 453

Chapter 29 The Power of Collaboration: the Case of the Renewable Grid Initiative...... 455 Antonella Battaglini, Andrzej Ceglarz & Theresa Schneider

1. Introduction: “If you want to go fast, go alone. If you want to go far, go together.”...... 455 2. How to collaborate: a learning process...... 456 3. New beginnings: changing perceptions ...... 457 4. The rta of staying relevant...... 460 5. References...... 461

Chapter 30 Training for the Energy Transition: Community Learning at Florence School of Regulation...... 463 Leonardo Meeus & Jean-Michel Glachant

1. Training challenges ...... 463 1.1 Multi-disciplinary engineers, economists, and lawyers...... 463 1.2 New entrants and consumer representatives...... 465 1.3 Sector convergence...... 466 2. Online training formats...... 467 2.1 Sharing knowledge where it is created...... 467 2.2 Community learning...... 468 2.3 Evolving across the spectrum...... 470 3. Training partnerships ...... 471 3.1 Partnerships to produce knowledge...... 471 3.2 Partnerships to share knowledge and organize community learning...... 472

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PART 6 – FACTS, MAPS AND SCENARIOS...... 475

Chapter 31 Facts and Statistics on the Energy Transition...... 475 Tom Howes

1. Historical picture of the energy sector in the EU...... 475 2. Transition 1...... 476 2.1 Market liberalisation...... 476 2.2 Transition of market coupling and security of supply...... 477 3. Transition 2 ...... 482 3.1 A sustainable energy mix...... 482 3.2 Transition in the electricity sector...... 484 4. Keeping the transition affordable...... 489 5. Cementing the direction of travel – market design and (45)-32-32.5...... 493 6. Climate neutrality by 2050...... 493

Chapter 32 A Forest of Scenarios – the Long-term Evolution of the European Energy System...... 497 Simeon Hagspiel & Jean-Baptiste Paquel

1. Introduction...... 497 2. From storylines to decision making...... 499 2.1 Scenarios, serving a purpose...... 499 2.2 How to use and trust scenarios?...... 501 3. Scenario building process...... 504 3.1 The art of building scenarios...... 504 3.1.1 Definition of scope and granularity...... 505 3.1.2 Definition of methodology and assumptions...... 506 3.1.3 Implementation ...... 508 3.1.4 Analysis...... 509 3.2 Storyline...... 509 3.3 Technical limitations...... 509 4. Arboretum: scenarios for the European Energy Transition ...... 510 4.1 Institutional scenarios...... 510 4.2 Other notable European scenarios...... 512

19 Table of Contents

5. Conclusion...... 514 6. References...... 515

Chapter 33 Lessons from 70 Years of European Energy Policy Transition...... 517 Helmut Schmitt von Sydow

1. Transition from war and fratricide to solidarity and peace ...... 518 keeping...... 518 2. The coal transition...... 519 3. Transition to dialogue – from Florence to Montecatini...... 520 4. The nternali market transition...... 521 5. Three packages reflecting subsidiarity and proportionality...... 523 6. The normative force of facts...... 523 7. The ransitiont from top down to bottom up...... 525 8. The Echternach way of transition...... 527

The authors...... 531

20 Chapter 1 – Foreword

CHAPTER 1

Foreword by Jacques Delors Founding President of the Jacques Delors Institute

Since 2008, national and European leaders have been dealing with crisis management on a daily basis. Their efforts have resulted in the Eurozone and the Schengen area being saved, and our Union strengthened.

Yet our Union must continue with its long-term objectives and promote positive messages, opening up new frontiers for European integration. We must work towards building a desirable future for all Europeans. As I often say, while Europe needs firefighters, it also needs architects.

If there is one project today which carries a positive vision for Europe, it is definitely the energy transition. Energy is the foundation of our nations’ power and is a key element in our daily lives: to transport the food we eat, heat the buildings we live in, power our televisions, phones and computers. As we shape our energy model, we shape the future of our societies.

If Europe’s architects are preparing a democratic, innovative, economically viable and socially fair Energy Union, it will contribute to a Europe that serves its citizens and paves the way for the rest of the world. If we fail in this project, the architects will have to give way to the firefighters, who will exhaust themselves putting out the fires caused by our past mistakes: climate refugees, dependence on Russia and Saudi Arabia, worsened energy poverty, the bankruptcy of energy suppliers who failed to adapt their strategy.

21 Chapter 1 – Foreword

The Energy Union, which we have been championing since 2010,1 was started by President Juncker. It is an ambitious project which can already be bolstered by the successes achieved by the European Union.

Back in 2005, the Hampton Court Summit was the meeting during which our energy-climate targets emerged. It led to the articulation of three target-goals: to reduce EU greenhouse gas emissions, to develop renewable energy sources, and to improve energy efficiency. The European Union is now broadly on track to meet its 2020 energy-climate targets.

The European Union now has the framework for the 2020 decade, with the ‘Clean Energy for all Europeans’ Package that has just been adopted. This package builds on past successes and significantly increases the European ambition to improve energy efficiency and develop more renewables in the 2020 decade.

As an architect needs to have an idea of how a house is going to look like in the end, the EU now has a clear objective for its Energy Union. The Paris Agree- ment, reaffirmed at COP24, is itself a European success, building on decades of continuous efforts to reach a global agreement to ensure the best chance that mankind avoids catastrophic climate change. We can now turn to the future with a clear purpose: net-zero emissions, a world where human activities will not emit a gram of C02 more than they can capture. This objective embedded into the Paris Agreement is now the objective of the European Union, with the European Commission asking the EU to reach carbon-neutrality by 2050, while several Member States have already set their own national targets to reach carbon neutrality by 2045 (e.g. Sweden, Finland) or by 2050 (e.g. France).

Those targets are necessary to provide certainty to all citizens, workers and businesses. But targets themselves will not perform the radical transformation of our way of life that we ought to perform.

Europe’s strength in the energy transition lies in the drive of millions of citizens, consumers, local elected representatives, researchers, innovators, entrepreneurs and workers, who make the energy transition a reality. Our mayors show everyday how the energy transition improves people’s life, as it reduces air pollution,

1 Delors Jacques, Buzek Jerzy, “Towards a new European Energy Community”, Tribune, Jacques Delors In- stitute, 9 May 2010; Andoura Sami, Hancher Leigh, Van der Woude Marc, “Towards a European Energy Community: a policy proposal”, Studies & Reports No.67, Jacques Delors Institute, March 2010; Andoura Sami, Vinois Jean-Arnold, “From the European Energy Community to the Energy Union”, Studies & Re- ports No.107, Jacques Delors Institute, January 2015; Pellerin-Carlin Thomas, Vinois Jean-Arnold, Rubio Eulalia and Fernandes Sofia, “Making the Energy Transition a European Success”, Report No. 114, Jacques Delors Institute, June 2017.

22 Chapter 1 – Foreword

traffic problems and stamps out energy poverty. Our wind power and energy efficiency companies are already the world leaders, providing jobs to thousands. We are already designing and manufacturing the clean energy solutions of today and tomorrow.

Europe has all the assets to succeed in its energy transition. We are the first in the world to have launched it and have paved the way for other global powers, such as China, to commit through the Paris Agreement. The US withdrawal from this Agreement further strengthens European leadership and enables us to attract innovators and investors who understand the opportunity created by the energy transition.

We have made great strides forward but there is still a great amount of potential. We must now leverage, increase and achieve it, to serve a long-term positive vision. Such vision was clearly defined by the European Commission in its Com- munication dated 25 February 2015 and confirmed at the highest level, by the commitment of all EU Member States to the Paris Agreement. This positive vision of our energy future has received widespread acclaim from citizens who support the fight against climate change by means of a European energy policy based on energy solidarity, energy efficiency, and renewables. I wish this element to be one of the defining topics of the European Parliament elections of 23-26 May 2019.

EU citizens, and the policy makers they will pick to lead the European Union for the next five years, need sound analysis of the stakes of the energy transition, and policy recommendations to make the energy transition a European success. This is what this book is about.

With the clean energy for all Europeans Package now adopted, we wish our national and European leaders to further understand the strategic importance of the Energy Union for our Europe, our nations and our way of life. The European elections and its aftermath are the opportunity to pave the way for the decisions that make the common aspirations of European citizens a reality: a socially-fair energy transition, guided by a European energy policy for all 27 Member States, based on energy efficiency and renewables, able to provide clean, safe and affordable energy to all Europeans. A lack of progress in achieving the Energy Union would cost citizens dearly and be detrimental to our ideal of a Europe which is democratic, prosperous, socially-fair and united in diversity.

Chapter 2 – Introductory Overview

CHAPTER 2 42 AUTHORS EXPLORING EUROPE’S ENERGY TRANSITION: ABOUT THIS BOOK

Susanne Nies

‘Europe’s strength in the energy transition lies in the drive of millions of citizens, consumers, local elected representatives, researchers, innovators, entrepreneurs and workers, who make the energy transition a reality.’

(Jacques Delors 2019)

2019 – a year of change: from an institutional point of view, a new European Parliament will be entrusted by Europe’s citizens in May, and a new Commis- sion will step in thereafter. 2019 is also the last year of a decade that has seen the ‘beauty’ and ‘the beast’, the good and the ugly. On the positive side it has seen Europe getting out of the recession and renewing with growth. On the ugly side on the other Europe has seen a major crisis over migration and terrorism, and over Brexit.

On energy and climate more specifically it is beautiful that the commitments from the 202020 targets, from the Paris Agreement in 2015 have translated into the promising next steps like the COP 24 agreement or the Clean Energy Pack- age for all Europeans, that puts the citizen at the heart of the energy transition. But on the debit side we have to acknowledge that 2018 was the hottest year in history1 ever measured, with unprecedented devastating fires in Sweden, a series of hottest years in history, that menkind continues to waste resources, that plastic fills the oceans, and that the circular economy, while being understood by

1 http://time.com/5466681/climate-change-hottest-year/

25 Chapter 2 – Introductory Overview

many as the direction of travel, is not yet part of our everyday life. Hans Joachim Schellnhuber, the director of the Potsdam Institute for Climate Impact, has compared the fight against climate change to an overweight person that has decided to run a marathon : but instead of starting to exercise the person remains in front of the TV with another package of chips. It is not surprising neither that Germany identified as the word of the year ‘Heisszeit’, meaning ‘Heat-Time’.2

European citizens are aware of these trends and risks, and have made clear what worries them and what they wish to see on European and on national level they are increasingly concerned with climate change and the state of our environment. They insist on the need for more sustainability, for clean air and clean transport, more renewables, and energy efficient houses.3

The energy sector has drastically changed over this decade, while the transformation has just about started in these early days of what Klaus Schwab called ‘The Fourth Industrial Revolution’:4 we are moving from an analogue, centralised, monopolistic, unidirectional to a digital, decentralised, competitive and multidirectional world. Energy is not any longer something that customers are related to some minutes a year, through their bills, but that they have started to take ownership of and responsibility in. They expect rightly the best possible match of participation, uninterrupted supply, a significantly improved environmental footprint, affordable prices and a good deal of innovation that one can see, feel and touch. And they want to understand this energy world and contribute to improving it.

European energy policy is framed, according to many, by the triangle competitiveness, security of supply, and sustainability. Are these three excluding each other, or are they compatible? Isn’t sustainability nothing more than the externalities put into economic efficiency? Aren’t markets and operations getting closer, so that security of supply is granted through market? And if they were compatible, should one not favor three overlapping circles, rather than a triangle, where the ends seem far away one from the other?

2 The word alludes phonetically to ‘Eiszeit’- Ice Age, having just one letter added to it. 3 Standard Eurobarometer November 2018, in particular page 21; http://ec.europa.eu/commfrontoffihttp://ec.europa.eu/commfrontoffice/pu ce/pu-- blicopinion/index.cfm/survey/getsurveydetail/instruments/standard/surveyky/2215 Eurobarometer on the future of Europe November 2018 ; http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/ survey/getsurveydetail/instruments/special/surveyky/2217 4 https://www.weforum.org/about/the-fourth-industrial-revolution-by-klaus-schwab

26 Chapter 2 – Introductory Overview

What does the next decade hold? What do European citizens, and the incoming policy makers have to prioritize for impact? This book is devoted to policymakers and citizens alike, and seeks to support their action, deepen their insight, answer questions and raise others. There is a need, as Jos Delbeke has put it in his contribution, for ‘a clear direction of travel’. The 42 authors of‘The European Energy Transition: actors, factors, sectors’ develop collectively a colourful and comprehensive mosaic of the European energy transition, and ambition at a ‘big picture for the Twenties’. The latter reads broadly as follows: While the outgoing decade has transformed the energy sector and in particular electricity, and took decisive first steps towards Renewables development and a framework for climate change mitigation, the 2020s will be the ‘proof- in-the-pudding-decade’: if the overweight person does not start to exercise for the marathon now, he/ she will actually have decided to change plan. The proof must foster Europe’s competitiveness and maintain its outstanding level of security of supply while delivering results on the circular economy. On the journey the very meaning of energy will change: from a separate sector dealing with heating, cooling, transport and electricity supply in neighbouring silos to energy as one common layer, where sectors have coupled, and are based on networks that becomes a cyber- physical grid, driven by digitalisation and innovation.5

As to explore Europe’s flagship project ‘energy transition’ the book is structured as follows:

In his introductory contribution, Jacques Delors, the architect of the contemporary EU with its single market and four liberties, this famous ‘non identified political object’ that is unique in the world, he emphasizes that it is precisely the energy transition that carries a positive vision for Europe today. Its strength is the drive of millions of citizens making it a reality, European architects are preparing a democratic, innovative and economically viable and socially fair Energy Union, and have made giant steps since the Juncker presidency on this ambition. But if Europe falls short on delivering in the 2020s, given its leading role globally on the energy transition, its architects will become firefighters. The energy transition is an opportunity and should be a major issue in the European Parlia- ment election campaign.

5 The groundbreaking work by Albert Laszlo Barabasi, Network Science, Cambridge University Press 2016, and the network science school is a relevant reference for the statement of the fourth industrial revolution being based on networks: http://networksciencebook.com/

27 Chapter 2 – Introductory Overview

A first section sets the scene on the inseparable dimensions sustainability, security of supply and competitiveness with five chapters exploring these: Jos Delbeke and Peter Vis introduce us into the EU Climate Policy as a driver of change, drawing the long line from the first Earth Summit in Rio de Janeiro back in 1992 to Katowice and the needed steps and commitment as to take ‘Paris’ from promise to practice. I develop in the following chapter how security of supply has changed priorities from oil in the Seventies to gas in the Nineties and electricity nowadays. I equally question the paradigm of ‘energy independence’ that, in excess application contradicts European integration and international cooperation objectives. Georg Zachmann and Gustav Fredriksson shed light on the distributional aspects of climate policies, that had been largely overlooked in research and policy. They claim that, while climate policies have to be intrusive as to address the challenge, political support can only be generated if the distributional and thus inequality aspects are addressed appropriately and early on.

Pascal Lamy and Thomas Pellerin state in their chapter on ‘Innovation as a vital challenge to the European Energy transition’ that ‘ the EU thus needs to work on the entire lifecycle of an innovation: basic and applied research (“Labs”), innovation and competitive fabrication (“Fabs”), and applications for the benefit of all (“Apps”)”.6 According to them efforts are most needed where the EU is currently the weakest: at the innovation/fabrication (Fab) stage. They flag out that budget is decisive : the EU lags behind government and businesses in RD spending, and acknowledge with pleasure that the European Commission largely followed up on those proposals as it suggests an increase of the Horizon Europe budget to 94 billion€. This is a major increase in a Brexit-dominated budgetary discussion. According to Philipp Ständer, when taking into consideration that this is a budget for an EU-27 without the UK, the increase of the EU R&I budget in nominal terms amounts to an increase of 47%.7 Dolf Gielen and Luis Janeiro from IRENA provide a global perspective on Renewables driving the energy transition, putting Europe in perspective. They state that a global decarbonisation of energy systems in line with the Paris Agreement will require keeping the total primary energy supply at the same level between 2015 and 2050 while the economy grows threefold in the same period. Energy efficiency is essential, and the potential is large, but by itself it is not sufficient to achieve complete decarbonisation. There is a need for a systemic approach, innovation and the electrification of transport.

6 High Level Group on maximising the impact of EU Research & Innovation Programmes, Lab-Fab-App: investing in the European future we want, European Commission, July 2017. The High Level Group that produced this report was chaired by Pascal Lamy, co-author of this Chapter. 7 Philipp Staender, “Research policy: guide to the negotiations on Horizon Europe”, Jacques Delors Institute- Berlin, July 2018

28 Chapter 2 – Introductory Overview

A second section is devoted to the institutions of the Energy Union, reflecting on the genesis of these, the multiplication of actors, start-ups, initiatives. This section also portrays the institutional developments of ACER, ENTSO- E, the Energy Community, the rise of the regional dimension in energy as of the Clean Energy for all Europeans Package, and the future trajectory of the EUDSO entity. Brexit, set to shake up interactions on energy is the topic of a separate chapter here. I start the section with an introductory overview on institutional change and the exponential increase of parties, reflecting on the future trajectory. Philip Lowe, stating that ‘at time of writing uncertainty continues on the EU-UK Energy relations. According to him it is now time that both sides weigh the potential benefits of energy cooperation against political doctrine. Klaus-Dieter Borchardt and Maria Eugenia Martin-Casallo devote their chapter to the new regional dimension in European energy policy: a fierce battle in the Clean energy package negotiations, symbolic somewhat for the national vs. European role, regional has been secured as an in-between layer, and here in particular on electricity. The authors provide a historical perspective on Regional in European energy policy, shed light on the Clean Energy Package negotiation package, the new Regional Coordination Centers of the TSOs, and the key questions that yet have to be addressed. ACER, like the ENTSOs, invented by the Third package, is the topic of its first directors’ Alberto Pototschnig chapter: how was ACER set up? What challenges did it address, and what comes next, with the augmented role in the new legislative package? Resources, resources, and again resources is the main challenge the Agency, that is different from all other decentralised agencies, is facing. Konstantin Staschus, ENTSO-Es first Secretary General, explains the rationale for TSO cooperation in Europe and summarizes the associations first steps up to the delivery of the mandates on network codes, Ten-Year-Network Development plans, adequacy forecasts, RD reports and others, with more mandates like a pan-European resource adequacy assessment to be delivered with the new legislative provisions, Christian Buchel, Chair of EDSO, reflects on the changing role of DSOs and their new place in the EU agenda, given that the lionsshare of distributed generation from Renewables enters the powersystem through DSO networks, and the essential cooperation between transmission and distribution. Digitalisation, already emphasized in the contribution of Konstantin Staschus is paramount in this new DSO setting. Dirk Buschle portrays the trajectory of the Energy Community since its incep- tion in 2005, tasked to implement progressively the EU acquis communautaire in member-countries, in most cases neighboring the EU, and here mainly the Balkan countries, but also Ukraine, Moldova and Georgia. As the EU and the Energy Community share the legal ‘DNA’ Buschle suggests to transform the organisation culturally into an Energy Transition Community, that prioritises sustainability more, after an initial focus on liberalisation.

29 Chapter 2 – Introductory Overview

The third section prioritises competitive energy and markets in three chapters that include not only a state of the art and reflections on future market design, but also the important issue of energy poverty to which 50 million Euro- peans: near to 10% of our population, are exposed to. Sami Andoura and Philip Offenberg in claiming ‘A Climate and Energy Union’ present the Clean Planet for All EU strategy, and agree with Georg Zachmann and Gustav Fredriksson that climate change is about to become a socially dividing issue. They urgeE urope to shift from moral to technological leadership. The following two contributions by Konrad Purchala and Christophe Gence-Creux shed light on European energy market integration in a historical and forward-looking perspective. What is missing? What was achieved? What was good, bad, and ugly? Is zonal pricing the solution, or nodal in the next decade? Marina Cubedo Vicén develops the energy poverty challenge, the establishment of the EU energy poverty observatory and solutions, completing the picture developed in chapter 5 previously by Zachmann and Fredriksson.

The fourth section is devoted to security of supply for all Europeans, as already introduced in an overarching perspective in chapter 4. The section sheds light on new emerging risks in particular in electricity, and related to digitalisation but also sector coupling and cybersecurity. Gas and gas networks in the future as well as the complex EU-Russia relationship are addressed in two other chapters. Christian Schuelke reflects on the future role of gas, with 2030 and 2050 horizons, ad portrays gas and gas infrastructure as flexibility tools for Europe, including the debate on hydrogen. Kirsten Westphal, in presenting the EU-Russia energy relation between 2000 and 2018, states that this relationship is at a turning point. The future will need to prioritize a different from hydrocarbons agenda, putting the Paris agreement and climate at its centre. Sonya Twohig elaborates on the cybersecurity challenge, new institutional achievements at Eu- ropean level and mitigation options and presents two case studies respectively from Ukraine and the US, as well as the actions by ENTSO-E.

The fifth section sheds light on the many new players, the innovation agenda, civil society, capacity building and educational efforts as undertaken by the Florence School of Regulation or rebranding and communication in the era of the energy transition. Claire Camus shows how the energy transition has triggered new brands, names and corporate identities, along with a new imperative to communicate. The latter was not straightforward in a world of experts, largely disconnected from stakeholders. Jesse Scott argues that digital energy is becoming a fact of life, and that a digital revolution is taking place. This has profound implications for the future of the energy system, many of which are not yet well recognised. Digital energy is at a very early stage, generating many questions

30 Chapter 2 – Introductory Overview

and few answers. Scott suggests five main points to be taken up by the incoming policy makers, starting with the major contribution made by the Estonian presidency of the Council in the second half of 2017. Laurent Schmitt presents the new digital architectures and platforms: energy companies and individuals alike have to be early adopters. The future system that is cyber-physical would need to allow for optimal flexibility, security and market to function. Alicia Carasco presents thirteen disruptive innovations insisting on the fact that the most disruptive innovation is the sum of all these disruptive innovations combined. Ol- ivier Corradi portrays his start-up Tomorrow the mission of which is to make our carbon footprint ubiquitous, thus to enhance transparency and trigger action. Diego Pavia and Pierre Serkine reflect on the eight years of projects made possible by KIC Innogy, and how innovation can speed up the energy transition, as well as on the Energy Union as a multidimension challenge. Frauke Thies explores how to manage the new realities of the decentralised energy resources: the energy transition is about more than just technologies; it is also about roles and actors. An appropriate regulatory framework and market access enabled by it become cornerstone. Recommendations to policy makers include dynamic retail prices, overcoming existing barriers. RGI is an organisation that unites TSOs and NGOs, with the purpose of a win-win on the energy transition: An- tonella Battaglini, Andrzej Ceglarz and Theresa Schneider to present this coalition of actors, their purpose, the learning process and achievements. Leonardo Meeus and Jean-Michel Glachant from the Florence School of Regulation present their important contribution on capacity building on the energy transition, community learning and online training. Network codes for example that are complex technical rules, relevant to many actors in charge of implementation, form part of the schools’ training offers since 2017. It should be mentioned at this point that ENTSO-E and FSR will team up in a dedicated course based on this book, and targeting a global audience eager to understand what lessons to implement at home. One definite recommendation for the incoming policy makers is to enable the FSR even more to expand their very professional and important mission.

The final section VI provides insights into long-term models, facts and figures. Tom Howes provides historical figures on Europe’s energy transition, helping to understand the largescale transition that is the topic of this book: markets shares by utilities, RES development or price trends form equally part of his contribution. Simeon Hagspiel and Jean-Baptiste Paquel describe the challenges of scenario building, with some examples provided like the assumptions on PV in past scenarios. Helmut Schmitt van Sydow explores the history and raison d’etre of European energy policy over 70 years.

31 Chapter 2 – Introductory Overview

Biographical information on all authors is provided for in the annex.

This book project started in the heatwave of summer 2018, with fires in Sweden and more than 36 degrees in Brussels. It concludes in early January 2019 a rainy dark day in Brussels, while snow piles up massively in the alpine area. I would like to thank all authors for their commitment, the extra time spent on week- ends and in late evenings reviewing chapters and formulating answers. I would also like to thank Claeys and Casteels, Aernoud J. Oosterholt and Cornelius Koelewijn for their professional support, and Mante Bartuseviciute from Berlin Free University for an additional pair of eyes in the last mile of the book. Last but not least I would like to thank my partner Dr. Wolfgang Jamann for his pa- tience and always interesting insights, when we discussed this project.

We wish you a very interesting read, hoping that our contributions inspire you, for who this book has been written. We also insist on the fact that all views expressed are those of the author and do not necessarily represent the official views of the institutions for which they work or worked.

We are equally grateful for all comments to this project that might see a second updated edition and based on which an online course is available at Florence School of Regulation. The link to the course ishttp://fsr.eui.eu/training/energy/ eu-energy-transition/

Please share any comments with [email protected].

32 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

PART 1 – SETTING THE SCENE: CLIMATE, SECURITY OF SUPPLY AND COMPETITIVENESS – INSEPARABLE

CHAPTER 3 EU CLIMATE POLICY AS A DRIVER OF CHANGE

Jos Delbeke & Peter Vis

1. Introduction

The scientific imperative to address climate change is taken as accepted. The -Par is Agreement succeeded in acknowledging universal recognition of the problem and the need for action by (almost) all countries, developed as well as developing ones. The question for policymakers has been and remains, what policies will get us to where we need to be while maintaining jobs and growth?

For the past 25 years the EU has been progressively building a toolbox of Euro- pean policies to address climate change. To do this there needed to be accurate emissions data, excellent economic analysis, and the ability to learn through experience, adjusting existing policies if needed and establishing new policies when necessary. Learning-by-doing has been essential. The result since 1990 has been a reduction of emissions by 22% to 2016 and a clear decoupling of greenhouse emissions from economic growth in the European Union.

33 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

Figure 3.1. Evolution of EU GDP, greenhouse gas emissions and greenhouse gas intensity 1990-2016 . Source: European Commission.

2. International process

The first major international climate agreement is the United Nation’s Frame- work Convention on Climate Change, agreed in 1992 at the Earth Summit held in Rio de Janeiro. The goals of that Convention were insufficient, aspiring only to stabilise greenhouse gas emissions ‘at a level that would prevent dangerous anthropogenic interference with the climate system’. It soon became clear that more specificity was needed, and the response was the Kyoto Protocol in which it was agreed in 1997 that the industrialised countries would reduce their emissions, collectively by about 5.2%. Differentiated targets were set for the 38 countries covered by the ‘quantitative emission limitation and reduction commitments’. The European Union collectively committed to an 8% reduction target compared to emissions levels of 1990, and it was importantly agreed that Eu- ropean countries could form a ‘bubble’ arrangement1 that would allow that the target be met collectively rather than individually. This was the first important flexibility of the Kyoto Protocol that has shaped European policymaking since.

1 Article 4 of the Kyoto Protocol.

34 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

The Member States of what was then the ‘European Community’, and is now the ‘European Union’, agreed differentiated targets between themselves, which took account of their different comparative wealth but which would ensure their collective target was met. Although there was some modelling basis behind the setting of these differentiated targets, there was also a substantial degree of political arm-twisting and horse-trading. What mattered to the rest of the world was that the EU met its obligations, which it comfortably did by the end of 2012. Some countries, such as China, criticised the fact that under European bubble arrangements some European countries could emit more than in 1990 even though these were countries listed in Annex B of the Kyoto Protocol and were expected to limit or reduce emissions. The rationale for that re-distribution of effort within the European bubble was to take account of fairness. Fairness is exactly the concept that underlies the concept of ‘Common but Differentiated Responsibilities and Respective Capabilities’ of the Climate Change Conven- tion and the Kyoto Protocol. This probably explains why criticism of the bubble concept has gradually subsided; the approach has even been praised by some as a model of how to ensure fairness within large and diverse countries.

The Kyoto Protocol’s other crucial achievement was to get the EU going with respect to climate policies, which is exactly what it was supposed to do. Before the Protocol was agreed, there were no explicit European policies to address climate change mitigation. A CO2-energy tax had been proposed by the Commis- sion in 1992,2 in the context of the Rio Summit, but it had proven impossible to agree by unanimity (as is required for European tax measures). The only explicit climate policy instrument before Kyoto was the Monitoring Mechanism Regulation,3 which was primarily intended to ensure European Member States properly reported their emissions to the UNFCCC Secretariat.

However, to prepare for ratification of the Kyoto Protocol, the Commission launched a European Climate Change Programme in 2000 to look closely at options for policy instruments, in conjunction with stakeholders. Among the instruments being examined was that idea of introducing a European greenhouse gas Emissions Trading System. A Green Paper (consultative document)

2 Proposal for a Council Directive introducing a tax on carbon dioxide emissions and energy COM(92)226 of 30.06.1992 (OJ C 196, 03.08.1992), later amended by Amended proposal for a Council Directive introducing a tax on carbon dioxide emissions and energy COM(95)172 of 10.05.1995. 3 Initially Decision 93/389/EEC, and currently ‘Regulation (EU) No 525/2013 of the European Parliament and of the Council of 21 May 2013 on a mechanism for monitoring and reporting greenhouse gas emissions and for reporting other information at national and Union level relevant to climate change and repealing Decision No 280/2004/EC’ published in OJ L 165 of 18.06.2013, pages 13-40.

35 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

was published in March 20004 and a proposal for a Directive in 2001.5 Remark- ably, European Member States were the first to agree legislation6 to introduce an Emissions Trading System from 2005 despite that fact that in Kyoto they had not been favourable towards its so-called ‘flexible mechanisms’ (allowing emissions trading between States and project mechanisms that generated carbon ‘credits’). The fact is, though, that the Kyoto Protocol was instrumental in initiating the process that led to the introduction of the world’s first multi-country greenhouse gas emissions trading (or ‘cap-and-trade’) scheme. No one can ever say that Kyoto was ineffective and without a real impact on policymaking. Several other policy measures grew out of the European Climate Change Pro- gramme, including policies relating to vehicle emissions, fluorinated gases, and energy efficiency measures.

Europe ratified the Kyoto Protocol in 2002 and led the efforts to ensure the Protocol’s entry into force despite the US having decided in 2001 not to ratify. These efforts bore fruit and the Kyoto Protocol achieved the necessary number of ratifications to enter into force in 2005.

The targets of the Kyoto Protocol were applicable for a 5-year period, called the ‘commitment period’, running from 2008 to 2012. These years coincided with a number of extraneous events, such as a severe financial and economic crisis in the West and a very considerable expansion of shale gas in North America. At the same time policies generated a remarkable expansion of renewable energy across the world, such that the costs of solar energy fell by 73% between 2010- 2017 and of on-shore wind by 18% between 2010-2016.7

Although the US never joined the Kyoto Protocol and Canada withdrew during the first commitment period, it was nevertheless agreed in Doha in 2012 to extend the Kyoto Protocol for a second commitment period running from 2013-2020. However, this amendment has not yet come into force and it is unclear whether it will ever do so.8 It nevertheless served to renew the resolve of the European Union to show leadership, and in this context the EU set itself targets

4 COM(2000) 87 final, 08.03.2000. 5 Proposal for a Directive of the European Parliament and of the Council establishing a scheme for green-greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, OJ 75E 26/03/2002, p. 33-44. 6 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, OJ L 275, 25.10.2003, p. 32–46. 7 ‘Renewable Power: sharply falling generation costs’, IRENA document 2017 www.irena.org/costs. 8 As of 3 May 2018, 112 Parties have deposited their instrument of acceptance of the Doha Amendment to the Kyoto Protocol (144 ratifications are needed for it to enter into force).

36 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

for 2020 that included a 20% greenhouse gas reduction goal,9 a 20% renewable energy goal by the same year and a 20% improvement in energy efficiency (compared to a business-as-usual projection without any additional policies and measures).

The setting of these goals for 2020 once again served to catalyse policy development within the European Union. After a communication by the Commis- sion early in 2008,10 the European Council endorsed the targets and by 2009 amendments had been agreed to several legislative instruments, including the 11 12 EU’s Emissions Trading System, a Directive on renewable energy, CO2 performance standards for cars,13 an amendment to the Fuel Quality Directive14 mandating a reduction in the carbon content of fuels by 2020, and several energy efficiency measures. So once again, the international negotiations were the context within which climate policies were substantially developed further within Europe.

Most recently, in December 2015, the Paris Agreement was adopted, in which all countries made pledges, called ‘Intended Nationally Determined Contribu- tions’. Once again, the Europeans knew that they had to show leadership and set an example. It was never likely that all countries would make quantitative commitments to reduce greenhouse gases, but Europe had made such commitments previously and it was only a question of how large the commitments should be. There was, of course, considerable debate within Europe, and indeed within the European Commission, on the size of the reduction target. In the end, the Eu- ropean Union pledged a reduction of ‘at least 40%’ of its greenhouses gases by 2030 (compared to 1990). Furthermore, it was decided that this 40% reduction would be done within Europe, so without carbon credits from projects in other countries.

9 Compared to 1990. 10 Communication ‘20 20 by 2020 - Europe’s climate change opportunity’ COM(2008)30 final, 23.01.2008. 11 Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Direc- tive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community, OJ L 140, 5.6.2009, p. 63-87. 12 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/ EC and 2003/30/EC, OJ L 140, 5.6.2009, p. 16-62. 13 Regulation (EC) No 443/2009 of the European Parliament and of the Council of 23 April 2009 setting emission performance standards for new passenger cars as part of the Community’s integrated approach to

reduce CO2 emissions from light-duty vehicles, OJ L 140, 5.6.2009, p. 1-15. 14 Directive 2009/30/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 98/70/EC as regards the specification of petrol, diesel and gas-oil and introducing a mechanism to monitor and reduce greenhouse gas emissions and amending Council Directive 1999/32/EC as regards the specification of fuel used by inland waterway vessels and repealing Directive 93/12/EEC, OJ L 140, 5.6.2009, p. 88-113.

37 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

Although it looks as if the EU will meet, and even over-achieve, its commitments for 2020, all the Member States are not on track to fulfil their differentiated targets. The closure of nuclear power plants in Germany after the nuclear accident in Fukushima, Japan, has resulted in more coal and lignite being burnt in Germany, making its 2020 commitments harder to achieve. However, the EU is still on track and there is still time for all Member States to come into compliance with their obligations, including their renewable energy obligations, even if this means using the flexibilities and cooperation mechanisms available between European States.

What is clear from the above is that the international negotiations are intri- cately linked to climate and clean energy policy development within Europe. Furthermore, Europe and European businesses can see very clearly the direction of travel. In 2011 the Commission published a low carbon economy 2050 roadmap,15 but also an Energy Roadmap for 205016 and a Transport White Pa- per.17 All three documents were based on economic analysis carried out jointly by the respective departments of the Commission and are consistent with each other. There is a clear longer-term commitment to reduce the EU’s emissions by at least 80% by 2050.

The 2011 economic analysis is now being updated and the European Council has asked the Commission to come up with a new 2050 Strategy by the end of 2018. Taking into account the temperature goals of the Paris Agreement, to limit temperature increase to well below 2°C compared to pre-industrial levels while pursuing efforts to limit the increase to 1.5°C, it would seem inevitable that the analysis now being undertaken will not weaken but rather reinforce the effort required of the European Union over the coming decades. Whether that will entail a strengthening of the 2030 greenhouse gas reduction target remains to be seen, as logically that would re-open the fixing of national reduction targets for each Member State. The new European Commission, taking office in the autumn of 2019, will have to decide what further action to take to remain consistent with the EU’s long-term goal and those of the Paris Agreement. Ac- tions will certainly include strengthening research and development efforts, and doubtless strengthening existing policy instruments. The new Governance rules of the Energy Union will allow for much closer and more structured dialogue between the Commission and Member States, which could enhance emissions reductions as a result of the energy transition to be made across Europe. How-

15 COM(2011) 112: ‘A Roadmap for moving to a competitive low carbon economy in 2050’ of 08.03. 2011. 16 COM(2011) 885 ‘Energy roadmap 2050’ of 15.12.2011. 17 COM/2011/0144 ‘White Paper: Roadmap to a Single European Transport Area – Towards a competitive and resource efficient transport system’ of 28.03.2011.

38 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

ever, the real challenge will be identifying potentially new policy instruments, which could focus on new obligations for sectors where it has proven difficult to reduce emissions, such as transport.

What is more important in the near term is that the legislation that has already been proposed by the Commission, and is now being negotiated in Council and the European Parliament, such as the proposals on CO2 standards for cars and vans18, as well as for trucks and buses,19 and also proposals in the energy field related to the Market Design Initiative,20 are adopted as quickly as possible. All legislation takes time to have its full effect. But the recently agreed energy targets, respectively 32% for renewable energy and 32.5% for energy efficiency -im provements, may well lead to a higher than 40% greenhouse gas emission reduction. That would be entirely consistent with the ‘at least 40%’ target agreed by the Heads of State and Government in 201421. It would put Europe in the right position for the much steeper emissions reductions that will be necessary in the period 2030-2050 than have been achieved so far (see Figure 3.2).

What is evident from this graph is that steeper reductions will be needed post 2030 than have been achieved so far if we are to meet our 2050 goals. Businesses and investors that choose to ignore the clear direction of travel being given by the European Union on climate change, risk making the wrong investments in out-dated technologies that will likely incur higher compliance costs in the future, and possible economic loss through ‘stranded assets’. Opportunities risk also being lost in new technologies, where other countries, in particular China, are racing to create an industrial based producing goods that are needed in a low-carbon world, such as solar panels and electric vehicles of all sizes and types.

18 COM/2017/676 - Proposal for a Regulation of the EP and of the Council setting emission performance standards for new passenger cars and for new light commercial vehicles as part of the Union’s integrated

approach to reduce CO2 emissions from light-duty vehicles and amending Regulation (EC) No 715/2007 (recast), of 08.11.2017.

19 COM(2018) 284 - Proposal for a Regulation of the European Parliament and of the Council setting CO2 emission performance standards for new heavy-duty vehicles, of 17.05.2018. 20 Including Proposals COM(2016) 861 final/2 and COM(2016) 864 final/2 of 23.02.2017 relating to the Market Design Initiative, which would provide a new rule book for the EU energy market. 21 European Council conclusions of 23/24 October 2014, EUCO 169/14.

39 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

Figure 3.2. EU’s greenhouse gas reductions since 1990, commitments to 2020 and 2030, and possible trajectories to 2050. Source: EEA.

3. EU policy response

In terms of the EU policy response to the progression of international agreements, two things are striking. First the number of climate policies at the Euro- pean level has increased, and they cover a wide range of economic sectors such as energy, transport, industry, Research and Development. Fairness considerations and economic analysis both argue for such a wide coverage. There have developed over time a mix of policy instruments ranging from economic instruments

(such as the Emissions Trading System) to regulatory standards (e.g. CO2 performance standards for cars), to rather ‘softer’ measures that inform consumers when buying new products (such as energy labelling for appliances22 and 23 buildings, and CO2 labelling for cars on promotional material and at the point of sale24).

22 Regulation (EU) 2017/1369 of the European Parliament and of the Council of 4 July 2017 setting a framework for energy labelling and repealing Directive 2010/30/EU, OJ L 198, 28.7.2017, p. 1-23. 23 Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings, OJ L 153, 18.6.2010, p. 13-35. 24 Directive 1999/94/EC of the European Parliament and of the Council of 13 December 1999 relating to

the availability of consumer information on fuel economy and CO2 emissions in respect of the marketing of new passenger cars, OJ L 12, 18.1.2000, p. 16-23 and Commission Directive 2003/73/EC of 24 July 2003

40 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

The second clear development is the need to adjust policies in the light of experience. Policymaking has been, and must remain, reactive and always looking to improve effectiveness. Given how comparatively new this policy area is, and the use of innovative instruments, such as emissions trading or CO2 standards for cars, it is not really surprising that these policies needed to be adjusted and improved. This is certainly true for the Emissions Trading System, which essentially suffered from an unquestionable and unintentional over-supply of allowances (unintentional because the allocation of allowances had taken no account of the severe economic recession that started in 2008, but also because of the unexpected abundance of project credits that could be used within the EU’s Emissions Trading System). It is also true of the methods of testing vehicle performance, in view of the increasing divergence over time between laboratory test results and the real driving performance of vehicles (not to mention the illegal use of ‘defeat devices’ with respect to some pollutants). In the necessary policy adjustments, there has been a combination of learning-by-doing as well as responding to fast evolving exogenous factors, such as the quantities of poor quality offset credits generated under the Clean Development Mechanism25, the economic slowdown in Europe after 2008-2009 financial crisis and the development of technologies behind the ‘dieselgate’ episode.

European Climate policies have never just been about setting targets and hoping that they be met. First, target setting has always been informed by the best economic analysis possible, searching for cost-efficient outcomes and the maintenance of fairness between Member States. For example, although the least energy efficient Member States tend to be those in Central and Eastern Europe, these are also poorer Member States in terms of GDP per capita. Consequently, it cannot be expected that these States make the largest emissions reductions just because it would be cheaper to do so there than in richer, more energy efficient countries. The way to overcome such problems has been to propose flexibilities or funds that serve to redistribute revenues to finance investment in these less wealthy Member States. Specifically, this has in part been done by the differentiated national climate and energy targets for 2020, the climate targets for 2030, the successive amendments to the EU’s Emissions Trading System and by the cooperation mechanisms of the Renewable Energy Directive.

amending Annex III to Directive 1999/94/EC of the European Parliament and of the Council, OJ L 186, 25.7.2003, p. 34-35. 25 A flexibility foreseen by Article 12 of the Kyoto Protocol.

41 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

Policies can be facilitators of greater fairness if designed carefully and with full engagement with all countries. Europe has not just looked for the existence of a qualified majority among Member States in Council but has sought to persuade all Member States by addressing their specific difficulties. The framing of the trade-offs has sometimes been very usefully made at the level of the European Council, through European Council conclusions, precisely because the bigger picture can be seen and the trade-offs and compromises crafted in a way that Ministers in the Environment Council or Transport, Telecommunications and

Energy Council cannot do. At the level of fairness between companies, the CO2 standards for cars do not treat all car manufacturers in the same way: the composition of each manufacturer’s fleet is different and to address fairness between them, the average weight of the vehicles is taken into account in the establishment of each manufacturer’s target.

As time has passed, the flexibilities of the differentiated climate targets for 2030 have been expanded compared to what they were for the sharing of effort within the EU bubble for 2008-2012 or for 2020. For 2030, the Climate Action Regu- lation not only provides for a novel limited flexibility with the EU’s Emissions Trading System for Member States where economic analysis indicates higher costs of compliance in the sectors outside the Emissions Trading System, but there has also been introduced a limited flexibility with the agriculture and forestry sectors. We know that Member States differ considerably. Over time, therefore, EU climate policies have become more attuned to the specificities of each Member State, whether with larger agriculture or forestry sectors, more energy intensive industries, or a greater dependency on coal for generating electricity.

Finally, climate considerations were also taken into account in the elaboration of the EU budget for the period 2014-2020 more than ever before. Other than climate having a place in specific Funding programmes, such as LIFE, the Euro- pean Regional Development Fund and Horizon 2020s research funding programme, for example, there was a political commitment made that 20% of EU Budget expenditure would be related to climate change.26 This was a bold ‘mainstreaming’ of climate considerations into the EU Budget as a whole, and has not only had real effect in the last few years, but the Commission has proposed that it be continued and increased to 25% in the next multiannual EU Budget negotiations. This climate related expenditure objective in the EU Budget demonstrates that the EU is ready to put its money where its mouth is.

26 The 20% commitment triples the share of between 6-8% in the previous Multiannual Financial Framework (2007-2013) and could yield as much as EUR 180 billion in climate finance in all major spending areas.

42 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

Space does not permit a more detailed description and explanation of climate- related policies developed at the European level, and this Chapter makes no attempt to detail the main measures developed at national and sub-national level across the Member States of the European Union. However, it is perhaps worth mentioning that the UK’s Carbon Price Floor for emitters covered by the EU’s Emissions Trading System in the UK does not result in an environmental improvement in terms of greenhouse gases, as UK operators are able to sell their allowances to operators throughout the rest of Europe who, as a result, are able to increase their emissions correspondingly. The UK’s unilateral move resulted rather in extra revenues for the UK Treasury, and although it is likely to have accelerated the rate of decarbonisation of the UK economy, it has at the same time resulted in cheaper allowances across the rest of Europe due to the lower demand for allowances by UK operators, who try to minimise their liability under the Climate Price Floor. This illustrates how unilateral measures, though well inten- tioned, may result in competitive distortions, however marginal, without there necessarily being an overall environmental benefit, which impairs cost-efficiency as a whole. Indeed, any carbon price floor will not only give rise to demands to fix a price ceiling as well, but will constrain the market-based cost-efficiency gains of an economic instrument such as the EU’s Emissions Trading System. Cost-efficiency is maximised by the comprehensiveness of EU-wide policies.

The EU has concentrated efforts on policies that potentially have the biggest -en vironmental impact, that relate to companies competing with other companies in the same sector (e.g. electricity generators or energy intensive industries) or that relate to the performance standards of new products and appliances that are sold across the Union. There would be no sense in individual Member States setting their own standards in a single market where goods sold in one Member States must necessarily be allowed to be sold in all others. Economies of scale are maximised by harmonised standards across the EU.

4. Carbon pricing and the EU’s Emissions Trading System

The establishment of carbon markets, implementing the polluter pays principle by putting an explicit price on carbon emissions, has not only been a novel development in Europe over the past 20 years but across the whole world. Other States and sub-regions of States have now introduced or are introducing carbon markets, such as China, New Zealand, US States and Canadian Provinces. More countries are considering doing the same.

43 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

Carbon taxes are clearly preferred by most economists, due to their greater pre- dictability and the possibility of covering more sectors of the economy. How- ever, despite the Commission’s efforts, agreement on a CO2/energy tax between the EU Member States was impossible (the European Parliament does not have a strong role in taxation matters, giving only its non-binding Opinion). Later in the 1990s, when it was clear that the CO2/energy tax was not going to win the support it needed, the EU did strengthen its energy products taxation Directive that worked through excise duties, but this Directive only imposes minimum rates of taxation – and industry benefits from substantial exemptions if Member States wish.

Given the climate commitments that Europe undertook under the Kyoto Pro- tocol, more measures were needed in order to be certain to reduce emissions by the required amount. Article 17 of the Kyoto Protocol incorporates a reference to emissions trading between States, but this was enough for the Commission to take the initiative to do more work in this area. The Commission made a legal proposal for an emissions trading in 2001 that covered electricity and heat generation as well as more energy-intensive industries, which was adopted in 2003.27

The EU’s Emissions Trading System started in 2005 with a ‘pilot phase’ of 3 years (2005-2007) that preceded the Kyoto Protocol’s first commitment period (2008-2012). The pilot phase was always designed to familiarise governments and businesses with the instrument, and the learning from this phase was very rapid.

It was quickly realised that more stringent and more harmonised allocation rules were necessary to ensure that the system reduced emissions and that distortions were not created between competitors operating within the internal market. Initially allocation was practically all done by free allocation based on historic emissions, but from 2012 auctioning became the default rule for the electricity generation sector, and for industry free allocation was based on harmonised benchmarking per sector, based on the 10% most efficient plants of each sector. Essentially, these are the allocation rules that exist today, and in the next phase of the EU’s Emissions Trading System (2021-2030) these free allocation rules will be based on more dynamic benchmarks, updated in the case of significant changes of production or of technological progress.

27 For references see footnotes 5 & 6.

44 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

Other crucial changes have been introduced to the Emissions Trading System over time. Some of the most important were the restriction of offset credits to projects based in the Least Developed Countries from 2013,28 and from 2021 offset credits will not be eligible for use at all within the EU’s Emissions Trading System.29 From 2012 the EU’s Emissions Trading System included the aviation sector,30 but this has in practice only applied only to flights within the European Economic Area.31

Another major innovation to the EU’s Emissions Trading System was the introduction of a ‘Market Stability Reserve’ that will come into being from 2019.32 It has been decided that when there is an excess supply of allowances in the markets, predictable quantities of allowances will be put into the reserve (rather than be auctioned), and only released when liquidity tightens to a pre-defined level. Although at first sight this may look like an additional complication, it is actually a crucial mechanism that ensures there is sufficient liquidity in the market without there being prolonged over- or under-supply. Also, importantly, the Emissions Trading System is now able to automatically adjust the supply of allowances if unforeseen economic situations arise, or other climate related policies are adopted and function effectively. As such, the Market Stability Reserve increases the compatibility of the EU’s Emission Trading System with other policies, such as energy efficiency and renewable energy policies.

One other important feature of the EU’s Emissions Trading System is that the overall supply of allowances (so, the overall level of emissions permitted by the system) is subject to an annual reduction of 1.74% per year, every year. With effect from 2021 the Linear Reduction Factor will change to 2.2% per year, and continue indefinitely unless changed. Figure 3.3 shows the steady reductions in the allowable emissions within the EU’s Emissions Trading System through to 2030 taking into account the change of the Linear Reduction Factor. This crucial feature ensures not only that emissions covered are reduced through to 2030, but also that reductions will continue beyond that date. It is this predict-

28 Directive 2009/29/EC (see footnote 11). 29 Directive 2018/410. 30 Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community, OJ L 8, 13.1.2009, p. 3-21. 31 Regulation (EU) 2017/2392 of the European Parliament and of the Council of 13 December 2017 amending Directive 2003/87/EC to continue current limitations of scope for aviation activities and to prepare to implement a global market-based measure from 2021, OJ L 350, 29.12.2017, p. 7-14. 32 Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC, OJ L 264, 9.10.2015, p. 1-5.

45 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

able environmental outcome that delivers much greater certainty that the Eu- ropean Union will fulfil its international commitments. It does so in a way that businesses can plan for, and which can steer new long-term investments.

Figure 3.3. Actual emissions covered by EU’s Emissions Trading System and the projection with the 1.74% and 2.2% Linear Reduction Factors. Source: European Commission.

Free allocation to industry sectors in competition with third countries has minimised adverse impacts on the competitiveness of European industry, and free allocation will continue for the foreseeable future. Other ways of minimising competitiveness impacts, such as border tax adjustments, are sometimes suggested. These would be highly complex to administer, given the complexities of monitoring emissions in countries across the global. If simplified estimates of the carbon content of primary goods, such as steel, are to be used, these simplifications would also lead to inaccuracies and unfair impacts on the products of some producers: how would steel from electric arc furnaces running on nuclear energy be compared with steel made in blast furnaces using fossil fuels? Border tax adjustments thus fail on implementation practicalities. Moreover, as part of its overall policy agenda, the EU consistently favours more free trade agreements and is less inclined to initiate ‘protectionist’ measures – even if the US is now introducing greater protectionism.

To conclude, the EU’s Emissions Trading System is an instrument covering some 45% of the EU’s emissions and ensuring cost-effective greenhouse gas reductions by electricity generators and industry. Between 2005 and 2016, the sectors covered by the EU’s Emissions Trading System reduced their emissions by some

46 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

26%. The problems of over-supply that have beset the carbon market since its creation have recently been effectively addressed by reforms to the Emissions Trading System that have made it more resilient and increased its stringency. This is reflected in the price of carbon allowances in Figure 3.4 that have staged a pronounced recovery in recent months. The price of carbon will fluctuate, as do prices in all free markets. It would be wrong to say that there needs to be a particular level of carbon price to have an impact: at whatever level, carbon price has an impact on different technologies and fuel mixes in different sectors. Let us not forget that oil, gas and coal prices fluctuate, as do the prices of new renewable technologies (though the latter are usually on a downward price trajectory). As scarcity increases under the EU’s Emissions Trading System, as it will do, carbon prices are expected to rise correspondingly. As the carbon price rises, more and more decarbonisation options become viable.

Figure 3.4. Prices of European Carbon Allowances (EUAs) from 2005 to Septem- ber 2018. Source: Intercontinental Exchange (ICE).

5. Conclusion

The international climate negotiations provide a valuable source of inspiration for Europe and serves as a forum in which the European Union provides leadership and urges other countries to act. The Paris Agreement, and its implementing provisions that were largely agreed at the 24th Conference of Parties to the

47 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

UNFCCC in December 2018, is the current vehicle for international action.33 Europeans have been moving forward on climate policies together: European Council conclusions have always been agreed on the basis of unanimity, and these conclusions have served as a mandate upon which Commission proposals have been based and subsequently agreed by the co-legislators (the Council and the European Parliament). Re-distributional elements are very much at the heart of climate policy, through target differentiation, revenue redistribution and the creation of dedicated funds for modernisation of the energy sector in poorer Member States or to promote innovation in energy intensive industries.

The power of carbon pricing has been reinforced, not just influencing behaviour by application of the polluter pays principle but also by using revenues raised for climate-related expenditure. Since 2012, when the default became auctioning for the power sector, more than EUR 20 billion has been raised by Mem- ber States, and in the year 2016 80% of the revenues generated were spent on climate-related expenditure.34 Between 2021 and 2030 the Innovation Fund alone, assuming a carbon price at today’s level of about EUR 20 per tonne of

CO2-equivalent, may raise revenues of EUR 9 billion for helping to fund innovation in the industry and energy sectors.

It continues to be the case that global technological leadership eventually translates into global political leadership. This has been true in history, most strik- ingly during the industrial revolution, but also with regard to today’s digital, space and defence technologies. A battle is now being fought around the low carbon economy: the science emphatically tells us that societies must decarbonise. There is a global energy transition in the making that is moving geopolitical power away from fossil fuels towards low carbon technologies, such as for renewable energy or electric vehicles. Europe’s industrial prowess has, until today, been based on coal and more recently oil. The race is now on to lead on clean technologies, and ideally those at the top of the value chain. If Europe does not act with sufficient determination, we will be dependent on others for essential technologies of the future. This explains the expansion of expenditure for research and innovation in the European Union’s present and future budgetary frameworks. This explains the design of the EU’s climate policy framework. What may have started as a European wish to fulfil its international obligations under the Kyoto Protocol has become the embryo of a strategy for a clean energy transition that forces the pace of change across Europe so as to ensure that

33 The “rulebook” for the Paris Agreement was agreed at COP-24 but adoption of the implementing rules for mechanisms under Article 6 of the Paris Agreement are still being negotiated. 34 Report from the Commission to the European Parliament and the Council on the functioning of the Euro- pean carbon market (COM/2017/693) of 23.11.2017, Section 3.1.2.4.

48 Part 1 – Chapter 3 – EU Climate Policy as a Driver of Change

Europe develops and manufactures future-orientated technologies that need to be deployed worldwide.

Although political decisions are difficult to take all at once, the European Union has a clear direction of travel. The last 20 years have been fertile years in terms of European climate policymaking, with adjustments being made when needed as a result of learning-by-doing. Europe has shown that it is ready to step up to the challenge. Everything may have not been optimal from the start, but the policy toolbox is being improved all the time in readiness for the further challenges ahead.

Part 1 – Chapter 4 – Security of Supply: a New Focus on Electricity

CHAPTER 4 SECURITY OF SUPPLY: A NEW FOCUS ON ELECTRICITY

Susanne Nies

1. Risks are changing

Security of energy supply was seen in the 1970s as related to oil, then, in Eu- rope, to gas, and today it centers around electricity. The increasing attention for electricity security is resulting from the shift from primary fuels to power, to the increasing electricity consumption, as well as to the rising complexity of a power system built upon variable renewables and the rise of an ‘internet of energy things’.1At once oil- and gas supply challenges remain and deserve continued attention. Different from the ‘traditional’, largely import related risks in primary fuels, the ones in the fast changing and regionalizing electricity system are yet subject to discovery and the formulation of appropriate responses.

Marc Elsberg describes in his bestseller ‘Blackout’ how a terrorist group hacks into the European power system through the Italian smart meter, and takes it down.2 Electricity, that replaces primary fuels in a number of areas – cooling, transport and partly heating – and the consumption of which increases naturally with the rise of the digital society is more a service then a good, and is indispensable to everyone. The new ‘central fuel’ electricity is exposed to a variety of risks, that are presented in this contribution together with the risks on oil and gas.

1 See the chapter by Laurent Schmitt, Susanne Nies in this book. 2 Marc Elsberg Blackout, first German edition 2012.

51 Part 1 – Chapter 4 – Security of Supply: a New Focus on Electricity

The EU imports 54% of all its energy. Oil is imported to 90%, natural gas to 69%, coal and other solids to 42%, and uranium and other nuclear fuels to 40%. The cost of importing energy accounts for roundabout 1 billion Euros every day and represents one fifth of Europe’s overall imports. However, let us state clearly here that autarky can’t be an objective in a globalized world, and that trade- and physical links contribute in a paramount way to improving and maintaining links between nations.

The European Union’s 28 Total Primary Energy Demand3 corresponded in 2016 to 1965 Mtoe.4 This number equals 14,28% of the global primary energy demand. Power generation uses about 42% of the total primary energy. In 2016 the EU has produced a total of 4.080 TWh and will see its production further increase in the forthcoming years. This trend is confirmed by all IEA scenarios. The most remarkable increase however can be spotted in the IEAs so called Cur- rent policies scenario, and that reflects the implementation of existing regulation: power generation will reach here 4468 TWh in 2025, 4662 in 2030 and a spectacular 5082 TWh in 2040.5 At once, and due to the Renewables deployment, capacity will further increase from 2016 total installed capacity of 1262 GW to 1401 in 2025 already. If one would try to translate this into the number of onshore windmills and an assumed capacity for each of 8 MW (meaning 0,008 GW), or into PV panels on household level with each a capacity of 265 Watts6 (meaning 0,265 KW= 0,000265 MW or 0,000000265 GW) the scale of the many decentralized installations becomes obvious: the previous big blocks, like nuclear with 600 MW per block, gas or coal with similar capacity are increasingly replaced by a huge number of largely privately owned generators, as the greenfield table below illustrates:

3 TPED represents domestic demand and is broken down into power generation, other energy sector and total final consumption ; IEA World Energy Outlook 2017 :747. 4 Mtoe-million tons of oil equivalent ; source IEA World Energy Outlook 2017 :66 ! 5 IEA World Energy Outlook 2017 :671. 6 The capacity for a solar panel of 65x39 inches. Also note that the same panel would have had a capacity of only 20 in the 1950s. Source https://solarpowerrocks.com/solar-basics/how-much-electricity-does-a-solar- panel-produce/.

52 Part 1 – Chapter 4 – Security of Supply: a New Focus on Electricity

THE TOTAL HOW MANY HOW MANY HOW MANY INSTALLED EU BASELOAD ONSHORE WIND HOUSEHOLD CAPACITY OF 1262 PLANTS WITH A MILLS 8 MW/ SCALE PV PLANTS GW (2016) … THEORETICAL WINDMILL? 265 WATTS/ CAPACITY OF 600 PANEL? MW/Block? …would corre- 2103 big blocks 157.750,000 wind 4.762.264.264,151 spond to… mills (trillion!)

Table 4.1. The number of generators in the energy transition. Source: author own calculations based on IEA installed capacity WEO 2017 and average capacity factors of state of the art plants.

Key message: the above table shows the steep increase of the number of generators with the Renewables paradigm and energy transition: this decentralization and shift in ownership goes hand in hand with new regulatory challenges, new challenges for networks, flexibility solutions, location of consumption, and of course security of electricity supply. While no system is only big block, wind mill based, or PV based, but mixed, the trend towards an increasing share of RES will foster the multiplication of generators as shown above.

As Tom Howes7 shows in his contribution, Europe’s energy mix, while continuing to rely heavily on oil, coal, nuclear and gas, sees a transition towards more Renewables, as reflected in the above capacity trends. What is more, an ambitious energy efficiency target has been adopted, as energy efficiency is the first fuel in all energy systems and contributes positively to increasing security of supply for all fuels.

2. Security of supply and the scope of risks Europe is exposed to

Security of supply is defined as the availability of energy, or the continuous delivery of energy at acceptable cost. As energy security refers to the uninterrupted supply it is of course important to refer to the issue of access to energy and energy poverty : 10% of the European population corresponding to roundabout 54 million citizens are concerned . In many cases this group is also the first to suffer from security of supply crises.8 As the newly established Energy Poverty Observatory of the EU shows energy poverty is unevenly present across the EU: countries like Romania for example count 42% of the population as energy poor.

7 See chapter 32 by Tom Howes. 8 See chapter 19 by Marina Cubedo Vicén on energy poverty and appropriate regulatory solutions and Zach- mann on distributional aspects of climate policies.

53 Part 1 – Chapter 4 – Security of Supply: a New Focus on Electricity

Security of supply risks encompass political risk related to dependency on third countries, as well as system risks, related to the overall performance of the energy system, technical risks, climate risks. Depending on the energy source risks are different, so that the energy mix of a country or region allows to understand its risk exposure.

While coal is also primarily imported the abundance of the world market and the absence of political risk around it allows to see coal import risks as negligible. Network bound energies like power and, to a large degree, gas are vulnerable through the network, forming part of the sensitive infrastructure. Risks related to cross border infrastructure in electricity exist as well, but in a minor way compared to gas.The European power system risk are mainly related to the energy transition: how to manage a power system with increasing variable generation and thousands of units, while big blocks are phased out for which the system was conceived ; how to respond to extreme weather events, increasing in number with climate change, like droughts and heat waves, cold spells and storms ; how to pro-actively formulate responses on cyber security, and that rise in parallel to the digitalisation of energy ? All in all increased attention is needed for the risks of large integrated systems.

Figure 4.1. Security of supply risks: priorities shifting from oil to gas to power and corresponding regulatory solutions. Source: author 2018.

Key message: the large dependency on oil in the 1970s -with countries such as Den-

54 Part 1 – Chapter 4 – Security of Supply: a New Focus on Electricity

mark being about 80 % dependent on this single source, including in burning oil for power generation, has made the oil choc a game changer, leading to the diversification towards nuclear and gas.9 The conflict opposing Russia and the former Soviet republic Ukraine made gas security of supply the second major issue, as several countries proved to be highly vulnerable. Regulatory responses have been identified both for oil and gas. Nowadays the power security of supply, or better: risk preparedness with regards to the large energy system has moved center stage, as electrification and digitalization lead to new risks, that require sound regulatory and technical answers. While the first two crises where related to third countries dependency, the new risk is largely system related.

3. The EU institutional and regulatory set up for energy security

From an institutional point of view the EU has responded to crises with the set- up of specific structures: they are the Gas Coordination Group,10 established in 2010 and ensuring fast information exchange and decision making among member states with respect to gas, and learning from the Ukraine crisis in 2006 and 2009; CESEC gas dealing with the specific needs and challenges for gas in South East Europe,11 and focusing in particular on networks and the gas ring; CESEC electricity following suit; the Electricity Coordination Group,12 ensuring that member states share proactively their intentions on energy policy. The latter was established in the immediate aftermath of the Fukushima accident in March 2011 and the related German nuclear phase out decision. And last but not least one should mention the Energy Union that seeks to establish a comprehensive overarching Union energy policy. The security of oil supply falls into the OECD/IEA framework that the EU is part of.

9 The famous French statement of that time should be quoted here ‘we have no money, but we have ideas’ meaning nuclear in this case. The nuclear euphoria of that time, seen as an appropriate answer to the oil crisis also saw the slogan « too cheap to meter » 10 The GCG has been established as of article 12 of the implementation of the Gas security of supply regulation https://ec.europa.eu/energy/sites/ener/files/documents/rop_of_the_gcg.pdf. An additional Commission decision of 2011 clarifies scope and the composition of the group. https://eur-lex.europa.eu/legal-content/ EN/TXT/PDF/?uri=CELEX:32011D0812(01)&from=EN 11 CESEC stands for Central and South Eastern Europe Energy Connectivity, and was established in 2015 as to accelerate the deployment of infrastructure in this complex region. See https://ec.europa.eu/energy/en/ topics/infrastructure/high-level-groups/central-and-south-eastern-europe-energy-connectivity 12 Commission decision formalising the Electricity Coordination Group in November 2012 https://eur-lex. europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32012D1117%2801%29

55 Part 1 – Chapter 4 – Security of Supply: a New Focus on Electricity

The European Commission and also the Agency for the Cooperation of Energy Regulators (ACER) monitor European security of energy supply. ACER oversees the mandates attributed to ENTSOG and ENTSO-E, and in the future also distribution system operators.13

The respective security of supply and risk preparedness regulations for gas and electricity have been updated in 2017 and 2018 respectively. Thus, new risks have been flagged out and policy solutions identified. Lessons learnt from the past regulation have translated into the new provisions.

Speaking with one voice in external energy policy, when it comes to the dependency in oil and gas, and for the latter particularly on Russia, is seen as crucial, and has proven so far successful: the block has been united in the sanctions against Russia and interactions with it, ever since 2014 and the Russian annexation of Crimea. Unity is less a given though on projects like Nord Stream. The establishment of the Energy Union as an overarching energy framework for the block brought further consistency also on security of supply and was launched as one of the ten priorities of Juncker Commission in the same year, in 2014.14

Establishing infrastructure in the frame of the Projects of Common Interests (PCI), themselves based on the results of the ENTSOs long-term infrastructure plans (the so called TYNDP) is an essential response on security of supply for gas and power.15

Investments by third countries into sensitive European energy assets are also carefully scrutinized by Member states and the EU. Currently the EU explores ways of tightening regulation related to foreign investment into European energy infrastructure. While Russia was targeted implicitly in a requirement of the Third package, called by some informally the “Gazprom clause” and requiring reciprocity on unbundling16, the foreseen screening regulation has in particular China in mind. 17 The screening of foreign direct investments framework as proposed by the European Commission in 2017 grants Member states additional tools to stop such investments. China owns the following assets in European energy companies: EDP, the Portuguese utility that also includes distribution is

13 See institutional chapter 8 Susanne Nies. 14 https://ec.europa.eu/energy/en/topics/energy-strategy-and-energy-union/building-energy-union 15 https://ec.europa.eu/energy/en/content/pci-maps-and-implementation-plans-2017-replace; for the TYN-TYN- DP see https://docstore.entsoe.eu/Documents/Events/2017/energy-futures/170704_scenarios_2017- final.pdf 16 https://www.euractiv.com/section/med-south/news/gazprom-clause-issues-russia-ultimatum-for-energy- co-operation/ 17 http://europa.eu/rapid/press-release_IP-17-3183_en.htm

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owned by Three Gorges, and Enemalta, the Maltese utility, to 33% by Shanghai Electric Power. The world biggest capitalization State Grid China owns respectively shares in the Portuguese Transmission system operator REN, the Italian TSO Terna through the Italian public bank; the Greek TSO IPTO. A recent tentative to take shares in the German TSO 50Hertz were offset by a common action of the Belgian majority shareholder and the German public bank Kf W.18

4. Oil

European import dependency on oil exceeds 90%, compared to about 69% for gas and in the light of an overall – oil and gas – import bill of more than 1 billion Euro every day.19 As to find an appropriate regulatory response the EU has adopted its Energy Security Strategy in 2014. The latter included also stress tests carried out in 2014 in the EU and the neighboring Western Balkan regions, as covered by the Energy Community.20

Oil security of supply has been addressed widely in the Seventies, through the establishment of the International Energy Agency managing the mandatory 90 days stock of all OECD countries.21 Of course, the straights, such as Hormuz, and associated risks form part of the wider international agenda. All in all, the situation is eased today by the weaker position of OPEC on one hand – resulting from the numerous non-OPEC producers, as well as the increased US production.

One of Europe’s specificities and legacy of the past is the existence of the oil pipeline Druzhba, the longest oil pipeline of the world, supplying oil to central and South East Europe.22 Important to some countries, the global oil market with oil tankers ensuring the transport via maritime routes remains however the dominant feature, so that potential supply disruptions on Druzhba would have a minor effect.

18 http://www.eliagroup.eu/Media-Room/Press-releases 19 Source https://ec.europa.eu/energy/en/topics/energy-strategy-and-energy-union/energy-security-strategy 20 For an extensive overview on oil security of supply see the forthcoming study http://claeys-casteels.com/ Security-of-Europes-gas-and-oil-supply, 2019 (Claeys to add right reference). 21 https://www.iea.org/about/ourmission/ 22 https://en.wikipedia.org/wiki/Druzhba_pipeline. See also Nies, Susanne, oil and gas delivery to Europe, 2009, updated in 2011 with the support of Christian Schulke

57 Part 1 – Chapter 4 – Security of Supply: a New Focus on Electricity

5. Gas: from golden age of gas to bronze and back to gold again?

Natural gas makes up for about one quarter of Europe’s energy: as domestic sources in the Netherlands and in the UK have declined, import dependency, and here foremost on Russia, is high and increasing.23 Gas demand itself has been subject to volatility and changing forecasts in the last ten years. While the IEA predicted a Golden Age for Gas in 2012, gas consumption declined de facto all across the period 2010 to 2014. Statistics show that gas is back since 2014, and that gas demand continues to grow. While the existing infrastructure from Eastern- to Western Europe has been largely underutilized in the period of recession and before, it appears saturated on an increasing number of days.

The current gas increase pattern is due to several factors: Renewables development and required balancing (where gas is perfectly suited), natural gas prices being competitive again due to US shale gas production and the fact that the Japanese demand spike was overcome. The role natural gas can play for climate change mitigation is somewhat complex: while on one hand gas is obviously better suited than coal or of course oil for driving climate change mitigation, gas is at once emitting methane, and leaks of pipeline systems and upstream are not sufficiently taken into statistical account, as a recent Nature Article reveals for the US case.24 The future is seen by many parties in the development of gas and power sector coupling, benefitting from the existence of the huge gas network in Europe, ensuring that Renewables generation can be properly used through storage. The coupled scenarios for TYNDP 2020 by ENTSO-E and ENTSOG are symbolic in that sense. It is worth mentioning here that both gas and power have to master the peak problem: while these peaks are cold related to gas today, and have become a more general pattern in power – as a result of variable Renewables- , a sector coupling perspective might need to consider the impact on peaks. The domestic dimension of gas security of supply should not be neglected. It relates to peak demand on an exceptionally cold day, and the needed filling of storage ahead of winter.

Is gas set to remain a main fuel in the mix? Experts agree that it has at least an important role to play as a “bridge fuel” until 2030. Its role beyond will depend on several factors: the success of the deployment and integration of Renewables and the related flexibility paradigm, the management of methane emissions as part of the climate agenda and a risk to the image and climate agenda compatibility of gas; the development of sector coupling power gas, using gas networks

23 See for a detailed discussion on gas the chapter of Christian Schulke. 24 https://www.nature.com/articles/d41586-018-05517-y

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in a different manner, and pushing the available gas storage into a combined power – gas system. Of course such “clean gas”, “wind gas”, hydrogen and power to gas strategies would match perfectly with the requirement of shifting proportions from import dependency to domestic production and thus match the overarching security of supply concern. As a Franco-German initiative has shown, the competitiveness of hydrogen is increasing with the quantity of variable Renewables put into the system, its business case being positive once the share of RES has exceeded 70% of energy.25

While awaiting a breakthrough on such promising solutions mid- and more long-term, and that match storage, cost efficiency and energy dependency at once, short term solutions have to be identified that address import dependency.

5.1 Import Dependency gas: the status quo

Where does Europe stand on gas security of supply, a decade after the last major gas crisis opposing Ukraine and Russia, and impacting EU and its neighborhood in an unprecedented manner?26

In the first quarter of 2018 Gazprom announced a 6.6% increase of its gas exports to Europe and Turkey versus the same period of the previous year 27. From the overall EU gas consumption of 491 bcm in 2017 167bcm -or 34% of the consumption- were imported from Russia- not counting imports for re-export to Ukraine.28 Other countries of origin are Norway, Algeria, Qatar29, Libya, Azerbaijan and Iran. 30 As Jack Sharples, Oxford Institute for Energy Studies, shows in a recent study, the existing Russian export routes are starting to be congested, so that the Ukrainian gas transmission system can’t be sidelined. This explains the Russian priority on new infrastructure, with Nordstream 2, adding an additional 55 bcm capacity, but also Turkish Stream to Turkey. A success-

25 See for example Thorsten Lenck, Office franco-allemand pour le développement des renouvelables, https:// energie-fr-de.eu /Downloads/09_Lenck_Thorsten_Energy_Brainpool_OFAEnR_DFBEE%20(1).pdf 26 For a comprehensive overview on the 2009 crisis see Simon Pirani and allii, https://www.oxfordenergy. org/wpcms/wp-content/uploads/2010/11/NG27-TheRussoUkrainianGasDisputeofJanuary2009ACom- prehensiveAssessment-JonathanSternSimonPiraniKatjaYafimava-2009.pdf and Nies, Susanne, Ukraine, a transit country in deadlock, IFRI 2010 https://www.ifri.org/en/publications/ouvrages-de-lifri/ukraine- transit-country-deadlock-0 27 Gazprom Export Press Release 3 April 2018 28 BP Statistical report 2018, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2018/03/Gaz-https://www.oxfordenergy.org/wpcms/wp-content/uploads/2018/03/Gaz- prom-in-Europe-%E2%80%93-two-Anni-Mirabiles-but-can-it-continue-Insight-29.pdf 29 Qatar is the third exporter of gas to Europe, after Russia and Algeria, exporting LNG. 30 Own calculations based on Jack Sharples Ukrainian Gas Transit : still vital for Russian Gas supplies to Eu-Eu- rope as other routes reach full capacity. March 2018 file:///C:/Users/Susanne/Desktop/Ukrainian-gas- transit-Still-vital-for-Russian-gas-supplies-to-Europe-as-other-routes-reach-full-capacity-Comment.pdf

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Figure 4.2. Gas Export Flows to Europe. Source: IEA, 2018. Gas trade flow in Europe. https://www.iea.org/gtf/. Sourced on 09 May 2018, adapted by Jack Shar- ples, Oxford May 2018.

Figure 4.3. Key message: this map shows the high import dependency from Russia.

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ful implementation of both projects would diminish the Russian dependency on the Ukrainian system, which from their perspective is even more crucial, as the current transit agreement expires in 2019 and that both countries are in conflict over the current gas purchases by Ukraine and continue their conflict at the Stockholm Court of Arbitration for their previous conflict.31 While the Ukrainian gas consumption has decreased by more than 90 % since the end of the Soviet union, taking it from 191 bcm in 1991 to merely 29,8 bcm of which 14.1 are imported,32 it is remarkable to see that direct purchase from Gazprom has ceased since end of 2016. The imports, in addition to domestic resources, are now entirely stemming from Europe, via Slovakia/Budince.33

Turkey, worried about its increasing dependency on Russian gas imports, has adopted an energy strategy to 2023 foreseeing primarily the decrease of the current 1/3 of imported gas in the mix, favoring largely coal, and secondly Hydro and Renewables.34 This strategy, however does not seem to be very realistic with Turkey reaching a new all-time import high of 52 bcm in 2017. At once, currently only about 1 GW of new coal capacity is under construction.

5.2 The role of LNG for security of supply

Liquefied natural gas is obtained through freezing of gas to -161 degrees, transport in adequate vessels and reconversion in LNG terminals. It allows to transform gas, very much like oil, into a global commodity, being traded on world markets, and thus independent from long term pipeline bound contracts. The global gas trade encompasses currently 32% in liquefied manner, with a tenden- cy set to increase. The US and Russia are the two countries driving the LNG growth globally.35 LNG infrastructure, very much like networks in gas have seen an important underutilization until 2014, with a trend change since then. While terminals were previously located mainly in Spain, France, UK; countries like Poland and Lithuania have seen two new terminals set to diminish their import dependency on their eastern neighbor, and to improve their competitive advantages. One should mention here the importance of floating import terminals (FSRUs), that make it possible for smaller markets like Lithuania to get access to LNG much faster and at much lower costs than with a fixed, tradi-

31 https://www.ft.com/content/5ae3b27e-1d2f-11e8-956a-43db76e69936 32 Source BP 2018, data for 2017 33 https://www.naftogaz-europe.com/article/en/ukraineimported141bcmofgasfromeuropein2017 34 http://www.tepav.org.tr/upload/files/haber/1374066601-0.Ozan_Acar_Turkey_s_2023_Vision_An_ Evaluation_from_the_Energy_Perspective.pdf 35 Thierry Bros, Oxford Institute for Energy Studies 29-30 May 2018, The global effects of LNG growth on European gas markets https://www.oxfordenergy.org/wpcms/wp-content/uploads/2017/07/The-Out- look-for-Floating-Storage-and-Regasification-Units-FSRUs-NG-123.pdf

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tional terminal on land. What is more, initial CAPEX is much lower as those terminals can be leased also for a reduced number of years.36

2011 saw LNG being rerouted for 7% of the global market to Japan, but an eas- ing of the market after. The benefits of LNG in the cold spells have been obvious, and the role played for example by the Greek LNG terminal for supplying the countries of the region in case of supply disruptions has been highlighted in various studies and regulations. The changing general sentiment vis-à-vis gas, seeing gas infrastructure potentially as the batteries of the new energy system has also positively affected the case for LNG.

5.3 Europe’s regulatory response to import dependency on gas

The first enhancement of regulatory response to crisis and dependency has been seen with the already mentioned 2010 Gas security regulation. It led to new infrastructure and in particular reverse flows being built in the most exposed countries to dependency in Central- and South East Europe. The Gas Security Regulation has been tightened and amended recently: the new Gas Security of supply regulation as of 201737 requires ENTSOG to take across EU wide infrastructure and gas supply disruption simulations. It equally provides for regional risk assessment by the concerned countries as well as the nomination of a competent authority country by country; transparency as for commercial contracts with security of supply implications; for solidarity to the most vulnerable customers in security of gas supply crisis and finally for boosting permanent bi-directional flows in number of regions. The crisis simulation of 2014 showed substantial exposure of some central European countries to a gas supply disruption, so that short term measures were formulated and taken up by the new Gas security regulation. More long-term measures include the enhancement of energy efficiency and domestic energy resources development such as hydrogen. The very positive contribution of Network Codes needs to be mentioned here: technical rules of the game, as established with the Third package, these codes have been framed by ACER, the Agency for the cooperation of Energy Reg- ulators, drafted by ENTSOG, and approved by the European legislator. They cover interoperability, congestion management, balancing, transmission tariff structures and capacity allocation and have been able, like those for electricity to adapt Europe to enhance the European energy market integration, while delivering on sustainability and security of supply.38

36 For a good overview on these see 37 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.280.01.0001.01.ENG&toc= OJ:L:2017:280:TOC 38 https://ec.europa.eu/energy/en/topics/markets-and-consumers/wholesale-market/gas-network-codes

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While all these developments must be judged as a success of European regulatory response, the question of the new infrastructure currently set up by Gaz- prom, Nord Stream 2, remains subject to many polemics, including on the social welfare impact on Europe as a whole and the divergence between Eastern – and Western Member States.39

6. Power: changing electricity paradigm and new risks

The energy transition is largely a power system transition, seeing an increasing share of decentralized Renewables replace big baseload blocks. The active management of such a system is the ultimate challenge that policymakers, companies and NGO across Europe are working on. Such a system would see sectors couple, integrate in a new fashion gas and power, but also mobility and power and the internet and power. It moves away from generation adequacy to resource – or system adequacy: here supply and demand are in balance through a large number of optional contributors. Storage, energy efficiency, demand side response and interconnection play a paramount role in this tool box. What is more, digitalization, while already present, will be boosted in its power sector application, set to transform it substantially in establishing new platforms, new architectures of players, a system of systems.40 New actors and services emerge, and the digital grid will complete the physical grid. At once the many integrated “things” increase the system risks. The consumption of data centers is extremely and increasingly high, with more than 10% already, and set to reach 1/5 of the global power consumption by 2025, unless this trend is curbed.41 At once electrification is a non-negligible fact, with dependency growing.

It is not surprising that security of power supply has moved centerstage: while of course well trained European engineers are skilled in managing the system as it exists, the paramount system changes require additional and new skills in the future. Such skills relate to digitalization but also to regional coordination: in this sense the staff of Europe’s regional security coordinators like Coreso or TSCNET deserve to be called an avant-garde. New concerns with power system security have translated into a new Risk Preparedness Regulation, forming part, as one of 8 legislative files, of the Clean Energy for All Europeans Package, adopted in December (tbc) 2018.

39 See here for example https://www.europeangashub.com/wp-content/uploads/attach_799.pdf 40 For a comprehensive overview see IEA 2017 Digitalisation of Energy https://webstore.iea.org/digitaliza-https://webstore.iea.org/digitalization-and-energy 41 https://www.theregister.co.uk/2013/08/16/it_electricity_use_worse_than_you_thought/. https://data- economy.com/data-centres-world-will-consume-1-5-earths-power-2025/

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6.1 Europe’s meandering electricity geography

Europe has seen large scale changes to its huge integrated synchronous power system. This huge grid includes today 24 countries and serves 400 million customers, and thus the lion share of the EUs 510 million population. Central Europe was synchronized in line with its accession to the EU, and Turkey in 2015. Next on the agenda are the three Baltic countries, that for the time being are part of the Russia controlled IPS/UPS system and are set to be fully synchronized via Poland in 2025. Ukraine, Moldova but also countries like Georgia are keen to form part of the regional continental European grid. The extension of the high quality standards of the European grid goes along, of course with new risks, that lie in the lack of compliance and common functioning. Political risk might upset the electricity security in the new member countries.

6.2 European blackouts and challenges since 2003

Supply disruptions in electricity can either result from the high voltage grid, or from the distribution grid. The quality of service and continuity of supply is very high in Europe, with transmission and distribution losses stretching from 2,24 to 10,44 % across Europe.42 2% of those interruptions are attributed to transmission; and 7-8% to distribution.

The last important disruptions in Europe are the Italian blackout of 2003, as well as the system split in the synchronous European power system in 2006. These events have shaped regulation and led to new requirements for transmission system operators with respect to their organization (like the Swiss TSO Swissgrid being established after the 2003 incident), their tasks and their regional and European interaction in the framework of regional TSO cooperation, started through ENTSO-E, implemented with the System Operation Guide- line (SOGL) and further developed through the Clean Energy for All Europe- ans Package.43

Regional energy coordination has to be seen as a crucial step in between national and European, and will further develop in the next decade, maintaining the ultimate decision making at national level, while underwriting it by common services and a common approach. Regulatory and governments interaction has to go along with the TSO regional interaction: initiatives such as the Pentalat- eral forum show the way forward.44

42 CEER 2015 https://www.metering.com/resources/reports-and-white-papers/ceer-power-losses-europe/ 43 See the contribution by Klaus Dieter Borchardt and more information on https://www.entsoe.eu/regions/ 44 See the contribution of Klaus-Dieter Borchardt on regional energy cooperation.

64 Part 1 – Chapter 4 – Security of Supply: a New Focus on Electricity

Figur 4.4. Source ENTSO-E.

On 31 March the Turkish system, recently synchronized with Continental Eu- rope, experienced an eight hours blackout. While some policy makers stated hastily that the synchronization was to blame, the blackout originated in the default of a component of the Turkish network.45

45 https://docstore.entsoe.eu/Documents/SOC%20documents/Regional_Groups_Continental_Eu-https://docstore.entsoe.eu/Documents/SOC%20documents/Regional_Groups_Continental_Eu- rope/20150921_Black_Out_Report_v10_w.pdf

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6.3 Nuclear risks

The costs of the nuclear disaster in Fukushima have been estimated at roundabout 626 billion Dollar, corresponding to 535,8 billion Euros.46 The nuclear accident starting 11 March 2011 and following a tsunami had a global impact on the perception of nuclear and governments choice for this technology. The ageing park and stepped up security measures post Fukushima have in addition led to the unavailability of nuclear blocks, which has proven challenging for countries with a high dependency, like France, but also Belgium. Germany decided to phase out nuclear by 2022, in the immediate aftermath of the Fuku- shima event, reverting thus a previous decision of the “exit from the exit.”47

While nuclear is considered being an important technology to contribute to climate change mitigation, technology risks and costs, as well as the ageing existing park of 148 reactors in Europe have made its case controversial in several European countries. Public acceptance has suffered from accidents such as Three Mile Island, Chernobyl and more recently Fukushima. Finally, when it comes to following load curves nuclear is less efficient than gas.

Nuclear safety requirements have been stepped up widely after the Fukushima accident; stress tests and risk assessment have been taken across.48 The ensuing stepped up requirements for retrofit have pushed costs up even more.

6.4 Traditional risks related to third countries

While new risks are gaining more and more attention, more traditional and here political security of supply questions should be also noted: thus, recent incidents between Kosovo and Serbia affected the continental European power grid49. The Balkan countries grouped in the Energy Community form part of the integrated continental European power system and strive for regulatory alignment with the EU Acquis communautaire. The three Baltic states are still part of the Russian IPS UPS system, and seek integration with the EU system, in particular since the Russian hostilities towards Ukraine and annexation of Crimea in 2014. Security of supply, not market is the main rational for this project. Finland is linked through a direct current sea cable dating back to the 1970s

46 https://www.japantimes.co.jp/news/2017/04/01/national/real-cost-fukushima-disaster-will-reach-¥70- trillion-triple-governments-estimate-think-tank/#.W2Fce_ZuJPY 47 https://en.wikipedia.org/wiki/Nuclear_power_in_Germany 48 https://ec.europa.eu/energy/en/topics/nuclear-energy/nuclear-safety 49 Kosovo Serbia incident on European power frequency see https://www.entsoe.eu/news/2018/07/09/ frequency-deviations-in-continental-europe-originating-from-kosovo-started-again-technical-measures- kicked-off-to-keep-time-delay-below-60-seconds/

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to Russia50: no incident has so far been reported on this link. Ukraine and Mol- dova as well as Georgia, all members of the Energy Community, seek equally to synchronize their systems with the Continental European ENTSO E system. Finally, the relationship between EU and non-members like Norway or Swit- zerland, and in the future the UK post Brexit have a potential impact on energy security of supply on both sides. How to frame these relations without granting a free ride to non-members?.

BOX: The case of the synchronization of the three Baltic countries: security of supply as main driver

Source EC.

While we emphasized in this contribution the new risks and that yet require collective preparedness and learning, the more traditional risk of dependency can be demonstrated with the example of the synchronization of the three Baltic states. The dependency on Russia at least with respect to the management of the IPS/UPS power system is perceived as a risk or a threat, and has justified the agreement of the Heads of State of Estonia, Latvia, Lithuania

50 See maps ENTSOs in this book.

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and Poland to get the synchronization with Continental Europe up and running by 2025.51 Considering also the symbolic value of synchronization, as the case of Turkey has shown in the past, or the Ukraine and Moldova cases show in present, it can be understood that the three small EU members from the Baltics desire to form part of the area they belong to contractually.

The three Baltic countries Lithuania, Latvia and Estonia have remained part of the Russian system called IPS/UPS, despite them joining the EU in 2004. The recent developments in Ukraine and the poor quality of relations between the OECD world and Russia has given momentum to the project of their synchronization with the Continental European power system. A memorandum of understanding in this sense was signed in late June 2018 among the Polish and Baltic governments. While the synchronization through Poland is a done deal, several aspects require clarification on the project that is to be up and running by 2025. The question of managing a possible loss of the double circuit synchronization line is prominently among these aspects, as much as the issue of the future electrical integration of Ka- liningrad, a Russian enclave located between Poland and Lithuania.

While the project has been on the agenda of European policy makers since the end of the 90s, it was always clear that there was no business case and that the justification of the about 900 Million Euros overall investment52 was only to be derived from the overarching objective of enhancing security of supply.

51 Signature ceremony of 28 June 2018. https://ec.europa.eu/energy/en/news/european-solidarity-energy- synchronisation-baltic-states-electricity-network-european-system; joint statement http://europa.eu/rapid/press-release_STATEMENT-18-2142_en.htm 52 These ENTSO-E rough estimates include the needed reinforcement of internal grids, including 4to9 new synchronous condensers costing about 100 to 225 Million Euros, the LitPo3 submarine HVDC link Poland-Lithuania of some 650 Million Euros plus 10% additional overloading capability on the link; plus additional studies about 5-6 Million Euros, plus an update on the Under-Frequency Load shedding scheme, of some 10 Million Euros, and finally the compliance with the CE operational standards of about 13 Million Euros per country (three Baltic countries 39 Million Euros)

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7. Always a winning bet: the first fuel energy efficiency53

Energy efficiency is rightly recognized by the Clean Energy Package as a ‘first fuel’ and provides solutions to the contemporary energy challenges: climate change mitigation, as emissions are curbed; competitiveness, as energy costs are decreasing over time, and finally security of supply, as import dependency decreases. As energy efficiency measures are capital expenditure (capex) heavy, investment incentives have to be created. A 32,5% increase in energy efficiency has been decided: this means that year by year 0,8 % real annual savings have to be delivered between 2021 and 2030. While the target is non-binding, it is expected that the provision will boost renovation of buildings and the use of more efficient technologies for heating and cooling.

The high consumption of data centers should not be forgotten in a context where remains of the recent past, fridges are still put in the centre of attention, and not standby devices or precisely the rising data economy. Energy efficiency RD testing and finance setting is a crucial part of the equation, requiring to use tax incentives along with other measures. New mandatory provisions on energy poverty link in a smart way the energy efficiency requirements with the most vulnerable: for the first time, there is a mandatory requirement for member states to use a share of their measures to help vulnerable customers.

7.1 Managing risks in a system with variable Renewables

In countries like Germany the peak load54 is today 82 GW, while the installed capacity is now four times higher. Networks are obviously a limiting factor here, resulting from the gap between peak load and overall installed capacity: what if the installed Renewables capacity is generating thanks to favorable wind- and sun capacity, while the demand including the peak load is already covered. The overcapacities have to be curtailed if one wants to avoid unscheduled flows55 into the neighboring systems.

53 A comprehensive overview on energy effiefficiency ciency state of play and measures is provided by IEA 2018 Perspec-Perspec- tives for the energy transition : The role of Energy Efficiency 54 Peakload is the maximum possible consumption of a country or area ; diffdifferent erent from baseload, that corre-corresponds to the needed supply at all times. 55 Unscheduled are flows when they are not foreseen by markets, but are unexpected and find their way in the powersystem according to the Kirchhoff Laws

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The power system of today and tomorrow is characterized by peaks in production and consumption, rather than a continuous supply curve as in the past. An ideal system in Europe would be able to socialize excess capacity in a very different way. This requires more networks at first hand, as well as digitalization, storage and all available tools to make up for too much or not enough sun or wind.

7.2 New climate risks

Heat waves and cold spells have challenged the European power system repeatedly: thus, in August 2015 Poland faced an important shortage and supported by largescale redispatch, relying on the Regional Security Coordinator TSC- NET. In January 2017 the cold spell of the third week of the month took several countries of South East Europe to restrict their exports, and France was suffering important system inadequacy. Here as well, only massive imports from all neighbors could prevent from shortage. France represents in fact a special case as it sees in winter demand peaks resulting from electric heating.56 In summer 2018 Swedish high voltage lines had to be taken out due to forest fires in a very hot and dry sumemr, and generators disconnected as rivers are overheating and that the regulatory limit temperature of 28 degrees in waters is reached. Of course, the increasing solar capacity has been of tremendous help here: while the production of coal and nuclear -to a lesser extend gas- had to be reduced as to respect environmental legislation on cooling water (like the heating of rivers, the temperature of which can’t exceed 28 degrees), solar has ensured security of supply in summer 2018.

Extreme weather impacts must be expected as a new pattern: the European En- vironmental Agency predicts droughts as well as floods as emerging seasonal patterns, putting an end to the traditional mild continental weather patterns that generations are used to experience.

ENTSO-E is bound by mandate to produce short term adequacy forecasts each Winter and each summer, flagging out risks and appropriate counter measures.57

In the light of more extreme climate conditions, but also the difficulty to build more lines, technological approaches such as dynamic line rating are more and more used and explored: they consist of charging lines depending on weather conditions, and to benefit for example from the natural cooling of lines in winter, as to increase the load.

56 Cold spell 2017 reports : https://ec.europa.eu/energy/sites/ener/fihttps://ec.europa.eu/energy/sites/ener/files/documents/platts_report_final_ver les/documents/platts_report_fi nal_ver-- sion_rrr.pdf 57 https://www.entsoe.eu/outlooks/seasonal/

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Beyond the risks of suboptimal coordination (as in 2003 or 2006), the risk of extreme weather conditions (as in 2015 and 2017), the new Renewables paradigm goes along with new risks: thus, the Solar Eclipse of 22 March 2015 in the morning occurred while an important share of solar generation was connected to the grid. A thorough preparation of the event among Transmission System operators as well as the proper coordination the day of the event has led to uninterrupted supply, despite this important challenge of a new type.58 The phase out of Nuclear as in Germany set for 2022 requires the adaptation of the power system to the new supply and demand pattern and complementary measures, such as undertaken with strategic reserves, imposed by Government despite diverging market incentives for maintaining such plants.

Loop flows, that are unintended flows due to Renewables, require equally a sound management and have led to the installation of so called phase shifters, that, if not managed in a coordinated manner, have the potential to offset the European internal energy market integration.

7.3 New risks: Cybersecurity, power electronics and sector coupling

Cybersecurity risks are moving into the spotlight.59 The example of Ukraine, exposed twice to cyber-attacks, or Estonia before shed light on a rising threat. The simple fact of more and more connected “things”, be it an e-car or a smart metering device open the door to the essential network, and make it vulnerable. Proper protection mechanisms shall be developed on a European level and will most probably translate into a network code on cybersecurity, setting standards. A proper Agency, ENISA, the European Network and Internet Safety Agency, has been set up already in 2004, and is gaining prominence.60 The new risk preparedness regulation, as described in greater detail below, is consistent with the existing legislation of 2016 on cybersecurity61 and the 2008 one on critical infrastructure.62

Sector coupling generates on its side new risks: can a power system be ‘hacked’ through an e-vehicle? And power electronics, which means the increasing number of ‘things’ leading to the constitution of an ‘internet of energy things’ alters the system as well: what is the impact of thousands of LED bulbs on the

58 https://docstore.entsoe.eu/Documents/Publications/ENTSO-E%20general%20publications/entsoe_ spe_pp_solar_eclipse_2015_web.pdf 59 See the detailed contribution by Sonya Twohig in this book 60 https://www.enisa.europa.eu/about-enisa 61 So called NIS directive, 2016 on cybersecurity 62 Council Directive 2008/114/EC

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frequency of an AC power system? While engineers observe the impacts, they acknowledge that these are early days of an amplifying phenomenon: tests and pilots are required as to avoid negative consequences on Europe’s security of supply.

7.4 Regulatory response to security of electricity supply risks

The overall monitoring of the risk preparedness falls under the responsibility of Member States as well as the Electricity Coordination Group.

As to tackle the risks related to electricity security, the European Commission has proposed to replace the outdated electricity security of supply directive from 200563 by a fully-fledged forward looking new regulation on “Risk preparedness”, forming part of the Clean Energy for All Europeans Package. The very title “risk preparedness” adequately stresses the difference between risks in electricity versus risks in gas or oil: while the first are very much system related, and in that sense internal, the latter are largely related to import dependency and require an adequate response.

The proposal of 201664 describes the shortfalls of the current setting, and here the too national approach in dealing with risks, while the interconnected reality proves to see risks and benefits shared already today. The European policy makers also deplore a lack of transparency.

The problems identified are largely related to purely national approaches, the lack of information sharing and transparency, as well as the absence of a common approach to identifying and assessing risks. The proposal therefore encompasses national risk preparedness plans to be prepared by Member states and a to be designated national authority, based on ENTSO-E methodology and scenarios. The plans include not only the national dimension, but also the regional one, and the coordinated measures foreseen with the neighbors. Simultaneous crisis situations are to be properly prepared and prevented.

The risk preparedness regulation requires ENTSO-E to develop a methodology for identifying electricity crisis scenarios at regional level, considering at least the following risks: rare and extreme natural hazards; accidental hazards going beyond N-1 security criterion ; consequential hazards such as fuel shortages; malicious attacks including cybersecurity risks.

63 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=LEGISSUM%3Al27016 64 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52016PC0862

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7.5 Recommendations for the incoming EC and EP

It should be noted as a starting point that the European security of energy supply is very high. This high quality applies to all fuels and is the result of a sound institution building, enforcement of regulation and risk preparedness. But more can be done and new risks require a pro-active solution-oriented approach.

Firstly, a new Commission and EP should make new risks a priority. They relate in particular to electricity, but also to domestic aspects of gas security, and indeed the combined cycles of a future power gas interlinked system. Climate related energy supply risks need to be prioritized and require a fit for purpose longterm energy and climate strategy in line with the Paris agreement thresholds.

Secondly, the incoming policy makers should refrain from populistic approaches such as claiming autarky in energy supply : they should recognize the benefits of interdependency and the opportunity of profiling energy as a bridge, and not a barrier. This requires a sound framework for investments, common rules and reciprocity.

Thirdly, the incoming EC and EP have to define in a more permanent manner the energy relations with two close countries : the UK as well as Switzerland. While Switzerland is situated electricity wise in the very heart of the European synchroneous system, and the gate to Italy in many senses, the UK is the gate for Ireland, an EU member, and is perfectly aligned with the acquis communautaire today. The win win that is outstanding requires, again, long term common rules and reciprocity.

Chapter 5 – The Distributional Effects of Climate Policies

CHAPTER 5 THE DISTRIBUTIONAL EFFECTS OF CLIMATE POLICIES

Gustav Fredriksson & Georg Zachmann

1. Introduction1

In order to avoid potentially disastrous consequences of climate change, greenhouse gas emissions need to be reduced drastically in the coming decades. To achieve this objective, a suite of intrusive polices is needed, most notably putting a meaningful price on emissions but also engendering public support for the deployment of low-carbon technologies and bans on inefficient technologies.

Consequently, climate policies will play a substantial role in this deep transformation. Given the challenge, policies need to be quite intrusive. Such intrusive policies are likely to have substantial side-effects. One important aspect is distributional effects. Depending on the general policy tool, the addressed sector and the design of the concrete policy, individual climate policy measures can have very different distributional effects.

To combat increasing inequality and improve the political acceptability of decarbonisation, the distributional effects of climate policies need to be addressed. Should this not occur, there is a real possibility that decarbonisation policies will face a political backlash.

The chapter is structured as follows. First, we describe how households and individuals of different income levels are impacted by climate policies. Second, we discuss the distributional effects of individual climate policies. Third, we -il

1 The research underpinning this chapter has been kindly funded by Cariplo foundation.

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lustrate how complex real-world policies affect inequality using the example of the EU ETS. Fourth, we argue that refraining from climate policies altogether is not the answer. Finally, we conclude with policy recommendations based on our analysis.

2. Assessing the distributional impact of policies

Each household is different and climate policies will hence affect each of them differently. A number of characteristics determine how households are affected by a given climate policy. For example, a fuel tax puts a higher burden on rural households than on urban ones.2 Other characteristics that could play a role include gender, nationality, wealth, income, ethnicity, region, occupation, and education.

To understand how climate policies affect households we refer to a very stylised model of the economic welfare of households, consisting of what we term the income side, expenditure side, and government side.

2.1 Income side

Households can generate income from employing their production factors (capital, land3 and skills). The income from employing these production factors might change because of climate policies. The owner of a coal mine might see his capital income decline due to carbon pricing,4 while a biotech engineer might gain a higher income from his skills when investment into advanced biofuels is publicly promoted.

Low-income households generally own less production factors (in particular land and capital) than high-income households. Even though the market value of skills owned by low-income households is lower than that of high-income

2 The rural/urban divide is correlated with income, but in a non-linear way. In the US, for example, rural households have a 3.5% lower median income, while the poverty rate is significantly higher for urban households (16% vs. 13.3%). The picture gets even more complex when looking into different regions, as, for example, in the Northeast, rural households also had the higher median income. (See Alemayehu Bishaw & Kirby G Posey, ‘A Comparison of Rural and Urban America: Household Income and Poverty’ (2016) United States Census Bureau, retrieved from: https://www.census.gov/newsroom/blogs/random- samplings/2016/12/a_comparison_of_rura.html). 3 Many models treat land as a form of capital. We single it out here, as the role of land might signifisignificantly cantly in-increase due to decarbonisation (e.g., as space for wind turbines, solar panels, biomass-planting, afforestation, and other mitigation options). 4 This will in turn also reduce the value of the capital itself – as capital should be valued at the future stream of income.

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households (e.g., in terms of formal education), skill-based income (i.e., labour) represents a much higher share in the total income of low-income households. Households can use their budget to invest in production factors. They might buy land and capital assets or engage in education. High-income households are more likely to find that such investment increase their overall utility over their expected lifetime, while low-income households might need all their income to meet their basic needs. This hence allows high-income households to better adjust to the economic shifts induced by decarbonisation.

2.2 Expenditure side

Households spend money to acquire goods and services for immediate consumption (e.g., food) and durable goods from which they will draw welfare in the future (e.g., houses). In addition, also the government provides goods (e.g., infrastructure) and services (e.g., health care) that have some utility for households. Finally, the quality of the environment furthermore contributes to the well-being of households.

Households try to acquire the combination of goods and services that maximise their individual utility. This is far from trivial as it depends on:

1. A household’s preferences for individual goods and services. For example, individuals that put a higher value on immediate consumption are often also lower-income (see an example in Table 5.1). Individuals with high time preferences might be more negatively affected by climate policies which encourage investments in lowering the carbon footprint (e.g., more efficient fridges).

Low-income 32.9 Lower middle-income 30.1 Upper middle-income 22.7 High-income 22.5

Table 5.1. An example of differing discount rates by income group (in Den- mark). Source: Authors based on Glenn W Harrison, Morten I Lau, & Melonie B Williams, ‘Estimating Individual Discount Rates in Denmark: A Field Experiment’ (2002) 92 American Economic Review.

Note: A discount rate indicates how much value is attached to present consumption relative to future consumption. A discount rate of zero reflects in- difference between present and future consumption, while positive discount

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rates imply greater preference for present consumption. In the table, the discount rate is highest for the low-income group, meaning these individuals place the greatest value on immediate relative to future consumption.

2. A household’s borrowing constraints. Low-income households so’metimes experience borrowing constraints that prevent them from investing in money-saving technologies and carbon-saving technologies. These credit constraints result from low-income households having lower credit scores and less collateral to borrow against.

3. A household’s total budget allocated to consumption5, which can explain consumption differences across income levels. Basic goods (such as heating or food) form a much higher share of low-income households’ consumption baskets. Consequently, policies that disproportionately affect prices of basic goods have distributional effects. If, for example, a carbon tax increases the cost of heating, the disposable income of low- income households might substantially shrink, while the effect on the disposable income of high-income households might be negligible.

Furthermore, households with different incomes might have different abilities to conduct expenditures that either reduce their exposure to carbon prices (e.g., an energy efficient fridge) or allow them to benefit from support schemes (e.g., an electric vehicle). Existing assets – like a detached house – might allow high-income households to benefit from climate policies such as rooftop solar- subsidies or energy efficiency retrofit credits. On the other hand, low-income households might not be able to conduct such clunky expenditures because they would severely unbalance their asset portfolio. In fact, low-income households might also not be able to undertake such expenditures at all due to credit constraints, in contrast to high-income households.

2.3 Government side

Governments receive taxes on the income on capital, labour and land, as well as taxes on consumption (including on durable consumer goods). Government budgets are used to provide public goods (e.g., streets and public transport) and transfers (e.g., social security).

5 A household might also invest in production factors or decide to consume more leisure instead of consuming more goods and services – so this is another complex optimisation.

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Climate policies that generate public revenue can allow governments to reduce other taxes and/or increase provision of transfers and public services. In theory, governments can offset the distributional effects of regressive6 climate policies by targeted lump sum transfers7 or at least mitigate the effects by reducing other regressive taxes. As governments are relatively free to use climate-policy related incomes either in a progressive way (e.g., through lump sum transfers or reductions in labour taxes) or regressive way (e.g., a reduction in capital taxes), we refrain from discussing this “recycling” in the main text of this chapter, and rather save this topic for the conclusion.

2.4 Summary

Figure 5.1 provides a simplistic overview of the economic activities of households/individuals. Climate policies can affect the welfare of households/individuals by changing their income, the value of their investments, and their utility from expenditures and consumption of public services. Structural differences in the economic activities of low- and high-income households imply that certain policies affect them differently. To obtain fair policy guidance, it is important to analyse the distributional effects of a given climate policy on each economic activity, as by focusing on only one might bias the outlook. For example, a policy that has a disproportionate cost for low-income households on the expenditure side, might only negatively affect the returns to production factors held by high- income households on the income side, making the overall distributional effect roughly proportionate.

The type of policy (e.g., standards, taxes, or subsidies), the targeted sector (e.g., agriculture or aviation), the concrete policy design (e.g., thresholds, or exceptions) and the characteristics of the economy (e.g., initial inequality, sector structure, or progressivity of the fiscal system) matter for the direction and extent of the distributional impact.

6 For the purposes of this chapter, policies that make low-income households worse off relative to high-income households are called regressive; policies that have the opposite effect are called progressive; and policies that affect high- and low-income households equally are called proportionate. 7 Perfect compensation might require perfect information on households which is not available. One might argue that acquiring information on households is costly (a lot of reporting and monitoring is especially required if taxpayers cannot be trusted to declare their true economic situation. Taxpayers might actually prefer to incur costs themselves to appear less rich, by, for instance, offshoring income). Hence, there might be a trade-off between the cost of organising transfers and the degree to which they are targeted.

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Figure 5.1. Simplified economic activities of households/individuals. Source: Grégory Claeys, Gustav Fredriksson & Georg Zachmann, ‘The distributional effects of climate policies’ (2018) Bruegel Blueprint.

3. Distributional effects of climate policies

Most of the literature on the distributional effects of climate polices focuses on how climate policies change prices of specific goods and whether low-income households are consequently disproportionately affected because they spend a larger share of their income on these goods. Flues and Thomas (2015), for instance, investigate the average distributional impact of electricity taxes8 across 21 OECD countries and find a regressive effect9. Figure 5.2, replicated from Flues and Thomas (2015), shows this. The downward sloping orange line indicates that, on average, those earning less spend a larger share of their income on electricity taxes. Similarly, the negatively sloped blue line suggests that, on average, the share of expenditure on electricity taxes is higher for individuals with low overall spending. The regressive effect might stem from low-income households spending a larger share of their income on electricity and from the inability to reduce electricity consumption in response to a price increase. Indeed, as highlighted by Flues & Thomas (2015), all modern households require a minimum amount of electricity, and few substitutes exist. Low-income households might also own older electrical appliances that consume more electricity and lack the financial means to buy efficient appliances. This might further explain the regressive nature of electricity taxes, according to Flues & Thomas (2015).

8 ThThe e effeffect ect of electricity taxes on household expenditures can be seen as a proxy for the effeffects ects of carbon pric-pricing in the electricity sector - which would also increase consumer electricity tariffs. 9 The degree to which electricity taxes are regressive varies across countries though in the study.

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Figure 5.2. Average electricity taxes (21 OECD countries) as a percentage of net income or pre-tax expenditure. Source: Florens Flues & Alastair Thomas, ‘The distributional effects of energy taxes’ (2015) 23 OECD Taxation Working Papers.

Electricity taxes constitute one type of climate policy. In practice, a wide portfolio of policies exists, for which the distributional outcomes can vary. In Table 2, we summarise the distributional effects of various climate policy tools, based on a review of the empirical literature and on our own assessment. Two major conclusions can be drawn from the table. First, the effect of several climate policies remains unclear, implying there is considerable room for more research on the distributional consequences of these policies. Such research could help underpin future impact assessments that evaluate the distributional effects of climate policies. Second, it is clear that different policies have different effects, as some policies are more regressive than others. This implies that a combination of policy tools can be used to achieve decarbonisation while simultaneously minimising the overall adverse distributional impact10.

10 If two policies are equally effiefficient cient in achieving decarbonisation, implementing the policy with more desir-desirable distributional effects is preferable. However, a trade-off between equity and efficiency might arise if policies are not equally efficient. This motivates using a combination of instruments to achieve the dual goals of decarbonisation and limiting the overall adverse distributional consequences.

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Climate policy Distributional impact Our confidence

Carbon pricing on…

… Road fuel Mixed evidence, as low-income households Medium are less likely to own cars, but those that do spend a larger share of their income on fuel … Electricity Regressive, due to low-income households Medium spending higher shares of their income on electricity and because of inelastic demand (e.g., because of a limited financial ability to replace old electric appliances with efficient ones). … Heating Regressive, although the extent to which Medium low-income households are disproportionately hurt compared to electricity taxes is less clear. … Air transport Likely progressive, as air transport is used High above-proportionately by high-income households. … Maritime transport Might be slightly regressive, as low-income Low households spend a higher share on imported goods. However, less maritime trade might benefit low-skilled manufacturing labour.

Subsidies on low- Can be regressive, as, for instance, clean High carbon technology vehicle, building-insulation and rooftop-solar subsidies mainly go to high-income households. Public investment in Mixed evidence, as it depends on whether it Low low-carbon technolo- increases demand for capital or low-skilled gy or complementary labour, and whether it is mainly used by low- infrastructure income households (e.g., city buses) or high- income households (e.g., high-speed rail). Higher tariffs on high- Mixed evidence, as low-income households Low carbon imports are more dependent on high-carbon imports, but low skilled workers might benefit from protections for high-carbon industries (e.g., coal mining). Vehicle standards Can be regressive if higher up-front cost only Medium pay off at low discount rates (i.e., for high- income households). Agriculture (e.g., Possibly regressive because of higher share Low standards or taxes) of low-income households’ food expenditures – partly compensated by higher carbon content of food consumed by high-income households.

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Effect of climate Likely regressive because of the skill bias in Low policies on the labour green industries; however, energy efficiency market measures in buildings might create construction jobs German feed-in- Regressive, as they increase household elec- High tariffs tricity prices, while industry is exempted and benefits from ‘merit-order’ effect EU ETS Regressive, as firms have benefited from free High allowances, cheap international credits, and indirect cost compensation at the expense of users of carbon-intensive products and governments

Table 5.2. A summary of our assessment of the distributional effects of climate policies. Source: Authors based on Grégory Claeys, Gustav Fredriksson, & Georg Za- chmann, ‘The distributional effects of climate policies’ (2018) Bruegel Blueprint. Note: Regressive (red/orange): low-income households are hurt more or benefit less than high-income households. Proportionate: low-income households are hurt or benefit as much as high-income households. Progressive (green): low-income households are hurt less or benefit more than high-income households. Mixed evidence (grey). The level of our confidence in the last column is based upon the availability of corresponding literature, the degree of consensus in the surveyed literature and, where applicable, on the findings from our own analysis in: Grégory Claeys, Gus- tav Fredriksson, & Georg Zachmann, ‘The distributional effects of climate policies’ (2018) Bruegel Blueprint.

4. The distributional effects of a real-world climate policy: The EU ETS

Actual policies are much more complex than the stylised examples of carbon taxes typically assumed in the academic literature. In the real world, policies often aim to achieve multiple targets and require support from various interest groups. They are consequently freight with exemptions and compensation mechanisms. The EU ETS is a prime example.

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As discussed below, the EU ETS has led to a transfer of wealth from governments and households to firms through two channels:11 the allocation of free allowances and indirect cost compensation for electricity-intensive firms.

4.1 Allocation of free allowances

Free allowances are allocated to eligible firms to safeguard their competitiveness and to prevent them from relocating their activities to countries with less strict emissions regulations. The issuance of free allowances has distributional consequences though, for two major reasons.

Firstly, there has been an overallocation of free allowances. In 2008-2014, industrial firms (excluding those burning fuels12) received around 3.5 billion allowances for free, although around four-fifths of this amount would have covered their emissions.13 Firms can sell their surplus allowances at a profit or use them for compliance at a later date. De Bruyn et al. (2016)14 estimate that the overallocation generated additional profits of more than €8 billion in 2008-2014. Governments, in turn, have foregone revenue since the surplus allowances could have been auctioned. The overallocation of free allowances can thus be considered a shift of wealth from governments to firms.

Secondly, firms have passed-through the value of their allowances in product prices, irrespective of whether they bought them at an auction or received them for free. By passing through the ‘opportunity cost’ (i.e. the money foregone from not selling the free allowances)15 to consumers, firms earn higher profits while consumers pay more.

11 Firms have in the past also profited from the use of cheaper international credits for compliance. In phase 2, firms could directly surrender these credits. The rules were revised for phase 3, however, so that the international credits could no longer be used as compliance units for the EU ETS. Operators must today instead exchange the credits for EU allowances, up to the operators’ individual entitlement limit as set in the registry. As this has significantly reduced the possibility to profit from the cheaper credits, we abstain from elaborat- ing on this channel of wealth transfer here. 12 Firms categorised under ‘Combustion of fuels’ in the EUTL include both installations receiving free allow-allowances and electricity producers that do not receive free allowances. The data from the EEA does not enable us to separate the two, and as such, we exclude these firms from this calculation. 13 The calculation is based on data from the EU ETS data viewer of the EEA, available at: https://www.eea. europa.eu/data-and-maps/dashboards/emissions-trading-viewer-1 14 Sander de Bruyn, Ellen Schep, & Sofia Cherif, ‘Calculation of additional profits of sectors and firms from the EU ETS’ (2016) Delft: CE Delft. 15 De Bruyn et al. (2015) find positive pass-through rates in 2008-2014 for about 60 percent of products investigated.

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4.2 Indirect cost compensation for electricity-intensive firms

Compensating electricity-intensive firms for higher electricity prices is another channel through which wealth is transferred to firms. The EU ETS has raised the price of electricity, because electricity producers pass through much of their compliance costs. Firms relying heavily on electricity as an input therefore incur large indirect costs from the EU ETS because they have to pay more for electricity. Some Member States compensate these firms with auctioning revenues. About one third of Member States has a compensation scheme in place, though the level of compensation varies.16

4.3 Overall distributional impact of the EU ETS

Figure 5.3 shows a simplified picture of the overall distributional impact of the EU ETS. The figure describes the monetary flows in phase 3, using allowance quantity and price data for 2013-17. For simplicity, a cost pass-through rate of 90% is assumed17 and governments are assumed to transmit 34% of its auctioning revenues in compensation to electricity-intensive firms.18 The numbers hence only provide a very rough first approximation of the size of the effects.

Thus, the EU ETS is not only regressive on the expenditure side - with rising electricity prices eating up an above-proportionate share of low-income households’ income. It is also regressive on the government side with free allowances and compensation representing significant transfers to firms.

16 In 2016, France, for instance, used 60 percent of auction revenues for compensation, compared to slightly above 30 percent in Germany and the Netherlands (Marcu et al., 2018). 17 The cost pass-through rate in the power sector is likely close to 100 percent. For industrial installations, the rates range from zero to above 100 percent (De Bruyn et al., 2015). An average rate of 90 percent is thus assumed for simplicity. 18 34 percent was the share of indirect cost compensation in auctioning revenue in Germany in 2016 (Marcu et al., 2018).

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Figure 5.3. A simplified picture of the monetary flows in the EU ETS (2013- 2017). Source: Authors based on European Environment Agency data, available at: https://www.eea.europa.eu/data-and-maps/dashboards/emissions-trading- viewer-1

Note: *The indirect cost compensation is directed towards electricity-intensive firms. ‘Firms’ include all stationary installations in the EU ETS (i.e. in both the EU and the EEA) in phase 3. The average allowance price was calculated manually for each year. The sum of the net revenues across actors differs from zero due to rounding.

5. Non-action

If not addressed, climate change will impair many livelihoods. Not everyone will be equally affected by climate change though, as those already at a disadvantage will be more likely to suffer harm. The disadvantage can stem from a low socioeconomic status, demographic characteristics, weak political power, or an inferior access to public resources.19 For instance, there is evidence from Austra- lia that rural male farmers are more prone to suicide during droughts.20 Further- more, low-income households might face relatively greater financial losses from hurricanes.21

19 S. Nazrul Islam & John Winkel, ‘Climate change and social Inequality’ (2017) UN Department of Eco-Eco- nomic & Social Affairs (DESA) Working Paper No. 152. 20 Ivan C Hanigan, Colin D Butler, Philip N Kokic, & Michael F Hutchinson, ‘Suicide and drought in New South Wales, Australia’, 1970–2007 (2012) 109 PNAS 13950. 21 Robin Leichenko & Julie A Silva, ‘Climate change and poverty: Vulnerability, impacts, and alleviation strat-strat-

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Disadvantaged groups suffer disproportionately from climate change because they are more exposed to the adverse effects. The greater exposure is partly due to their housing location. Low-income households may, for instance, live in areas at risk of flooding because housing is cheaper there. Moreover, in a given area, the exposure can be larger for certain occupations. Those working outdoors can, for example, be more prone to heat-related stress if temperatures rise.22 Differ- ences in housing location and nature of work are in turn driven by inequalities.23 For instance, less educated individuals may more likely work outdoors, and thus be more exposed to the heat-related stress. Various inequalities between groups can also interact, further exacerbating differences in the exposure level. Mutter (2015)24 shows that a combination of economic and racial factors made Afri- can-Americans in New Orleans especially exposed to Hurricane Katrina.

For a given level of exposure, disadvantaged groups are also more vulnerable to the damage caused by the adverse effects of climate change. For example, in areas prone to flooding, low-income households may be especially susceptible to flood damage if their houses are made of less durable material.25 Differences in vulnerability are rarely due to a single cause, but rather due to a combination of various inequalities. For instance, discrimination based on race can increase income disparities, which can translate into differences in vulnerability.26

Disadvantaged groups may also be less able to cope and recover from the damage caused by climate hazards. Hurricane victims with low incomes might not be able to afford insurance and might therefore receive little compensation for destruction of their property. A reduced ability to cope and recover means disadvantaged groups are hurt more in the event of climate hazards, for instance through the loss of assets (e.g., property or income). This can in turn aggravate existing inequalities and make the disadvantaged even worse off (see Figure 5.4, which is based on Islam & Winkel, 2017).

egies’ (2014) 5 WIREs Climate Change 539. 22 Stephane Hallegatte, Mook Bangalore, Laura Bonzanigo, Marianne Fay, Tamaro Kane, Ulf Narloch, Julie Rozenberg, David Treguer, & Adrien Vogt-Schilb, ‘Shock Waves: Managing the Impacts of Climate Change on Poverty. Climate Change and Development’ (2016) Washington DC: World Bank; Joshua Graff Zivin & Matthew J Neidell, ‘Temperature and the allocation of time: Implications for climate change’ (2014) 32 Journal of Labor Economics 1 23 S. Nazrul Islam & John Winkel, ‘Climate change and social Inequality’ (2017) UN Department of Eco-Eco- nomic & Social Affairs (DESA) Working Paper No. 152. 24 John C Mutter, ‘Th‘The e disaster profiprofiteers: teers: How natural disasters make the rich richer and the poor even poor-poorer’ (2015) New York: St. Martin’s Press. 25 S. Nazrul Islam & John Winkel, ‘Climate change and social Inequality’ (2017) UN Department of Eco-Eco- nomic & Social Affairs (DESA) Working Paper No. 152. 26 IPCC, Fifth Assessment Report. Climate Change 2014: Impacts, Adaptation and Vulnerability (2014) New York: Cambridge University Press.

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While we have seen that climate policies can have adverse distributional effects, non-action cannot be the answer. Non-action would not only make everybody worse off – it would especially hurt the disadvantaged. There is hence no trade- off between climate and equity, and the question is rather how climate policies should be designed to minimise adverse distributional effects.

Figure 5.4. The vicious cycle between climate change and inequalities. Source: Au- thors based on S. Nazrul Islam & John Winkel, ‘Climate change and social In- equality’ (2017) UN Department of Economic & Social Affairs (DESA) Working Paper No. 152.

6. Conclusion and recommendation to the incoming Commission and EP

To limit the global temperature increase to well-below 2°C, mankind needs to stabilise the concentration of greenhouse gases in the atmosphere by the middle of this century. That is, industry and agriculture cannot emit more CO2 and other greenhouse gases than will be absorbed. This will require a massive shift in our economies. Heating, transport, electricity and industry will have to be transitioned to a world without fossil fuels. Agriculture and industry will have to find new ways to reduce emissions.

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These shifts might be eased by societal and technological shifts (e.g., urbanisa- tion, digitalisation, etc.) but they will not happen by themselves. In fact, decarbonisation will likely remain an uphill battle, with reduced fossil fuel consumption translating into lower fossil fuel prices, and hence a continued need for incentives to not use the remaining fossil resources.

Consequently, climate policies will play a substantial role in this deep transformation. Given the challenge, policies need to be quite intrusive. Such intrusive policies will likely have substantial side-effects. One important aspect is distributional effects. Depending on the general policy tool, the addressed sector and the design of the concrete policy, individual climate policy measures can have very different distributional effects.

We find that key climate policy tools such as carbon taxes for different fuels, mandatory standards, subsidies, and regulatory tools can be highly regressive on the consumption side. For other polices, such as trade policies, the effects are less clear. And for fuel taxes on aviation, for example, the effect might be progressive. As the example of the emission trading system demonstrates, the detailed policy design matters. We also note, however, that the literature on the distributional effects of climate policies is still sketchy and integrated assessments that allow to compare the overall distributional effects of different climate policy portfolios are absent.

While climate policies can have adverse distributional effect, non-action cannot be the answer. Non-action would not only make everybody worse off – it would actually also affect low-income households more than high-income households. There is hence no trade-off between climate and equity, but the question is how we design climate policies to minimise any adverse distributional effects.

To combat increasing inequality and to improve the political acceptability of decarbonisation, the distributional effects of climate policies need to be addressed. We see three main possibilities to do so:

1. Compensating low-income households. Research shows that carbon tax revenues can be used to fully compensate the regressive effect of said taxes on low-income households. Such compensation can take different forms, including lump-sum transfers, social policies (e.g., targeted transfers to households most in need), reducing other regressive taxes or increasing allowances for labour taxes, using income to provide public goods that primarily benefit lower-income households, and facilitating transition towards new jobs.

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2. Designing the specific policy measures in a way that reduces the distributional effects. A second approach is to design policies in a way such that their burden is proportionate to the income of the affected individuals/households. In many cases, addressing distributional effects in the design of policies will have some impact on the effectiveness and efficiency of the climate policies. Options to reduce distributional effects include focusing on less regressive sectors first, focusing on less regressive policy tools, revising existing regressive policies such as renewable support schemes and the EU ETS, and increasing climate diplomacy to mitigate the competitiveness vs. equality trade-off.

3. Introducing climate policies that have progressive features. For example, public low-carbon investments that primarily benefit less wealthy individuals/households could reduce inequality. Such investments can include public programs that increase the energy efficiency in public housing and improving public transport.27

Overall, we find that – despite excellent works on individual instruments – the issue of distributional effects of climate policies is underexplored in research and policy-making. Especially the large-scale modelling exercises that underpin many long-term climate strategies do not address this issue. Thus, more should be invested in researching this issue as to deliver fit for purpose impact assessments that also look at distributional effects of climate policies.28

7. References

– Bishaw A., & K.G. Posey, ‘A. Comparison of Rural and Urban America: Household Income and Poverty’ (2016) United States Census Bureau, retrieved from: https://www.census.gov/newsroom/blogs/random- samplings/2016/12/a_comparison_of_rura.html – Claeys G., G. Fredriksson, & G. Zachmann, ‘The distributional effects of climate policies’ (2018), Bruegel Blueprint. – De Bruyn S., E. Schep, & S. Cherif, ‘Calculation of additional profits of sectors and firms from the EU ETS’ (2016) Delft: CE Delft.

27 But public transport might also drive gentrification. 28 Including different household types with different consumption patterns and discount rates into models used for policy analysis could provide interesting insights into this complex question.

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– De Bruyn S., R. Vergeer, E. Schep, M. ’t Hoen, M. Korteland, J. Cludius, K. Schumacher, C. Zell-Ziegler, & S. Healy, ‘Ex-post investigation of cost pass-through in the EU ETS: An analysis for six sectors’ (2015). Brussels: European Commission. – Flues F., & A. Thomas, ‘The distributional effects of energy taxes’ (2015) 23 OECD Taxation Working Papers. – Graff Zivin J., & M.J. Neidell, ‘Temperature and the allocation of time: Implications for climate change’ (2014) 32, Journal of Labor Economics, 1. – Hallegatte S., M. Bangalore, L. Bonzanigo, M. Fay, T. Kane, U. Narloch, J. Rozenberg, D. Treguer, & A. Vogt-Schilb, ‘Shock waves: Managing the impacts of climate change on poverty’ (2016). Washington DC: World Bank. – Hanigan I.C., C.D. Butler, P.N. Kokic, & M.F. Hutchinson, ‘Suicide and drought in New South Wales, Australia, 1970-2007’ (2012) 109 PNAS 13950. – Harrison G., M. Lau, & M. Williams, ‘Estimating Individual Discount Rates in Denmark: A Field Experiment’ (2002), 92 American Economic Review, 1606. – IPCC, Fifth Assessment Report. Climate Change 2014: Impacts, Adap- tation and Vulnerability (2014) New York: Cambridge University Press – Islam S.N., & J. Winkel, ‘Climate change and social Inequality’ (2017) UN Department of Economic & Social Affairs (DESA) Working Paper No. 152. – Leichenko R., & J.A. Silva, ‘Climate change and poverty: Vulnerability, impacts, and alleviation strategies’ (2014). 5 WIREs Climate Change 539. – Marcu A., E. Alberola, J-Y. Caneill, M Mazzoni, S. Schleicher, W. Stoefs, C. Vailles, & D. Vangenechten, ‘2018 State of the EU ETS Report’ (2018) I4CE, ICTSD/ERCST, the University of Graz, Nomisma Energia and Ecoact. – Mutter J.C., ‘The disaster profiteers: How natural disasters make the rich richer and the poor even poorer’ (2015) New York: St. Martin’s Press.

Chapter 6 – Innovation: a Vital Challenge for the European Energy Transition

CHAPTER 6 INNOVATION: A VITAL CHALLENGE FOR THE EUROPEAN ENERGY TRANSITION

Pascal Lamy & Thomas Pellerin-Carlin1

The energy transition is a vital challenge for Europe and the world. It has never been so urgent. After three years of stagnation of greenhouse gases emissions in 2014-2016, they have risen by 2% in 2017, both in the world and in the EU2. In the meantime, President Trump unilaterally withdrew the US from the Paris Agreement, and China keeps improving its lead on the production of solar panels, rare earths and batteries.

It is in this context that Europe at large (i.e. EU member states and other Euro- pean countries such as Norway and Switzerland) faces a serious energy innovation challenge. It can use its opportunity to show its ambition to fight climate change and make sure that, after having largely missed the digital revolution, the EU can lead the energy revolution and ensure that European companies are the ‘Energy GAFAM-BATX’. But it can also keep losing ground to major international competitors with the ensuing negative consequences, whether economic, social, environmental or political.

This chapter thus looks at the European energy transition through the lens of Research and Innovation (R&I). Section 1 first underlines the vital importance of R&I to make the energy transition successful and competitive (cf. Box for the definitions of energy transition, research, innovation and competitiveness). Section 2 analyses the challenges for energy R&I. Section 3 presents the current

1 The authors would like to thank Geneviève Pons, Bruno Liebhaberg,Emilie Magdalinski, Philipp Ständer, Pierre Serkine, Julia Reinaud, Martin Porter, Jean-Arnold Vinois and Kurt Vandenberghe for their valuable comments. 2 Enerdata, Global Energy Trends 2018, 2018.

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EU R&I policy framework. Section 4 presents the 2018 European Commission proposals and a few recommendations.

Box 1. Defining energy transition, research, innovation and competi- tiveness3

“Energy Transition” can be defined in several ways. We here define it as “phasing-out fossil fuel consumption by (a) reducing energy demand through energy conservation and energy efficiency, and (b) boosting renewable energy generation”. At the global level, we are witnessing an energy addition, where new renewables (especially solar and wind power) are added to existing sources. In Europe however, energy demand has declined since 2006 and increased renewable generation has started to substitute some oil, coal and gas.4

“Research” is the process of creating ideas, processes, technologies, services or techniques that are new to the world. In terms of input, available statistics often refer to Research & Development (R&D) spending. One could thus say that research is a process that transforms resources into knowledge.

“Innovation” is here defined as introducing something new to a given organisation or process —but not necessarily new to the world. For innovation to be beneficial, it must be useful and valuable, and can often be monetised. One could thus say that innovation is a process that transforms knowledge into resources. Innovation can be a ‘disruptive innovation’ that creates new products and new markets and reshapes existing ones, it can also be an ‘incremental innovation’ or ‘sustaining innovation’ that merely makes something better, without disrupting a system.5

“Competitiveness” is a too often ill-defined buzzword excessively used as a synonym for cost-competitiveness6 (i.e. cost-minimisation: “doing what everyone does, but cheaper”), a definition that is “not only wrong but

3 Those definitions synthesis the more complete definitions given in Thomas Pellerin-Carlin and Pierre Serk- ine, “From Distraction to Action – towards a bold Energy Union Innovation Strategy”, Policy Paper No. 167, Jacques Delors Institute, June 2016. 4 Data from the British Petroleum Statistical Review 2018. 5 Clayton M. Christense, Michael E. Raynor, Rory McDonald, ‘What is disruptive innovation ?’, Harvard Business Review, December 2015. 6 Karl Aiginger, Susanne Bärenthaler-Sieber, Johanna Vogel, “Competitiveness of EU versus USA”, WWW- forEurope Policy Paper, No.29, November 2015.

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dangerous”.7 What makes European competitiveness in 21st century globalisation is the capacity to “do what no one else can do”,8 something that is first and foremost characterized by one’s capacity to innovate.

1. Innovation is vital for Europe and for the energy transition

The energy transition is introducing new technologies, processes, services, techniques and behaviours in human organisations. It is, almost by definition, a process of innovation on a massive scale, that should lead to systemic change and societal change.

More and better innovation will thus help foster the energy transition in Europe. It will reduce global emissions and boost the competitiveness of EU companies.

1.1 Innovating to reduce global greenhouse gas emissions

Fighting climate change and implementing the Paris agreement require a radical transformation of our entire economy into a net-zero greenhouse gas emissions economy. This transformation will affect all the sectors of the economy, especially the ones most responsible for greenhouse gas emissions, such as agriculture – a topic that is not covered in this chapter-, and the energy sector, which is the focus of this chapter.

The EU represents only 8.7% of global greenhouse gas emissions and more than 20% of global GDP. Europe should further use its economic and innovative strengths to impact 100% of global emissions – rather than the EU’s 8,7%. In this regard, energy R&I is of critical importance as many EU innovations can be exported or be inspirations for innovations in the rest of the world.9

The EU should articulate its policy tools (trade, R&I, development assistance etc.) to aim at co-developing the goods and services helping poor countries to leapfrog: i.e. go from poverty to low-carbon prosperity, without going through a phase of high-carbon economic development. Leapfrogging already occurred in other sectors, such as in telecommunications as poor countries went from

7 Paul Krugman, Competitiveness: A dangerous Obsession, Foreign Affairs, March/April 1994 8 Andrea Ovans, What is Strategy Again?, Harvard Business Review, May 2015. 9 It is also possible to witness phenomena of ‘reverse innovation’, i.e. where an innovation first conquers emerging markets before being transferred to developed countries.

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no-phones to mass-scale diffusion of mobile phones—without going through a landline phone phase. In this endeavour, as the European Commission underlined it in its ‘Accelerating Clean Energy Innovation’ communication,10 innovation will include frugal innovations11 that are adapted to local conditions. This approach is particularly well-suited to tackle one of Europe’s biggest challenge: fostering access to (renewable) energy for all Africans.12

Energy innovation thus requires stronger international cooperation with both industrialised, emerging and developing countries. Here the challenge for the EU will be to strike the balance between its willingness to lead internationally and ensuring that such cooperation does not unfairly harm the competitiveness of European companies.

1.2 Innovating for competitiveness

The public sector is at the forefront of technological revolutions, thanks to its capacity to regulate (see. Section 3.b) and thanks to public support to R&I.13 Stronger public sector support to energy R&I will help energy companies to benefit and develop innovations. This will give them a competitive edge in the booming energy transition markets (e.g. wind turbines, batteries, electric cars, energy efficiency services). In this context, the energy R&I policy should seek ways to transform often risk adverse businesses into the energy transition tigers Europe needs. It should do so by providing support across the entire innovation value chain, from basic research to innovation, and foster innovative practices.

1.3 Innovating to enhance Europe’s soft power

Currently, the EU imports more than 50% of the energy it consumes.14 This creates a dependence of the EU vis-à-vis its energy suppliers, especially its gas suppliers such as Russia.

10 European Commission, Accelerating Clean Energy Innovation communication, 30 November 2016 11 Frugal innovation is the process of simplification of a product (removing nonessential features). Cf. Navi Radjou and Jaideep Prabhu, Frugal Innovation – how to do more with less, The Economist Books, 2015. 12 Thomas Pellerin-Carlin, Jean-Arnold Vinois, Eulalia Rubio and Sofia Fernandes, “Making the energy transition a European success. Tackling the democratic, innovation, financing and social challenges of the Energy Union”, Studies & Reports No. 114, Jacques Delors Institute, September 2017. 13 Mariana Mazzucato, The entrepreneurial state: Debunking public vs. private sector myths, Anthem Press, 2015. 14 https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-2c.html. This figure is actually underestimated as nuclear power is considered to be a European production, even if it consumes foreign-imported uranium.

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Energy geopolitics is being reshaped by the energy transition.15 The dependence on fossil fuel suppliers decreases as fossil fuel consumption is being reduced. However, the energy transition creates a new kind of dependence towards Chi- na, that is the main exporter of some key clean technology and rare earth elements to Europe.16

2. Leading in energy innovation: EU successes and challenges

2.1 Energy sectors: where the EU leads, lags or falls behind

So far, Europeans have had victories and defeats when it comes to leading the energy transition. A sound analysis of the situation is key for those policy makers who want to make evidence-based decisions to better design R&I tools, looking for instance into three key sectors: wind turbines, solar panels and electric vehicles.17

The EU is leading in a sector like wind turbines, with five EU companies in the Top 10.18 In those ‘leading sectors’, EU policy can aim at strengthening an already solid position, working with companies that already successfully invest in skills, research and innovations that they can deploy themselves.

The EU has fallen behind in a sector like solar PV production, with no EU company in the Top 10.19 In such ‘defeated sectors’, a safe policy bet can be to simply accept one’s defeat and focus efforts on other areas.

When the EU is lagging behind, policy makers can consider this domain to be critical enough to invest in (re)conquering a competitive edge and bridge the gap. This is for instance the case for pure battery electric vehicles where the Fran- co-Japanese Alliance Renault-Nissan is n°120 and BMW is n°6 (cf. Figure 6.1).

15 See the work of the IRENA global commission on the geopolitics of energy transformation. 16 Meghan O’Sullivan, Indra Overland, David Sandalow, ‘The Geopolitics of renewable energy’, Working Pa- per, June 2017. 17 Those three sectors are critical to the energy transition. They were also already well analyzed by the i24c report: i24c and Capgemini Consulting, “Scaling up innovation in the energy union to meet new climate, competitiveness and societal goals”, 2016. 18 ibidem. 19 ibidem. 20 This represents the sum of the sales of the French company Renault and of the Japanese company Nissan. Each company account for roughly half of the sales, led by Nissan’s Leaf and Renault’s Zoé.

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To help European carmakers bridge the gap, policy targeting the entire value chain, from battery manufacturing to car sales, have to be established – and the EU already attempts to play its role in this.21

Figure 6.1. Source: Thomas Pellerin-Carlin, Jacques Delors Institute, from Forbes 2018 data.

2.2 Two cross-sector challenges for the EU

The EU is a scientific powerhouse that struggles to turn the high volume and quality of its research into timely and valuable innovations. The EU thus needs to work on the entire lifecycle of an innovation: basic and applied research (“Labs”), innovation and competitive fabrication (“Fabs”), and applications for the benefit of all (“Apps”)”.22 Efforts are most needed where the EU is currently the weakest: at the innovation/fabrication (Fab) stage.

21 Emilie Magdalinski and Thomas Pellerin-Carlin, “Electric Cars: a driver of Europe’s energy transition”, Pol- icy Paper, Jacques Delors Institute, October 2017. 22 High Level Group on maximising the impact of EU Research & Innovation Programmes, Lab-Fab-App: investing in the European future we want, European Commission, July 2017. The High Level Group that produced this report was chaired by Pascal Lamy, co-author of this Chapter.

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This cross-sector challenge holds true for several energy sectors, such as the PV sector where the EU is a relevant research player with the CEA and Saint Gobain ranking respectively n°2 and n°8 in the Top 10 investors in number of patents but no EU company makes it into the Top10 of solar PV suppliers.23

Ambitious EU-wide regulation is a critical tool to boost energy innovation. Regulation and innovation are friends, not foes. Good regulation cannot be concerned only by price, quality and choice; it must also be investment – and innovation – conducive. As Bertrand Piccard recalls24 it is ambitious regulation and strict enforcement of it that has fostered innovation in the waste industry. 50 years ago, it was common practice to simply throw one’s garbage away in nature. To fix this problem, European countries successfully banned such practices. Those regulations boosted innovation with the creation of local waste collection services, recycling, waste-to-energy district heating that now form the basis on which the EU attempts to develop a more circular economy.

EU-wide regulation is much more efficient than uncoordinated national regulations, as to fully tap into the massive EU market to provide economies of scale. And yet, the EU market remains fragmented by different regulations, financial incentives and risks, which impeaches some innovations to be scaled-up.

In some areas, such fragmentation is entirely legitimate as it stems from deeply rooted national preferences. For instance, the market for new nuclear power plants is legitimately fragmented between countries that strongly favour building new nuclear power plants (e.g. United Kingdom, Hungary), countries that have a more balanced approach (e.g. Sweden), and those where nuclear is or will soon be entirely forbidden (e.g. Germany, Austria, Italy).

Most EU market fragmentations are however illegitimate as they stem from the inability of national governments to reach an agreement, and/or the capacity of some national government to mistake the national interest for the interest of a powerful lobby25. For instance, the diesel lobby has successfully managed to hinder the development of electric vehicles in many countries. But in countries where the diesel lobby is weak, governments created more favourable conditions for electric vehicles (e.g. Norway, Netherlands).

23 i24c and Capgemini Consulting, op. cit., p. 103. 24 Speech by Bertrand Piccard at the Jacques Delors Institute Energy Union Conference, Brussels, 25 February 2016. 25 For a brief classification of energy lobbies, see p. 29 of Thomas Pellerin-Carlin, Jean-Arnold Vinois, Eulalia Rubio and Sofia Fernandes, “Making the energy transition a European success. Tackling the democratic, innovation, financing and social challenges of the Energy Union”, Studies & Reports No. 114, Jacques Delors Institute, September 2017.

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2.3 Energy-specific challenges

Other challenges are specific to the energy sector, and such specificity tends to be obscured by the understandable focus on digital. Despite its importance, it is worth reminding that the digital innovation model based on venture capital and start-ups is the “wrong model for clean energy innovation”.26

Three sectoral examples can help understanding: pharmaceutical, digital and energy, which are affected by both a ‘technology risk’ i.e.( will my innovation technically work?), and a ‘market risk’ (i.e. will my innovation find its customers?).

Pharma is characterised by a high technology risk and a low market risk. For instance, when developing a new treatment, a pharma company has to manage a high technology risk (i.e. will this treatment actually cure AIDS?). It however has a low market risk as a cure to AIDS will find customers.

Digital is characterised by a low technology risk and a high market risk. For instance, the technology needed to build a mobile phone app is pretty well known. It however has to manage a high market risk as this new app may never find its market due to irrelevance, competition and/or regulatory changes on the market.

Energy actually cumulates a high technology risk and a high market risk. If a company tries to develop a Carbon Capture and Storage (CCS) technology to capture the GHG emissions of coal/gas power plants, it faces a high technology risk: will it ever be able to capture all the carbon emissions and safely store them for decades/centuries without any leaks? It also faces a high market risk: will this technology ever find a market if alternatives for zero-carbon power plants, such as wind power or solar panels, continue to be cheaper than the combination of coal/gas power plants with CCS?

The success of energy innovations will moreover often be highly dependent on the regulator’s availability to adapt in an appropriate way the market design within which these innovations will be implemented. Therefore, when developing the EU R&I and regulatory policies for the 2020 decade, policy makers should take into account those specificities of clean energy innovation.

26 Gaddy Benjamin, Sivaram Varun, O’Sullivan Francis, “Venture Capital and Cleantech: the wrong model for clean energy innovation”, July 2016

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3. The EU has potent tools to boost energy R&I

3.1 How much does the EU invest in R&I ?

The EU’s Framework Programmes (FP) were introduced in 1984 to serve as an umbrella for the EU R&I budgetary policy. Its multiannual budget was significantly increased over time, from 3,8 billion euros to 77 billion euros, of which “over €10 billion in energy funding is dedicated to clean energy research and innovation”.27

Yet, only 3% of all R&D expenditure in the EU comes from the EU budget. 17% come from national governments, and 65% from businesses (cf. Figure 6.2). For energy R&I as well as for other energy policies,28 the challenge for the EU is thus to use EU financial resources in a way that fosters quality national public and private investment in R&I. In other words, the raison d’être of EU R&I policy is not primarily to fund energy R&I, but to steer it.

Figure 6.2. R&D expenditure in the EU by source of funds in 2014 ( in billions of euros). Source: T. Pellerin-Carlin and P. Serkine, Jacques Delors Institute, data from the European Commission and from Eurostat.

27 European Commission, Accelerating Clean Energy Innovation communication, 30 November 2016. 28 See Chapter Three of Thomas Pellerin-Carlin, Jean-Arnold Vinois, Eulalia Rubio and Sofia Fernandes, “Making the energy transition a European success. Tackling the democratic, innovation, financing and social challenges of the Energy Union”, Studies & Reports No. 114, Jacques Delors Institute, September 2017.

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3.2 H2020: how the EU R&I budget is being invested

The EU R&I policy positively evolved from a project-driven approach (1983- 2002) which helped developing transnational cooperation, to a more program- matic approach (2003-2013), and now closer to a policy approach with Horizon 2020 (running from 2014 to 2020) and its partial focus on societal challenges, including energy transition.

H2020 is the EU’s key instrument for R&I support.29 It is structured in three pillars: excellent science, industrial leadership and societal challenges.

H2020’s first pillar is dedicated to research. Its central tool is the European Re- search Council (ERC) that funds basic and applied research projects submitted by researchers through a bottom-up process.30

H2020’s second pillar aims to speed up the development of technologies and innovations for businesses. This pillar aims at developing Key Enabling Technolo- gies (KETs), providing financing tools for R&D activities in the private sector, and supporting innovative SMEs.

H2020 brought a much welcomed evolution with a third pillar meant to address societal challenges, thus starting to bring policy orientations into the EU’s innovation policy. Among those challenges, ‘energy’, ‘transport’ and ‘climate change’ directly relate to the energy transition.

4. How to get it done: proposals to improve the European energy R&I policy

4.1 Horizon Europe

In June 2018, the European Commission announced its “Horizon Europe” (HEU) proposal. HEU is the proposed EU R&I Framework Programme for the period 2021-2027, and is thus the successor to H2020.

29 Some other activities lay outside H2020 three pillars, with a notable one for clean energy innovation being the EIT-InnoEnergy that has an annual budget of 70-80 million euros. 30 Reillon, Horizon 2020 budget and implementation – a guide to the structure of the programme, European Parliamentary Research Service, November 2015, p.20-21.

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HEU is to be understood as another step in the same direction already undertaken by H2020 with:

– a further increase in the budget.

– three Horizon Europe’s pillars that mirror Horizon 2020’s three pillars.

– a stronger focus on societal challenges with the creation of ‘Missions’ and of the ‘European Innovation Council’.

4.2 A significantly increased EU R&I budget

Budget matters. The bigger it is, the more the EU can support R&I. This is why the “Lamy group” called in 2017 to “doubling the overall budget”,31 while the European Parliament wants it to increase to up to 120 billion€.

The European Commission largely followed up on those proposals as it suggests an increase of the Horizon Europe budget to 94 billionn€. This is a major increase in a Brexit-dominated budgetary discussion. According to Philipp Stän- der, when taking into consideration that this is a budget for an EU-27 without the UK, the increase of the EU R&I budget in nominal terms amounts to an increase of 47%.32

This however remains below the independent Lab Fab App Report (Lamy Re- port) and below what the European Parliament calls for.

The final budgetary decision will be taken by the European Parliament and the Council as part of the negotiations for the EU’s Multiannual Financial Frame- work 2021-2027. During those difficult negotiations, national representatives should refrain from cutting R&I, including when they will want to reallocate funding to other policies (e.g. cohesion and agriculture) where money is pre- allocated in advance to specific countries, rather than attributed based on excellence (like in the case of R&I).33 On that note, a key element will be the capacity of R&I funding to mobilise and coherently articulate other relevant EU funding schemes (e.g. FEDER, European Social Fund, Connecting Europe Facility, the

31 High Level Group on maximising the impact of EU Research & Innovation Programmes, Lab-Fab-App: investing in the European future we want, European Commission, July 2017, p.9. 32 Philipp Staender, “Research policy: guide to the negotiations on Horizon Europe”, Jacques Delors Institute- Berlin, July 2018 33 Philipp Staender, Pola Schneemelcher, “Why innovation could struggle to be a priority in the next MFF”, Jacques Delors Institute-Berlin, April 2018

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ETS Innovation Fund, InvestEU, the European Investment Fund, the European Investment bank etc.).

To maximise the impact of EU funding for energy R&I, it is critical to ensure that EU funding drives the much more significant funding capacity of the EU Member States and private companies. In such an attempt, the European Com- mission suggests new tools, especially the ‘Missions’ and the ‘European Innova- tion Council’.

4.3 Designing energy-related innovation « missions »

“Missions” are a newcomer to EU R&I policy. They are meant to give an explicit direction to innovation in order to “harness the power of research and innovation to achieve wider social and policy aims as well as economic goals”.34

Drawing on the historical example of the USA willingness to “put a man on the moon”, EU R&I Missions should spearhead R&I collaboration of different actors and across different sectors in order to meet a strategic objective that can be supported by citizens.

In policy terms, Missions are supposed to provide the ‘missing link’ between a grand challenge (e.g. climate change mitigation) and smaller concrete R&I projects supported by the EU (e.g. better understand women needs in future low- carbon urban transport).

Each Mission (see Figure 6.3 below) should be bold, inspirational and with wide societal relevance (e.g. achieving carbon neutrality to mitigate climate change). It should set a clear direction with measurable and time-bound targets (e.g. having 100 carbon-neutral cities by 2030) and lead to ambitious but realistic R&I actions (e.g. achieving a sustainable passenger transport system). It should also be cross-disciplinary, cross-sector and cross-actor (e.g. achieving a better understanding of citizen choices as regard modes of transportation, housing, diet etc.), and lead to multiple bottom-up solutions (e.g. housing renovation, better urban planning, local renewable energy communities etc.).

34 Marianna Mazzucato, Mission-oriented research & innovation in the European Union, European Commis- sion, February 2018.

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Figure 6.3. Example of a ‘Mission’. Source: Marianna Mazzucato, Mission-oriented research & innovation in the European Union, European Commission, Febru- ary 2018.

4.4 The European Innovation Council

European Commissioner Carlos Moedas spearheads the proposal for a “Euro- pean Innovation Council” (EIC). It can serve as a way to create synergies with both new and existing initiatives, such as Missions and the European Institute of Technology. It could also be used as a tool helping the most mature and promising European start-ups to scale-up in Europe, rather than relocate to the US or Asia.

Regulation for innovation: giving more policy certainty to reduce market risk. Beyond the R&I debate in itself, innovation needs to be embedded in all energy decisions. As already underlined, contrary to a mainstream view, regulation is the friend – not the foe – of innovation. Forward-looking regulation can effectively boost innovation, especially as it reduces market risk.35

35 Cf. the reports published by the Centre on Regulation in Europe (CERRE), a European think tank focusing on the regulation of digital and network industries, including energy.

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For instance, the EU could forbid car manufacturers to sell new oil-powered cars by 2030 (like in the Netherlands) or 2040 (like in the UK and in France).36 This would send a clear signal to car manufacturers and reduce the market-risk for electric vehicles. It would thus embolden EU car manufacturers to speed-up and scale-up their already existing plans to switch to electric vehicles, thus pushing them to become the “energy GAFAM-BATX” Europe needs them to be to push the energy transition forward while creating jobs in Europe.

4.5 Involving citizens to legitimize the EU R&I policy

At a time when basic scientific knowledge is sometimes questioned by conservative movements, it would be a sensible political move to re-invest in participatory democracy, and articulate it with independent expertise and representative democracy on scientific issues.

Involving citizens may lead to raising the awareness of the European society at large about the need to foster the energy transition to tackle climate change, hopefully with the right sense of urgency. It could also help get rid of the idea that R&I is not relevant to society, and thus strengthen the European resolve to use R&I to invest and build the future we want. It would also increase the degree of co-creation and help stimulate the impact and demand for the innovative products and services needed in the energy transition. It would also help to ensure buy-in regions and member states. This could be a game-changer especially if it fosters the use of national and regional policies, R&I budget but also education, public procurement and taxation.

There are many ways to involve citizens. Citizen workshops can be organised to allow small groups of citizens to co-create, debate and define specific Missions; as well as co-define the criterion on which the EU should decide to evaluate proposals.

Those meetings can be physical ones, such as the ones performed in 2018 as part of the EU Citizen Consultations, or some national experiments such as the French Government’s energy policy debate that involved a group of 400 citizens (the G400). This can also be done via social media or through virtual groups such as the ‘Groups of 1000 citizens’ (G1000).

36 Emilie Magdalinski and Thomas Pellerin-Carlin, “Electric Cars: a driver of Europe’s energy transition”, Pol- icy Paper, Jacques Delors Institute, October 2017.

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Involving citizens can also be fostered by encouraging citizen science (where citizens become providers and/or users of data), crowdsourcing (where citizens play a role in innovation) as well as crowdfunding that ensures a direct and financial involvement of some citizens in favour of specific innovations. Building on local participatory budget initiatives, a portion of the EU R&I budget could moreover be allocated directly by citizens37.

5. Conclusion and recommendation to the next European Parliament and next European Commission

Addressing the EU’s innovation deficit for the energy transition requires a sense of urgency and a sense of collective responsibility.

Action is needed now to avoid the risk of losing key portions of our industry to other countries, like in electric vehicles, where we are currently taking the risk to lose our car manufacturing industry to China.

Action is needed now because we are still not fighting climate change enough to ensure that it will not provoke the dusk of our civilisation.

A sense of collective responsibility is needed because the energy transition can only be done by European societies at large: innovators, entrepreneurs, start- upers, researchers, investors, consumers, citizens, workers, as well as policy makers from the EU, Member States, regions and cities.

The European Commission’s Horizon Europe proposal is well suited for moving the energy transition forward. In our view, the next European Parliament, European Commission and National Governments should now:

– Consolidate what already works well (e.g. ERC, EIT-InnoEnergy).

– Increase the Horizon Europe budget even further to 120Bn€ budget (as currently suggested by the current European Parliament). There should also be significant (e.g. from 30% to 50%) earmarking of this budget to climate change.

37 For a concrete and developed proposal, see Thomas Pellerin-Carlin and Pierre Serkine, “From Distraction to Action – towards a bold Energy Union Innovation Strategy”, Policy Paper No. 167, Jacques Delors Institute, June 2016.

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Confirm the creation of the new mechanism of the R&I ‘Missions’ to inspire action while ensuring continuous EU support throughout the entire ‘Lab-Fab- App’ R&I cycle. At least one of those missions should focus on making at least 100 European regions, islands or cities carbon-neutral by 2030, to serve as test beds for clean energy innovation in view of becoming the figureheads of the energy transition all over the world.

Structure the European Innovation Council as a genuine structure able to provide patient capital to breakthrough innovation, building on the lessons learnt from the US experience with DARPA and ARPA-E.

Mandate a High-Level Expert Group to provide the European Commission with analysis and policy recommendations to ensure a sound management of European economic and geopolitical interests in the energy transition, especially vis-à-vis foreign investment in strategic EU energy companies, and EU dependence on imported clean technologies and rare earth elements.

Now it is up to EU citizens to choose whether to act politically when they will cast their vote in the European Parliament elections of May 2019, as well as when taking EU and national politicians to account. We, as citizens and workers, can also act locally as the innovators, users, funders, consumers, producers of the energy innovations that make the energy transition a reality for all of us.

6. References

– Christensen Clayton M., Raynor Michael E., McDonald Rory, ‘What is disruptive innovation ?’, Harvard Business Review, December 2015. – European Commission, Accelerating Clean Energy Innovation communication, 30 November 2016. – Gaddy Benjamin, Sivaram Varun, O’Sullivan Francis, “Venture Capital and Cleantech: the wrong model for clean energy innovation”, July 2016. – High Level Group on maximising the impact of EU Research & Inno- vation Programmes, Lab-Fab-App: investing in the European future we want, European Commission, July 2017. – i24c and Capgemini Consulting, “Scaling up innovation in the energy union to meet new climate, competitiveness and societal goals”, 2016. – Magdalinski Emilie and Pellerin-Carlin Thomas, “Electric Cars: a driver of Europe’s energy transition”, Policy Paper, Jacques Delors Institute, Oc- tober 2017.

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– Marianna Mazzucato, Mission-oriented research & innovation in the Eu- ropean Union, European Commission, February 2018. – Mazzucato Mariana, The entrepreneurial state: Debunking public vs. private sector myths, Anthem Press, 2015. – Pellerin-Carlin Thomas, Vinois Jean-Arnold, Rubio Eulalia and - Fer nandes Sofia, “Making the energy transition a European success. Tackling the democratic, innovation, financing and social challenges of the Energy Union”, Studies & Reports No. 114, Jacques Delors Institute, September 2017. – Pellerin-Carlin Thomas and Serkine Pierre, “From Distraction to Ac- tion – towards a bold Energy Union Innovation Strategy”, Policy Paper, Jacques Delors Institute, June 2016. – Reillon Vincent, Horizon 2020 budget and implementation – a guide to the structure of the programme, European Parliamentary Research Ser- vice, November 2015, p. 20-21. – Staender Philipp, “Research policy: guide to the negotiations on Horizon Europe”, Jacques Delors Institute-Berlin, July 2018

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Part 1 – Chapter 7 – Renewables Driving the Energy Transition

CHAPTER 7 RENEWABLES DRIVING THE ENERGY TRANSITION: EUROPE IN THE GLOBAL CONTEXT

Dolf Gielen & Luis Janeiro

1. Introduction

The European Union (EU) has been a global leader in renewable energy deployment over the last couple of decades. The early adoption of long-term targets and supporting policy measures has driven investments, accelerated technological and institutional learning, and resulted in strong growth in renewable energy consumption across the region.

Back in 2007, the EU agreed on legally binding climate and energy targets for the period until 2020: 20% energy demand reduction compared to baseline, 20% renewable energy share in final energy consumption and 20% greenhouse gas emission reduction compared to 1990. According to the latest progress report of the European Commission, the EU is well on track to reach its 20% renewable target by 2020.1 As of 2016, eleven Member States already had reached renewable shares that were larger than their 2020 target. Most Member States can be expected to meet their renewable energy shares targets by 2020; however, for some Member States this may be more challenging.

For the period 2020-2030, European policy-makers have recently agreed to a new set of renewable energy and energy efficiency targets. On June 14, 2018 a new legally-binding EU-wide target of 32% for renewable energy by 2030

1 European Commission (2017), Renewable Energy Progress Report [COM (2017) 57 final], European Com- mission, Brussels. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52017D%20 C0057&qid=1488449105433&from=EN

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was agreed during the ‘trialogue’ discussions among European Parliament, EU Member States and European Commission. Just a few days later, on June 19, a 32.5% energy efficiency ‘headline’ target at EU level was also agreed. Both targets include a clause for an upwards revision by 2023, opening the possibility for further action.

The new set of targets is significantly more ambitious than the initial legislative proposal of November 2016, which contained targets of 27% and 30% for renewables and efficiency respectively. This decision reflects multiple drivers,- in cluding not only the rapidly falling costs of key technologies but also a growing consensus among stakeholders that renewables and energy efficiency are the key building blocks to accelerate the decarbonization of Europe. It also reflects a growing consensus that pursuing renewables results in multiple additional benefits, including economic growth and competitiveness, reduced dependency on energy imports and improved air quality.

In this paper, we reflect on the past progress and prospects for renewables in Europe as well as the role that renewables can play in the long-term decarbonization of Europe and globally.

2. Renewables deployment in the EU: A decade in the balance

During the last decade, the overall share of renewables in the EU has grown significantly, from 10.5% in 2007 to 17% in 2016 – an average of 0.7% increase per year. However, there are large differences across sectors: renewables have grown much faster in the power sector (on average 1.3%/year) compared to the heat sector (0.6% /year) and transport (0.4%/year).2 Figure 7.1 shows the consumption of renewables vs. the overall energy consumption in each of the three sectors as well as the evolution of shares over the last 10 years.

2 Own analysis based on EUROSTAT (2018b)

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Figure 7.1. Evolution of renewable energy shares by sector: 2007-2016 (ktoe) Source: IRENA based on EUROSTAT, 2018b.

2.1 Renewable electricity: cornerstone of the European energy transition

The power sector, while representing only 22% of the EU’s final energy consumption, accounts for more than half of the renewable energy additions over the last decade. The production of renewable electricity grew by almost 80% compared to 2007. In 2016 the EU generated 418 TWh more renewable electricity than in 2007, an amount comparable to the electricity consumption of Italy and Poland combined.2

In the 90s and early 2000s several members of the European Union were global leaders in adopting support policies for technologies such as solar photovoltaics and wind, which were still immature at the time. These policies were effective in triggering investments, accelerating deployment, technology and institutional learning, and bringing down costs dramatically. These cost reductions, while -fi nanced to a substantial extent by European consumers, will benefit the rest of the world for decades. In this sense Europe has been instrumental in advancing progress on key technologies that will be at the core of the global energy transformation.

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While support policies were generally effective in terms of triggering deployment at EU scale, mixed results can be observed in terms of the rate of progress when analyzing individual Member States. In the last 10 years, some countries have averaged growth rates of more than 2% renewable power share/year; however, almost half of the EU Members States grew well below 1% share /year.

There are also large efficiency differences in terms of support provided to renewables and the volume of deployment obtained. In some Member States insufficient levels of support or unmitigated risks and barriers for investors resulted in deployment rates falling behind targets. Conversely, in several countries support schemes triggered fast deployment but unnecessarily high costs for consumers and “boom and bust” cycles of investment, corrected with retroactive changes in policy which resulted in investor confidence loss and a slowdown in renewables expansion. In some countries, administrative or regulatory barriers prevented faster deployment of distributed renewable power, despite being economically attractive in many cases.

In the last few years, renewable technologies – markedly solar photovoltaics and wind power – have reached high degrees of technological maturity and are becoming cost-competitive with conventional generation in a broader range of resource and market conditions. New developments in Europe are increasingly financed with very reduced needs for economic support or even without subsidies. For example, recent solar photovoltaics, onshore as well as offshore wind auctions in Germany were awarded in the range of ~40-50 EUR/MWh, below current wholesale market prices.3

Today, most new power generation capacity additions in Europe are variable renewables, mostly wind (both onshore and offshore) and solar photovoltaics. This trend may be accelerated with the adoption of the new Renewable Energy Directive, which improves the administrative and market conditions for the deployment of these technologies, e.g. by limiting barriers to self-consumption, among others.

Moving forward, the challenge will be to operate power systems dominated by these cheap but variable renewable sources. A diversified portfolio of flexibility options – including not only flexible and firm generating plants, but also demand response, storage interconnectors, and flexible operation rules – will be key to keep increasing the share of variable renewables in a cost-effective way.

3 Wind prices have risen in recent months. Weighted average bids for onshore wind in August 2018 were 61.6 Euro/kWh with a lowest bid of 40 Euro/kWh.

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Also, operational practices, market designs and business models must be adjusted to accommodate higher shares of variable renewable power. Power system and market integration aspects are complex and still insufficiently understood. Addressing these is a priority for future growth of renewable power in Europe and forms part of the ‘Clean Energy of all Europeans’ package.

2.2 Renewable heat: room for acceleration of the transition

Heat demand in buildings and industry accounts for roughly half of the energy consumption of the EU. In absolute terms, renewable heat remains the largest contributor to the overall renewable energy consumption in Europe; however, progress has been much slower than in the power sector over the last 10 years.

Multiple barriers prevent faster progress of renewables in the heat sector. Firstly, despite the competitive costs of energy offered by renewable technologies e.g. heat pumps, these require upfront investments that are usually higher than conventional equipment. Secondly, renewable heat technologies are still insufficiently known by consumers and installers and require often tailor-made system design that acts as barrier for quick replacement. Therefore, gas boilers are still the ‘default’ option for new installations or renovations in most markets. Thirdly, the adoption of renewable heat solutions in the industrial sector – particularly for high temperature processes – is often still unattractive in absence of a sufficient carbon price. Finally, the heat sector is local by nature and as such, it has received less policy attention at national and European level than the power sector, resulting in unmitigated barriers to renewable deployment.

In terms of technology shares, solid biomass still accounts for the bulk of direct renewable heat supply both for buildings and industry and accounted for most of the growth over the last years. The contributions of other technologies remain well below their potential in the region.

Only a handful of EU countries have reached substantial levels of solar thermal technology deployment. Cyprus is the leader, with approximately 0.8 m2 of solar panels installed per capita, followed by Austria, Greece and Denmark. Across the EU, the average level of deployment is estimated at approximately 0.1 m2 of solar panels per capita, resulting in an almost negligible contribution to final heat consumption at EU level.4

4 IRENA, 2018 Renewable energy prospects for the European Union. Available from: http://www.irena.org/ publications/2018/Feb/Renewable-energy-prospects-for-the-EU

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District heating systems provide about 9% of the EU’s heating needs;5 however, the bulk is still produced with natural gas and coal. The conversion of district heating systems to use renewables is an option to accelerate renewable deployment in the heat sector. Baltic countries have made progress in the conversion to biomass. Some cities such as Munich and Paris will convert to geothermal heating.

While the uptake of heat pumps has improved in recent years, their share of sales for heating equipment remains very low in most European markets. Old dwellings and service sector building uptake is particularly lagging. The estimated average market share for new built and renovations across Europe was 11% by 2015. Nordic countries (Finland, Norway, Sweden) lead the way with heat pump shares already above 80% of sales.6

Moving forward, the efficient electrification of heat applications will be a strategic building block for the long-term decarbonization of the EU. Heat pump applications offer a huge potential for electrification of space heating in residential and commercial buildings but also for low temperature applications in industry or even district heating systems. They can improve very significantly the efficiency of heat supply (~3x) and enable the use of renewable electricity instead of a fuel. Furthermore, a highly electrified heat sector can be of great help to facilitate faster deployment and integration of high shares of cheap solar and wind generation in the power sector by providing flexibility through demand response or even heat storage.

2.3 Renewables in transport: renewed commitment through electrification

Transport has proven to be the most difficult sector for renewables in Europe so far. The renewable share has grown just 4% from 2007 to 2016 in a context of stagnation of energy demand. In most Member States the share of renewables is still below 6%. First generation liquid biofuels are the main source of renewables in the transport sector in Europe. Biodiesel dominates the market, accounting for about 80% of the biofuel consumption. Bioethanol is the second largest, with 19% of the EU biofuel market. Biogas accounted for a much smaller fraction (1%), concentrated mainly in Sweden and Germany.7

5 Commission Staff Working Document on an EU Strategy for Heating and Cooling [SWD (2016) 24], European Commission, Brussels. https://ec.europa.eu/energy/sites/ener/files/documents/1_EN_autre_ document_travail_service_part1_v6_0.pdf 6 EHPA, 2017 European Heat Pump Market and Statistics Report 2017 7 Own analysis based on EUROSTAT (2018)

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The EU is a major player in the global liquid biofuel market. It accounts for almost half of the world’s biodiesel consumption and about ~1/6th of total global consumption of biofuels.8 Biofuel consumption roughly doubled from 2007 to 2012 in the EU driven by regulations and economic incentives; however, the sector has faced difficulties in recent years. The harsh economic environment after the economic crisis, reductions in support coupled with uncertainty about long-term policies and targets along with the decline in oil prices after 2014 have resulted in stagnation of demand and production in Europe.

The use of food crops for first generation biofuel production, and the direct and indirect effects on greenhouse gas emissions over the life cycle of biofuels, has raised concerns in the EU; however, current production of advanced biofuels not based on food crops is still limited to a handful of first of a kind demonstration or small-scale commercial plants.

Electricity accounted for just 1.5% of the final energy consumption in EU transport in 2016. Most of this electricity (80%) was used in trains. Electrification of road transport is still negligible (0.04% of total final energy consumption).7 While the adoption of electric vehicles in Europe is still in the very early stages, the sector shows positive signs of a very deep transformation ongoing. Sales of new light duty electric vehicles in the last years follow an exponential trend with 42% growth over 12 months (July 2017-June 2018). Europe has recently reached the mark of 1 million plug-in vehicles in stock (battery electric vehicles and plug-in hybrids) with a 2% market share in the first half of 2018.9

As with the heat sector, electrification of transport is strategic for the long-term decarbonization of Europe. Electric vehicles boost the renewable share by allowing the use of (renewable) electricity for an application currently dominated by fossil fuels, but also by reducing the total energy demand in the sector (electric vehicles require two to three times less energy for the same transport function). Furthermore, the potential positive effects of massive deployment of electric vehicles extend beyond the transport sector. The vast aggregated battery storage in these vehicles could be used to enable higher shares of renewables in the power supply – for example, by storing excess solar and wind electricity and returning it to the grid at times of higher demand. Appropriate power system planning will be needed to reap this flexibility potential cost effectively, minimizing -in vestment needs in distribution systems. Smart charging of electric vehicles – responding to power price signals – will be critical to ensure a smooth integration.

8 EIA, 2018 International Energy Statistics. Available from: https://www.eia.gov 9 http://www.ev-volumes.com/news/europe-plug-in-sales-results-for-2018-h1/

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3. Prospects of renewables to 2030

Back in February 2018, IRENA presented the report Renewable Energy Pros- pects for the European Union (REmap EU), outlining the EU’s potential to increase its share of renewables by 2030.10

IRENA’s analysis for the EU identified renewable energy options to scale-up deployment beyond business as usual. The report concluded that the full implementation of all such renewable energy options would enable the EU to reach a renewable share of 34% cost-effectively.11

Figure 7.2. Additional 2030 renewable energy potential beyond current plans and policies.

The additional potential beyond a reference case based on current plans and policies can be broadly split into three categories: the first category comprises different forms of renewable power generation (wind, solar, hydro, geothermal) as well as solar thermal in buildings. The second category includes electrification of heat and transport by means of heat pumps and electric vehicles (in combination with renewable power generation), as well as biodiesel for transport, solar thermal in industry and geothermal in district heating systems. The third category comprises different forms of biomass use across sectors.

10 IRENA (2018) Renewable energy prospects for the European Union. Available from: http://www.irena. org/publications/2018/Feb/Renewable-energy-prospects-for-the-EU 11 Assuming the realisation of a 30% energy efficiency objective by 2030. At the time of preparation of REmap EU study, the legislative proposal for a new energy efficiency directive considered a 30% energy efficiency target by 2030.

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3.1 Impacts of accelerating renewables

The full implementation of all identified renewable options would result in estimated net energy cost savings of EUR 21 billion per year by 2030 compared to a reference scenario based on current plans and policies.

Additional costs for the modernization of power grids, or a potential scenario of low or stagnating fossil fuel prices, could reduce these estimated savings; however, the potential additional costs are outweighed by the benefits when health and environmental externalities are considered.

The REmap savings from avoided health damage alone are estimated at between EUR 16 billion and 60 billion per year by 2030, while the environmental costs avoided with the deployment of REmap Options are estimated at between EUR 7 billion and 31 billion per year by 2030. When the savings from a pure cost– benefit analysis are aggregated with avoided health and environmental external- ity costs, the accelerated deployment of renewables would result in total savings of between EUR 44 billion and EUR 113 billion per year by 2030.

The additional investment in renewables would also have a positive effect in terms of job creation. Today the renewable sector employs about 1.2 million people in Europe12. This figure would increase substantially with a doubling of the renewable share by 2030.

In terms of climate change mitigation impact, the full deployment of the additional renewable potential identified in IRENA’s study would deliver a reduction of 412 Mt CO2 (15%) compared to the Reference Case in 2030, an amount comparable to Italy’s total emissions today.

3.2 Implications of the new 2030 targets

The newly agreed EU efficiency target of 32.5% by 2030 is higher than the 30% anticipated at the time of the development of the scenarios for the REmap EU study. This additional effort in energy efficiency enables higher shares of renewables with the same level of deployment.

12 IRENA (2017) Renewable Energy and Jobs. Annual Review 2017, International Renewable Energy Agency, Abu Dhabi. http://irena.org/publications/2018/May/Renewable-Energy-and-Jobs-Annual-Review-2018.

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Realising the 32% renewable energy target by 2030 could only require the deployment of about half of the additional renewable energy potential identified under the REmap analysis for the EU, if the newly agreed 32.5% energy efficiency target is also met.

Figure 7.3. Resulting RE share vs efficiency improvements deploying renewable energy options as per REmap analysis for the European Union10. Source: Own elaboration.

4. Renewables and long-term decarbonization

4.1 EU decarbonisation milestones

The European Union has ratified the Paris Agreement, which established the goal to limit the rise in global temperatures this century to “well below 2°C” compared to pre-industrial levels. In practice, this entails reducing global carbon emissions from energy use to zero by 2060 and maintaining that level until the end of the century. This long-term decarbonisation objective has profound implications for European climate and energy objectives in the 2030 timeframe. Back in 2014, the EU agreed on a target to cut emissions by at least 40% below 1990 levels by 2030. Several studies show that a 40% emissions reduction, while substantial, would imply much deeper and faster reductions between 2030 and 2050.

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In April 2018, IRENA published a global energy transformation scenario compatible with the “well below 2°C” objective of the Paris Agreement. Under that scenario, the EU would realise a 55% GHG reduction compared to 1990 levels by 2030 and an 85% reduction by 2050.13

The newly agreed renewable and efficiency 2030 targets (32.5% EE /32% RE) are a first step towards deeper decarbonisation and – if realised – will likely result in emission reductions in the energy sector in the order of 45-46% below 1990 levels. This exceeds the existing policy objective. However, there is potential for deeper, cost-effective decarbonization by 2030.

Assuming the realisation of the new 2030 energy efficiency target, the full deployment of the renewables potential identified in the REmap EU study could result in a share of 35 to 36% by 2030. The combined effect of efficiency and renewables deployment under such scenario would deliver emission reductions in the range of 49-51% below 1990, which are closer in line with a continuously declining energy CO2 emissions pathway compatible with the objectives of the Paris Agreement.

4.2 Long-term European and global decarbonisation challenges

A global decarbonisation of energy systems in line with the Paris Agreement will require keeping the total primary energy supply at the same level between 2015 and 2050 while the economy grows threefold in the same period.13 Energy efficiency is essential, and the potential is large, but by itself it is not sufficient to achieve complete decarbonisation. Renewables are the other major component. Two out of three units of primary energy supplied must come from renewables by 2050. This requires the renewables’ share of total primary energy supply to increase at a rate of about 1.2% per year, an eightfold acceleration compared to the global trend seen in recent years.13 In final energy terms, a six-fold acceleration would be needed.

To achieve this major increase in the share of renewables in the global energy mix, both faster deployment of available technologies and the development of new renewable energy solutions will be needed. Innovation must support both aspects.14

13 IRENA (2018b) Global energy transformation: A roadmap to 2050. Available from: http://www.irena.org/ publications/2018/Apr/Global-Energy-Transition-A-Roadmap-to-2050 14 IRENA (2017) Accelerating the energy transition through innovation. Available from: http://irena.org/ publications/2017/Jun/Accelerating-the-Energy-Transition-through-Innovation

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4.2.1 Power sector

The power sector is the largest source of CO2 globally, but also where the transformation towards a renewable-based system is moving faster. Since 2012, the bulk of capacity additions and investment in the global power sector have been in renewable energy. In 2016, 62% of added power capacity worldwide was from renewables. In the same year, solar photovoltaics capacity grew more than any other source of power generation. By 2050, solar and wind could be the backbone of global power systems.

Solar and wind are variable renewable energy sources. The integration of very high shares of variable electricity supply by 2050 requires careful long-term planning to optimize power system design, maximizing the economic, environmental and social benefits of renewable generation sources. To achieve this cost-effectively, all solutions that can increase the flexibility of power systems will need to be considered in a holistic fashion, including grid infrastructure expansion, demand-side flexibility, improved coordination of demand and supply through smart-grids, ICT and digitalization, and storage. However, the optimal strategy is not yet known. It will require innovation in all components of the energy system, including new approaches to system operation, innovative market design and regulation, out-of-the-box business models, and the enabling infrastructure.

4.2.2 End use-sectors

Buildings, industry and transport are the most challenging sectors to decarbonise, where there has been only limited progress in recent years and deployment rates are currently too slow to achieve the emission reduction patterns needed to decarbonize the energy sector by 2050. Efforts to address this must be ramped up significantly over the next few years.

Electrification of many energy-services in the end-use sectors of transport, buildings and industry will be a key solution in driving transformation to a low- carbon energy system. Electricity accounts for about 1/5 of the global energy mix today. A significant potential exists to raise this share further, region specific studies for China, the EU, and the USA indicate a potential for 45-60% electrification by 2050. The use of electricity instead of fossil fuels eliminates emissions in end use sectors. If this electricity is produced from CO2-free sources, it eliminates energy CO2 emissions. In addition to the imperative of addressing climate change, the reduction of local air pollution in cities is a powerful driver for a shift to electricity.

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The electrification of end-use sectors also creates room for more production of renewable electricity. If this additional power demand can adjust to variations in renewable electricity generation (through so-called “smart grids”), that flexibility can support the integration of higher shares of variable renewable energy in power systems.

Where energy services in transport, buildings and industry cannot be electrified, other renewable energy technologies are needed. Solutions for these sub- sectors could include an increased use of modern bioenergy (solid, liquid and gaseous), solar thermal heat, district energy systems, hydrogen from renewable electricity as well as other emerging technologies.

Synergies between the deployment of energy efficiency and renewable energy technologies in end-use sectors should also be considered. More efficiency means higher shares of renewables for the same levels of renewable technology deployment. Furthermore, key technologies that facilitate the use of renewables in buildings, industry and transport – such as heat pumps or electric vehicles – deliver very substantial efficiency gains. Moreover, these same energy efficient technologies can increase electricity demand flexibility, facilitating the integration of more renewables in power generation. Therefore, a holistic approach, considering both efficiency and renewables in a coordinated fashion will substantially facilitate the energy transition.

4.2.3 The decarbonization gap – innovation needs

Looking at total energy supply, economically scalable solutions are available for around two-thirds of supply requirements. For the remaining one-third, no cost-effective solutions exist today. The challenges are concentrated in end-use sectors.14

There are multiple examples of promising technologies in early development stages that could bridge this gap in the future, e.g.:

– In industry, hydrogen-based direct reduced iron technology could dramatically reduce steelmaking emissions. In Austria and in Sweden this option is currently explored by the private sector. Bio-based building blocks such as ethylene or methanol could substitute fossil-fuel feedstocks in the chemical industry. The Netherlands has significant activities in this area.

– In transport, the scope of cost-effective electrification options could be expanded in the future. For instance, short range electric planes and ships

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are already under development or pilot stages. European manufacturers are developing this option. Advanced biofuels could be a solution for long range operations where electrification is not feasible. Various parties are establishing commercial scale plants in Europe.

– Renewable-based hydrogen or synthetic methane could become feasible options for the decarbonization of heat applications in industry and buildings. This is a focus area of many parties in Europe, especially from the viewpoint of bringing remote electricity supply to markets and avoiding the stranding of gas assets in a carbon constrained world.

On the one hand, innovation is needed to accelerate deployment: driving cost reduction, improving performance and enabling integration of existing and emerging renewable technologies in energy systems. On the other hand, innovation is also needed to unearth and develop new technologies. Incremental improvements will continue to foster significant progress but may not lead us to a complete transformation of the energy sector – game-changing technologies and approaches will be needed as well.

Whether today’s breakthroughs and early-stage technologies will become commercially available, and how soon, is difficult to determine in advance. Many new technologies for achieving decarbonisation undoubtedly have yet to be en- visioned, and the solid prospects of today’s solutions are no reason for inaction given the serious consequences of climate change.

A systemic approach is needed: one that combines emerging technologies, new advanced operational practices and energy market designs, new business models to monetise services, innovative financial instruments to unlock investments, and enabling regulations and policies. A proper combination of all these factors will create the new solutions needed to speed up the European and global energy transformation.

5. Moving forward: European global leadership in renewables

Europe has played a leading role in the development of affordable renewable energy, being the undisputable lead investor in renewables for a good part of the last two decades. However, this situation has changed in recent years, putting European global leadership at risk.

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Back in 2007, Europe accounted for almost half of new investments in renewables worldwide. In 2017, this share had fallen to 15%. While this reduction in share reflects the global growth success of renewables, it is also the result of decreasing investment in the region in absolute terms. After a period of very strong growth, where investments almost doubled from EUR 57 billion in 2007 to a peak of EUR 105 billion in 2011, new investments in renewable energy in Eu- rope have declined to EUR 35 billion in 2017. At the same time, other regions continue scaling up. For instance, China invested three times more than Europe in 2017, and it has doubled its total new investment in renewables in the last five years.15

Despite having lost the role of largest global investor, Europe still plays a leading role in multiple areas crucial for the long-term global energy transition.

– In the power sector, some EU Member States e.g. Denmark, Germany, Portugal, Spain, are already integrating high shares of solar and wind in their generation mixes successfully. In terms of development of new technologies, the region accounts for more than 90% of the world’s offshore wind capacity currently installed and is scaling up efforts to bring floating offshore wind systems to market16, a technology that could dramatically increase the global wind generation potential. Another example is concentrated solar power where Europe accounts for roughly half of the global installed capacity today. Europe also leads e.g. in biogas electricity production, with more than 10 GW installed in comparison to the global biogas capacity of 15 GW in 2015.17

– Global best practice in terms of renewables deployment in the heat and transport sectors can also be found in Europe. In some European countries, efficient electric heat pumps already dominate the market for space heating systems. In transport, Norway has been the global leader in market share of plug-in electric vehicles for years, surpassing 50% of new sales in 201718. In Sweden, almost 1/3 of energy consumption for transport is renewable, mostly liquid biofuels. There is a recognition that Europe needs its own battery manufacturing industry if it wants to play an important role in the electric vehicle market long term.

15 Own analysis based on Frankfurt School UNEP Centre and BNEF (2018) 16 Statoil’s Hywind 30MW park is the largest floating offshore wind facility worldwide, operational off the coast of Scotland since 2017 17 Scarlat et al. 2018. 18 https://www.reuters.com/article/us-environment-norway-autos/norway-powers-ahead-over-half-new-car- sales-now-electric-or-hybrid-idUSKBN1ES0WC

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– Europe is still the leading region by investment in R&D related to renewables globally, having spent USD 2.7 billion in 2017, vs USD 2.1 billion in US and USD 2 billion in China.15 Nine European countries, as well as the European Union play an active role in the global initiative Mis- sion Innovation,19 pledging to double investment in clean energy research over the course of 5 years.

– In a recent global analysis of corporate sourcing of renewable energy,20 Europe stands out as the region showing more companies reporting renewable electricity consumption.

– European TSOs and DSOs have acquired unique knowledge how to operate grids with high shares of variable renewable power. An example is the 50Hz Eastern German utility that managed a system with 53.4% variable renewables in 2017. Such knowledge is attractive and of strategic importance.

– Europe is advanced in systemic innovation involving aggregators, virtual power plants, peer-to-peer electricity sales and other aspects.

Initially the European lead in renewables resulted in a lead in equipment manufacturing. But this lead has been lost in some cases (e.g. in solar photovoltaics, largely to Chinese manufacturers). In the case of wind, the situation is better for various reasons but there is a trend towards losing this advantage, with more and more components being produced elsewhere, especially for onshore wind. Eu- ropean institutions, national governments and industry stakeholders intend to reinvigorate the global position of European manufacturers, for example in the area of battery storage21, but it remains to be seen if such efforts will bear fruit. The next 5 to 10 years are crucial for the world to realise a transition within a carbon budget that minimizes the risks of catastrophic climate change. At the same time, this period will define who are the key players of the future – low- carbon – global energy markets.

19 Mission Innovation (MI) is a global initiative of 23 countries and the European Union to dramatically accelerate global clean energy innovation. Mission Innovation was announced on November 30, 2015, as world leaders came together in Paris to undertake ambitious efforts to combat climate change. Source: http:// mission-innovation.net/about/. Last accessed: October 2018 20 IRENA (2018), Corporate Sourcing of Renewables: Market and Industry Trends – REmade Index 2018. International Renewable Energy Agency, Abu Dhabi. 21 The European Battery Alliance (EBA) was launched in October 2017 by the European Commission to “create a competitive manufacturing value chain in Europe with sustainable battery cells at its core”. More info at: https://ec.europa.eu/growth/industry/policy/european-battery-alliance_en

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Accelerating the European transition towards a low-carbon energy system makes strong economic sense. Recent IRENA analysis13 shows that the shift to renewables and energy efficiency can boost economic growth and significantly improve overall welfare. It can also create more energy jobs than those lost in fossil-fuel industries. People employed in renewables globally could increase to 26 million in 2050 (from about 10 million today) if the deployment of renewables and energy efficiency is accelerated to meet the objectives of the Paris Agree- ment. A significant share of these additional jobs could be realized in Europe.

Developing a long-term vision of the possible pathways of evolution of energy systems and markets is fundamental to be able to define strategic priorities and maintain global leadership. As key technologies become increasingly competitive, the world will transition to an era of abundant, affordable energy. This will trigger a profound paradigm shift that could change the global energy landscape dramatically.

Under such completely new paradigm, global leadership in renewables is also redefined. The challenge will progressively shift from deploying larger amounts of renewables to operating effectively increasingly integrated and smarter energy systems, where power, heat and transport are closely and flexibly coupled, with energy production increasingly decentralized, with producers and consumers increasingly interlinked.

This means that future energy systems will be fundamentally different from today’s – from an operational, regulatory and market perspective. Transition- ing towards such systems will require bold and swift policy action to 1) define ambitious but realistic long-term targets that provide a firm signal to investors and 2) adapt policies and regulations to the new paradigm, enabling new and innovative business models. It will also require close cooperation with the private sector, that must develop new technological and business solutions as well as mobilize the large amounts of capital that will be needed.

Such deep transformation is a huge challenge for all European energy sector stakeholders, but it also represents a great opportunity for renewed global leadership.

The accumulated experience over the last couple of decades puts Europe in a privileged position to be again a global leader in developing the next generation of technological, regulatory and business solutions needed to make the global energy transformation possible.

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6. References

– EHPA (2017) European Heat Pump Market and Statistics Report 2017. – EIA (2018) INTERNATIONAL ENERGY STATISTICS Available from: https://www.eia.gov – European Commission (2016), Commission Staff Working Document on an EU Strategy for Heating and Cooling [SWD (2016) 24], Europe- an Commission, Brussels. https://ec.europa.eu/energy/ sites/ener/files/ documents/1_EN_autre_document_travail_service_part1_v6_0.pdf. – European Commission (2017), Renewable Energy Progress Report [COM (2017) 57 final], European Commission, Brussels. http://eur-lex. europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52017D C005 7&qid=1488449105433&from=EN. – Eurostat (2018a), Short Assessment of Renewable Energy Sources (SHARES) 2016, European Commission. http://ec.europa.eu/eurostat/ web/energy/data/shares. [Accessed: September 2018]. – Eurostat (2018b), Renewable energy statistics, European Commission. http://ec.europa.eu/eurostat/ statistics-explained/index.php/Renew- able_energy_statistics. [Accessed: January 2018]. – Frankfurt School-UNEP Centre/BNEF (2018). Global Trends in Renewable Energy Investment 2018, http://www.fs-unep-centre.org (Frankfurt am Main) – IRENA (2017) Accelerating the energy transition through innovation. Available from: http://irena.org/publications/2017/Jun/Accelerating- the-Energy-Transition-through-Innovation – IRENA (2017b), Renewable Energy and Jobs. Annual Review 2017, In- ternational Renewable Energy Agency, Abu Dhabi. http://www.irena. org/publications/2017/May/Renewable-Energy-andJobs--Annual-Re- view-2017. – IRENA (2018a) Renewable energy prospects for the European Union. Abu Dhabi. Available from: http://www.irena.org/publications/2018/ Feb/Renewable-energy-prospects-for-the-EU – IRENA (2018b) Global energy transformation. A roadmap to 2050. Abu Dhabi. Available from: http://www.irena.org/publications/2018/ Apr/Global-Energy-Transition-A-Roadmap-to-2050 – IRENA (2018c), Corporate Sourcing of Renewables: Market and In- dustry Trends – REmade Index 2018. International Renewable Energy Agency, Abu Dhabi.

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– IRENA and IEA (2017). Perspectives for the Energy Transition: Invest- ment needs for a low-carbon energy system. IRENA and OECD/IEA, Abu Dhabi and Paris. http://www.irena.org/DocumentDownloads/ Publications/Perspectives_for_the_Energy_Transition_2017.pdf – Scarlat et al. (2018) Biogas: developments and perspectives in Europe, Renewable Energy. doi: 10.1016/ j.renene.2018.03.006.

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Part 2 – Chapter 8 – An Introductory Overview on Institutional Change

PART 2 – INSTITUTIONS FOR THE ENERGY UNION

CHAPTER 8 AN INTRODUCTORY OVERVIEW ON INSTITUTIONAL CHANGE

Susanne Nies

The following overview describes the institutional change the EC and then EU have experienced with respect to energy policy. The following contributions by Alberto Potoschnigg and Konstantin Staschus summarize respectively the foundation and experience of ACER and ENTSO-E in their first decade. Klaus- Dieter Borchardt elaborates on the new regional dimension as enshrined in the Clean Energy for All European Package. Christian Buchel discusses what we can expect from the newly to be established European distribution system operators entity, the so-called EUDSO. Dirk Buschle elaborates on the the Energy Com- munity and the organisations preparedness for the Clean Energy transition.

This overview provides the reader with a broad perspective on institutional development: what are the different phases of energy policy development on a Eu- ropean level? how will the various stakeholder forae from Florence to Madrid and Dublin evolve in the future? What is the role of institutions on standardization, like CEN CENELEC and how do they interface with ISO? Of the new and important structures resulting from the engagement of local communities, like the Covenant of Mayors? What will be the institutional Impact of Brexit, but also of an electricity agreement between the EU and Switzerland? How to frame the energy relations with neighbors like Ukraine, but also the Mediter- ranean? Should the incoming Commission reconsider the current breakdown of Directorates General into DG ENER, DG Clima, DG Move, DG Research, Technology and Development (RTD), DG Connect, as to address, in a matrix structure, the most burning energy questions of our time? How will sector coupling and digitalization translate institutionally? And how, finally, are the EU institutions and structures interacting in the broader international context, with

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the UN led climate agenda called COP, the IEA, IRENA, the Clean Energy Ministerial and Mission Innovation?

1. The rise of EU energy policy over seven decades

The seven decades of European institutional development on energy have taken us from the initial European Community of Coal and Steel (ECCS) to a complex setting conceived to deliver security of supply, competitiveness and the climate agenda at once. It should be noted here that we mean by Europe until the end of the Cold War the Western European integration project, disregarding institutional developments in the Eastern bloc.1 The accession of Central Euro- pean countries in 2004 and 2007 has indeed led to an unprecedented standardization and integration move uniting East and West. It should be noted here as well that the Energy Union was inspired by Poland.

Energy has long been placed under national primacy, even though the Euro- pean project saw the European Community for Coal and Steel (ECCS) as an early symbol of the new Europe, formalized with the Treaty of Paris, in 1951, and operational as of 1952. This starting point seeing the strategic assets of six European countries under a centralized authority sought to avoid any future war, to make it ‘materially impossible’, as Robert Schuman put it,2 by a common oversight on those assets fundamental to warfare. ECCS was conceived foremost for Germany and France: the cooperation of the two was considered unanimously as the conditia sine qua non for any European project. The importance of the ECCS can hardly be overestimated and it should be noted as well that it represented the first international organization built on the principle of supranationalism, ultimately translating into the European Community. 1957 saw the Euratom Treaty being established under the Treaties of Rome. Euratom ensured the cooperation of the six founding members Benelux, Federal Repub- lic of Germany, France, and Italy on this promising new area for energy, and that was also meant to provide a solution for the declining coal reserves as well as the increasing dependency on oil.3

1 For an overview on institutional development and energy policy in the Sovietunion see https://www.osti. gov/biblio/6116770 2 Robert Schuman, foreign minister of France, 9 May 1950, the Schuman declaration, ‘make war not only unthinkable, but materially impossible’. 3 Initially Jean Monnet wanted Euratom to be part of an enlarged ECCS setting. As the Benelux opposed the French plan a separate authority was created in 1957. Euratom and ECCS have been merged institutionally with the EC 1967 ; Euratom, different from the ECCS the treaty of which expired in 2002 continues to exist and ensures in particular the monitoring of civil nuclear installations, in close liaison with the International Atomic Energy Agency. The UK withdrew in January 2017. It is based in Luxembourg.

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Looking at the complex institutional development that the EU has undergone the following phases of development, and the following types of institutions can be identified:

An initial ECCS phase starting in 1951, expanded to Euratom in 1957 and followed by three decades of national energy policy primacy, and where energy and economic policy were intrinsically linked. These three decades did not take environmental externalities into account but prioritized the strategic asset approach, whereby the State was owning and in charge of common goods like infrastructure, airports, airlines etc.; an approach indeed inherited from the early days of industrialization. The Maastricht Treaty (1992) completed the development from the initial Free Trade Area of the Treaties of Rome to the Customs Union as set in 1968: a unique sui generis, first of its kind governance model, labelled European Union was established here. Its uniqueness, called by Jacques Delors the Non-identified European object4, is related to the fact that it is nor a state nor a confederation, nor a federation; but something different, and stable in this difference. The four liberties came with Maastricht, representing the free movement of goods, services, capital and labor within the EU. This major shift meant for energy a series of three consecutive liberalization packages. The starting point was of course the 1986 Single Act.5 At once the emerging environmental agenda, centering around the discussion on DDT, on dying forests, and acid rain contributed to enhancing the Europeanisation of energy policy from 1996. Environment itself had only been politicized in European countries and later Europe in the early 70s. The paramount publication of Rachel Carsons ‘The silent spring’ (1962) and the rise of Green parties in Europe have incentivized this shift. It is worth noting that the Greens celebrated their first victory with the first direct elections to the European Parliament in 1979.

4 In French OPNI – objet politique non-identifie –, reminds OVNI – objet volant non identifie – the latter referring us to science fiction. 5 See chapter Helmut Schmitt van Sydow

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Sustainability

Competitiveness Security of supply

Figure 8.1. Source author 2018.

Triangle or overlapping circles?

The well-known triangle of Security of supply, competitiveness and sustainability, as below, has been ‘invented’ in the early 2000s by European policy makers. And the World Energy Council invented, based on it, the notion of ‘energy trilemma’. Energy policy has to ‘square’ the triangle, the implicit assumption being that the three corners are not compatible. Many academic papers have been published on the triangle, and affordability has often been used in lobbyist discussions to question notably sustainability.

However, there is a different way of presenting these three dimensions, and to insist on their deep link and cross fertilization, rather than opposition. For example sustainability is, from an economic perspective, nothing more than putting externalities into the equation. An alternative representation would show overlaps and efficiency gains through an integrated approach to these three dimensions that need each other.

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Figure 8.2. Source Author 2018.

The European Environmental Agency (EEA) was established as early as 1994 in Copenhagen: obviously environment and climate later on proved to be convincing topics asking for more Europe at times where national economic priorities pushed repeatedly back, in the name of an often-misinterpreted subsidiarity. The period of the 90s corresponds thus to a fundamental change of what energy policy is all about: from strategic resources (ECCS) and early strategic innovation clusters at European scale (Euratom) to energy policy, and from energy policy to the famous triangle where competitiveness, security of supply and environmental and sustainability policies are equally important. The article 194 of the Lisbon Treaty that entered into force in 2009 sees energy for the first time mentioned in a European treaty as a community domain. The triangle security of supply, competitiveness and sustainability was conceived in 2006 in the EU Green paper “A European Strategy for sustainable, competitive and secure en-

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ergy” and has gained a quasi-religious status ever since.6 Obviously the ‘big bang’ enlargements of 2004 and 2007, uniting the continent, put considerable emphasis on the security of supply dimension, as a result of the East-Central East divorce it represented at once.

What does the future hold? A new phase of institutional development on energy is likely to see an overarching priority on climate take the lead, encompassing the field of energy, transport, buildings, innovation, as well as a relevant part of digitalization. Agriculture, while being a paramount sector of climate change mitigation is likely to stay out of this climate cluster. More traditional aspects of energy policy will fall under economic and competition policy.

Figure 8.3. The background for institution building on energy in the EC and EU and a potential future. Source: Author 2018.

2. What institutions?

As a matter of fact, institution building of all kinds is prolific in phase 3, and has not yet come to an end: it includes the institution building in the national context- setting up regulatory agencies, or TSO and DSO through unbundling, as well as informal institutions, expert groups, but also, due to a “democratization” of energy, the various stakeholder groups and NGO that emerge. The future is likely to see internationalization through COP 21 push for new types of institutions, as they started to emerge with Mission Innovation (conceived by IEA) or the Clean Energy Ministerial. The EU is represented as a bloc in all of these. Our scope of institutions focusses on political institutions, including formal ones, as well as agencies, expert structures, and informal structures. We do not consider pan European interest groups like EURELECTRIC or environmental NGO like the European Climate Foundation or Greenpeace, the Smart energy demand coalition, BEUC or Solar Power Europe, that play of course an important role.7

6 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=legissum:l27062 7 See for the development of these structures the contribution by Alicia Carasco and Frauke Thies.

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The author suggests to rely on a limitation to ‘organizations which create, enforce and apply laws. They often mediate conflict, make (governmental) policy on the economy and social systems and otherwise provide representation for the populous’.8 The soft fora and working groups that constitute the ecosystem around the above institutions are also taken into account.

3. The democratization of energy in Europe and the expansion of interest groups and institutions, as well as start-ups

In particular phase 3 has led to an explosion of groups and institutions of all kinds, as a direct result of the liberalization and small scale prosumer type Renewables development, leading in a cascading way to more companies and structures: aggregators could be mentioned here as much as the Covenant of Mayors or e-mobility suppliers. It is also interesting to note that the European energy transition is the first taking place in a context of liberalized markets, different from previous major changes that took place in a state run economy: the number of startups delivering single solutions for energy is unprecedented and contributes to the explosion of cascading structures and interactions.

Figure 8.4. Share of electricity from renewable sources in gross electricity concump- tion in European countries in 2016. Source Clean Energy Wire 2018.

8 Alistair Boddy-Evans, https://www.thoughtco.com/political-institutions-44026.

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The German example is illustrative for the multiplication of generators in the last 10 years or so: with 33% of mainly solar- and wind based Renewables in the mix the number of generators, including prosumers, has exploded in the last decade, overhauled business models of incumbents like E.ON and proliferated many new companies.

New actors such as aggregators that bundle services, sell and buy on behalf of their clients. At once new associations and interest groups have emerged at Eu- ropean level, dealing with energy and participating in the expanded stakeholder interactions that the European institutions provide for.

4. European Commission, EP, Council

After having left the era of a technocratic numbering of the General Directorates and the introduction of names to them, energy and transport were put together in DG TREN. In February 2010 both were split. Today DG ENER is organized in six directorates two of which are dealing with Euratom.9 The European Par- liament deals with energy within its Industry, Transport, Research and Energy Department (ITRE). The European Council finally addresses energy at working level through the Energy Working party, that meets every week and is composed of the permanent representatives of the EU member states, and then the En- ergy Minister Council taking the more high level decisions, with the European Council of Heads of State and Government above it. Commission, Council and European Parliament interact on legislative proposals through the so-called trilogues, like currently with the Clean Energy for all Europeans Package. Other Directorate Generals closely related to energy are of course DG COMP, dealing with competition and market abuse; DG CNECT, dealing with digitalization and networks, DG Clima, looking in an overarching manner on climate issues, DG RTD, dealing with innovation – while DG ENER has also its innovation team, working on applied RD for energy and closely interacting with DG RTD. New trends like digitalization and the related cybersecurity will require the next Commission most probably to reconsider how to organize itself between the related DGs.

9 https://ec.europa.eu/energy/; see also the contribution by Helmut van Sydow

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5. Regulatory institutions and their architecture

Energy regulators are represented on a European level through the Agency for the Cooperation of the Energy Regulators, ACER, as well as their “own” association, Council of the European Energy Regulators (CEER). While the second is funded directly by the NRAs, ACER is funded by the EC, as an Agency. Both boards have the same chairperson. The focus areas of the respective actions are clearly defined for ACER by the ACER regulation, as updated with the Clean Energy for All Europeans Package. CEER sets its own work-programme, and typically focusses on those areas that are not covered by ACERs mandates. It should be noted that the expansion of ACERs mandate for example on retail and on the European DSO entity might see the role of CEER further shrink and lead to the risk of duplication.

6. Transmission and distribution system operators and their European faces

Transmission system operators as regulated monopolies had already developed a European voluntary organization for power, ETSO, followed by a mandatory setting up of ENTSO-E with the Third package. The electricity TSOs have also established regional security coordination centers, that they own and that have become mandatory with the System Operations Guideline entry into force. The gas transmission system operators have established ENTSOG, split from a lob- bying organization Gas Infrastructure Europe (GIE).

Distribution system operators have organized themselves on a European level through four associations EURELECTRIC, Geode, EDSO for smart grids as well as CEDEC, and will see with the Clean Energy Package a new structure emerge: the new EUDSO entity. This entity that should be established by the late decade and be fully operational after the entry into force of the new package, will have to deliver mandates and therefore to interact properly with ENTSO-E, on the transmission-distribution interface.

7. Informal forae: Florence Forum, Madrid Forum, Dublin Forum

Informal forae were set up by the European Commission during the second liberalization package as a place was deemed necessary were the stakeholders could interact; previously energy policy was a matter of governments, as energy was largely government controlled.. Taking place in a hosting country that covers the

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cost for the venue, these forae typically gather once or twice a year and ensure an upfront interaction and exchange between European Commission, relevant institutions as well as stakeholders. They are concluded with formal minutes, that provide important input to legislation. The Florence Forum deals with wholesale market integration and was established in 1998.10 Some forae like the Amsterdam Forum for Renewables or the Berlin Forum initially for Fossil fuels have ceased their existence. The Madrid Forum deals with gas market integration, and the newly established Infrastructure Forum in Copenhagen addresses the needs for energy infrastructure development. Retail and customer issues are at the center of the London Forum that has moved in 2018, because of Brexit, to Dublin.

8. The Regional and the Local

Regional energy cooperation provides for the needed level of subsidiarity between Europe and national. The new regional dimension has seen voluntary organizations such as the Pentalateral Forum, the more institutional Baltic En- ergy Market Integration Plan (BEMIP), and of course the regional structures of the Transmission System operators, the RSC. Regulators have not yet set up their regional more formal interaction. The fact that Europe has a large variety of energy regions: from capacity calculation regions to planning regions has not helped develop a consistent set of regions. Regional interaction has in any case to be consistent with the overall pan-European development.

As for the local, the energy transition with its powerful decentralization paradigm, the rising consciousness on air pollution and quality of life in particular in cities has led to the rise of European structures of local communities, like the Covenant of Mayors.11 These commit voluntarily to implement the European energy and climate targets. It is the world’s largest such initiative and has been launched at the European Commission in 2008. By 2010 it already counted 2000 members. In June 2017 a global initiative was developed from the initial format and has seen the establishment of regional offices. EC should be seen as the initiator of the process to which it has remained close ever since.

10 https://ec.europa.eu/info/events/meeting-european-electricity-regulatory-forum-florence-2018-may-30_ en 11 https://www.covenantofmayors.eu/

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9. Cooperation beyond membership

How does the EU interact with neighboring countries or regions? First and foremost, dedicated bilateral agreements frame the partnership with these countries: this applies for Ukraine, Moldova or Morocco, to quote some examples. The General Directorate NEAR, formerly neighborhood, is having the lead here. For non-neighbor third countries in the developing world partnerships are set up through the General Directorate for Development, DG DEVCO.

Institutionally the countries of South East Europe, synchronously connected in electricity and members of ENTSO-E (with the exemption of Kosovo), surrounded by EU member States, are organized in the Energy Community, established by treaty in Athens, in 2005.12 Additional initiatives seek to boost the energy development and integration of the region, like CESEC, but also the WestBalkan6 process. The Mediterranean countries are organized through a common regulatory setting, MEDREG, a common TSO setting, MEDTSO, as well as the Union for the Mediterranean (UMP), and MEDELEC. Advance- ments in this heterogeneous setting have proved difficult in the past, as political unity was difficult to achieve.

Finally, the Energy Charter Treaty was established in 1994, the immediate aftermath of the Cold war, designated to ease and solve conflicts between countries. It has expanded its activities since and is focusing on a more global scale today.13

10. Standardization architecture – CEN-CENELEC

The paramount importance of statistics and standardization is easily overlooked: without them and the related institutions the integration and the promotion of innovative solutions reaches fast its limits. The framework for energy standards in Europe is CEN-CENELEC, resulting from a new organizational setting between CEN and CENELEC in 2010, required by the European Commission that started to fund it institutionally, based on the corresponding Third package provisions.14

12 https://www.energy-community.org/aboutus/whoweare.html 13 https://energycharter.org/ 14 https://www.cencenelec.eu/Pages/default.aspx

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The mission is described as follows by CEN-CENELEC: ‘By setting common standards that are applied across the whole of the European single market, CEN and CENELEC ensure the protection of consumers, facilitate cross-border trade, ensure the interoperability of products, encourage innovation and technological development, include environmental protection and enable businesses to grow. Products and services that meet these European Standards (ENs) can be offered and sold in all of the participating countries.CEN and CENELEC bring together the national standards agencies of 34 countries.Together, CEN and CENELEC provide a platform for the development of European Stand- ards and other technical specifications across a wide range of sectors.’ As for international cooperation ‘CEN and CENELEC cooperate with respectively the International Organisation for Standardisation (ISO) (ISO) and the Inter- national Electrotechnical Commission (IEC) to reach agreements on common standards that can be applied throughout the whole world, thereby facilitating international trade.’15

11. The EU as part of the global energy and climate architecture: incubating phase four of a climate driven institutional setting?

The global agenda requires an architecture of institutional relations, relating countries and regions within a new ecosystem of institutions. The stagnating Conference of the parties process of the United Nations Framework Conven- tion for Climate Change (UNFCCC) has overcome deadlocks in COP 21. The test comes with 2020, when all signatories have to put their commitments and trajectories on the table. The EU as a signatory has committed itself to align its energy and climate agenda with the COP21 decisions. The Paris Climate Con- ference of 2015 saw also the establishment of Mission Innovation: a voluntary commitment of EU and 23 countries on the global level to upscale by 50 percent and by 2021 their clean energy related research and to encourage the private sector in the same direction.16

The International Energy Agency within the OECD framework and established in the 70s to address the oil crisis, plays an important role as a global clean energy hub and as an authoritative source of facts- and analysis based models. Interactions between DG ENER and IEA have increased recently, as to align more on scenarios and on solutions within the Clean Energy Ministerial, hosted like ISGAN by the IEA, the UNFCCC and Mission Innovation, last but not

15 Quote from mission statement CEN CENELEC. 16 http://mission-innovation.net/

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least. Finally, the International Renewables Energy Agency, IRENA, having 158 members, located in Abu Dhabi, was established in 2008 as to put particular emphasis on the need for Renewables Development. IRENA and the EC cooperate on points of common interest.

12. Looking forward and recommendations for Policy makers

We have portrayed, in the above, the colorful landscape of energy related institutions and their recent expansion. New will emerge, some will disappear, and mandates of third will be augmented. The incoming Commission needs to break silos on digitalization, as to deliver. The incoming Commission and ITRE will also have to define in a more systematic manner how the EU Internal Energy Market interacts with non-members, such as UK, Norway, or Switzer- land, defining categories of ‘associates’ and the conditions linked to them. It will thirdly need to ensure the delivery on COP 25, placing the EU in the lead on the climate agenda, and committing its member states to further efforts, including on coal phase out.

The most important task remains therefore to dare an institutional setting that is led by the climate agenda, and encompasses transport, buildings, innovation, digitalization in a more holistic manner. The Long Term Energy and Climate Framework that the EC is set to deliver in 2020 as it committed at COP 21 could be the institutional starting point.

Once in office the new teams will already have to deliver at COP 25. Avoiding the failure of the COP 21 breakthrough is therefore the priority.

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Part 2 – Chapter 9 – The EU, the UK and Energy

CHAPTER 9 THE EU, THE UK AND ENERGY: NOT MUCH SHARED AMBITION POST-BREXIT

Sir Philip Lowe

1. Continuing uncertainty over future UK-EU relations…

At the time of writing this article, the UK House of Commons had yet to vote on the draft UK-EU agreement on UK withdrawal from the EU and the framework for future UK-EU relations. At that time there was therefore still considerable uncertainty over the framework for future EU-UK trade, in particular whether the UK would remain, in the short or longer term, within the EU customs union and whether it would continue to participate in some way or another in the EU single market for goods.

The terms of the Political Declaration on future UK-EU relations which has now been agreed between the UK Government and the EU may be reinforced or weakened by the outcome of the current political debate in the UK.

2. ... but so far a consensus that Brexit will only have a limited impact at least in the short term

Most commentators have so far concluded nonetheless that the impact of Brexit in the energy sector will be relatively limited in the short term, even if there were some hard choices to make in the longer term.1 After all, UK and EU energy and

1 ‘The Impact of Brexit on the EU Energy System’. Study for the ITRE Committee of the European Parlia- ment, Bruegel, 2017. ‘Energy and Climate Policy after BREXIT’. Professor Dieter Helm. Energy Futures Network: Paper 21. ‘Brexit and Energy: Time to make some hard choices’. Philip Lowe. Centre for European Reform. September 2017. ‘Impact of Brexit on the energy sector’. Norton Rose Fulbright. July 2018.

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climate change policies have been closely aligned. UK thinking and experience have also had a strong influence on EU policy and regulation. Even if there are some differences in policy instruments, such as UK carbon taxation, the objectives of EU and UK policies converge strongly.

The legal provisions for UK withdrawal, now reflected in the formal Withdraw- al Agreement foreseen under article 50 TFEU, are also unlikely to change very much, unless of course the United Kingdom decides to exit the EU abruptly (the so-called ‘no deal’ scenario) which is unlikely to be a durable solution for the UK given the political and economic disruption that it would cause. It would inevitably be followed by a deal of some sort.

3. The Withdrawal agreement contains further guidance on the impact on the energy sector

Under these circumstances, the current Withdrawal Agreement contains gives some useful guidance as to the strategic options chosen by both sides for future cooperation in the energy sector.

In the first place, the Agreement sets out the conditions for the withdrawal of the UK from the institutions and agencies of the EU. From the date of withdrawal on 29th March 2019, the UK will no longer be represented in the Council, the European Parliament, the Commission, and the European Courts, and will have no formal means of influence on the work of EU regulatory agencies, such as ACER, or other bodies such as ENTSO-E or ENTSO-G. It can, on an exceptional basis be invited to send representatives to specialised committees and other bodies and participate in their deliberations but will have no voting rights. UK lawyers will in addition have standing before the European Courts where cases relate all or in part to activities on the territory of the United King- dom.

There will be a transition period up to the end of 2020 (which can be extended by mutual agreement) during which European laws and regulations will still be applicable in the UK and in which the ECJ will still have jurisdiction over the application of EU law in the UK. As long as there is no agreement on a permanent, frictionless border between Northern Ireland and Ireland, the Withdrawal Agreement also establishes a single customs territory covering the EU and the whole of the UK, which will inter alia prevent the UK from negoti- ating new trade agreements with other non-EU countries. During the transition period, there will also be an obligation on the UK to apply any new or amended

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EU regulation in the UK, such as elements of the recent Clean Energy Package, insofar as EU Member states as a whole are under an obligation to implement them at a date before the end of the UK’s transition period.

Under these circumstances, there is an understandable concern in the UK to agree new frameworks for EU-UK cooperation as soon as possible. Otherwise it will remain subject to EU law and policy but with no say in how it is drawn up or implemented.

Beyond the transition period, the UK ceases to be legally bound by EU objectives and legal instruments and is no longer under the jurisdiction of the European Court of Justice, except, as a general rule, for matters initiated before the end of the transition period and relating to the UK. A key exception (under Article 11 of the Ireland/Northern Ireland Protocol attached the Agreement) though is that ‘the provisions of Union law governing wholesale electricity markets… shall apply to and in the UK in respect of Northern Ireland’. To this extent the progress made in integrating North/ South integration in wholesale electricity markets is preserved.

The Agreement clarifies is particular that the UK redefine its obligations under the UNFCCC Paris Agreement separate from the EU-27. It will correspondingly withdraw from the EU ETS and set up its own emissions trading system. The UK will however meet the GHG limits applicable in the EU framework for the years 2019 and 2020 and will respect its share for the 2nd commitment period under the Kyoto Protocol

With respect to Euratom, the Agreement passes all responsibility for ores, sources material and special fissile materials located in the United Kingdom form Euratom to the UK. commits the UK to the setting up of a safeguards regime with standard equivalent to those applicable in the EU and to the respect of its obligations as a signatory of the international treaties and conventions in the nuclear field which were previously dealt with by Euratom.

Given that the Agreement foresees the possible continuation of the ‘backstop’ arrangement that the UK as a whole will remain in a single customs territory with the EU until other arrangements are agreed, the Protocol to the Agreement on Ireland/Northern Ireland foresees the establishment of parallel institutions and procedures to implement laws and regulations where the aim is to guarantee broad equivalence between the UK and EU regimes. In respect of competition and state aid rules, the European Commission and the ECJ will still have jurisdiction for cases notified or initiated before the end of the transition

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period. But after that date, state aid in the UK will be vetted by a national UK ‘independent authority’ ( in principle be a role taken over by the UK Compe- tition and Markets Authority) and UK competition rules (which are in most areas broadly identical to those under EU law) will also be enforced by the UK Competition and Markets Authority. These provisions do not rule out specific situations where the Commission and the CMA agree on a reallocation of responsibilities for cases of both UK and EU relevance.

A key exception (under Article 11 of the Protocol) which retains EU jurisdiction, and has been mentioned earlier is that ‘the provisions of Union law governing wholesale electricity markets…shall apply to and in the UK in respect of Northern Ireland’. To this extent the progress made in integrating North/South integration in wholesale electricity markets is preserved at least until more permanent EU/UK cooperation arrangements are agreed.

4. UK-EU energy cooperation post-Brexit

Despite the appearance of irreversibility in many of the provisions relating to UK withdrawal from the EU’s institutions and from the jurisdiction of its courts, the draft Withdrawal Agreement and Political Declaration arguably reflect the aspiration of both the UK Government and the EU to retain close alignment of their energy and climate change policies. Whether this aspiration can be turned into reality depends on as much on market conditions as on political will. Moreover, parts of the text of the Political Declaration do not demonstrate much ambition for cooperation on either UK or the EU side.

On climate change policies for example, paragraph 72 of the Political Declara- tion states that ‘the Parties should consider cooperation on carbon pricing by linking a UK national GHG emissions trading system with the Union’s ETS’. At first sight, this commitment has no more ambition than to maintain the status quo of the UK inside the EU’s ETS. The UK already has a much more ambitious programme of climate change policies, including several years’ experience of a national carbon tax. One would hope that these two signatories of the Paris accords could go further than simply talking to each other about cap-and-trade systems.

Paragraph 68 talks of a ‘wide-ranging nuclear cooperation agreement between Euratom and the UK’, but is not followed in later articles with many specifics, except that there should be combined efforts on nuclear R&D and on the use of medical radioisotopes.

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On energy market regulation, paragraph 66 of the Political Declaration, states with ambition that ‘the parties should cooperate to support the delivery of cost-efficient, clean and secure supplies of energy, based on competitive markets and non-discriminatory access to networks’ something that they have been striving already for some years to do together inside the EU.

Clearly the commitment in the Ireland/Northern Ireland Protocol to maintaining the single Irish wholesale electricity market is a very positive element. But it is unclear how it will be possible to ring-fence regulation on wholesale electricity on the island of Ireland with respect on the one hand to the downstream market on the island of Ireland and on the other to the UK wholesale market. If there is any component of the Irish wholesale market which is sensitive to market developments in mainland Britain, it is surely through the Irish- British interconnectors, but there is no specific mention of how their contribution to the Irish electricity market will be regulated.

It is true that paragraph 67 of the Political Declaration says that the ‘parties should establish a framework to facilitate technical cooperation between electricity and gas network operators and organisations such as ENTSO-E and G, in the planning and use of energy infrastructure connecting their systems. The framework would also include ‘mechanisms to ensure as far as possible security of supply and efficient trade over interconnectors over different timeframes’.

However these commitments seem to reflect only a pale version of potential cooperation in an area where the UK and the EU have much to gain.

The UK is becoming a major importer of gas for security of supply as well as climate change reasons. It will be importing gas both through LNG imports but also by importing gas by pipeline from a European system that will always provide a strong competitive alternative to LNG. As a consequence, it should be interested in very close cooperation on gas market regulation, not just on interconnection but on market-wide network codes.

At the same time in a more carbon-free world, electricity delivered form renewable and nuclear sources is likely to become the dominant form of delivery of energy. In that light, there is going to be a premium on providing constant supplies of electricity in a flexible and adaptable manner. This seems to be more achievable in a larger network with a diversity of supply sources ,which no single European country is capable of delivering on its own. Over the last two decades, wholesale electricity prices in Northern Europe have generally been more than 20% lower than in the UK. Under these circumstances, the UK and the EU

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should not only be interested in more interconnection, but also in letting the market decide where electricity should flow. Here again, UK involvement in, and Commitment to, Europe-wide market rules and network codes should be in everyone’s interest.

Last but not least, both the UK and EU-27 are engaged in a radical transition to a low-carbon economy. This involves a move towards new sources of energy and a more effective use of energy in industry, in transport, in buildings and in homes. It implies major changes in the development and use of technologies, in product design and recycling, in consumer behaviour and in overall societal change. None of these changes are referred to in the Political Declaration.

Even viewed in the narrow area of wholesale energy market regulation, the vo- cabulary of paragraph 67 of the Political Declaration (technical cooperation between TSO’s, mechanisms to ensure …trade over interconnectors over different time frames…) does not seem to deliver on the commitment of the parties to deliver supplies of energy and gas based on competitive markets. In the absence of the further integration of the UK in a wider European energy market, in which UK-based suppliers are exposed to more competition, one can only assume that more government intervention and more regulation will be needed both at a wholesale and retail level in order to protect consumers and citizens from further exploitation. On the EU-27 side, it is doubtful, after the departure of the UK from the EU, whether there is sufficient support for a market-oriented approach to energy. Governments and incumbents, acting together, have a record of resisting change, at the expense of energy users.

5. The way forward

It is possible that the political constraints placed on UK and EU negotiators have prevented both sides from expressing further ambition. This should be a matter for regret on both sides. Climate change is a serious challenge which will require more than token international cooperation. Energy supplies in Europe need to be secure, clean and competitive. Hopefully any new UK-EU agreement to be negotiated on energy will meet tomorrow’s challenges rather than simply shoring up fragments of what has been achieved together up until now.

On the UK side, further integration into a single European energy market would come at the cost of acceptance of some form of supranational regulation and judicial control. On the EU side, further integration of UK and EU energy markets would mean accepting that the UK could participate in one sector of

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the internal market while remaining outside others (which has given rise so far to so-called ‘cherry-picking’ objections). It is now time for both sides to examine seriously whether the potential benefits of deeper energy cooperation for consumers and citizens on both sides of the Channel outweighs their attachment to political doctrine.

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Part 2 – Chapter 10 – Regionalisation and Regional Cooperation

CHAPTER 10 REGIONALISATION AND REGIONAL COOPERATION IN THE EUROPEAN ELECTRICITY MARKETS

Klaus-Dieter Borchardt & Maria Eugenia Leoz Martin-Casallo

1. Introduction

The Treaty on the Functioning of the European Union defines that Union policy on energy shall aim to ensure, in a spirit of solidarity between Member States, the functioning of the internal market and security of energy supply, aim to promote energy efficiency and energy savings, the development of new and renewable energy sources as well as promote the interconnection of energy networks.1

Regional cooperation and regionalisation are increasingly being relied upon to advance the EU’s energy policy objectives. The main advantage of the regional approach is that it can lead to faster results and is better suited to address issues that arise in a specific regional context.2

What is regional cooperation? And regionalisation? Regional cooperation is a voluntary and bottom-up approach to several aspects of transmission and cross-border trade of electricity. Regional cooperation has taken place in a wide range of areas, e.g. day-ahead flow-based market coupling, regional security coordination initiatives, balancing projects. By contrast, regionalisation is a top-down approach generally used by the Commission and the European legislator to translate voluntary regional cooperation initiatives into a mandatory

1 Article 194 TFEU. 2 For the purposes of this paper, the term ‘region’ is to be understood at at macro-level, comprising two or more Member States.

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framework. So far, regionalisation has taken place mainly through the adoption of electricity network codes.

In the electricity sector, both regional cooperation and regionalisation have led to the convergence of markets, system operation and policies. While the creation of an EU-wide internal electricity market remains the goal, the regional approach constitutes a facilitator in achieving its completion.

The objective of this paper is to provide an overview of how the regional approach has evolved in the energy policy framework, including in the Clean Energy for all Europeans Package recently agreed by the European Co-Legislators. It also raises some questions and challenges that will need to be addressed in the future if we want to ensure that regional initiatives evolve in a coherent way and lead towards further cooperation and integration at European level.3

2. The regional approach prior to the Clean Energy for All Europeans Package

2.1 From the First Electricity Directive to the Third Energy Package

Historically, electricity markets were managed on a national basis by State-owned vertically integrated monopolies. Cooperation among national utilities took place mainly for reasons relating to system security rather than for commercial objectives.

The process of liberalisation of electricity markets started with the adoption of Directive 96/92/EC on common rules for the internal market in electricity (“First Electricity Directive”).4 The First Electricity Directive required implementation of competitive electricity markets and constituted a first step towards the integration of national markets into a single internal market in electricity.

3 As underlined by the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank, A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, COM (2015) 80 final. 4 Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity (OJ 1997, L 027 p. 20).

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The Second Energy Package, adopted between 2003 and 2005, included more detailed rules on cross-border exchanges in electricity transmission networks, further addressing the integration of national markets.5 Although the measures adopted in the Second Energy Package had a positive effect, the Regulation was considered not sufficiently specific and limited progress was achieved.6

Following the adoption of the Second Energy Package, a number of regional initiatives were developed. To make progress in different regions regarding the implementation of the congestion management principles set out in Regulation 1228/2003, a series of ‘mini-fora’ were set up.7 The mini-fora were to provide specific plans and timetables for introduction of market-based congestion management mechanisms at regional level for at least the day-ahead market. In these mini-fora, the participants discussed the development of regional market coupling projects. In addition, in 2006 the Electricity Regional Initiative (‘ERI’) was launched in order to further develop regional markets. This initiative pursued to speed up the integration of national markets at regional level as an interim step that would converge towards a competitive single electricity market. These initiatives focused on developing and testing solutions for cross-border issues with a view of rolling them out to other regions. In parallel, the Union for the Coordination of Transmission of Electricity (‘UCTE’), which represented the transmission system operators (‘TSOs’) of Continental Europe, adopted in 2005 the Operational Handbook, a multilateral agreement containing operational standards agreed among the TSOs of this region.

5 The Second Energy Package comprised: Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC (OJ 2003, L 176, p. 37); Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC (OJ 2003, L 176, p. 57); Regulation (EC) No 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity (OJ 2003, L 176, p. 1) (“Regulation 1228/2003”); and Regulation (EC) No 1775/2005 of the European Parliament and of the Council of 28 September 2005 on conditions for access to the natural gas transmission networks (OJ 2005, L 289, p. 5). 6 From regional markets to a single European market, 2010 report by Everis and Mercados, p. 16. 7 Minutes of the eleventh meeting of the European Electricity Regulatory Forum which took place on 16-17 September 2004.

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2.2 Third Energy Package and regionalisation in the context of electricity network codes

The Third Energy Package,8 adopted in 2009, provides a set of new regulatory tools and a governance framework (the creation of the Agency for the Cooperation of European Regulators “ACER” and of the European Network of Transmission System Operators - Electricity “ENTSO-E”) meant to address the shortcomings of the previous legal framework.9

In the context of the Third Energy Package, regionalisation has taken place through the adoption of electricity network codes and guidelines. The EU network codes and guidelines are a detailed set of rules harmonising some aspects of national electricity markets and regulations.10 In the field of electricity, a total of eight network codes and guidelines have been adopted so far as Commission implementing regulations.11

Regionalisation through the electricity network codes and guidelines builds on the bottom-up regional cooperation that took place regarding different areas of the electricity sector. Regional solutions promoted through the European Regional Initiative such as day-ahead market coupling, creation of the Joint Allocation Office or the implementation of the cross-border intraday market (XBID) project, were codified in the framework of the electricity network codes and guidelines. This was also the case for the regional security coordination

8 The Third Energy Package comprises: Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators (OJ 2009 L 211, p 1); Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003 (OJ 2009 L 211, p 15); Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005 (OJ 2009 L 211, p 36); Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC (OJ 2009 L 211, p 55); Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC (OJ 2009 L 211, p 94). 9 Commission staff working document accompanying the legislative package on the internal market for electricity and gas (SEC (2007) 1179). 10 Initially developed following the procedure of Article 6 of Regulation 714/2009, these implementing regulations were adopted pursuant to Article 18 of the same Regulation. Even though electricity guidelines are adopted under a different provision of the Regulation, they follow the same adoption procedure through comitology and are both legally binding regulations. 11 These eight implementing regulations can be categorized in three groups: market (comprising the guidelines on capacity allocation and congestion management, on forward capacity allocation and balancing), grid connection (comprising the network codes on requirements for grid connection of generators, on demand connection and on high voltage direct-current) and system operation (comprising the guideline on transmission system operation and the network code on emergency and restoration).

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initiatives (‘RSCIs’) established by TSOs for the purposes of coordinating system operation. In all these instances, the adoption of the guidelines has entailed a shift from voluntary implementation of initiatives or pilot projects to their mandatory implementation.

Moreover, the regional approach is a key element in the implementation phase of the network codes and guidelines. In this phase, TSOs (or TSOs jointly with Nominated Electricity Market Operators ‘NEMOs’) are tasked with developing methodologies or terms and conditions at pan-European and regional level.12 For the regional methodologies or terms and conditions, the TSOs of such regions will have to jointly develop and submit a proposal for approval by the National Regulatory Authorities (‘NRAs’). The NRAs will then approve, ask to amend or reject the proposal of TSOs. If the NRAs do not agree, the decision is then handed over to ACER for a decision as per Article 8(1) of Regulation 713/2009.

To sum up, from the point of view of regionalisation, the electricity network codes and guidelines push for the integration of electricity markets and enhance the regional cooperation of TSOs regarding system operation. The regional approach in the network codes and guidelines leaves room to consider regional characteristics and needs. However, even though the electricity network codes and guidelines are still in a phase where the implementation is at an early stage and many methodologies are pending of being developed, the framework provided for in these regulations already shows some flaws. For example, there are concerns about the lack of consistency between the methodologies developed in different regions. In addition, the regional approach may lead to differences not only regarding content but also regarding the timely development and application of such methodologies in the different regions, where delays result from the lack of agreement between TSOs or between NRAs in the region.13

12 The regions stemming from the electricity guidelines vary depending on the rules at stake. Market regions comprise mainly capacity calculation regions whereas the system operation regions comprise the regions covered by regional security coordinators, synchronous areas, load-frequency control blocks, etc. 13 The conclusions of the 4th Implementation and Monitoring Group meeting of 8 March 2018 call for close cooperation by TSOs at regional level and coordination with NRAs, ENTSO-E, ACER and EC regarding potential blocking issues which may result in delays in achieving the deadlines for the submission of proposals. See also the conclusions of the XXXIII EU Electricity Regulatory Forum of 30-31st May 2018.

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2.3 Regionalisation and regional cooperation in other legislative and non-legislative initiatives

In addition to the Third Energy Package, regionalisation and regional cooperation have taken place through a number of other legislative and non- legislative initiatives.

The TEN-E Regulation14 sets out a framework for the long-term energy infrastructure of the EU and introduces the concept of projects of common interest (‘PCIs’). PCIs are key energy infrastructure projects conceived to help deliver Europe’s energy and climate objectives. For the selection and review of PCIs, the TEN-E Regulation establishes nine regional and three EU-wide thematic groups. The regional groups ensure that PCIs obtain Member States’ support as well as the support of other regional actors (NRAs, project promoters, TSOs). The goal is to ensure the interoperability of and coordination between the different regional and national electricity and gas networks. The electricity PCI regional groups set up pursuant the TEN-E Regulation are the North Seas Offshore Grid (‘NSOG’), the North-South electricity interconnections in Western Europe (‘NSI West Electricity’), the North-South electricity interconnections in Central Eastern and South Eastern Europe (‘NSI East Electricity’), and the Baltic Energy Market Interconnection Plan in electricity (‘BEMIP Electricity’). Some of the TEN-E regional groups are complemented by Commission and Member State led High-Level Groups designed to strengthen the political support for regional projects.15

The Renewables Directive (‘RED’)16 facilitates the cooperation between Member States in three areas: statistical transfers, joint projects and joint support schemes. Regional cooperation within the framework of the RED aims to offer Member States the option to tap their common renewables potential to ensure that the 2020 renewable energy targets will be reached. So far, Member States have only made limited use of this possibility, with the bilateral cooperation between Norway and Sweden on a joint support scheme for renewables and the

14 Regulation (EU) No 347/2013 of the European Parliament and of the Council of 17 April 2013 on guidelines for trans-European energy infrastructure and repealing Decision No 1364/2006/EC and amending Regulations (EC) No 713/2009, (EC) No 714/2009 and (EC) No 715/2009 (OJ 2013 L 115, p. 39) (‘TEN-E Regulation’). 15 There are currently four High-Level Groups: the Baltic Energy Market Interconnection Plan (BEMIP), the Central and South Easter Europe Gas Connectivity (CESEC) which has been extended to cover electricity, Northern Seas and South West. 16 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/ EC and 2003/30/EC (OJ 2009 L 140 p. 16).

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mutual opening of national support schemes between Denmark and Germany. In addition, a number of Member States have set up frameworks for regional cooperation towards improved electricity market integration and security of supply. This is especially the case for the Pentalateral Energy Forum, created in 2005 by the Energy Ministers of Benelux, Germany and France to give political backing to the process of regional integration towards a European electricity market. This cooperation was later formalised through a Memorandum of Understanding signed in 2007. Other Member States’ regional cooperation frameworks that include energy in addition other areas are the Nordic Cooperation, the Baltic Cooperation, the Visegrad Cooperation and the Benelux Union.

3. The regional approach in the Clean Energy Package

3.1 Energy Union Framework Strategy

The Energy Union Framework Strategy, presented by the Commission in 2015, highlights the role of regional cooperation as a stepping-stone towards achieving a fully integrated Single Energy Market.17

The Energy Union Framework Strategy received strong support from both the European Council and the Energy Council. In particular, the 2015 March European Council called for “developing a more effective, flexible market design which should go together with enhanced regional cooperation […]”.18 The November 2015 Energy Council also acknowledged the important role of regional cooperation as instrument for progressing towards the completion of a well-functioning internal energy market, for the development of trans-European infrastructure development and for cost-efficient achievement of energy and climate policy objectives. It further considered that regional cooperation and consultation on these issues needed to be facilitated or incentivised.19

17 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank, A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, COM (2015) 80 final. The Communication remarks that “technical implementation of the different elements of our Energy Union strategy will be very complex. Some elements, such as new market arrangements for short term markets in gas and electricity or integrating the operations of transmission system operators should be developed and implemented at regional level as a step towards full EU-wide market integration. […] The Commission will ensure that all regional initiatives evolve in a coherent way and lead towards a fully integrated Single Energy Market.” 18 Conclusions of the European Council Meeting (10 and 20 March 2015), EUCO 11/15. 19 Council conclusions on the governance system of the Energy Union, 26 November 2015.

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3.2 Proposed measures enhancing regionalisation and regional cooperation in the electricity sector

The Clean Energy for All Europeans Package (‘Clean Energy Package’) presented by the Commission in November 2016, comprises a wide range of measures with the goal of providing a stable legislative framework to facilitate the clean energy transition. The Clean Energy Package includes eight different legislative proposals, covering the energy performance in buildings, renewable energy, governance, energy efficiency, electricity market design and rules on ACER.

In line with the Energy Union Framework Strategy and the mandate from the European Council and the Energy Council, the Clean Energy Package addresses and aims to strengthen regional cooperation in several of its proposals.

The Governance Regulation aims to ensure that the objectives of the Energy Union, especially the EU’s 2030 energy and climate targets, are achieved by setting out a political process defining how Member States and the Commission are to work together and how Member States should cooperate with each other to achieve the Energy Union goals. In this regard, the Governance Regulation stresses the importance of regional cooperation in the development and implementation of energy and climate policies.20

The revised Renewable Energy Directive (‘RED’) aims to adapt the framework for renewable energy development to the 2030 horizon and addresses the potential of renewable energy in a number of sectors. The proposal identifies six key areas for action, including the adoption of an EU level binding target as well as a framework for the further deployment of renewables in the electricity sector. It sets out a framework for the design of support schemes, laying down common principles ensuring that, when and if support is needed, such support fosters regional approaches through stronger convergence in the design of support schemes and gradual opening up of cross-border participation through mutually-open tenders, joint tenders or joint support schemes.21

20 At the moment of writing this paper, the Governance Regulation has been published in the Official Journal of the Union as Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action, amending Regulations (EC) No 663/2009 and (EC) No 715/2009 of the European Parliament and of the Council, Directives 94/22/EC, 98/70/EC, 2009/31/EC, 2009/73/EC, 2010/31/EU, 2012/27/EU and 2013/30/EU of the European Parliament and of the Council, Council Directives 2009/119/EC and (EU) 2015/652 and repealing Regulation (EU) No 525/2013 of the European Parliament and of the Council (OJ 2018, L 328, p. 1). 21 At the moment of writing this paper, the revised Renewables Directive has been published in the Official Journal of the Union as Directive (EU) 2018/2001 of the European Parliament and of the Council of 11

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The Electricity Market Design proposals (comprising the recast Electricity Regulation, the recast Electricity Directive and the Risk Preparedness Regulation) aim to establish the general principles and technical details on energy market participation, as well as specify rights and responsibilities of market participants.22 The proposals include: enhancing the coordination of TSOs at regional level through regional operational centres to ensure the most optimal use of the grid and better grid stability,23 rules on capacity mechanisms designed to provide for the cross-border participation with the aim to lead to the integration of capacity mechanisms, and rules relating to the cooperation between Member States regarding risk preparedness as well as requiring them to assist each other where needed. In order to complement the rules on regional cooperation in the Electricity Market Design proposals, the recast ACER Regulation includes a framework for the cooperation of NRAs at regional level.24

3.3 Proposals on Regional Operational Centers as a tool to enhance regional TSO cooperation

The Electricity Market Design proposals aim at strengthening the regional cooperation of TSOs through the proposed establishment of Regional Operational Centres (ROCs), which will centralise some functions at regional level over relevant geographical areas.

December 2018 on the promotion of the use of energy from renewable sources (OJ 2018 L328, p. 82). 22 At the moment of writing this paper, a political agreement has been reached on 22 November 2018 for the Risk preparedness Regulation and on 18 December 2018 for the recast Electricity Directive and the recast Electricity Regulation. In the coming months these legal instruments will be published in the Official Journal of the Union, once endorsed by the co-legislators. 23 Further described in section 3.3. below. 24 At the moment of writing this paper, a political agreement has been reached on 11 December 2018 on the recast ACER Regulation. In the coming months this Regulation will be published in the Official Journal of the Union, once endorsed by the co-legislators.

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The ROCs’ proposals build on the successful regional cooperation of TSOs in voluntary cooperation initiatives.25 This voluntary cooperation already led to the mandatory regional cooperation for TSOs through regional security coordinators (‘RSCs’) as part of the Commission Regulation establishing a guideline on electricity transmission system operation adopted in 2017.26

The model for the cooperation of TSOs at regional level through RSCs resulting from the electricity network codes and guidelines constitutes a positive development. However, the integration of the European electricity markets and the ambitious decarbonisation agenda for the energy sector with increasingly variable and decentralised generation, has made system operation more interrelated than before. This requires stronger cooperation between national TSOs as the challenges the EU power system will be facing in the medium to long-term are pan-European and cannot be addressed and optimally managed by individual TSOs.27

The establishment of ROCs in the Electricity Market Design proposal aims to reinforce the regional cooperation by ensuring that regional tasks are performed by one ROC, of which the geographical delineation is developed by ENTSO-E with approval by ACER, based on the technical operation of the grid. The proposals delineate the competences between ROCs and national TSOs and attribute an enlarged scope of functions to ROCs, who will assume tasks that do not cover real time operation, in addition to the functions foreseen under the system operation guideline.

Functions In addition to the six main functions envisaged for RSCs, the Commission proposal provided for new functions concerning system and market operation as well as risk preparedness for which it was considered that a degree of coordination at regional level could increase the efficiency of the overall system compared to these functions being only performed at national level. The middle column in the table below illustrates the additional functions proposed for coordination

25 Driven by the lessons learnt from the serious electrical power disruption in Europe in 2006, European TSOs have pursued enhancing further regional cooperation and coordination. To this end, TSOs voluntarily launched Regional Security Coordination Initiatives (RSCIs), entities covering a greater part of the European interconnected networks aiming at improving TSO cooperation. The main RSCIs in Europe are Coreso and TSC, both launched in 2008, followed by the ongoing development and establishment of additional RSCIs, such as SCC in Belgrade and the Nordic RSCI. See Annex 2.3 of the Impact Assessment accompanying the proposals on Market Design. 26 Commission Regulation (EU) 2017/1485 of 2 August 2017 establishing a guideline on electricity transmission system operation (OJ 2017 L 220, p. 1). 27 Annex 2.3 of the Impact Assessment accompanying the proposals on Market Design.

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by ROCs in the Electricity Market Design. None of these functions entail real- time operation responsibilities, which are left solely in the hands of TSOs.

Mandated Market Looking Cooperationa Design Pack- beyond RSCs age ROCs System Operation Coordinated Security Analysis (including X Remedial Actions-related analysis) Common Grid Model Delivery X Outage Planning Coordination X Short and Medium Term generation X Adequacy Forecasts Regional system defence and restoration X plans Coordination during major incidents X Centralised post operation analyses and X reporting Training and certification of employees X Market Related Coordinated Capacity Calculation Xb Coordinated sizing and procuring of X balancing reserves Network Planning Identification of the transmission capacity X needs Technical and economic assessment of X CBCA cases Administration of TSO-TSO payments X (e.g., congestion rent sharing, redispatching cost sharing) Risk preparedness Support Member States on development X of risk preparedness plans Adequacy and Capacity Remuneration Mechanims Capacity calculation as regards the par- X ticipation of foreign resources in capacity mechanisms

a System Operation Guidelines b The Commission Regulation establishing a guideline on capacity allocation and congestion management provides for Regional Capacity Calculators. However, following the commitments of TSOs in the multilateral agreement signed in 2015, this role could be assumed for RSCs.

Table 10.1. Source: European Commission.

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Geography / Governance While the System Operation requires full European coverage by RSCs, the size and composition of the regions so far has not always been defined having the technical operation of the grid in mind. Business and political criteria also played a role. In addition, in the current context of the rolling out of RSCs, there will be certain flexibility for TSOs to decide which coordinator executes a given coordination task in a region. This allows the TSOs of a given region to be coordinated by different RSCs.

The ambition for the future ROCs in the Market Design Initiative proposal was to require that ‘system operation regions’, covering the whole EU, are defined based on the grid topology so that ROCs could play an effective coordination role. Moreover, the proposal enshrined the principle that in each region a single ROC should perform all the tasks for the TSOs of the region. System operation regions would therefore be the regions where these entities are established and where they execute their tasks. The benefits of this approach would be enhanced system security and market efficiency – given that the ROCs would be able to optimize the operations over larger regions. For larger regions – especially the central Continental Europe area – the proposals allowed for the possibility of having a second ROCs acting as a back-up.

Even though the proposals do not define how the ‘system operation regions’ should look like or their number, during the preparatory phase, in discussions with stakeholders in the context of the European Electricity Regulatory Forum, the graph below was presented illustrating a possible geographical delineation of the future ROCs.28

The Commission proposals established that the governance of the ROCs should be designed by the TSOs involved. Flexibility in governance arrangements should be allowed as long as the decision making process is non-discriminatory and efficient, not allowing individual TSOs to block the decisions. Appropriate involvement of NRAs, the Commission and stakeholders in an advisory and observer position was also envisaged.

28 European Commission slides presented at the 30th European Electricity Regulatory Forum, March 2016.

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Figure 10.1. Source: European Commission.

Decision making responsibilities When developing the proposals on how to enhance regional TSO cooperation through the establishment of ROCs, it was considered necessary to entrust them with decision-making powers on a number of issues, as opposed to the advisory role RSC have. The main reason was that in the context of increasingly integrated electricity systems, such a ‘support role’ could lead to inefficient outcomes on a regional level as TSOs tend to act on their best national interest.29 Thus, the Market Design Initiative proposed entrusting ROCs with decision- making powers as regards four of the coordinated functions assigned to these entities. The functions initially proposed for decision-making were: (i) coordinated capacity calculation, (ii) coordinated security analysis, (iii) regional sizing of balancing reserves, and (iv) capacity calculation for the purpose of the participation of foreign resources in capacity mechanisms. None of these functions entail real-time operation responsibilities. The ROCs would assume a ‘support role’ for the remaining functions through the adoption of recommendations.

29 For example, when deciding about the commercial cross-border capacities in a given region which are already calculated at regional level, it was considered that the decision taken by ROCs should not merely be an input that can be challenged by TSOs based on national interest. This is because in case of scarcity of supply in one country, the TSO might be tempted to reduce their export capacities but this might not be the best decision from a regional system security perspective.

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The decision-making process, as described in the proposals, follows a cooperative approach that would ensure that the views of the TSOs of the region are rightly considered in the decisions. These decisions would be based on the application of the methodologies, terms and conditions developed in network codes and guidelines or that may be developed in implementation of provisions in the Market Design. Moreover, the proposals included a safeguard allowing individual TSOs not to apply the decisions of ROCs if they compromise the safety of the system.

ROCs would therefore assume decision-making responsibilities in their market facilitation functions and in the planning phase of system operation while system operation in real time would remain in the hands of national TSOs.

Finally, the proposals set out a framework for the liability of ROCs and for its coverage.

Implementation The development steps towards the establishment of ROCs requires sufficient time for the implementation of the new framework, e.g. to build up relevant expertise and to procure and implement data systems.

Implementation will take place by building on the current status quo and the relevant network codes and guidelines. The first step will consist in fully implementing the Guidelines on System Operation, on Capacity Allocation and Congestion Management and the Network Code on Emergency and Restoration in terms of RSC functions30 and geographical coverage (obligation on all TSOs to be coordinated by an RSC). This should take place in 2020.

Further enhancing the role of RSCs and achieving the target of ROCs will require introducing changes to the existing framework to implement the rules in the Market Design Initiative. Those changes should specifically address streamlining the regions, enlarging the scope of functions and entrusting the regional structures with decision-making power. The changes and their respective implementation will take place after 2020.

The graph below describes the stepwise approach for the implementation of the future ROCs as set out in the Market Design Initiative.

30 The tasks envisaged for RSCs in network codes and guidelines are: operational security analyses, building the common grid model, outage coordination, adequacy analyses, coordinated capacity calculation and support to TSOs as regards the preparation of system defence plans and system restoration plans.

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Figure 10.2. Source: European Commission.

3.4 Negotiation of the proposals on ROCs

Since the presentation of the Clean Energy Package by the Commission in 2016, as regards the proposals on ROCs, there was a wide consensus for strengthening the regional cooperation of TSOs beyond the baseline set out in the electricity network codes and guidelines. The main remarks and objections focused on the provisions relating to the decision-making competence of ROCs. Stakeholders criticised that there is a lack of clarity in these provisions, particularly as regards the binding nature of these decisions, the impact on the TSOs’ responsibilities for managing the electricity system and on the responsibility and liability of ROCs vis-à-vis the TSOs of the region. Stakeholders also raised concerns that ROCs would wrongly constitute a tool for solving political issues that Member States have not been able to agree upon. Finally, there was quite some debate around the name of the regional entity, called in the Commission’s proposal “Regional Operational Centers”

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3.4.1 The Council’s General Approach

The Council General Approach, adopted on 18 December 2017,31 opted for ‘continuity’. The Council preferred to set out a framework that enhances regional TSO cooperation through adding new features to existing RSCs as opposed to setting out a new framework through ROCs. For example, as regards the functions assigned to the regional entities, the Council General Approach deleted the tasks related to balancing, the possibility of delegation of the risk preparedness functions from ENTSO-E to the regional entities and the task related to facilitating inter-TSO payments. Based on the General Approach, the geographic scope of regional entities would be equivalent to regions that RSCs will cover in implementation of the system operation guideline, including the possibility that two RSCs coordinate the TSOs in the same region. As regards the decision-making competences, the Council agreed that the TSOs’ discretion in the exercise of the tasks of capacity calculation and coordinated security analysis should be limited. RSCs would issue ‘coordinated actions’ (instead of binding decisions) that TSOs would be expected to implement except for reasons concerning the operational security of the electricity system. The timeline for implementation proposed by the Council was 2025, with the possibility for Member States of a given region to agree on an earlier deadline.

3.4.2 The European Parliament Report

TheEuropean Parliament Report adopted on 27 February 2018 put forward a framework for the establishment of regional coordination centres (RCCs) which resembles the framework initially proposed by the Commission but with some variations.32 As regards the functions, the European Parliament maintained all the functions initially proposed by the Commission but introduced some limitations to the function relating to facilitating the procurement of balancing reserves by TSOs and introduced a new task, relating to supporting TSOs in the identification of new transmission infrastructure. The European Parliament endorsed the Commission proposal to define the geographic scope on the basis of objective criteria and to set out a single RCC for the coordination of TSOs in a given region. Regarding the type of act that an RCC can issue, the European Parliament maintained the competence of regional entities to issue binding decisions on TSOs but limited its scope to two tasks of the

31 See the General Approach adopted on 18 December 2017: http://www.consilium.europa.eu/en/press/ press-releases/2017/12/19/creating-a-modern-electricity-market-council-agrees-its-position/ 32 The European Parliament report was adopted on 27 February 2018 and the text can be accessed through http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&mode=XML&reference=A8-2018- 0042&language=EN

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four initially proposed. The European Parliament also proposed measures to increase the transparency in the way that RCCs will operate. The timeline for implementation of this framework would be of one year after entry into force of the Regulation, early 2021.

3.4.3 The political Agreement of the European Co-Legislators

At the moment of writing this paper, the negotiations between the Council and the European Parliament on the Market Design proposals have concluded, with a political agreement having been reached on 18 December 2018. In broad lines, the agreement of the Co-Legislators on regional cooperation of TSOs looks as follows:

1. As regards the future framework for the regional entities and the choice to be made between an enhancement of the existing framework for RSCs (as per the Council’s preference) and the set-up of RCCs that would replace RSCs (as per the European Parliament’s preference), the Co-Legislators have opted for “Regional Coordination Centers” – RCCs. Even though in terms of ambition there was no substantial difference between the Council General Approach and the European Parliament report, the choice of a new framework for the set up of RCCs reflects better the enhanced nature of these regional entities, with more tasks, competences and obligations and with enhanced governance requirements and regulatory oversight, compared to the existent RSCs.

2. Regarding the timeline for implementation of the framework, the co-legislators have provided that RCCs shall assume their role from July 2022 onwards. This timeline is both ambitious and reasonable as it ensures that the TSOs and the regional entities will be in a position to fulfil their obligations in a timely manner and with the greatest diligence.

3. For the geographic scope, the co-legislators have agreed on an approach that requires TSOs to define the system operation regions on the basis of pre-defined criteria. Based on the agreement, the Regulation will also enshrine the general principle that TSOs should designate only one RCC per region to carry out the coordination tasks for all the TSOs in the region. However, the Regulation will allow certain flexibility as regards wider regions in Continental Europe where two RSCs have been designated to coordinate tasks pursuant to the System Operation Guideline. Indeed, in such instances the TSOs may decide to either designate a single RCC or that the two RCCs shall continue to perform some or all of

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the tasks in the entire region on a rotational basis or allocate the tasks between them or a combination of both approaches.

4. On the tasks, the co-legislators have agreed to maintain all the tasks initially proposed by the Commission. They have also agreed to include a new task in the list, related to the identification of the need for new transmission capacity or the upgrade of existing transmission capacity. The balancing tasks of RCCs will cover both the sizing and the procurement of balancing capacity as initially proposed by the Commission. The coordination of sizing of balancing and balancing procurement is expected to improve market integration and market functioning and to deliver important efficiency gains and lead to significant cost savings. It will also enhance the transparency of how TSOs take decisions to reserve balancing capacity or procure it. By issuing ‘recommendations’, RCCs will contribute to the opportunity assessment of TSOs, whereas the decision will be taken by the TSOs who, in case of deviating from these recommendations, will have to explain to NRAs and ACER the reasons why they deviate.

5. Regarding the decision-making competences of RCCs both the Coun- cil and the European Parliament coincide in their preference for limiting the discretion of individual TSOs to deviate from the actions proposed by RCCs as regards coordinated capacity calculation and coordinated security analysis. Such discretion is limited to reasons of operational security. For these two tasks, RCCs will have the competence to issue ‘coordinated actions’. For the remaining tasks, RCCs will have the competence to issue ‘recommendations’ to the TSOs of the region. TSOs may deviate from the recommendations issued by RCCs for reasons that go beyond operational security, e.g., economic, efficiency reasons. As regards the deviations from coordinated actions and recommendations, TSOs will need to communicate this to the RCCs and other TSOs as soon as possible and justify this decision.

6. Last, NRAs and ACER will exercise direct oversight over RCCs. The Co-Legislators have agreed that the enforcement against such RCC remains with NRAs but that ACER should have an advisory and arbitration role as regards national enforcement. NRAs will be able to adopt joint decisions regarding the non-compliance of RCCs with their obligations under EU law and take appropriate actions. ACER will have the competence to issue opinions and recommendations regarding the non- compliance of RCCs with their obligations, at the request of NRAs or on

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its own initiative. Where ACER identifies such a case of non-compliance, the concerned NRAs will take coordinated actions to establish whether there is a breach of obligations and, where applicable, determine the measures to be taken by RCCs to remedy such breach. Where NRAs fail to take such joint decisions, the matter will be referred to ACER for a decision.

4. The way forward: key questions yet to be addressed

In the wider context of creation of a single energy market, the regional approach is a process that started early on, with the adoption of the First Electricity Directive. It has evolved beyond the facilitation of commercial cross-border exchanges to cover also other aspects that are fundamental to electricity market integration, such as the operation of the electricity system and security of supply issues. So far, the regional approach has been very beneficial and it is widely perceived as necessary tool for the full integration of the European energy market. Against this background, the Clean Energy Package further relies on regionalisation and regional cooperation to facilitate the integration of the electricity markets and electricity systems.

The regional approach helps reflect the reality of integration of electricity markets in instances where the most appropriate geographical scope may neither be bilateral or European-wide. Moreover, the regional approach allows Member States, NRAs and stakeholders to consider important regional and local characteristics, to exploit the regions’ opportunities and to address specific challenges and objectives with tailor-made solutions.

Looking beyond the framework set out in the Clean Energy Package, as regionalisation and regional cooperation become increasingly widespread it will be necessary to reflect further on certain questions.

In the first instance, it will be necessary to consider which aspects/areas should merit being part of the regional dimension and to which end. For some areas (e.g., integration of day-ahead and intraday markets across the EU), the need for an EU-wide target model is clear. For other areas (e.g., regional TSO cooperation, regional security of supply), there might be merit in considering that the regional approach should be the target model. In both instances, regionalisation and regional cooperation should never become barriers to market integration and EU wide cooperation.

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It will also be necessary to consider the interplay between regional cooperation at technical level and regional cooperation at political level. Recently, this question has been raised in the context of the negotiations of the Clean Energy Package. ENTSO-E considers that a wider regional cooperation at political level is necessary to provide a stable and reliable framework and to keep pace with the developments of the clean energy transition.33 For this purpose, ENTSO-E suggested the creation of ‘regional energy fora’ which would encompass TSOs, NRAs and Member States in order to provide political guidance and commitment regarding cross-border electricity markets, common grid planning, cross-border cooperation of system operations and ensuring security of supply. As a first step, in the Electricity Regulation, the Co-Legislators have agreed to require RCCs to consult Member States or their regional fora, where they exist, on matters of political relevance. The coming years will provide more clarity as to whether a consultation obligation of existing regional fora will suffice as a means for obtaining ‘political guidance’ or whether it will be necessary to set out a more detailed framework for the organisation and functioning of these fora. As described above, a number of Member State fora exist currently, but they have grown organically, do not span across the EU and do not necessarily have the same geographic coverage that RCCs will have.

Related to this question is also the matter of the geographic scope and sphere of regional cooperation. Regional cooperation has been primarily established to address specific opportunities and challenges such as implementing electricity market coupling or addressing insufficient interconnection capacity. The geographical scope of regional cooperation so far has varied depending on the matter at stake comprising only the Member States directly concerned. A future consideration to be made is whether those parallel regional thematic platforms can converge to avoid an abundance of overlapping cooperation frameworks and the administrative burden that they may entail. The ‘regional energy fora’ could contribute to achieving such convergence. However, the same framework may not be suitable for all kinds of cooperation.

A final reflection to be made relates to the governance of the regional framework. The responsibility for progress in regional cooperation, depending on the topic, lies mainly with Member States, NRAs and TSOs. In some instances, as in the case of electricity network codes and guidelines, the governance is specified (e.g., qualified majority voting or unanimity by TSOs, decision-making by NRAs, what happens if NRAs do not agree unanimously, etc.). In other cases,

33 Power regions for the Energy Union: regional energy forums as the way ahead, ENTSO-E policy paper, October 2017.

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the governance for cooperation at regional level is not provided for and it is up to the Member States to set out that structure. The Commission fulfils an important role by providing political steering, transparency and ensuring that progress in one region serves as a model for other regions.

All in all with the recent Clean Energy Package a bold move towards more regional cooperation between TSOs has been achieved. However, this is only one of the necessary stepping stones towards an integrated European Single Electricity Market based on fully converged regional markets. The evolution therefore is not over but has just entered into a final decisive phase.

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Part 2 – Chapter 11 – The ACER Experience

CHAPTER 11 THE ACER EXPERIENCE

Alberto Pototschnig

1. An Agency from scratch: the establishment of the Agency and its purpose

The Agency for the Cooperation of Energy Regulators (the ‘Agency’) was established by Regulation (EC) No 713/20091 (the ‘Agency Regulation’), as part of the institutional framework defined by the Third Energy Package.2 Its purpose was defined3 as to assist national regulatory authorities for energy (‘NRAs’) in performing their regulatory tasks at European Union (EU) level and to coordinate their action where necessary. In this way, the Agency was meant to fill the regulatory gap on cross-border issues that was emerging while creating an Internal Energy Market (‘IEM’), in the face of NRAs mainly having national powers and competences.

1 Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators. 2 The Third Energy Package includes: Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC; Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC; Regula- tion (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators; Regulation (EC) No 714/2009 of the European Parlia- ment and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003; and Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005. 3 In Article 1(2) of Regulation (EC) No 713/2009.

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The need for a new framework for regulatory cooperation was – and still is – most obvious with respect to wholesale markets and the so-called horizontal networks.4 In fact, wholesale markets are being integrated beyond national bor- ders5 and it is undisputable that such a development can hardly be supported and overseen, in an efficient and effective way, by NRAs cooperating on a purely voluntary basis. The same considerations apply to the development of the Euro- pean energy networks. Therefore, for the effective EU-wide integration of -en ergy markets and energy networks, a more efficient regulatory framework, than what could be achieved by the voluntary cooperation of NRAs, was needed, a purpose for which the Agency was established. Instead, despite some ambitions in the 1990’s to create a EU-wide retail market, markets for the supply of energy to final consumers are still very much national in scope, as they have to deal with consumers’ attitude which responds to different legacies and cultural differences. Therefore, while all efforts should be made to liberalise national retail markets and ensure non-discriminatory access by competing suppliers, the enforcement of retail market provisions and consumer protection are national in nature and this is why limited competences – mainly in monitoring – were assigned to the Agency in this area.

While the Agency was established as a vehicle for enhanced cooperation among NRAs, over time, its role vis-à-vis NRAs has evolved and, for example in the implementation of Regulation (EU) No 1227/2011 (‘REMIT’),6 the relationship between the Agency’s and NRAs’ roles has taken a different form. This and other aspects of the Agency’s activities which were added to its initial mandate were recognised in the recast of the Agency Regulation following the “Clean Energy for All Europeans” Package legislative proposals, where it is specified that “[t]he Agency shall also contribute to the establishment of high-quality common regulatory and supervisory practices, thus contributing to the consistent, efficient and effective application of Union legal acts in order to achieve the Union’s climate and energy goals”.7

4 These are the high-voltage electricity network and the high-pressure gas network, which support cross- border exchanges in electricity and gas, respectively, as opposed to the “vertical networks” which are mainly intended to deliver electricity and gas to final consumers through the distribution grids. The distinction between horizontal and vertical networks is not codified and it is mainly conceptual. 5 In 2018, the ‘Price Coupling of Regions’ (PCR) market coupling project, which started as a voluntary initia-initiative in 2009 (with the PCR Agreement signed in 2012) and which has become the backbone of the Single Day-ahead market Coupling (SDAC) as stipulated in Commission Regulation (EU) No 2015/1222 of 24 July 2015 establishing a guideline on capacity allocation and congestion management, covered 19 jurisdictions (18 Member States and Norway). The other market coupling initiative, the 4M MC, covers 4 Member States. 6 Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency. 7 Article 1(2), second sentence, of the Agency Regulation as modified in the recast.

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In this respect, the Agency is quite unique among the many decentralised EU agencies. In fact, it is one of the few regulatory agencies (as opposed to operational or licencing agencies). The European Banking Authority (EBA), the Euro- pean Insurance and Occupational Pensions Authority (EIOPA), the European Securities and Markets Authority (ESMA) and the Body of European Regula- tors for Electronic Communications (BEREC) are probably the most similar agencies, also with regulatory responsibilities. However, in all these agencies, regulatory decision-making is mostly in the hands of national regulators, while in the Agency it is mostly vested in the Director, with national regulators providing guidance and exercising control (see Section 3).

This uniqueness of the Agency is what attracted me to apply for this job. In the previous twenty years, I had worked mostly on energy sector regulation and market design issues, as a consultant in London and Madrid, serving in the Ital- ian NRA eventually as Director of electricity regulation, as the first CEO of the Italian Market Operator and in the Italian Transmission System Operator (‘TSO’). My interest for the post of Director in the newly established Agency was therefore obvious, as a natural next step in my professional career. I now feel privileged of having had the opportunity to serve as the Agency’s first Director, an extremely interesting and rewarding position, as under the current legislative framework the Director is able to shape the vision and the work of the Agency, set its standards and, through the activities of the Agency, have an influential role in the development of energy sector regulation and market design.

This chapter presents the main activities of the Agency over its first eight years. I also provide some personal remarks on its achievements and challenges. Overall, I believe that this period has been a successful one, not only for the Agency, but also for the EU energy market. What the Agency has achieved so far could have not been possible without the professionalism, enthusiasm and dedication of my colleagues, to whom I am extremely grateful. Needless to say, I take sole and full responsibility for any instance in which the Agency failed to deliver or to meet stakeholders’ expectations.

At the end of the chapter, I also provide an outlook of how the recast of the Agency Regulation will shape the future role and functioning of the Agency. This chapter has been written after the political agreement between the co-Leg- islators on the recast of the Agency Regulation, but before the formal adoption of the new text8 and its implementation. Therefore, it is too early to determine

8 Therefore, unless indicated otherwise, any reference to provisions in the Agency Regulation relate to the text before its recast following the “Clean Energy for All Europeans” Package legislative proposals.

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what some of the modified provisions will mean in practice for the functioning of the Agency.

2. Shaping the Internal Energy Market: the Agency’s tasks and responsibilities under the Third Energy Package and the Infrastructure Package

One of the main roles assigned to the Agency by the Third Energy Package, and which kept the Agency busy in its first years, was to contribute to the development of Framework Guidelines and Network Codes. Network Codes contain the market and system rules directly applicable across the EU, while the Frame- work Guidelines provide the principles and criteria for the development of Net- work Codes.

While the Network Codes are formally adopted by the Commission following the so-called Comitology process,9 the draft is recommended for adoption by the Agency following an interactive process, involving the Commission, the Agency and the relevant European Network of Transmission System Opera- tors (ENTSO), i.e. the European Network of Transmission System Operators for electricity (ENTSO-E) or the European Network of Transmission System Operators for gas (ENTSOG), depending on the sector to which the Network Code will apply. In particular, this process starts with the Commission defining the areas where Network Codes need to be developed. On this basis the Agency, for each of these areas, produces and submits to the Commission a Framework Guideline. If the Commission finds the Framework Guideline submitted by the Agency adequate to contribute to “non-discrimination, effective competition and the efficient functioning of the market”,10 it requests the relevant ENTSO to draft and submit to the Agency the corresponding Network Code(s).11 Finally, the Agency assesses each submitted Network Code against the principles and criteria specified in the Framework Guideline and, in case of a positive outcome of such an assessment, recommends the Network Code to the Commission for adoption. Otherwise,12 the Agency issues an opinion to the relevant ENTSO,

9 This is the process which is followed when the Commission has been granted implementing powers in the text of a law. The same law also stipulates that the Commission is to be assisted by a committee when defining the measures contained in the implementing act. In the Third Energy Package, such provision is contained in Article 46 of Directive 2009/72/EC and Article 51 of Directive 2009/73/EC. 10 Article 6(4) of Regulation (EC) No 714/2009 and Article 6(4) of Regulation (EC) No 715/2009. 11 As it turned out, a Framework Guideline can result in the development of more than one Network Code, as it was the case in the electricity sector with the Framework Guideline on capacity allocation and congestion management and the Framework Guideline on system operation. 12 In reality, an opinion is also issued in the case in which the Network Code is directly recommended to the

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indicating those changes in the draft Network Code necessary to bring it in line with the principles and criteria specified in the Framework Guideline. In this case, the ENTSO has the possibility of resubmitting an amended draft of the Network Code, which is assessed again by the Agency and, if deemed compliant with the Framework Guideline, recommended to the Commission for adoption. If the ENTSO does not resubmit an amended draft Network Code, or if the resubmitted version is still deemed incompliant with the Framework Guide- line, the Agency, by established praxis,13 recommends the Network Code to the Commission for adoption, with the necessary modifications.14 Figure 11.1 sum- marises this process.

Figure 11.1. Outline of the process for the development of Network Codes.

Commission for adoption, even though with a much lighter content. 13 In reality, neither Regulation (EC) No 714/2009, for electricity, nor Regulation (EC) No 715/2009, for gas, contains specific provisions covering this situation. Therefore, in order to avoid an endless loop between the relevant ENTSO resubmitting incompliant drafts and the Agency issuing opinions indicating the necessary changes, a praxis was established such that, if the resubmitted Network Code were still not in line with the principles and criteria defined in the Framework Guideline, the Agency would directly proceed with recom- mending it to the Commission for adoption, albeit with the necessary modification. The Agency proceeds in the same way when the relevant ENTSO does not resubmit an amended draft, following an Agency’s opinion indicating the required changes. The recast of the Agency Regulation streamlines the process for the development of electricity Network Codes, by allowing the Agency directly to propose a Network Code for adoption to the Commission, with the necessary amendments, without having first to issue an opinion to ENTSO-E (see Section 7). 14 In this case, the recommendation provided by the Agency is generally referred as a “Qualifi“Qualified ed Recommenda-Recommenda- tion”.

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In 2011, the Commission identified eight priority areas for the development of Network Codes, four in electricity and four in gas.15 Between 2011 and 2013, after widely consulting stakeholders, the Agency prepared and submitted to the Commission a Framework Guideline for each of the eight areas.

Table 11.1 presents statistics regarding the subsequent process, indicating in how many cases the draft Network Code developed by the relevant ENTSO was recommended by the Agency to the Commission for adoption without any modification, how often the need for changes were indicated in the Agency’s opinion, whether the relevant ENTSO resubmitted a revised draft of the Net- work Code and whether the latter was compliant. Overall, apart from the eight Framework Guidelines, the Agency issued 27 opinions and recommendations related to the Network Codes. This provides an indication of the demand on the Agency already in its first years.16

The Network Codes were intended to define the detailed rules for the functioning of the electricity and gas systems and markets. However, in the case of electricity, it proved impossible to define the very detailed rules in the Network Codes – and, given their highly technical nature, it would have been also difficult to have them adopted through the Comitology process. Therefore, it was decided that these very detailed rules would be defined at a later stage, through so-called “terms and conditions or methodologies” (TCMs).17 When this happened, the corresponding Network Code took the form of a (Commission) Guideline.18

The Network Codes and the (Commission) Guidelines have, as intended, defined a consistent set of rules for the IEM. It has then been necessary to assess whether these rules have been properly implemented and have had the intended effects and delivered the benefits – ultimately to energy consumers – which are the final objective of the whole market integration project.

15 Capacity allocation and congestion management, network connection, system operation, and balancing in electricity; capacity allocation, interoperability and data exchange, balancing, and harmonised transmission tariff structures in gas. 16 Two consultation documents – on the Framework Guideline on Capacity Allocation Mechanisms for the European Gas Transmission Network and on the Framework Guideline on Electricity Grid Connections - were published on the same day the Agency formally opened, on 3 March 2011. This was possible thanks to the substantial support provided by NRAs through the Agency’s Working Groups, which have remained an important characteristic of the modus operandi of the Agency to these days. 17 Please refer to Section 6 for more information on the TCMs and the Agency’s involvement in their defidefini ni-- tion. 18 In fact, the legal analysis of the implication of detailed rules being defined through terms and conditions or methodologies took more than a year, thus delaying the adoption of the first Commission Guideline, on capacity allocation and congestion management.

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Electricity Gas Framework Guidelines adopted by the Agency 4 4 Network Codes developed by ENTSO-E/ENTSOG and sub- 10 4 mitted to the Agency Network Codes recommended by the Agency to the Commis- 4 0 sion for adoption (as initially submitted by ENTSO-E/ENTSOG) DCC, HVDC, LFCR, ERP Network Codes for which the Agency’s opinion indicated the 6 4 need for modifications Network Codes resubmitted by ENTSO-E/ENTSOG 5 4 Resubmitted Network Codes recommended by the Agency to 0 2 the Commission without further modifications Resubmitted Network Codes recommended by the Agency to 5 2 the Commission with further modifications Network Codes not resubmitted by ENTSO-E/ENTSOG and 1 recommended by the Agency to the Commission with modifications Total number of opinions on Network Codes adopted by the 10 4 Agency Total number of recommendations on Network Codes 10 3* adopted by the Agency

* The Agency was not able to deliver its Recommendation on the Network Code on harmonised transmission tariff structures for gas, as the draft prepared by the Director did not receive the required favourable opinion by the Board of Regulators (see also footnote 53).

Table 11.1. The Network Code development process in practice.

Therefore, beyond contributing to the development of the Network Codes and Guidelines, the Third Energy Package also tasked the Agency with monitoring the internal electricity and gas markets and, in particular, “the retail prices of electricity and natural gas, access to the network including access of electricity produced from renewable energy sources, and compliance with the consumer rights laid down in Directive 2009/72/EC and Directive 2009/73/EC”.19 The Agency has interpreted this mandate in an extensive manner and has extended the scope of its monitoring activities to other important market integration areas, well beyond those specifically indicated in the legislation. For example, the Agency regularly assesses the welfare gains delivered to EU energy consumers by market integration, but also the level of electricity cross-border capacity made available to the market and the efficiency of its use, or the performance of gas markets against the Gas Target Model20 metrics. As part of its monitoring

19 Article 11(1) of the Agency Regulation. 20 ThThe e Gas Target Model (GTM) was initially developed by CEER – the Council of European Energy Regula-Regula- tors. An updated version was published by the Agency in January 2015. The updated GTM defines 4 market

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toolbox, the Agency in 2015 developed a new indicator of the degree of competition in retail energy markets (‘ARCI – ACER Retail Competition Index’), which it has used to score the relative performance of national retail energy markets in the different Member States.21 The results of the monitoring performed by the Agency have been presented, since 2012, in annual Market Monitoring Reports (‘MMRs’), which have become authoritative reference documents on energy market developments in Europe. The monitoring results contained in the MMR are also typically presented to the Committee on Industry, Research and Energy of the European Parliament and were used by the Commission for its Impact Assessment for the “Clean Energy for all Europeans” Package. Since 2017, the Market Monitoring Report also covers, for some aspects (mostly related to the wholesale gas market and the retail markets) the Contracting Parties of the Energy Community.22

The third main area of activity of the Agency under the Third Energy Package relates to energy network development planning. This is also the area where the mandate of the Agency was extended by Regulation (EU) No 347/201323 (the ‘TEN-E Regulation’). The Third Energy Package tasked the Agency with providing opinions on the EU-wide Ten-Year Network Development Plans (TYN- DPs) prepared by the ENTSOs and on the consistency on the National De- velopment Plans with the TYNDPs. With the introduction of the designation of Projects of Common Interest (PCIs) for those infrastructure projects which have a beneficial cross-border impact and address the EU energy and climate policy goals in one of the eight priority corridors and in other thematic areas,24 the TEN-E Regulation calls on the Agency to contribute to the identification of (electricity, gas and smart grid) PCIs and to support and monitor their implementation. In particular, the Agency is required to provide an opinion on the draft regional PCI lists – and specifically on the consistent application of the selection criteria and the cost-benefit analysis across regions –, as well as on the methodologies, including on network and market modelling, for a har-

participants’ needs metrics and 5 ‘market heath’ metrics. The updated GTM is available at: https://www. acer.europa.eu/Events/Presentation-of-ACER-Gas-Target-Model-/Documents/European%20Gas%20Tar- get%20Model%20Review%20and%20Update.pdf. 21 However, the ARCI analysis and the publication of its results in the MMR were discontinued in 2017, due to the Agency’s resource limitations. 22 The data for the Contracting Parties of the Energy Community is collected and analysed with the support of the Energy Community Secretariat. 23 Regulation (EU) No 347/2013 of the European Parliament and of the Council of 17 April 2013 on guide-guidelines for trans-European energy infrastructure and repealing Decision No 1364/2006/EC and amending Regulations (EC) No 713/2009, (EC) No 714/2009 and (EC) No 715/2009. 24 Four electricity priority corridors and four gas priority corridors. Moreover, the TEN-E Regulation also identifies one oil priority corridor and three additional thematic areas: smart grids developments, electricity highways and cross-border carbon dioxide networks.

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monised energy system-wides cost-benefit analysis at EU level for electricity and gas PCIs. The Agency is also responsible for adopting decisions on cross-border cost allocation (CBCA) for PCIs, following investment requests submitted by the project promoters, when NRAs fail to agree or upon their joint request. This surrogate role of the Agency vis-à-vis NRAs, in case they fail to agree, was already envisaged in the Third Energy Package for decisions on access to and operational security of cross-border interconnectors and on exemptions. However, while the Agency was called to adopt two CBCA decisions already in 2014 and 2015,25 the first exemption request was referred to the Agency only at the end of 2017.26

Apart from these main areas, the Third Energy Package also required the Agen- cy to formulate opinions on many documents produced by the ENTSOs, such as Work Programmes and Annual Reports.27 Finally, it assigned the Agency a potentially important role as a technical adviser to the EU Institutions, with the possibility of issuing opinions, which was however used only once so far, by the European Parliament.28

3. REMIT: venturing into uncharted waters

With the increasing integration of wholesale energy markets and the consequential growth of cross-border trading, the issue emerged of ensuring integrity and transparency of these markets. Transparency shall be understood as the availability of the same price-relevant information to all market participant in a timely, effective and non-discriminatory way. Therefore, transparency gives confidence to all market participants that they trade on the basis of the same information set. In turn, integrity requires that market abusive behaviour be prevented. In this way, integrity of energy markets gives confidence to consumers that the prices they pay for energy reflect the fair interplay of demand and supply and, more generally, market fundamentals.

25 In the period 2014 – 2017, 29 CBCA requests, 10 related to electricity PCIs and 19 related to gas PCIs, were submitted to NRAs. Decisions on 27 of these requests were adopted by the concerned NRAs, while two requests were referred to the Agency for decision. Despite the fact that, through the CBCA decisions, the TEN-E Regulation provides the possibility to allocate the cost of a PCI beyond the Member States in which the project is geographically located, if its benefits reach more widely, in only four cases, related to gas PCIs, non-hosting Member States were allocated a share of the project costs. 26 See Section 6. 27 With the recast of the Agency Regulation, such an obligation has become, for many documents, only an opportunity, which the Agency will use when it has relevant comments to make on these documents. 28 On 14 November 2012, the Chair of the Committee on Industry, Research and Energy of the European Parliament requested the Agency to provide its opinion on Capacity Markets, which the Agency provided on 15 February 2013.

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The concerns about transparency and integrity of trading activity is not specific to the energy markets. Similar concerns have existed (and still exist), for example, in financial markets and have been addressed by several waves of legislation.29 What is specific of energy markets is the physical dimension,30 which might make market manipulation easier. Such specificities have called for a tailor-made approach to market surveillance. This is what REMIT aims to provide. For the first time, REMIT introduced specific obligations and prohibitions in relation to trading in wholesale energy products for delivery in the EU. It pro- hibits market abuse in the forms of market manipulation, attempted market manipulation and insider trading. At the same time, it requires the disclosure of inside information and defines strict criteria for when such a disclosure can be delayed. It also requires the so-called Persons Professionally Arranging Transac- tions (PPATs) – i.e. power and gas exchanges, brokers and the likes – to “establish and maintain effective arrangements and procedures to identify breaches”31 of the REMIT prohibitions of insider trading and market manipulation. Finally, it introduced an obligation for market participants to report to the Agency all trades and orders to trade in wholesale energy products for delivery in the EU. Such reporting can be done directly, or through Registered Reporting Mecha- nisms (RRM - third parties reporting on behalf of market participants).

Such a reporting provides the basis for the EU-wide market surveillance of wholesale energy markets which the Agency has been tasked with. In particular, REMIT recognises that “[e]fficient market monitoring at Union level is vital for detecting and deterring market abuse on wholesale energy markets” and that “[t]he Agency […] is best placed to carry out such monitoring as it has both a Union-wide view of electricity and gas markets, and the necessary expertise in the operation of electricity and gas markets and systems in the Union”.32 Therefore, REMIT requires the Agency to “monitor trading activity in wholesale energy products to detect and prevent trading based on inside information and market manipulation”. Energy market surveillance, covering an area as large as the EU and based on individual transaction (and order-to-trade) reporting was, and is still, unprecedented, not only in Europe, but also worldwide. The number of transactions and orders to trade reported to the Agency has steadily increased

29 For example, Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (Market Abuse Directive – MAD), replaced by Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation – MAR). MAR aims at enhancing market integrity and investor protection. To this end MAR updates and strengthened the existing MAD framework by extending its scope to new markets and trading strategies and by introducing new requirements. 30 Electricity and gas, once traded, are delivered over networks which are subject to physical limitations. 31 Article 15 of REMIT. 32 Recital (17) of REMIT.

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over time. When the reporting obligations first applied in October 2015, the Agency received on average just over one million records per day. This number reached 2 million at the beginning of 2018 and exceeded 3 million at the end of the year.33 Despite this sharp increase, the number of records of transactions and orders to trade received by the Agency is only a fraction of the number of financial transactions executed in Europe and reported to ESMA under the new Markets in Financial Instruments Directive and the Markets in Financial Instru- ments Regulation. However, as indicated above, energy markets are characterised by greater complexity, given their physical dimension. Moreover, ESMA is not responsible for monitoring financial markets, a task which, in the financial sector, is left to national financial conduct authorities. In the energy sector, under REMIT, NRAs are responsible for investigation and enforcement in relation to possible breaches of REMIT, and may also be given the mandate to monitor trading in their national markets, but this is without prejudice to the Agency’s obligation to monitor energy trading EU-wide.

To meet this obligation, the Agency has adopted a two-stage approach. It first automatically screens all reported transactions and orders to trade, in combination with fundamental data provided by TSOs and other system operators on the state of the physical energy system, to identify anomalous instances, i.e. instances that appear unusual. Such automatic screening is conducted with the use of a purposely-customised surveillance platform. The Agency then performs an initial assessment and analysis to identify for which anomalous instances there are grounds to suspect that a breach of REMIT has occurred. These “suspicious” instances are then notified to NRAs for investigation and, where appropriate, enforcement.

The transaction reporting obligations under REMIT entered into force only in late 2015-early 201634 and therefore 2017 was the first full year in which the Agency could directly monitor EU wholesale energy markets. At the end of the year, after significant effort by the Agency, the quality of the data reported reached a level that allowed the Agency effectively to use its surveillance platform, even though still on a subset of the EU wholesale energy market, due to resource limitations. As a result, the Agency was able, at the beginning of 2018, to start notifying suspicious instances to NRAs, at a rate of 50-80 per month.

33 Part of the increase in the number of records of transactions and orders to trade occurred during 2018 was due to the go-live of the ‘XBID’ cross-border intraday market integration project in June. 34 Following the entry into force of the REMIT Implementing Regulation - Commission Implementing Regu-Regu- lation (EU) No 1348/2014 of 17 December 2014 on data reporting implementing Article 8(2) and Article 8(6) of Regulation (EU) No 1227/2011 of the European Parliament and of the Council on wholesale energy market integrity and transparency - on 7 January 2015.

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Such notifications are based on six “alerts”, i.e. types of abusive behaviour that the surveillance platform looks for, and the subsequent assessment by the six market analysts currently employed by the Agency. The Agency has come to the view that effective market monitoring would require the deployment of approx. 20 alerts; the additional alerts will be developed as soon as resources permit. It is to be hoped that, by that time, the Agency will also have a sufficient number of market analysts to assess the anomalous instances detected by the surveillance platform on the basis of the full set of alerts.

Even before the activation of automatic screening on the reported data, the Agency received notifications of suspicious events from other stakeholders – NRAs, PPATs and market participants – or identified itself such instances through other sources. Over the years, the number of “open” suspicious cases increased significantly. This is partly physiological: as a case can take several months or years to be fully investigated, one would expect that, in the initial implementation period, there are more new cases than cases which, having been fully assessed, can be closed. However, the increasing number of open cases also reflects the great scarcity of resources with which NRAs and the Agency are forced to implement REMIT (see more on this in Section 5).

Table 11.2 shows the number of cases opened and closed each year over the period 2012 to 2017. It also shows, as a result, the number of cases still under review at the end of each year.

Year Number of cases Number of cases Number of cases opened during closed during the year still under review the year at year-end 2012 10 7 3 2013 12 3 12 2014 33 14 31 2015 33 11 53 2016 48 24 77 2017 85 24 138

Table 11.2. Number of REMIT cases opened, closed and under review.

Figure 11.2 presents the relative importance of the different types of breaches of REMIT in the cases opened over the period 2013 to 2017. The largest shares of cases have been related to potential breaches of the prohibitions of market manipulation and of insider trading. Potential breaches of the obligations to publish inside information, which represented a sizeable share of the cases opened in

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the period 2013 to 2015, have since become less frequent, as market participants have improved their publication practice, even though the issue remains of the establishment of a EU-wide platform for the publication of inside information.

Figure 11.2. Composition of the opened REMIT cases, by type of breach

The implementation of REMIT proved to be extremely challenging, for the Agency, for NRAs and for market participants. Yet, for my colleagues and me, it has also been a fascinating experience. As already mentioned above, some of its features were unprecedented worldwide and therefore there was no direct experience to refer to. Back in 2012, soon after REMIT was adopted, more than a few stakeholders did not believe that the Agency, still in its early years, would have been capable to put in place the new market surveillance framework. This challenge provided us with an additional stimulus. From the very beginning, we were able to enjoy the support and cooperation of the US Federal Energy Regulatory Commission (FERC), which, while not yet collecting individual transaction data on a regular basis as required under REMIT, had significant experience in energy market surveillance and was able to share useful insights with us. Later on, especially when it became clear that REMIT was indeed going to be properly implemented, we enjoyed the constructive engagement of an increasing number of stakeholders, market participants in primis, something which tremendously helped us in the final stage before go-live.

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4. A unique governance: four bodies and decision-making

4.1 The Agency’s four bodies

The Agency comprises four formal bodies - the Administrative Board, the Board of Regulators, the Board of Appeal and the Director – with clearly different roles and responsibilities.

The Administrative Board is composed of nine members and their respective alternates. Two members and their alternates are appointed by the European Parliament, five members and their alternates by the Council and the remaining two members and their alternates by the European Commission. Each member and alternate is appointed for a period of four years. The terms of office of the members and alternates are defined in such a way that half of the Board is up for reappointment every two years.35

As its name clearly suggests, the Administrative Board has mostly an administrative role, while it is not involved in the regulatory activities of the Agency. In particular, the main responsibilities of the Administrative Board include: a. ensuring that the Agency carries out its mission and performs its tasks in accordance with the Agency Regulation and any other relevant provision; b. formally appointing the members of the Board of Regulators and of the Board of Appeal, and the Director; c. adopting the Agency’s Annual Work Programme and Multi-annual Pro- gramme, now combined into a single Programming Document, as well as the Agency’s Annual Activity Report; d. providing an estimate of the revenue and expenditure required to deliver the activities envisaged in the Work Programme and adopting the budget of the Agency on the basis of the subsidy provided to it in the EU Budget and any other sources of revenues;36 and

35 For the first mandate, half of the members and alternates were appointed for a period of six years, so as to introduce the staggering in the terms of office of the Board members and alternates. 36 Even though the Agency Regulation envisages the possibility for the Agency to collect fees in respect of its exemption decision, and the possibility of raising fees was extended to CBCA decisions by the TEN-E Regulation, in both cases this is subject to the European Commission adopting implementing provisions, which has so far not happened. Therefore, until now, the Agency has been fully funded from the EU Budget.

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e. drawing up the Agency’s implementing rules for giving effect to the Staff Regulations.

The Board of Regulators comprises a senior representative of the NRA in each of the Member States, and their respective alternates, as well as a non-voting representative from the European Commission. National regulatory authorities from third countries could participate in the Board of Regulators’ meetings as observer, if the third country has adopted and is applying EU law in the field of energy and, if relevant, in the fields of environment and competition.37 The Commission is responsible for assessing the fulfilment of these conditions and, so far, no third country’s national regulatory authority has been granted access, as observer, to the Board of Regulators’ meetings.38

The main role of the Board of Regulators is to scrutinise many of the acts to be issued by the Agency as part of its regulatory activity, through the provision of a formal opinion on the Director’s proposal.39 The Board of Regulators can also provide guidance to the Director within the field of the Board’s competence and is consulted by the Director on all aspects of REMIT implementation. Finally, the Board of Regulators approves the Agency’s Work Programme, which is then presented to the Administrative Board for adoption, and the independent section – on regulatory activities – of the Agency’s Annual Activity Report.

The Director is responsible for the day-to-day management of the Agency, including the selection and appointment of staff,40 for drafting the Work Pro- gramme, the Budget and the Annual Activity Report of the Agency, for implementing the Budget and the Work Programme, and for drafting, adopting and publishing the acts of the Agency. With respect to these acts, the regulatory decision-making process in the Agency envisages a varied interaction between the Director and the Board of Regulators, as illustrated further below.

37 According to Article 31 of the Agency Regulation. 38 A different regime has applied to participation in the Agency’s Working Groups, which support the work of the Director and of the Agency’s Departments, as well as providing input to the Board of Regulators. In this case, participation, as observers, is granted by the Director to the national regulatory authorities from third countries which are making good progress towards meeting the requirements of Article 31 of the Agency Regulation and are expected to meet them within the following six-twelve months. On this basis, the national regulatory authorities of Norway, Switzerland and Montenegro are currently allowed to participate, as observers, in some or all of the Agency’s Working Groups. The recast of the Agency Regulation has given formal status to the Working Groups, albeit not making them formal bodies of the Agency. It remains to be seen what this implies for the participation of national regulatory authorities from third countries. 39 See Table 11.4 for details of the acts which require a formal favourable opinion by the Board of Regulators before they can be adopted by the Director. 40 According to the recast of the Agency Regulation, the Director will be delegated by the Administrative Board to appoint the Agency’s staff.

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The Board of Appeal is composed of six members and six alternates. It rules on appeals lodged against individual decisions of the Agency. In deciding on these appeals, the Board of Appeal may remit the case to the competent body of the Agency or it may exercise any power which lies within the competence of the Agency. In this latter case, it can even replace the whole process of interaction between the Director and the Board of Regulators required for many of the regulatory acts of the Agency.41 Over the period to the end of 2018, the Board of Appeal decided on three appeals, ruling one as inadmissible and dismissing the other two.

Decision-making in the collegial bodies of the Agency is generally based on a two-third majority.42

4.2 Decision-making in the Agency

Decision-making for the formal acts of the Agency has different requirements according to the type of the act and the area concerned, but in general it is unique in the agencies’ landscape, as it gives a stronger weight to the EU perspective through the role of the Director. In fact, all acts of the Agency – as well as the other deliverables – are formally prepared by the Director. In reality, preparation is carried out in the Agency’s Departments and in the Agency’s Working Groups, involving experts from NRAs, under the guidance of the Di- rector. Then depending of the type of act, the Director is able to proceed with the adoption of the act without any additional formality, may need to obtain a formal favourable opinion by the Board of Regulators, or may have to consult the Board of Regulators.

Table 11.3 illustrates in detail the involvement of the Board of Regulators in the regulatory decision-making of the Agency. It also shows which decisions of the Agency can be appealed for review by the Board of Appeal.

41 This possibility has been removed by the recast of the Agency Regulation and therefore, in the future, the Board of Appeal will only be able to confirm the decision of the Agency or to remit it to the Agency’s competent body (i.e. the Director). 42 The most notable exception is the opinion of the Board of Regulators to the Administrative Board on the candidate to be appointed as Director, for which a three-quarter majority in the Board of Regulators has been needed. Such an exception has now been removed in the recast of the Agency Regulation.

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Type of act/Activity Legal basis Involvement of Review by the the Board of Board of Appeal Regulators Opinion and Recom- Artt. 5 to 9 of the Formal Opinion No mendations Agency Regulation (non-binding acts) Decisions Artt. 8 and 9 of the Formal Opinion Yes Agency Regulation All aspects of REMIT REMIT Consulted No implementation Opinions on the PCI Point 2(12) of An- Formal Opinion No Regional Lists nex III of the TEN-E (non-binding acts) Regulation Cross-border cost Art. 12(6) of the TEN- No formal involve- Yes allocation Decisions E Regulation ment Other acts/activities No formal involve- No (including the MMR) ment (non-binding acts) Table 11.3. Decision-making in the Agency.

As shown in Table 11.3, for most decisions, opinions and recommendations, the favourable opinion of the Board of Regulators is required before these acts can be adopted. However, in formulating its opinion, the Board of Regulators is not allowed to amend the Director’s proposal: it can only accept the proposal, i.e., grants the favourable opinion, or reject it in its entirety. This “control” function of the Board of Regulators has resulted in a different dynamics in the decision- making process than it would have been the case if the Board of Regulators could intervene to amend the Director’s proposals.

Moreover, for some acts the favourable opinion of the Board of Regulators is not required. This is most notably the case of all acts to be adopted under REMIT and the CBCA decisions under the TEN-E Regulation. In the former case, the role of the Board of Regulators is only a consultative one, and this is justified by the fact that, under REMIT, the Agency and NRAs – represented in the Board – have concurrent responsibilities (rather than the Agency just supporting the cooperation among NRAs). In the case of the CBCA decisions, the Agency acts in an arbitration role between NRAs that have failed to agree, and in this case it clearly makes sense that the Agency be able to decide without having to seek the agreement of NRAs (including the directly involved ones). In this respect, it would seem sensible if the same approach – i.e. the possibility of adopting decisions without the need to obtain the favourable opinion of the Board of Regulators – applied also to the decisions, of a similar arbitration nature, on terms and conditions for access to and operational security of cross-border infrastructure – and in general on regulatory issues having effect on cross-border

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trade or cross-border system security which require a joint decision by at least two NRAs – and on exemptions.43

Another important deliverable where the favourable opinion of the Board of Regulators is not required is the MMR; this allows the Agency greater freedom in analysing developments in the IEM and the implementation of the Network Codes and Guidelines, highlighting the areas of incompliance and/or delay.

In practice, a modus operandi has been established that the most complex or potentially contentious acts are presented by the Director to the Board of Regula- tors well ahead of the stage of the formal opinion, for an orientation discussion. It is in fact in the interest of the Director to understand where the Board of Reg- ulators stands on complex or potentially contentious issues, before preparing the final version of the act or deliverable. Moreover, even where the Board of Regu- lators has no formal involvement, the Director has kept the Board informed of developments, often seeking the Board’s feedback before proceeding with the adoption of the act or deliverable. In order to promote this close working relationship between the Board of Regulators and the Director, well beyond the requirements in the Agency Regulation, the Director has always been invited to attend the meetings of the Board of Regulators.

4.3 Independence and neutrality

Given the regulatory mandate of the Agency, the independence and neutrality of its bodies and of the decision-making process is of paramount importance. Such independence should be ensured not only vis-à-vis industry interests, but also with respect to political interference. The Agency Regulation therefore introduced specific requirements and protections for the “bodies” of the Agency. In particular, it specifies that:

– The members of the Administrative Board shall undertake to act independently and objectively in the public interest, without seeking or following any political instruction.44

43 As envisaged in Articles 8 and 9 of the Agency Regulation. In all these cases, the Agency becomes respon-responsible for deciding if the involved NRAs have failed to agree within a six-month period or upon their joint request. Unfortunately, the recast of the Agency Regulation has not removed the requirement of the Board of Regulators’ favourable opinion for the decisions the Agency adopts in an arbitration role between NRAs. Instead, it added conditions for the transfer to the Agency of decisions on regulatory issues having effect on cross-border trade or cross-border system security, including those on terms and conditions for access to and operational security of cross-border infrastructure. See Section 7. 44 Article 12(7) of the Agency Regulation. The corresponding text in the recast of the Agency Regulation reads: “Without prejudice to the role of the members appointed by the European Commission, the members

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– When carrying out the tasks conferred upon it by the Agency Regulation and without prejudice to its members acting on behalf of their respective regulatory authorities, the Board of Regulators shall act independently and shall neither seek nor follow instructions from any government of a Member State, from the Commission or from another public or private entity.45

– Without prejudice to the respective roles of the Administrative Board and the Board of Regulators in relation to his/her tasks, the Director shall neither seek nor follow any instruction from any government, from the Commission or from any other public or private entity.46 In the recast of the Agency Regulation it is also clarified that “[t]he Director shall be accountable to the Administrative Board on administrative, budgetary and managerial matters, but remain fully independent concerning her or his tasks [related to the Agency’s regulatory activities].

– The members of the Board of Appeal shall undertake to act independently and in the public interest.47 Moreover, members of the Board of Ap- peal shall not take part in any appeal proceeding if they have any personal interest therein, or if they have previously been involved as representatives of one of the parties to the proceedings, or if they participated in the decision under appeal.48

The recast of the Agency Regulation has also clarified that “[w]hen carrying out its tasks, the Agency shall act independently and objectively and in the interest of the Union. The Agency shall take autonomous decisions, independently from private and corporate interests”.49

The Agency has also adopted and maintain very high transparency standards. It makes public, on its own website, the agenda, the background documents and, where appropriate, the minutes of the meetings of the Administrative Board, of the Board of Regulators and of the Board of Appeal,50 as well as the declarations of commitments and the declarations of interests of Administrative

of the Administrative Board shall undertake to act independently and objectively in the interest of the Union as a whole and shall neither seek nor follow instructions from the Union institutions or bodies, from any government of a Member State or from any other public or private body”. 45 Article 14(5) of the Agency Regulation. 46 Article 16(1) of the Agency Regulation. 47 Article 18(7) of the Agency Regulation. 48 Article 18(4) of the Agency Regulation 49 Article 1(3) of the recast of the Agency Regulation. 50 As provided for in Article 10(4) of the Agency Regulation.

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Board’s members. It also publishes the Curriculum Vitae and the declarations of interest of all members of the Board of Regulators, of the Board of Appeal, of the Agency’s management,51 as well as of the Chairs of the Agency Working Groups and of the Conveners of their substructures.

5. The three main challenges: resources, resources and resources

When the Agency was established in 2010 and started its operation in 2011, a staff52 complement of 52 was envisaged.53 This level of resources was adequate for the Agency statutory mandate under the Third Energy Package. The resource issue, which has been the most pervasive problem for the Agency over the last years, started with the adoption of REMIT and the assignment to the Agency of the task of developing and deploying the unprecedented market surveillance framework already described in Section 3. The REMIT Financial Statement authorised the Agency to recruit 9 additional staff members and to receive 6 additional seconded national experts (a total increase of 15 FTEs).54 Moreover, on top of the budget related to this increase in human resources, the Agency was also assigned financial resources of approx. € 1 million for the development of the REMIT IT system. Both the financial and human resources envisaged in the REMIT Financial Statement soon proved to be totally inadequate to support the implementation of the market surveillance framework mandated by REMIT. However, given the unprecedented nature of this project, the Commis- sion should be excused for having so significantly under-estimated the required resources. In fact, the Financial Statement contained other inaccurate estimates: for example, it assumed 200 parties reporting trading data to the Agency. Since the adoption of the REMIT Implementing Regulation55 and the opening of the RRM registration, the Agency has received more than 1,500 applications from aspiring RRMs.

The experience in developing REMIT and the international benchmark with other organisations tasked with similar responsibilities have clarified that the level of resources required effectively to run the market surveillance system mandated by REMIT is much higher than what was envisaged by the EU Legislator for the Agency. In terms of international benchmark, when Norman Bay, the

51 Director and Heads of Department. 52 Here “staff ” is used in a loose sense, to include seconded national experts. See footnote 35. 53 40 temporary agent posts, on top of which 2 contract agents and 10 seconded national experts were envis-envisaged. 54 The new posts were spread over two years, 2012 and 2013. 55 See footnote 24.

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then Chairman of the US Federal Energy Regulatory Commission (FERC), joined the Agency’s delegation for a presentation to the Energy Working Party of the Council of the European Union on 10 September 2015, he indicated that FERC at that time employed 89 staff members for the same activities mandated to the Agency under REMIT.56 At that same time, the Agency was still implementing the REMIT monitoring framework with the 15 FTEs assigned by the Financial Statement. In 2016, perhaps partly also as a result of Chairman Bay’s testimony, the Budgetary Authority authorised 15 additional posts for the Agency, 11 of which were eventually assigned to the implementation of RE- MIT. However, even with an increased complement of 26 FTEs, the Agency’s resources are still less than a third of those that FERC was able, back in 2015, to devote to the same activities. This difference is difficult to justify, also taking into account the comparable size and complexity of the EU and US energy wholesale markets.57 Therefore, since 2014, the Agency has been requesting additional human resources to ensure the effective fulfilment of its mandate, but with limited success. Table 11.4 presents the additional staffing requests submitted by the Agency over the years and the actual allocation of posts.

Agency’s Authorised Comments Authorised Request Posts Posts +SNEs + actual CAs

2011 40 TAs +10SNEs 52

2012 43 TAs 43 TAs 3 additional posts 57 (+3 TAs) (+2SNEs) for REMIT 2013 49 TAs 49 TAs 6 additional posts 72 (+6 TAs) (+4SNEs) for REMIT 2014 98 TAs 54 TAs 5 (8-3*) additional 77 (+49 TAs) posts for the TEN- E Regulation 2015 95 TAs 54 TAs 77 (+41 TAs) 2016 98 TAs 69 TAs 15 additional posts 92 (+44 TAs) (11 for REMIT, 3 for NCs and 1 for Horizontal tasks)

56 In reality, FERC has a much wider remit in wholesale market surveillance, being also responsible for inves-investigation and enforcement. The total number of staff involved at that time in market surveillance was in the order of 200. 57 In fact, the US wholesale energy market is somewhat larger, but in about a third of the States the market is not liberalised and therefore there is no wholesale energy trading.

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2017 102 TAs 68 TAs -1* 91 (+33 TAs)

2018 98 TAs 67 TAs -1* 90 (+30 TAs)

Table 11.4. Agency’s staffing requests and allocations.

One aspect which is worth emphasising is the reduction in staff posts in 2014 (3 posts), 2017 (1 post) and 2018 (1 post), highlighted in Table 11.4 with an asterisk (*), to contribute to the commitment of all EU Institutions and bodies to reduce their staff levels by 5%. The Agency was clearly ready to contribute to this common effort at a time of economic crisis in Europe. However, in the case of the Agency, as for many other similar bodies, the reduction went well beyond the 5% target – in the case of the Agency it reached 10% – as the Com- mission unilaterally58 imposed a higher reduction to cover for the assignment of additional posts to new agencies or to agencies assigned with new tasks. While the Agency welcomes the fact that new tasks are supported by additional staffing – and it itself benefitted, albeit to an insufficient extent, in 2013, 2014 and 2016 – it is questionable that this should be covered by staff reductions in other bodies, mostly operating in unrelated sectors. If the EU Legislator decides that new tasks should be taken on by agencies at EU level, it should also recognise that this requires larger resources.

Apart from persistent staff shortages, the Agency has also been continuously struggling to obtain the necessary financial resources, mostly for the implementation and operation of REMIT. As already indicated, the REMIT Financial Statement envisaged a budget of around € 1 million for the implementation of the IT system to support the new market monitoring framework. Very soon, this budget proved insufficient to cover the actual costs of developing the RE- MIT information system and a further € 2.8 million had to be transferred from the budget of the Directorate-General for Energy of the European Commission to the Agency in October 2013 to allow the Agency to continue in its REMIT implementation activities and to develop ARIS, the Agency REMIT Informa- tion System.59 The same insufficient funding has characterised the REMIT operations. The REMIT Implementing Regulation was adopted in December 2014

58 The European Parliament has consistently criticised the so-called “redeployment pool”, the mechanisms by which posts are cut across all agencies to allow new posts to be assigned to new agencies or agencies being assigned new tasks. 59 ARIS is a composite, purposely-developed IT system for the collection, storage and screening of trade and fundamental data for market surveillance purposes, and for the sharing of these data with NRAs for their monitoring and enforcement activities.

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and reporting to the Agency started in 2015. Since then the Agency is expected to operate a market surveillance system based on ARIS. In the 2013 Commu- nication from the Commission,60 an annual budget of around € 1.5-1.6 million was envisaged for the operation of the REMIT IT system over the period from 2014. As it turned out, the actual operating and maintenance costs are almost twice as high, at € 2.8 million. However, despite evidence to the contrary,61 both the Commission and the Budgetary Authority maintained the funding for the REMIT IT system for 2017 (and 2018) at the level foreseen in the 2013 Com- munication, putting the Agency in the unfortunate position of having to cover the gap by reallocating funds from other activities. This has meant, for example, that the implementation of further aspects of REMIT62 had to be indefinitely postponed63 and since 2017 the retail market coverage of the MMR has had to be significantly reduced.

While it is evident that the EU is now facing more important and urgent priorities to which to devote its budget, integrity and transparency of wholesale energy markets, and, more generally, the completion of a well-functioning IEM are set to deliver significant benefit to consumers.64 In particular, while it is too early to derive reliable statistics regarding energy market abuse in the EU, the longer experience of FERC in this area can provide an indication of the kind of market abuse instances that effective market monitoring might detect and sanction, thus producing a deterrence effect as well. In 2017 FERC concluded a number of investigations, resulting in the disgorgement of profits obtained through market abusive practices in excess of US$ 42 million (approx. € 35 million) and the imposition of penalties in excess of US$ 52 million (approx. € 45 million). Dis-

60 Communication from the Commission to the European Parliament and the Council: Programming of hu-human and financial resources for decentralised agencies 2014-2020 of 10.7.2013 (COM(2013) 519 final). 61 The € 2.8 million figure, initially determined by the Agency, was confirmed by a Limited Review performed by experts from the Directorate-General for Energy of the European Commission in November-December 2016. 62 For example, the collection of derivatives data from “trade repositories” under REMIT and of emission al-allowances data, the publication of aggregated REMIT information for transparency reasons or the provision of sample transaction data to market participants in order for them to verify completeness, accuracy and timeliness of data submission to the Agency. 63 The problem was finally recognised by the Commission in 2018 and in the Draft EU Budget for 2019 an additional € 3.5 million was added, to provide adequate funding for operations in 2019 and to compensate for the underfunding in 2018. 64 For example, in the electricity sector, “market coupling” in the day-ahead timeframe by itself is estimated to have so far delivered benefits to EU energy consumers of approx. € 1 billion per year. The completion of this process, with the extension of market coupling to the remaining borders, is expected to deliver additional benefits at a rate of approx. €250 million per year. In the gas sector, the full and optimal use of the existing transmission capacity, through enhanced capacity allocation and congestion management procedures, is estimated to have delivered benefits to EU gas consumers in the order of € 400 million. These and other estimates of the benefits of energy market integration delivered to EU consumers are presented in the Agency’s MMR.

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gorged profits are typically returned, directly or indirectly, to energy consumers. In the past, high-profile investigations that FERC closed in 2012 and 201365 led to the identification of unjust profits in the order of US$ 370 million (approx. € 320 million) and in penalties exceeding US$ 1 billion (approx. € 850 million). While it is impossible to predict what effective market monitoring – once the Agency is given adequate resources to implement it – might detect in terms of abusive behaviour on EU energy markets, the experience in the US unambigu- ously indicates the high value of this activity for protecting energy consumers, especially when compared with the cost of operating the market-monitoring framework. Investing the EU budget in the operation of the REMIT monitoring system would indeed be an investment with an extraordinarily high return! Beyond the staff and financial limitations of the Agency, a third resource challenge is linked to the location of the Agency. Ljubljana is an enchanting little capital - as it should be clear from Figure 11.3 which appears on the front cover of many Agency’s presentations – with summer swimming, winter skiing and mid-season hiking all within easy reach; but it poses its own challenges.

Figure 11.3. Ljubljana city centre and castle.

Despite the 2010 Seat Agreement containing a commitment of the Slovenian Government to establish a European School in Ljubljana, the School only

65 In 2013, J.P. Morgan Ventures Energy Corporation agreed to pay a civil penalty of US$ 285 million and to disgorge unjust profits of US$ 125 million, while FERC imposed a US$ 453 million civil penalty on Bar- clays Bank PLC (and four of its traders) and ordered Barclays to disgorge US$ 35 million of unjust profits. The previous year, the disgorgement of unjust profits of US$ 110 million was imposed on, and agreed by, the Constellation Energy Commodities Group.

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opened in September 2018. Therefore, for seven years, staff of the Agency had to rely on the local international schools for the education of their children, with the Agency covering the tuition fees, which are typically much higher than the cost of a European School.66 Moreover, the Agency is still the only international organisation in Ljubljana, which makes it difficult for spouses and partners of Agency staff to find occupational opportunities locally, unless they speak Slovene. This means that many non-Slovenian Agency’s staff members, and notably those of higher seniority, are forced to keep their families in their countries of origin, which leads to two other considerations. First, Ljubljana has limited direct air connections with the other EU capitals, making commuting for expatriates more difficult and expensive. Secondly, the correction coefficient applied to the salaries of Agency’s staff is supposed to reflect the cost of living in Slovenia. However, it is doubtful whether the coefficient reflects the cost of living in Ljubljana – more expensive than other parts of the country – especially for expatriates – and, for sure, it does not reflect the true cost of living for staff with families still in their countries of origin, especially if these are in Western Europe. Since 2011, when the Agency opened its headquarters in Ljubljana, the coefficient decreased from 86.2% to 81.5% in 2017, before increasing to 84.6% in 2018 - meaning that salaries for Agency’s staff were, in 2017 and 2018, respectively 18.5% and 15.4% lower than those of staff in equivalent positions in Brussels.

These objective difficulties for relocating to Ljubljana have meant greater challenges for the Agency to attract staff, with a number of good candidates eventually declining an offer of employment. This nonetheless, the Agency has been lucky enough to be able eventually to assemble a very capable complement of staff, whose enthusiasm and expertise have been instrumental in its successful performance, as presented in the following Section. But it has been much harder than it would have been without the challenges highlighted above.

6. An evaluation of the Agency’s activities

In the period 2011 – 2017, the Agency adopted 180 formal acts, of which 120 were opinions, 26 recommendations and 34 decisions. Half of the Decisions taken so far were related to REMIT,67 while a growing number relate to the TCMs, the technical rules mandated for adoption to NRAs and on which the Agency

66 The burden on the Agency’s budget of the funding of school fees for Agency’s staff, due to the delay in the Slovenian Government honouring its commitment in the Seat Agreement, was highlighted by the European Court of Auditors already in 2014. 67 And the majority of them to grant NRAs access to data sharing according to Article 10(1) of REMIT.

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intervenes in case of their disagreement. However, these statistics – which might not be too impressive by themselves – and the fact that more than 80% of the acts of the Agency are of a non-binding nature - might not give the full sense of the impact that the Agency has had on the development of the energy sector in the EU and on the market integration process.

It is therefore useful to highlight a number of acts and other “deliverables”, which have been of particular significance (beyond the Framework Guideline and the acts related to Network Codes, and the implementation of REMIT).

– The MMR, whose first edition was published in 2012, analyses developments in the electricity and gas market. Over time, the MMR has become the reference document for an independent assessment of the performance of the wholesale and retail energy markets in the EU. As already mentioned, the Commission used some of the MMR results in its impact assessment supporting the “Clean Energy for All Europeans” Package. It was through the MMR analysis that the Agency detected the low level of usage of electricity interconnection capacity in Europe. It was also in the context of the MMR that the Agency developed ARCI, the only comprehensive indicator available in the EU to measure the relative performance of retail electricity and gas markets.

– The CBCA Decision on the Gas Interconnection Poland-Lithuania (GIPL) of 14 August 2014. This was one of the two CBCA Decisions adopted by the Agency,68 one of the four CBCA Decisions adopted so far69 in which costs were, at least in part, allocated to countries other than those hosting the PCI and the only one of this kind involving a cross- border interconnector. With this Decision, the Agency put in practice a number of the criteria proposed in its 2015 Recommendation.70

– The Agency Recommendation of November 2016 on the common capacity calculation and redispatching and countertrading cost sharing methodologies. In this Recommendation, the Agency proposed three high-level principles which, if applied, would remove the current discrimination between intra- and cross-zonal electricity exchanges and promote

68 The other one was related to the Lithuanian part of the Electricity Interconnection between Lithuania and Poland (LitPol Link), adopted by the Agency on 16 April 2015. 69 The other decisions were adopted by the concerned NRAs and related to a pipeline in the United Kingdom, a pipeline in Lithuania and a storage facility in Latvia. 70 Recommendation of the Agency for the Cooperation of Energy Regulators No 02/2016 of 11 November 2016 on the common capacity calculation and redispatching and countertrading cost sharing methodologies.

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an efficient sharing of remedial action costs, also giving the correct signals for an efficient bidding-zone configuration of the EU electricity wholesale market. In this way, the Agency proposed to move away from a legacy approach to transmission capacity calculation towards a “single system paradigm”.71 Two of these three principles were followed by the Commis- sion in the proposed recast of the Regulation (EC) No 714/2009 as part of the “Clean Energy for All Europeans” Package.

– The Decisions on TCMs according to the Guideline on capacity allocation and congestion management (CACM)72 and the Guideline on forward capacity allocation (FCA)73. As indicated in Section 2, the TCMs contain the detailed rules for the functioning of the internal electricity market, at EU-wide or regional level. These rules are proposed by the TSOs or the Nominated Electricity Market Operators (NEMOs) and approved by NRAs. In such a process, the Agency intervenes when the NRAs fail to agree on the TSOs’/NEMOs’ proposal, or upon NRAs’ joint request. By the end of 2017, the Agency had adopted seven decisions on TCMs, typically on the most complex and contentious ones (otherwise such decisions would have been agreed by the concerned NRAs). The Guidelines on CACM, on FCA, on Electricity System Op- eration74 and on Electricity Balancing75 envisage almost 200 decisions on TCMs, which are essential for the completion of the internal electricity market and its well functioning. Therefore, if an impression could have emerged that, with the adoption of the Network Codes and Guidelines, the rule-making for the IEM was complete, this impression was and is clearly incorrect, as some of the more significant hurdles still need to be dealt with, and in many cases the TCMs will be referred for decision to the Agency.

– The Decision on the exemption request for the Aquind Interconnector between France and Great Britain.76 In this Decision, the Agency defined a new paradigm for the assessment of exemption requests, deviating

71 In which political borders in the EU becomes irrelevant in the geographical configuration of the internal electricity market and where only the network topology matters. 72 Commission Regulation (EU) 2015/1222 of 24 July 2015 establishing a guideline on capacity allocation and congestion management. 73 Commission Regulation (EU) 2016/1719 of 26 September 2016 establishing a guideline on forward capac-capacity allocation. 74 Commission Regulation (EU) 2017/1485 establishing a guideline on electricity transmission system opera-operation. 75 Commission Regulation (EU) 2017/2195 establishing a guideline on electricity balancing. 76 Decision of the Agency for the Cooperation of Energy Regulators No 05/2018 of 19 June 2018.

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from the approach followed in some of the previous decisions adopted by NRAs and the Commission. In interpreting the requirement that “the level of risk attached to the investment [be] such that the investment would not take place unless an exemption is granted”,77 the Agency maintained that if the typical regulatory test based on a cost-benefit analysis is passed, the infrastructure shall be deemed as suitable for development under the regulated regime, as reinforced by the provisions in the TEN-E Regulation, and therefore no exemption is needed in order to make the infrastructure viable. In this way, I believe that the Agency has clearly put the interest of EU electricity consumers ahead of that of infrastructure project promoters.

This list, which is clearly partial, already shows the important role that the Agen- cy has played and is playing in ensuring the efficient integration of the IEM and that EU energy consumers are able to benefit from it in terms of better prices – i.e. prices that reflect market fundamentals – and greater choice.

In 2014 the Commission published its first evaluation of the Agency,78 where it concluded that “[s]ince its establishment, ACER has become a credible and re- spected institution playing a prominent role in the EU regulatory arena” and that “[o]verall, ACER has focused on the right priorities”. Stakeholders also seems satisfied by the activities of the Agency. In 2015 the Agency run an online survey, asking stakeholders about their level of satisfaction with the relevance and quality of the Agency’s deliverables. While participation in the survey was quite limited, more than 80% of the participants declared themselves satisfied or very satisfied by the Agency’s output. And this despite the very limited resources with which it has had to operate over the recent years. Similar results -were obtained from the on-line feedback forms that, since early in 2018, the Agency has made available for most of its documents published on its website, where stakeholders are asked to rate the usefulness and quality of the Agency’s deliverables: both dimensions were scored positively by more than 70% of the respondents.

The internal governance of the regulatory decision-making process has also worked remarkably well. Despite being not particularly robust on paper – there is no dispute-resolution mechanism in case the Board of Regulators and the Di- rector disagree – the mutual interests of the Director and the Board of Regula- tors in the Agency delivering on its mandate have meant that, in practice, the process has been very successful. Only in one occasion in seven years, I was un-

77 Article 17(1)(b) of Regulation (EC) No 714/2009. 78 Commission Evaluation of the activities of the Agency for the Cooperation of Energy Regulations (ACER) under article 34 of Regulation (EC) 713/2009, Brussels, 22.1.2014, C(2014) 242 final.

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able to obtain the prescribed favourable opinion of the Board of Regulators;79 for two other acts, the favourable opinion initially withheld was later granted, in one case on an identical text.80 I believe such a performance rate is remarkable and testimony to the positive engagement of all the actors in this process. It should discourage any change in the decision-making framework within the Agency: if it ain’t broke don’t fix it.

7. The future of the Agency: the “Clean Energy for All Europeans” Package

The completion of the IEM and the transition to a decarbonised energy sector require a stronger regulatory governance at EU level.

In this context, the “Clean Energy for All Europeans” Package, as presented by the Commission in November 2016, envisaged a strengthening of the role of the Agency, with the assignment of new tasks and responsibilities, and an enhancement of its independence. Quite surprisingly, of all the eight legislative proposals included in the Package, the recast of the Agency Regulation turned out to be one of the most, if not the most contentious, and the political agreement was reached only in December 2018. The European Parliament defined its negotiat- ing position already in February 2018, also thanks to the excellent work of its rapporteur, Morten Helveg Petersen MEP. Instead, the Council took much longer to reconcile the position of four “large” Member States – France, Germany, Italy and Spain – which were in favour of a more limited role of the Agency in the future, with that of a majority of “smaller” Member States, which recognised the need for a stronger Agency.

The political agreement reached by the co-Legislators in December 2018 assigns important new tasks and responsibilities to the Agency. It also preserve the independence of the Agency and its ability to play an influential role in promoting the EU interest in the energy sector.

79 At its meeting in Madrid on 13 October 2015, the Board of Regulators refused to provide a favourable opinion to the Recommendation on the network code for harmonised transmission tariff structures for gas. 80 At its meeting in Madrid on 13 October 2015, the Board of Regulators refused to provide a favourable opinion to the Recommendation on good practices for the treatment of the investment requests including cross border cost allocation requests for electricity and gas projects of common interest. A revised version of this Recommendation received the Board of Regulators’ favourable opinion at the meeting in Ljubljana on 16 December 2015. The Recommendation on the electricity balancing network code did not receive the favourable opinion through the electronic procedure launched in early June 2015. The Recommendation, unchanged, received the Board of Regulators’ favourable opinion at the meeting in Luxembourg on 16 July 2015.

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The new tasks and responsibilities assigned to the Agency by the final agreement on the recast of the Agency Regulation include:

– directly revising and submitting the electricity sector Network Codes to the Commission for adoption. For the gas sector Network Codes, the current framework will continue to apply, where, if the Network Codes submitted by ENTSOG need to be modified, the Agency has first to -is sue an opinion to ENTSOG and then see whether ENTSOG resubmits an amended version before issuing a recommendation to the Commis- sion;

– approving the methodologies regarding the use of revenues from congestion income from cross-border exchanges in electricity, after requesting updates to the drafts submitted by TSOs where appropriate;

– providing operational assistance to NRAs, upon their request, regarding REMIT investigations;

– monitoring and analysing the performance of Regional Coordination Centres (RCCs), in close cooperation with NRAs and ENTSO-E;

– monitoring progress of the NEMOs in establishing their functions under the CACM Guideline;

– approving and amending, where necessary, the proposals for methodologies and calculations related to the European resource adequacy assessment in the electricity sector and the proposals for technical specifications for cross-border participation in capacity mechanisms;

– providing an opinion, at the request of the Commission, on the ENTSO- E’s evaluation of national adequacy assessments;

– approving and amending, where necessary, the methodologies for identifying electricity crisis scenarios.

Beyond the assignment of these new responsibilities, there are three areas which are crucial in determining the role of the Agency in the new market design defined by the “Clean Energy for All Europeans” Package and which were the focus of much attention and controversy in the negotiations between the Euro- pean Parliament and the Council:

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– the role of the Agency in the development of TCMs and, in general, in solving disputes between NRAs;

– the role of the Agency in the regulatory oversight of the ENTSOs, the new EU DSO Entity81 and the RCCs;

– the internal decision-making process in the Agency.

In what follows, I provide some reflections on the outcome of the negotiations in each of these three areas.

7.1 The role of the Agency in the development of TCMs and, in general, in solving disputes between NRAs

As already indicated in Section 6, according to the electricity sector Guidelines adopted so far, the primary responsibility for adopting EU-wide and regional TCMs rests with NRAs, and is only passed on to the Agency in case they fail to agree or upon their joint request. Already in 2014, both the Agency and NRAs came to the view that this process is unnecessarily cumbersome, since the opposition of one NRA is sufficient to frustrate the efforts for the necessary unanimous agreement and, at least in the case of EU-wide TCMs, where unanimity of all 28 NRAs is necessary, the occurrence of one dissenting NRA is not unlikely.82 In its November 2016 legislative proposals, the Commission envisaged the transfer to the Agency of the responsibility for approving both EU-wide and regional TCMs. I have taken and promoted a slightly different view: while agreeing that EU-wide TCMs should be directly approved by the Agency, in the case of regional TCMs I believe that the regional NRAs should be given a chance to agree on them (as they know the specificities of the regions better than the Agency), unless these TCMs have an impact beyond the region,

81 The creation of such an Entity is provided for in the recast of Regulation (EC) No 714/2009. The envisaged tasks of the EU DSO Entity include the promotion of: the coordinated operation and planning of transmission and distribution networks; the integration of renewable energy resources, distributed generation and other resources embedded in the distribution network such as energy storage; the development of demand response; the digitalisation of distribution networks including deployment of smart grids and intelligent metering systems; data management, cyber security and data protection. The EU DSO Entity shall also participate in the elaboration of network codes especially where their subject-matter is directly related to the operation of the distribution system and less relevant for the transmission system. 82 This conclusion, and the proposal that the approval of EU-wide TCMs be transferred directly to the Agency were already presented in the Agency’s “Energy Regulation: A Bridge to 2025 – Conclusions Paper” of 19 September 2014, in which paragraph 83 reads: “In respect of the approval of binding subsidiary instruments in the case of EU-wide proposals prepared under future Guidelines, it is recommended that the EC considers proposing new legislation so that the Agency be empowered to take decisions directly rather than only in those cases where all NRAs fail to agree”.

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in which case they should be directly approved by the Agency. In the case of approval of the regional TCMs by the regional NRAs, I also proposed an ex-post assessment by the Agency, to ensure that the approved regional TCMs are in line with the wider IEM framework. It is worth pointing out at this stage that, in my proposals, approval by the Agency would have still implied the involvement of NRAs, through the required favourable opinion of the Board of Regulators. However, in the Board, unanimity is not required, as a two-third majority is sufficient. This would make the approval process more robust.

During the negotiations, the Parliament was quite open to follow such a view, while the Council took a more prudent stance regarding the transfer of the decisions on TCMs and, in general, the conferral of new powers and responsibilities to the Agency. The negotiations were further complicated by the difference in views between the two co-Legislators as to the more adequate instrument for the assignment or transfer of new decision-making powers to the Agency: the Council insisted on this happening only through acts adopted through the normal legislative process or through implementing acts (where the Member States are involved in the adoption process). The European Parliament was instead more relaxed on this point, and being generally supportive of a stronger role of the Agency, was happy to envisage this transfer in all cases, even with Network Codes or Guidelines adopted as “delegated acts”.

In the end, the final text assigns the approval of EU-wide TCMs to the Agency. For regional TCMs the primary responsibility is left with the NRAs of the region, with the decision being transferred to the Agency in case the NRAs fails to agree or upon their joint request, but only where the TCMs are provided for in existing Guidelines83 and their later revisions, in legislative act of the Union adopted in an ordinary legislative procedure or in new Network Codes or Guide- lines adopted as implementing acts.84 However, either the Director or the Board of Regulators will be able to request that the decision on a regional TCM be transferred to the Agency in case the TCM had a tangible impact on the IEM or on security of supply beyond the region.

83 While the text refers to “network codes and guidelines”, TCMs are only provided for in Guidelines and not in Network Codes (see also Section 2 and the text leading to footnote 15). 84 However, new text in Article 5 of the recast of the Agency Regulation reads: “Without prejudice to para-paragraphs 2 and 2a, the Agency shall be competent to take a decision pursuant to Article 6(8) where the competent national authorities fail to agree on terms and conditions or methodologies for the implementation of new network codes and guidelines adopted after entry into force of this Regulation as delegated acts, which require regulatory approval by all regulatory authorities or by all regulatory authorities of the region concerned”. This opens the way, under certain conditions, for the Agency to take decisions when the competent NRAs fail to agree or upon their joint request even when competences have been conferred by new Network Codes and Guidelines adopted as delegated acts.

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A similar dispute-resolution role for the Agency is envisaged in respect to “regulatory issues having effect on cross-border trade or cross-border system security which require a joint decision by at least two [NRAs]”,85 where the Agency will be called to adopt individual decisions if the competent NRAs fail to agree or upon their joint request, but only if such competences have been conferred under a legislative act of the Union adopted in an ordinary legislative procedure or in existing Network Codes or Guidelines and their later revisions or in new Network Codes or Guidelines adopted as implementing acts.

It will remain to be seen what these new arrangements mean in practice and whether they will lead to future Network Codes and Guidelines providing for TCMs or conferring decision on cross-border issues to NRAs being adopted as implementing acts, but at least, for existing Guidelines and their future revisions, the approval process for EU-wide TCMs has been significantly streamlined.

7.2 The role of the Agency in the regulatory oversight of EU entities

With EU entities – such as the ENTSOs, the new EU DSO Entity – and regional entities – such as the RCCs – taking on an enhanced role in the IEM, ensuring their proper regulatory oversight becomes obvious and urgent. In this respect, the Agency has been calling for an approach which mimics the typical set-up at national level – where NRAs are responsible for the regulatory oversight of TSOs with the possibility of issuing binding decisions – and therefore for the Agency to be able to issue decisions upon EU entities to ensure compliance with their obligations.86 The Commission’s initial proposal was not very specific in this respect. The European Parliament was instead in favour of such a solution, while the Council, or at least the larger Member States, were not inclined to assign new powers to the Agency in this area.

85 Article 6 of the recast of the Agency Regulation. Therefore, even beyond “access to and operational security of cross-border interconnectors”. 86 The “Energy Regulation: A Bridge to 2025 – Conclusions Paper” of 19 September 2014, paragraph 75: “Although NRAs exercise oversight of individual TSOs, the ENTSOs are not currently subject to similar oversight. The current arrangements for regulatory oversight by the Agency are limited to monitoring and issuing opinions which are not binding in nature and so the ENTSOs are under no obligation to follow them. Against this background, we consider that, in the same way that national TSOs are regulated by NRAs, so should the Agency have effective oversight of the ENTSOs in respect of their EU-wide activities. These oversight arrangements should ensure that the European public interest is properly served and that the ENTSOs’ operations are undertaken efficiently and transparently”.

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In the end, the final text envisages concurrent responsibilities of NRAs and the Agency in overseeing the activities of ENTSO-E, of the new EU DSO Enti- ty and of the RCCs, but, interestingly, not of ENTSOG.87 In particular, both NRAs and the Agency, including on its own initiative, will be able to identify instances of non-compliance of these entities with their obligations. It will be then for the concerned NRAs to decide on the appropriate remedial actions; but if these NRAs failed to agree, the responsibility would be passed on to the Agency. I consider this a significant step forward at least for the electricity sector - the Third Energy Package did not provide any regulatory oversight of the ENTSOs - and it can only be hoped that similar provisions will be enacted for the gas sector when the gas market design and regulatory framework is reviewed in the near future.

7.3 The internal decision-making process in the Agency

In this area, much of the disagreement between the co-Legislators has focused on which acts of the Agency should be subject of the favourable opinion of the Board of Regulators and to what extent the Board of Regulators should be able to modify the proposals submitted by the Director. As indicated in Section 4, most, but not all of the acts of the Agency are subject to the favourable opinion of the Board of Regulators; notable exceptions include all acts under REMIT and all acts under the TEN-E Regulation, except for the opinions on the drafts PCI lists, as well as all reports issued by the Agency, even where they contain opinions or recommendations (most notably the MMR). Also, very importantly and as also already highlighted in Section 4, it is established practice that, when providing its favourable opinion, the Board of Regulators cannot modify the text proposed by the Director: it can only grant or refuse the favourable opinion on the entire proposal.

During the negotiations, the Council was keen to extend the requirement for the Board of Regulators’ favourable opinion to all documents containing decisions, recommendations or opinions (and therefore, for example, also to the MMR) and to grant the Board of Regulators the power to impose amendments to the Director’s proposals. This would have led to the Agency becoming a secretariat of the Board of Regulators,88 drastically changing its nature and,

87 While ENTSOG has been left outside the scope of the new regulatory oversight framework defined by the recast of the Agency Regulation, it is included in other general regulatory provisions, such as the one giving the Agency the power to require the information it needs to fulfil its mandate (Article 3(2) of the recast of the Agency Regulation). 88 This is essentially the role played by the BEREC Office with respect to the BEREC Board of Regulators, composed of the heads of telecom national regulators, which is the decision-making body on regulatory matters.

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probably, hampering its ability to perform in the same way as it has done so far. The European Parliament was instead keen to maintain the current scope of the Board of Regulators’ favourable opinions and adamant that the Director shall continue to “hold the pen”, so as to preserve a degree of independence of the Agency from national interests. In the end, the compromise reached by the co-Legislators slightly extends the scope of the Board of Regulators’ favourable opinion, but not to the MMR and other important reports, and, while making the process more convoluted89, still ensures that the Board of Regulators cannot force amendments to the Director’s proposals, but only grant or refuse its favourable opinion.

In this way, the system of checks and balances between the roles of the Director and of the Board of Regulators that, unique among EU decentralised agencies, has characterised the Agency and its internal decision-making process so far, will be maintained in the future.

From these considerations and the additional responsibilities assigned to the Agency, it should be clear that the final text of the recast of the Agency Regula- tion calls on the Agency to play the enhanced role required by the completion of the IEM and the challenges which the energy sector will face in the years to come, while preserving its independence and the unique governance of its decision-making process. This, in my view, is a guarantee that the Agency will continue to be able to promote the EU interest in shaping the future of the Eu- ropean energy sector, to the benefit of all energy consumers in terms of fairer prices, wider choice and greater supply security.

89 The additional complexity in the process comes from the requirement that: – the Director’s proposal for an act subject to the Board of Regulators’ favourable opinion has to be circulated to the relevant Working Group in advance; – the Director has to justify in writing if he/she does not follow the amendments proposed by the Board of Regulators. This means, in my understanding, that the Director would have to present its proposal to the Board of Regulators, give the Board of Regulators the time to see if it wants to come up with amendments, then react to these amendments before tabling the final proposal. The details of how this process can work will have to be worked out. In any case, in one of the recitals, it is clarified that “the Director can seek the favourable opinion of the Board of Regulators on a new or revised draft text at any stage of the procedure”, which may provide an opportunity for short-circuiting the process, especially for simple, non contentious acts.

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Part 2 – Chapter 12 – The ENTSO-E Experience

CHAPTER 12 THE ENTSO-E EXPERIENCE

Konstantin Staschus

1. Rationale for TSO cooperation

1.1 Advantages of interconnection

The advantages of interconnection between areas hundreds of km apart have been clear to electricity system planners since 100 years ago. They have been pursued systematically and in cooperation across country borders even more after World War II:

– Trading benefits due to daily or seasonal patterns of availability of resources – back then particularly of Alpine hydro power: exporting hydro surpluses during runoff season and importing thermal power to hydro regions in winter saves both regions money.

– Reliability benefits: The cost of reliable supply goes down in larger interconnected systems, as the larger number of generators of cost-effective size implies a lower probability of simultaneous forced outages of a given percentage, and thus a need for less percentage reserves to achieve a given reliability level.

When the 1980s brought combined cycle gas turbines (CCGT) of an efficient size much smaller than many internally well connected electricity markets, competition in generation and supply became economically advantageous. This added a third advantage to interconnection:

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– Competition benefits: Small markets might have difficulties even with CCGT power plants to make an effective switch from the prior monopoly structure to competition in generation. But with more interconnection, the effective market size becomes bigger, more generation companies can offer reliable supply to the country’s customers, and different countries’ generation companies can begin to compete with each other. Functioning competition is to lower cost and allow for better service for customers than in the monopoly case and all other things being equal.

With the onset of the energy transition and introduction of variable renewable energy sources (RES) since the early 2000s, a fourth advantage to interconnection started manifesting itself:

– Extracting more value from wind and solar generation: With strong interconnections, regional surplus renewable energy does not need to be curtailed at zero value, but can be transported to other parts of Europe where their value at the same time is higher (because the weather or the resource mix there are different).

1.2 European TSO associations: Already a technical success story 1951-2009

Interconnection needs to be managed cooperatively between the involved transmission system operators (TSOs), for ensuring adequate balance of resources, loads and transmission, for secure system operations rules, and for trading and market rules. TSO associations have been the focus and foundation of such cooperation and rulemaking since 1951, when the UCPTE was founded. For the decades until the late 1990s, these associations covered primarily system operations, adequacy and statistics, as the need for operational cooperation was especially clear for a synchronous interconnection where disturbances can spread in milli-seconds into a wide blackout if fast-acting reserves are insufficient or poor- ly managed). These associations’ rules remained voluntary and beginning on 1 July 2005 contractual among the TSOs until electricity market liberalization.

In line with the appearance of the third reason for interconnections, i.e. competition benefits, TSO cooperation on market rules was added in 1999 with a parallel EU-wide association ETSO, in close cooperation with the European Commission and national regulatory agencies. Also in 1999, UCPTE changed its statutes and became UCTE since due to market liberalisation and unbundling, there was no longer any coordination of production of electricity. ETSO was first a cooperation of the four synchronous areas’ TSO associations UCTE,

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Nordel (founded 1963), ATSOI (Ireland) and UKTSOA (UK; the latter two founded 1999), but in 2001 became an International Association with direct membership of 32 independent TSO companies from the 15 countries of the European Union plus Norway and Switzerland. In 2006, BALTSO joined also.

With market liberalisation came a multiplication of actors, unbundling rules, and an explosion of the number of market transactions. Going beyond the voluntary cooperation in ETSO for market rules, this alone could have been reason enough for a definition of TSO cooperation duties in European laws. But this legal definition became crucial through the increasing penetration of fluctuating renewable resources in the European electricity system which began with feed- in-tariff support for RES in several countries in the early 2000s and became Eu- ropean legislative mainstream with the 2008 agreed EU 20/20/20 goals for 20% reduction in CO2 emissions, 20% increase in energy efficiency and 20% RES in the energy supply for 2020. After the legal implementation of the 20% RES goal in the 2008 Renewable Energy Directive, European Commission, Council and Parliament as well as the European TSOs themselves realized a strong resulting need for further formalization of TSO cooperation. In the 3rd Energy Package of 2009, ENTSO-E and its TSO cooperation tasks were defined in the EU Regulation (EC) 714/2009 on cross-border exchanges of electricity. These legally binding TSO cooperation tasks include primarily system operations, system development, market rules and RD&I.

Because of the strong mutual benefits of interconnection described above, it often precedes the establishment of general economic cooperation rules between countries: Synchronous interconnection predated for example the EU membership of Poland, the Czech and Slovak Republics, Hungary, Romania and Bul- garia. On the other hand, electricity supply is one of the most basic foundations of modern society, and disturbances can propagate across synchronous (and in special circumstances even DC) interconnections into country- or continent- wide blackouts. Successful cooperation between TSOs thus requires trust but also builds trust: Many issues need to be discussed and solved, engineers and managers get to know each other, one can observe the other party adhere to the common rules, and over years without maligne manipulations, trust grows. The history of interconnection and TSO associations thus reflects the waxing and waning of mutual trust in Europe, and includes the intense studies to determine the measures these Eastern countries needed to take, to bring operating and reliability procedures in line with Western standards. A contractually agreed Catalogue of Measures guided the preparations, the various tests and the actual synchronization procedure toward contractually agreed permanent synchronous operation. Similar approaches were later on used for additional

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countries besides those named above, i.e. the Western part of Ukraine (2003), Turkey (2015) and Albania (formalised 2014), and are still being used today for preparing for synchronisation of Moldova and the rest of Ukraine, and of the Baltic States, with Continental Europe. The first Catalogues of Measures in the early 2000s represented a substantial formalisation of the operating and planning rules of UCPTE. With increasing size and diversity of the Continental Eu- ropean Synchronous Area, such formalization was considered necessary to keep ensuring reliable interconnected synchronous operations. In consequence, the UCTE presented in September 2004 its first comprehensive “Security Package”, i.e. the “Operation Handbook” with technical standards for interconnected operation, the “Multilateral Agreement” to ensure enforceability, and a “Compli- ance Monitoring and Enforcement Process”.

2. The rationale for ENTSO-E

All these increasingly formal and contractual rules were subject only to decisions by the participating TSOs themselves. Even if many TSOs are owned by national governments and thus subject to significant political supervision and guidance in each country, there was no international in the EU body supervis- ing and guiding them in their international cooperation. With the market and RES driven reasons described above for interconnection and TSO cooperation after 2000 and especially since 2008, the EU and also the TSOs themselves concluded that further political legitimacy of the common rules was necessary: through description of the TSO cooperation in European laws, and through some oversight and guidance by European institutions, especially the European Commission and the newly defined ACER (see previous chapter).

This need was due partly because the TSO rules do not only affect the TSOs themselves in their operational cooperation, but also market parties such as generators and consumers in their connection conditions, and in the management of the injection into or withdrawal of energy from the grid. Even more importantly, the ambitious EU RES goals implied RES contributions to electricity supply of about 35% in 2020 – and later of over 50% for 2030. Large percentages of generated kWh from wind and solar resources which have full-load hours well under 50%, imply a need to build installed kW capacities of wind and solar energy which exceed peak loads by factors of 2 to 5. This in turn means there will be, and already are, regional surpluses of RES generation compared to regional load during many sunny and windy hours each year. Rather than expensively curtailing or storing regional surpluses, they can be transported to other parts of Europe where their value is higher. The ambitious RES goals thus mean the Eu-

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ropean transmission grid has to be strengthened significantly to transport large temporary regional surpluses to potential deficit regions. That means it has to be planned together by many or all European countries’ TSOs, and it has to be operated securely with lots of data exchange and multi-country security analyses so that continental-scale power flows do not surprise the operators of the individual national grids.

This energy transition and RES rationale for TSO cooperation led to increased need for a formal, legal basis for relying on each other, and also for trust growing further between TSOs.

2.1 ENTSO-E foundation, tasks and structures: EU, regional and national

The formal part: Regulation (EC) 714/2009 on cross-border exchanges of electricity This Regulation, part of the 3rd EU Energy Package, ordered all TSOs to cooperate through ENTSO-E, and stated as goals the completion and functioning of the internal electricity market, more cross-border trade, and coordinated operation and sound technical evolution of the European electricity transmission network (Art. 4). Statutes, list of members and rules of procedure are subject to an ACER and an EC opinion.

The ENTSO-E task specified in most detail in the Regulation is the - draft ing of network codes:, As described in the previous chapter, based on ACER Framework Guidelines before and Opinions after the ENTSO-E drafting, and through Comitology approval by Member State representatives, these become binding European Regulations directly applicable to all they address. Further ENTSO-E tasks include common network operation tools (specified more in a 2013 amendment related to the Infrastructure Regulation 347/2013), non- binding Community-wide ten-year network development plans (TYNDP), adequacy outlooks, and coordination of R&D.

2.2 The establishment of ENTSO-E: The voluntary, early and eager part

In the two years before the 13 July 2009 approval of Regulation 714/2009, the TSO associations ETSO, UCTE, NORDEL, BALTSO, UKTSOA and ATSOI had been discussing the TSO views and proposals on this new Regulation and the foundation and Articles of Association (AoA) of ENTSO-E. Because of the different development stages of national electricity markets, these discussions

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were not easy. But the TSOs had realized as well as Commission, Council and Parliament that growing percentages of renewable energy and further market development required much closer TSO cooperation than in the decades past, and succeeded in approving ENTSO-E AoA on 9 December 2008. ENTSO-E’s first Secretary-General Konstantin Staschus was appointed by the ENTSO-E Assembly in February 2009 and began his work in Brussels on 1 March 2009. The prior organisations of UCTE and ETSO, including ten staff, were merged into ENTSO-E in Summer 2009, and the ENTSO-E System Operations, Sys- tem Development and Market Committees took up their work in Spring 2009. The TSOs and ENTSO-E thus achieved a head start on the implementation of Regulation 714/2009.

AoA, list of members and Rules of Procedure (incl. Internal Regulations, Con- sultation Process, Network Code Development Process) needed to be submitted to EC and ACER (and its predecessor organization ERGEG) according to Art. 5.1 of Reg. 714/2009, and this was done 23 Nov 2009. Based on an EC Discussion Paper on Codes and Guidelines of 21 Sep. 2009, ENTSO-E was able to fulfil the EC wish to “follow the procedures as if the Third Package was already applicable”, even if formal applicability only started 3 March 2011. After several meetings and discussions, focused especially on the role and influence of non-EU member TSOs and a sunset clause in case a TSO does not receive certification, a slightly changed set of these documents was submitted to EC and ACER/ERGEG on 22 Dec. 2010 and again on 28 June 2011. An ACER opinion of 5 May and a Commission Opinion of 11 Aug. 2011 described how prior concerns had been addressed satisfactorily, leaving two recommendations about the NC Development Process to be implemented subsequently. This iterative process between ENTSO-E, EC, ERGEG and ACER brought to a successful conclusion, only 5 months after applicability of Reg. 714/2009, the carefully balanced process of ENTSO-E’s formal establishment as the body described in Reg. 714/2009: an association fulfilling legal mandates which can partly give itself the AoA and rules of procedure its members consider fit for purpose, and whose rules must also fit the legislative and regulatory purposes represented by EC and ACER.

In late 2014, based on its strategic processes, ENTSO-E submitted further modifications to its AoA and Rules of Procedure, designed to speed and simpli- fy decision processes, improve governance and implement other lessons learned. These were subsequently accepted by ACER and EC.

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But even more important than the institutional support from EC and ACER for ENTSO-E was and is the support from its TSO members. For the reasons described above, they had supported the foundation of ENTSO-E, gave up their venerable prior associations with decades of history and merged them into ENTSO-E, kept sending their experts and managers to a growing number of ENTSO-E committees and working groups, staffed ENTSO-E projects for methodology and software development, and approved various increases in staff and budget. They did this with constant insistence on maximum efficiency and effectiveness, and as Secretary-General, Konstantin Staschus honored the efficiency imperative by requesting more resources from Board and Assembly only when the need was very clear. Together with careful selection of the best possible staff, preferably from TSOs or as secondments, but with highest value placed on ability, skills, experience and motivation, this led to additional workloads often covered by too few existing staff for about half a year before the new staff could be recruited. While the end-of-year headcount of the ENTSO-E Secretariat grew from 11.5 from the prior associations to 20 at the end of 2009, and via 35.5 in 2011, 51.5 in 2012, 75.4 in 2015, to 76.7 in 2017, the budget grew from 2.5 M€ 2009, 6.8 M€ 2010, 8.6 M€ 2011, 11.2 M€ 2012, 13.6 M€ 2013, 17.7 M€ 2014 and 2015, 18.2 M€ 2016, to 20.2 M€ 2017. During the years 2011-2015, the ENTSO-E Transparency Platform IT development contributed major parts to the budget needs; in recent years, the Common Grid Model CGM has been a major budget driver.

2.3 Tasks and achievements

2.3.1 Network Codes: Rules which enable the energy transition

Regulation 714/2009 insists network codes shall be developed for cross-border network issues and market integration issues, and listed the following as content areas for network codes. This list largely stayed the same with the proposed update as part of the Clean Energy Package but was complemented with significant technical detail and some new tasks related to DSOs and cyber security. Table 12.1 compares the 2009 and 2017 areas, giving an indication of what was learned through the first eight electricity network codes and guidelines which have become law so far.

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NC content area 2009 NCs/guidelines in effect NC content area Council Regulation 714 position Dec 2017 Network security and reli- System Operations, 8/17 Same, + list of technical ability… topics Network connection… Requirements for Generators, Same, + list of technical 5/16 topics Demand Connection, 9/16 HVDC, 9/16 Third-party access… Included in CACM Same Data exchange and settle- Included in SO Same ment… Interoperability… Included in SO Same Operational procedures in an Emergency & Restoration, Same, + list of technical emergency… 12/17 topics Capacity allocation and con- CACM, 8/15 Same, + list of technical gestion management… topics …trading related to technical Parts of Forward Capacity Same, + list of technical and operational provision of Allocation, 10/16, CACM, topics network access services and Balancing, 12/17 system balancing Transparency… No NC but separate Regula- Same tion Balancing … including net- Included in SO Same, + list of technical work-related reserve power topics …harmonized transmission No NC Same, incl. locational signals tariff structures… and inter-TSO compensation rules; energy efficiency … N/a N/a … non-frequency ancillary services, + list of technical topics incl. inertia Energy efficiency regarding No NC With tariffs electricity networks. N/a N/a …cyber security… Table 12.1. Network code content areas.

The eight network codes developed so far are grouped in the three content areas of markets, connection conditions and system operations. The connection codes are to ensure that any new generation, load or storage is connected with such technical parameters and capabilities to the grid that this equipment supports the secure and reliable system operations in a future-proof way: i.e. especially as the system gets dominated more and more by fluctuating, converter-connected renewable energy sources over the decades of the new equipment’s lifetime. The market codes define the next evolutionary steps of cross-border integration of

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the electricity markets in all timeframes, from multi-year forward contracts to balancing energy. The system operations codes define how secure operations can be ensured as the system evolves towards more regional and continental- scale flows and more converter-connected fluctuating renewable generation. The market and system operations codes include significant numbers of clauses which define several but not all details of a new methodology to be developed and implemented, with precise deadlines and responsibilities for drafting and approving the remaining details. This has advantages of more flexibility for regional or national implementation differences, and of easier adaptability to future developments. Because such clauses do not provide the final details of the rules to be applied in the system and market, the EC Legal Service determined that approval needed to be based not on the network code sections of Regula- tion 714/2009 but on its Commission Guideline sections. Although these were developed and consulted upon in accordance with the network code rules, they were therefore approved as Guidelines.

Table 12.1 also shows that the process of EC prioritization of NC topics, ACER framework guidelines and ENTSO-E drafting, has worked well so far, albeit slower than anticipated in 2009. The full set of eight NCs/guidelines have all been approved in Comitology, and all topics have been addressed with two reasoned exceptions. With the eight codes in force, a sound foundation of common Europe-wide but also flexible rules has been made legally binding, making our electricity systems and markets more secure and more efficient for the coming decades of the energy transition.

The two exceptions of NC areas in the Regulation not having been drafted are reasoned as follows: The benefit of harmonizing transmission tariffs was notes timated to exceed the considerable effort and cost needed for understanding and debating very different network fee regulation approaches in the different Member States, and for agreeing on harmonized approaches. The cross-border effect and need of harmonizing tariffs is also not clear. Network energy efficiency also has no clear effect on cross-border markets, and the minimization of losses would point into a different direction from aiming to increase the average loading on the transmission system in order to gain more benefits from exchanges between high- and low-price areas, as losses increase with loading.

Additional topics are also being defined in the new legislation: Technical sub- topics are being specified for many NC topics to achieve greater clarity on sound basis in primary legislation (the Council- and Parliament-approved Regulation on Cross-Border Exchanges) for the secondary legislation of network codes and guidelines. The details and also the new topic of cyber security do justice to

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the increased need e.g. for smart grids, customer engagement, and TSO-DSO cooperation.

2.3.2 TYNDPs and Adequacy Forecasts: Grid planning and reliability warnings for the energy transition

The second major ENTSO-E legal mandate based on the needs described in section 1.4 concerns joint planning of the European electricity grid: It needs to be strong enough to transport temporary regional surpluses of renewable energy to regions where their value is higher or there may even be temporary scarcities. Following Art. 8 of Reg. 714/2009, the TSOs set out to draft their first common Ten-Year Network Development Plan ever (TYNDP) already in Spring 2009, and published it in 2010. Every two years since, a new TYNDP was published, with significant methodological enhancements each time. The 2010 TYNDP was largely a systematic collection of existing planned transmission infrastructure projects by all TSOs with some consistency checking among the different TSOs’ plans. But future TYNDPs evolved strongly towards a joint determination of needed new infrastructure for economic and reliability reasons, within 6 defined regions and also Europe-wide, complemented by consistent cost-benefit analyses (CBA) of all known projects with a multi-criteria analysis. Among the latest methodological improvements are an interlinked ENTSO-E – ENTSOG electricity and gas model (based on the TEN-E Regulation of 20131) focused on joint scenario building: This led to the Spring 2018 publication of joint electricity and gas 2040 scenarios, and the derivation of a curve a marginal value of additional transmission capacity for all possible existing or new cross-border link- ages, as a function of the amount of new capacity. This does justice to the value of additional infrastructure decreasing, the more capacity there is, and even allows in principle to analyze potential reductions in capacity if that ever would become economically attractive (perhaps in extreme local balancing market, or energy efficiency scenarios). The economic benefits are calculated based on chronological stochastic market simulation of all hours of the target year with a model licensed by the ENTSO-E Secretariat, and in cooperation between Sec- retariat experts and planners from the TSOs from all six European regions. The performance of these simulations in the Secretariat improves consistency across Europe and also efficiency, compared to the prior approach where TSO experts from each region performed calculations separately in each region, partly based on different simulation tools. However, complementary network simulations

1 REGULATION (EU) No 347/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUN- CIL of 17 April 2013 on guidelines for trans-European energy infrastructure and repealing Decision No 1364/2006/EC and amending Regulations (EC) No 713/2009, (EC) No 714/2009 and (EC) No 715/2009.

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(e.g. for security of operations and redispatch needs) continue to be performed by the TSO experts in each region. In addition to the economic costs and benefits of new infrastructure, the following criteria are analyzed and published for each concrete transmission project which any party can propose within the TYNDP process: Flexibility, technical resilience, environmental and social impact, security of supply, losses variation, CO2 variation, RES integration.

The same ENTSO-E Secretariat staff has been using the same chronological simulation tools for medium-term adequacy forecasts. These are updated yearly, currently for a 2025 time horizon. They analyze potential deficits (in terms of loss-of-load expectations LOLE and expected energy not served EENS) by bidding zone, and also ramping needs. The analysis takes into account the transfer capacities between bidding zones, thus the mutual possible support between zones and countries, but also a pan-European climate database to ensure simultaneous scarcities from region-wide challenging wind, solar or temperature conditions are captured. The role of these ENTSO-E adequacy analyses in the context of determining when and where a national capacity mechanism may be needed, is likely to grow with the Clean Energy Package.

2.3.3 Efficient, secure and future-proof

Reg. 714/2009 lists the following additional ENTSO-E tasks: common network operation tools, incidents classification scale, research plans, and recommendations about technical cooperation between Community and third-country transmission system operators. Additional Regulations added administration of the Inter-TSO Compensation (ITC) system2 and the mandate to create and run the Europe-wide Transparency Platform.3 And of course the network codes and guidelines each define several new tasks for ENTSO-E.

Building on the tradition of UCTE and Nordel, rules for operational cooperation among TSOs continued to be discussed in ENTSO-E’s System Operations Committee (SOC) and – for the five synchronous areas – in SOC’s five regional groups. The two operational guidelines described above further formalized these rules. However, the needs of renewable energy integration described above required also common tools and data, which is why the TSOs in ENTSO-E embraced the requirements of Regulation 347/2013 on energy infrastructure,

2 COMMISSION REGULATION (EU) No 838/2010 of 23 September 2010 on laying down guidelines relating to the inter-transmission system operator compensation mechanism and a common regulatory approach to transmission charging 3 Commission Regulation (EU) No 543/2013 of 14 June 2013 on submission and publication of data in electricity markets and amending Annex I to Regulation (EC) No 714/2009

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addressing also operational planning data environment, the common grid model based on the CIM standard, and Regional Security Coordinators. The basic need comes from large regional power flows provoked by renewable energy surpluses, in particular wind power from around the North and Baltic Seas, which transit through several TSOs’ grids before reaching their points of consumption. This means a single TSO cannot necessarily see in data about his own network’s nodes the origin and destination of such power flows. To be able to analyze all flows over his network, a larger regional data set and security analysis is needed, and all regional TSOs affected frequently by such large regional flows need to cooperate for this. For reasons of efficient software to merge national power flow data sets and analyze them for possible security violations, and for reasons of personnel gaining expertise with regional-scale flows, these tasks are performed in regional offices staffed jointly by the regional TSOs, called Regional Security Coordinators: TSC in Munich for Central-Eastern Europe, Coreso in Brussels for Western Europe, and further RSCs for the Nordic, Baltic, and Southeastern European regions. These perform a total of five tasks:

– common grid model (CGM) merging from the TSOs’ individual grid model delivery in the Common Information Model-based CGM Ex- change Standard format;

– coordinated capacity calculation;

– coordinated security analysis (including the analysis of remedial actions);

– short- and medium-term adequacy;

– outage planning coordination.

While the RSCs are subsidiaries of the regional TSOs without any direct hierar- chical relationship to ENTSO-E, the CGM software applies to all regions and is therefore being programmed as an ENTSO-E project. ENTSO-E also manages the cooperation and coordinated development between the six RSCs.

Two further large software projects also benefit all European TSOs and were therefore managed within ENTSO-E: The Transparency Platform and the ENTSO-E Awareness System. The former is governed by Regulation 543/2013 and establishes a single Europe-wide platform for publishing electricity network data of relevance to electricity market participants, e.g. data on transfer capacities and congestion management, or on forced outages of power plants above 100 MW, under ENTSO-E responsibility. The latter makes available in near-

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real-time selected key operational data from each TSO’s control area to all other European TSOs’ Energy Management Systems. This allows operators to be aware of imbalances or frequency issues in other parts of Europe, which would not be visible to them based on their own SCADA systems.

ENTSO-E also makes strong contributions to Europe’s RD&I planning, through its own legally mandated regular publications of R&D roadmaps, implementation plans and monitoring reports, and through its input into the European Technology and Innovation Platform “Smart Networks for Energy Transition” (ETIP SNET). This supports systematic preparation of important research topics through all steps of the Technology Readiness Level ladder towards implementation in the market or the TSOs themselves.

2.4 Context and benefits of the ENTSO-E tasks

In 2017, ENTSO-E estimated the benefits of fulfilling its tasks and of other aspects of TSO cooperation in its master slide deck on network codes as follows: The TYNDPs and the 150 billion € transmission investments until 2030 which they identify, justify and coordinate, are a crucial prerequisite of a successful energy transition as they enable connection and system integration of growing capacities of renewable energy. The network codes support sustainability by setting conditions that already enabled the system to integrate 260 GW of RES (25 GW in 2016 alone) and to harvest over 10 GW of demand response. They support security of supply as the TSO cooperation they specify has led to no multi-state supply interruptions in recent years, and as the RSCs whose tasks they specify coordinate 300 grid operational measures per day, with hundreds of employees already trained in RSC programs and offices. They support competitiveness and social welfare as the market coupling they specify has already led to 23 countries and 85% of European consumption being coupled with optimal day-ahead trading, and as ENTSO-E’s Transparency Platform makes available 10 million data files annually to 2500 daily users.

More generally, the 3 market guidelines support liquidity and competition, efficient utilization of the grid and of generation, storage and demand flexibility resources, and can lower costs to industry and consumers. The 2 operation guidelines lead inter alia to more efficient exchanges of reserves and secure operations in the face of ever increasing renewables. The 3 connection network codes lead to more efficient investments and operations, better industrial solutions, competition and cost reductions. The day-ahead market coupling specifically saved 1 billion € in social welfare. The flow-based coupling in Central Western -Eu rope alone is estimated to save 100 million € annually. Europe-wide, 1500 TWh

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(about 50% of total consumption) are traded on power exchanges. Although intraday cross-border trading has only become supported by the XBID software in mid-2018, already in 2016 120 TWh were traded intraday on exchanges, with annual growth of 3.6%. Balancing market integration is estimated to save 220 million € annually in the Nordics alone; 260 million € annually are saved due to German common reserves, netting and common merit orders, 80 million € due to imbalance netting within and around Germany, and 120 million € annually due to a pilot project (TERRE) in Western Europe on replacement reserves. The theoretical benefits of full integration of balancing markets are estimated at up to 3 billion €/year.

These benefit estimates, largely based on experience with actual data, show how current Europe’s lawmakers and the TSOs were in seeing and acting on the need for more formalized cooperation. But e.g. the market coupling examples also show how voluntary cooperation, even before codes and guidelines become binding, and can already lead to big cost savings, can test the best methodologies, before further legal formalization.

2.5 ENTSO-E organisation and governance: Balance of formality and realism

The ENTSO-E organization of decision and working bodies and groups is based on the different legal mandates, on the technical needs of interconnected planning and operations, and on the need to cover both pan-European and regional cooperation. The total number of groups has risen steeply to about 100 active groups, plus about 100 active projects. Whereas in the decision bodies of Assembly and the four Committees plus the Legal & Regulatory Group (LRG), all or most member TSOs are represented, WGs and projects will often include only a limited subset of especially interested members. The Articles of Asso- ciation govern, among others, the operation of ENTSO-E, its membership, the roles and relationships between the various ENTSO-E’s bodies and the distribution of voting rights between the members. The Internal Regulations complement the Articles of Association by defining the practical and technical rules and procedures governing the operations of the Association. Strategic decisions of both technical and formal nature are reserved for the Assembly, while the Board with 12 elected members guides the daily work of the Secretariat and coordinates the Committees’ work.

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The Committees deliver the work programme through projects, mandated work products, and policy suggestions:

1. TheSystem Development Committee (SDC) – “developing a strong and adequate grid” – coordinates network development at European and regional level and prepares the Ten-Year Network Development Plans, the regional investment plans and adequacy forecasts. It also coordinated the drafting of the connection network codes and supports their implementation.

2. The System Operations Committee (SOC) – “guaranteeing secure and reliable power system operations” – is in charge of technical and operational standards, including operational network codes, as well as of power system quality. It ensures compliance monitoring and develops tools for data exchange, network models and forecasts, and oversees the grid security from physical, organisational and cyber security points of view.

3. The Market Committee (MC) – “promoting a fully developed internal electricity market” – works towards an integrated and seamless European electricity market and is in charge of developing methodologies, mostly in the context of network codes, and innovative solutions for cross-border congestion management, integration of balancing markets and ancillary services. It also oversees the inter-TSO compensation mechanism.

Horizontal structures cutting across all technical areas of work are:

1. The Research, Development, and Innovation Committee (RDIC) ensures the effective implementation of ENTSO-E’s mandate in the area of innovation and R&D, largely focusing on strong and smart grids and the empowerment of consumers. It also steers ENTSO-E’s leading participation in several EU large scale research projects. It acts as an innovation hub, fostering inter TSO cooperation on innovation projects and technologies. Finally, it encourages innovation exchanges between the TSOs and other business communities through a Business Network for Innovation @ENTSO-E.

2. The Digital committee advises the Board on digital matters and ensures the sound, coherent and cost-effective technical management, development and operation of large scale IT projects enabling the link between the national, regional and pan-European levels. Flagship IT projects that are partly funded by the EU include the Common Grid Model and the Transparency Platform.

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3. The Legal and Regulatory Group (LRG) ensures that ENTSO-E fulfils its legal mandates in accordance with the applicable requirements and with a high level of legal robustness. It also ensures legal consistency of ENTSO-E deliverables across the three vertical committees.

2.6 Coordination of national, regional and European levels

The essence of ENTSO-E is the coordination of national and Europe-wide TSO tasks, but also the regional level plays a key role. In system operations, the five synchronous areas in Europe form natural regional groupings of TSOs that need to cooperate to set and enforce synchronous area rules: Continental Eu- rope, Nordic, Baltic, Great Britain and the island of Ireland. In system development, e.g. security studies with AC power flow analyses for planning are best performed on a less than Europe-wide but larger than national scale (similar to the operational security analyses performed in the Regional Security Coordi- nators), and SDC therefore includes six regional groups. And also in markets, aspects such as loop flows or capacity calculation are best discussed at regional level, leading to Capacity Calculation Regions defined in the CACM Guideline and to regional groups under MC.

2.7 Global comparisons and influence

Based on the strong legal framework of the European Union and its Internal Energy Market, the TSO cooperation in ENTSO-E has a broader scope and firmer legal basis than similar cooperations in other parts of the world. The five African power pools, the South American CIER, ASEAN Power Grid Con- sultative Committee, and even the North American NERC do not have the same broad legal mandates as ENTSO-E (though NERC’s legal mandates and work go deeper into operational and cyber security issues than ENTSO-E’s). NERC’s and ENTSO-E’s legal mandate to draft codes which are approved and enacted by regulators or lawmakers is similar, and developed in parallel in the 2000s. While NERC’s standards go into significantly more detail and go along with much stronger monitoring and enforcement authorities, ENTSO-E’s code drafting scopes are significantly broader, including not only system operations but also connection and market rules. Also ENTSO-E’s mandate to develop Ten-Year Network Development Plans with links to Project-of-Common-Inter- est designation and binding national transmission plans, has so far no parallel in North America. These differences can largely be linked to the EU’s strong decarbonization objectives and the corresponding need for and reality of much higher renewables penetrations in the energy system in Europe. As the energy transition becomes global and all continents increase their renewable energy

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shares, the interest in other continents for ENTSO-E’s codes and TYNDPs increases. CIGRE and IRENA are two global institutions where ENTSO-E experience is well sought-after.

2.8 Digitalisation and TSO/DSO cooperation

The eight network codes described above are all binding EU Regulations now, and so far no further ENTSO-E codes are foreseen. However, with digitalization of the entire energy system, smart and active distribution grids, many renewables connected at distribution voltages, sector coupling and demand response, a new need for codes covering the entire electricity system incl. distribution has ap- peared. This is one of several areas where much improved TSO-DSO cooperation is needed. With the expected strong penetration of electric vehicles and heat pumps, it is becoming uneconomic to build distribution grid capacity to cover all possible combinations of customers’ uses, and active distribution congestion management is becoming a necessity4. When both TSOs and DSOs depend on flexibility of demand and generation connected in distribution grids e.g.( for TSO balancing and DSO congestion or voltage management), data exchange, price signals and priority of control signals become a difficult market design -is sue. The Clean Energy Package therefore foresees mandates for a new European DSO body, in cooperation with ENTSO-E, to be able to draft network codes in certain areas. This European task as well as cyber security and national data exchange or data hub rules need to be addressed soon if system flexibility is to keep up with increasing fluctuations of feed-ins and flows at all voltage levels.

The challenge for ENTSO-E and the DSOs will be to push forward digitalization while staying within the boundaries of what a consensus-based, legally mandated body can achieve. Lawmaking and regulatory schedules often do not seem well adapted to the fast progress of ICT. On the other hand, standardization can also be a key enabler of tech progress, as the GSM standard in mobile phones and the CIM standard in power system data have shown. By building both on its legal mandates and on the strengths of the TSO software already developed, ENTSO-E and the European TSOs have excellent chances to manage this balance well, and with best use of digitalization in cooperation with market operators and DSOs to empower the customer and enable the energy transition.

4 Many worldwide and European papers emphasize this, e.g. the ETIP SNET Vision, Roadmap and Imple- mentation Plan or the ENTSO-E – CEDEC – EDSO4SG – Eurelectric – Geode paper on TSO-DSO data exchange

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3. The Clean Energy Package and beyond

Besides the distribution and whole-system codes mentioned above, the Clean Energy Package foresees important proposed requirements affecting TSOs and ENTSO-E on the following issues:

– Results of capacity calculations to increase trading capacities.

– Cooperation of TSOs in Regional Security Coordinators.

– New requirements for and uses of adequacy analyses according to the new Risk-Preparedness Regulation.

– Pragmatic specification of interconnectivity targets.

– Inclusion of foundational articles from network codes/guidelines in the Cross-Border Trading Regulationmany market design adjustments, e.g. stronger balancing group responsibilities (incl. for RES); restrictions on regulated price caps; shorter market time units; better opportunities for RES to contribute to ancillary services; further specified bidding zone procedures; strengthening of active customers, aggregators, energy communities.

While the Clean Energy Package aims to define the market structures to maintain reliability and well-functioning markets during the next 10 years of the Eu- ropean energy transition, European RD&I has begun to address sector coupling as the key for the completion of the energy transition until about 2050 with complete decarbonization of the energy system. Sector coupling addresses the interactions of an electricity system which covers not today’s quarter but half or three quarters of all energy supply (largely replacing natural gas and oil in heating and transport), with a gas transmission and distribution system for clean biogas, hydrogen, and/or methanized hydrogen, both electrolyzed from surplus renewable electricity generation, and very importantly with the mobility and heating systems. It is for example important to optimize the amount and kind of energy storage needed to balance summer surpluses (from PV and hydro) with winter deficits e.g.( during windless winter weeks). Such seasonal storage can be electrochemical (batteries), thermal (e.g. hot water reservoirs or cement block storage), or in the form of clean gas. As the EU has decided on the energy transition but also on a market structure for its energy systems, the future sector-coupled, decarbonized system will depend on coherent price signals for all energy carriers, i.e. with consistent taxes and fees. It is yet unclear whether

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sector coupling will partly build on blockchain-enabled peer-to-peer trading, or on other evolving energy cloud platforms. Current Horizon2020 projects, following recommendations from ETIP SNET, examine such coherent price signals and market designs, as a foundation for future legislation. As conversion of energy carriers and energy storage can take place both at wholesale/transmission and retail/distribution levels, price signals and market designs for sector coupling will continue to affect both TSOs and DSOs, require their intense cooperation, and their market facilitation. Joint planning between electricity TSOs and DSOs, but also between electricity, gas and heating network operators, will need to evolve over the coming years to anticipate and enable sector coupling. ENTSO-E will need to support these evolving tasks, and already today contributes strongly to RD&I prioritization in ETIP SNET and to the RD&I projects themselves.

4. Conclusion

The energy transition is the main reason for the need for ENTSO-E, for joint planning between European TSOs and for coordinated system operations. TYNDPs have improved tremendously methodologically since the very first joint plan published 2010, all eight network codes have become law, market coupling on day-ahead and intraday basis covers ever bigger parts of Europe with the best-known methods and software, RD&I looks forward and structures sector coupling, and RSCs implement five well-defined operational cooperation tasks ahead of legally mandated schedules. ENTSO-E has been a success for the benefit of European electricity customers and of the energy transition. But the implementation of network codes will take years, the Clean Energy Package will bring new requirements, and sector coupling to carry Europe with reliable energy supply through future windless winter weeks will remain a challenge for many reasons, including energy tax harmonization. Meanwhile, digitalization keeps creating new opportunities for cooperation but also new data exchange challenges, and the software development for ENTSO-E’s Common Grid Mod- el, Transparency and Awareness Platforms will need to keep up with these challenges. As long as Europe’s TSOs pursue the same goals of facilitating markets and enabling the energy transition, their association ENTSO-E will live up to these challenges.

So am I proud of having contributed to this success of ENTSO-E as Secretary- General for its first eight years? You bet, proud and grateful for the opportunity to help mitigate climate change. But after a freaky hot European summer and new, even sterner warnings from IPCC, I believe ENTSO-E, ACER, EC,

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TSOs, DSOs, utilities, regulators and national governments need to get even stronger, faster and bolder in pushing the energy transition forward, in building stronger and smarter transmission and distribution grids, and in implementing sector-coupled markets with ever-better and more consistent price signals. Most importantly, let us not be shy in engaging citizens and customers in averting some of the biggest risks in human history, and in using the necessary decarbonization of electricity, gas, heating, transport and industry to consciously make Europe a better place to live. The end of oil for cars will be a good thing not only for the world’s climate but also for our health. The end of driving wheels will be not only good for the climate but also for our then less congested cities with lots of parking square meters converted to livable spaces. And prices spiking during windless winter weeks for heating our homes, offices and factories does not need to be an economic disaster if prices are low all the rest of the year, and if we all understand why this happens, and why it is even good for us. Self-confident explanations to citizens and customers will be needed, but if we explain and manage the energy transition well, I am sure people will appreciate it. But if we bicker and hesitate and cling to the ways we’ve always done it, the people will become mad at us, and rightly so. The energy transition will bring many tough challenges – let us not spend too much time arguing before we solve the ones that are clear enough, because new ones will come at us in fast succession.

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CHAPTER 13 THE CHANGING ROLE OF DSOs AND THEIR NEW ROLE IN THE EU AGENDA

Christian Buchel

Although the electricity system was in its early days characterised by small local networks,1 it later developed into more demand-predictable, centralised and controllable power generating infrastructures, with electricity transported across vast distances by high and extreme high voltage transmission grids to then be transformed into lower voltage and distributed to all end-users through the distribution network. Distribution network operators (DNOs) were the operating managers of these energy distribution networks, operating at low, medium and, in some cases, high voltage levels. Historically, they played a rather passive role of managing a network crossed by unidirectional flows of electricity, with the real-time balancing of the system left to transmission system operators (TSOs).

But in the last decade, DNOs around the globe have seen their role deeply changed, due to new technology, the need to integrate the highly volatile and decentralised renewable electricity, increased loads and capacity due to electrification of transportation, cooling and heating, as well as the impact of evolving market-needs and changing customer behaviour. From a passive role to an active one, the DNOs became DSOs; no longer simply network operators, but real system operators. Although the core responsibility of DSOs of managing the distribution network remains the same, the fulfilment of their mission has been hindered by these changes and a more and more complex and smarter energy system, turning from network operators to system operators, DSOs. DSOs are

1 As electricity could then not be easily or efficiently transformed to the higher voltages necessary to minimize power loss during long-distance transmission

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today reorganising their business models, transitioning from network operator to system operator at the core of energy transition, while openly favouring a review of the European and national legal frameworks.

When considering the role of DSOs in the European Union, the diversity of the European DSOs needs to be kept in mind. In fact, DSOs differ from a country to another, mostly due to historical, geographical, legal, political and economic reasons. Difference can be in the number or size of DSOs. Indeed, a single DSO can manage a whole Member State, while in others there can be hundred operating a regional or even municipal network. But regardless of their size, all DSOs with more than 100 000 customers connected to their networks have to be clearly unbundled.

1. The transformation of DSOs: from unbundling to neutral market facilitator

The industry was first transformed with the unbundling of TSOs and later DSOs from other players in the energy value chain. In 2009, the directives 2009/72/ EC and 2009/73/EC of the Third Energy Package laid out the common rules for the upcoming development of the internal electricity market. Among the main decisions was the requirement for supply companies to separate, or un- bundle, the generation side of their businesses from their network side, so to ensure that licensed public service companies were separated from the competitive activities of energy generation and retail to final customers. It would prevent market distortion through cross-subsidization and discrimination of other companies. The vertically integrated value chains were to be broken and DSOs were to have a separate legal form. In France, Enedis, the main distribution system operator, as a subsidiary of EDF, is therefore legally separated from the historical supplier and does not offer preferential treatment to EDF compared to other suppliers. To draw up and enforce these rules, national regulatory authorities (NRAs) were set up in the member states.

But my profound conviction is that, more than regulation, the major transformation for DSOs has been technology, from solar production to electric mobility, and to the involvement of final consumers at the centre of the energy system. Whereas European and national energy frameworks are mainly based on large electricity production units which produce energy at the request of the end-consumers, the current market is transitioning. With the European Union looking at cost-efficient ways to reduce greenhouse gas emission, new renewable energy generation sites have been more and more decentralised, using more dis-

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tributed energy sources largely connected to the distribution system, as opposed to the traditional system where large centralised sites were connected to the transmission grids. In addition, the demand on the customers’ side is shifting, with the emergence of new types of electricity needs, such as electric mobility or the growing part of electricity in heating and cooling.

The increase in number of local renewable energy production units on the supply side led to a more complex management of the network, due to the intermittent nature of the resources and the bi-direction of flows. This changing utility landscape is today stimulating a transition from a one-direction road of electricity delivery to a more complex, smarter model that accounts for and manages multiple points of entry and exit, of supply and demand. In response to these new challenges of grids management and congestion, DSOs had to adapt themselves, their technology, their culture and their knowledge, to constantly seize new digital technology and ICT layers to enable flexibility of the network, allowing the balancing of demand and supply to be as close as possible to real time levels and having profound consequences for the design, operation, maintenance and improvement of distribution network everywhere.

While traditional electric distribution networks were not crafted with today’s technology in mind, they are now essential actors to modern electric system and are key for the substantial integration of renewables. The energy transition needs smart distributors. Smartening the grids offers opportunities for more efficient and flexible markets. Thanks to increased real-time monitoring and steering capabilities, both producers and consumers can contribute to improve the operational management of distribution grids. To seize this opportunity, DSOs need to allow suppliers and market actors – to those already implemented but also to new comers – to enable a more flexible and efficient demand response. To do so, digital is an opportunity to adapt to disruptive global trends and industry innovation. The French case of Enedis is an example of pushing harder in this direction and was the first to adopt this role.

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2. Digital technology as a key factor for smart DSOs and the French case of Enedis

In 2016, E.DSO for Smart Grids, the Brussels based association regrouping some of the major European DSOs, released a position paper where it presented the digital trends that the industry was or would be facing.2 Among them, increasing interconnectivity of the system, emerging collaboration and interaction of consumers with the operator through smart meters, collaboration of DSOs with other parties in the ecosystem, data innovation and cyber security.

Because of the regulation ensuring their neutrality, DSOs have access to information regarding energy use, imbalances and congestions areas when exercising their core tasks. Hence, they are able to publish data that is valuable in empowering aggregators and consumers, while protecting their privacy. The digital challenge consists in pushing beyond the limits of the actual electrical system and make it evolve to adapt to the integration of renewable energies, decentralization, digitisation and changes in consumers’ expectations while maintaining a goal of less costs, very low CO2 emissions and strong resilience. All electrical infrastructures (production, networks and demand) must evolve qualitatively to integrate smart grid technologies while never forgetting the fundamental missions of security and quality of supply.

These technologies aim to value flexibility on both generation and consumption sides and in some cases reduce the need for the reinforcement of networks and means of production. They make it possible to improve the forecasting management, the automatic resorbing of certain incidents, the centralized regulation of the voltage, the dynamic adjustment of the reactive power of the producers ... In concrete terms, these different smart grids solutions rely on a set of technologies: sensors to better understand the state of the electro-technical quantities of the network for real-time control as well as to feed the production / consumption forecasts, digital equipment for processing and transmitting data collected on networks to control decision-support systems, communicating meters, more and more new software functions for supervision and real-time control, network study and simulation tools, and big data to manage flexible energy resources and flows on the network with a finer time step and spatial resolution. Finally, DSOs are becoming real platforms on which customers and territories can develop their energy transition policies. New forms of stakeholders bring new challenges and opportunities to DSOs and their current business organisa-

2 Digital DSO, a vision and the regulatory environment needed to enable it, EDSO for Smart Grids, January 7, 2016.

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tion. With the deployment of electric vehicles charging stations, DSOs can for example help municipalities to better organise their implementation schemes by advising them on the location to build stations where the grids can properly support them, and where the cost for the community will be lower. DSOs’ knowledge can also be beneficial for smart city planning, with data on energy consumption and thermo sensibility, which can help municipalities to allocate more efficiently their investments.

Enedis, a major DSO representing up to 95% of distribution grids in mainland France, is dedicated to public service. In France, the distribution networks are owned by the local authorities. Enedis is in charge of operating the grid while ensuring service continuity and quality, and non-discriminatory access to the network for both consumers and generators. To ensure the first mission, the DSO decided to capitalise on its smart grid investments: an electricity supply network using technology, and most especially digital innovation, to detect, predict and react to local changes in uses. It would allow DSOs to balance the flexible and fluctuating supply and demand in real-time. Succeeding in the smartening of the grids relies on various tools and technology. In collaboration with dozens of partners from utilities, ICTs, universities and R&D, Enedis boosted investments to integrate new energy sources and uses.

To allow more flexibility on the grids and to avoid grids congestion, one option would be to store the electricity while waiting to consume it. One of the main challenges of DSOs today is to integrate the potential of decentralised storage – fixed or mobile - within their network. The use of grid-scale storage by DSOs is limited in the Clean Energy Package. However, DSOs are expected to own and operate storage devices for the technical management of the grid and without interfering in the market. But another key element for smart grids has already been widely implemented: smart meters, or communicating meters.

Enedis is deploying smart metering, like most of European DSOs. Its deployment started in 2015, with the goal of installing 35 million meters by 2021. To this day, about 13 million meters have been installed. Its smart transformation has turned Enedis into a market maker, facilitating connections between the supply and demand sides. The company demonstrated its capability to propose an open data platform enabling new services and business models.3

3 In 2016, the Vlerick Business School published research project What every DSO should know about digital, which encompasses a case study on Enedis’ digital transformation which chronologically summarizes these various steps and breakthroughs.

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In parallel, Enedis launched its digital program driven by its digital maturity, encompassing all its activities. The company started in 2014 by studying and comparing its maturity in order to build the major orientations of the roadmap around digital program levers. Every year, the teams would measure their digital maturity, so to identify the necessary actions to speed up Enedis digital transformation and the major inflexions to be made. Four years after the launch of the program, in summer 2018, significant progress has been made in the data processing business, which is becoming increasingly diversified. Data has allowed an improvement of operation performance, prioritization of investments, maintenance and prevention, as well as an increase in efficient faulty meters’ detection. In their digital Factory, Enedis’ team of data scientists can thus calculate losses and propose internal services covering all the network in the 25 regional divisions. The company is also testing new data processing for external services such as the weekly calculation of consumption statistics, electrical footprints or load curves. Datasets around electric mobility, thermo sensitivity or annual consumption and production data have been published. Data also allowed the enhancement of customer relationships, a key criterion for measuring operational excellence. The company invested in digitized customer relations, with the “Enedis à mes côtés” (Enedis supporting me) application, which provides a step by step diagnosis in case of power outage and proposes weekly and monthly consumption analysis thanks to the data provided by smart meters. But in the end, with my experience as former CDO, the most important aspect was, for the company, to invest in its cultural transformation, to work in a horizontal collaborative way, rather than a vertical one. It enabled bottom-up collaborative innovation within the digital platform, The Hive, or via workshops and project acceleration. Innovation, rather than competition, was our new goal.

3. The framework needed to allow European DSOs to serve the energy transition

Smart networks and digital transformation are a historical opportunity for all European distributors. Constant innovation is key to adapt to major issues related to climate and digital revolutions, and is also the answer to the empowerment of consumers, citizens and territories. As an example, the profession is committed to open data, while protected privacy, and E.DSO signed in Tallinn in 2017 an e-energy declaration4 that «aims to promote the digitalization of Europe’s energy systems and the use of smart solutions to step up the energy transition» and

4 The Tallinn e-energy declaration was signed on September 19th and 20th in the margins of the high-level conference on electricity market and informal meeting of energy ministers. It records a political intent alone and does not establish any new legal commitments, replace or modify any existing legal obligations.

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proposed an open data protocol on behalf of all European DSOs.5 However, common challenges for DSOs across Europe do not necessarily call for a perfectly uniform regulation. If regulation principles are common to all Member States, situations vary from one state to another (with the example of tariffs regulation). To represent their interests and closely follow European legislation, distribution system operators are represented in Brussels into associative structures according to their sizes. Geode, Cedec, Eurelectric and European DSO for Smart Grids (E.DSO) association, founded in 2010, whose 38 members cover up to 75% of the distribution network in the EU. All these structures however face various similar challenges and work closely together to bring compelling arguments to European decision-makers.

European DSOs have taken note with satisfaction of the recognition, by the Clean Energy Package, of their major role in moving towards the political objectives of the European Union regarding climate.6 To do so, the evolution of their role is yet to be clarified in the European legal framework: the key challenge is now to ensure that DSOs are equipped for their role as neutral market enablers which empower territories, aggregators and customers themselves. As technology development is constantly improving, the question is now to make sure that, even if the legislation will give DSOs a clear framework and direction, it will also allow enough room to experiment and improve with new partners, practices and services, to ensure a sustainable, affordable and secure energy supply. Fu- ture areas of activities are yet to be clarified in the Energy Market Directive and the division between DSO’s core and non-core activities is yet to be agreed on; Enabling DSOs to use all flexibility possibilities, including storage as a technical network management tool is an example of one DSO’s non-core activities being discussed at the European level. The Electricity Directive and Regulation were agreed at the political level on December 19th, but formal adoption by the Council and by the European Parliament is still pending.

5 This protocol, proposed by EDSO, were to set guidelines to ensure the highest quality of data creation and management while issuing procedures to make them widely accessible 6 The European Commission published on November 30th 2016 eight legislative proposals under a single title, the Clean Energy Package for all Europeans. This legislative projects, which outline the practical con- tours of the energy transition, will have many implications for the entire electricity system.

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In spring 2018, EDSO published its key recommendations on Market Design for trilogues discussions:

1. Fast challenges need an effective and operational framework for the EU DSO entity. A key disposition linked to DSO/TSO cooperation in the regulation on the internal electricity market is the establishment of an expert body composed of DSOs representatives and experts, similar to the one transporters already have. This structure will provide technical support to the European Commission. Concerns on the governance of such an entity remains: voting rights and decision-making should, for example, be based on a fair and proportional representation of DSOs according to the number of connected customers.

2. Match DSO/TSO responsibilities on network codes and data management. Although DSOs consider crucial the cooperation with TSOs, responsibilities on drafting network codes and data management, data protection and cyber-security should be based on reciprocity.

3. Encourage DSOs to innovate and not take away important means and instruments. As I previously wrote, the possible prohibition of future DSOs activities by the Directive on Market Design, which contradicts the evolving roles DSOs are required to perform as part of the energy transition is a concern.

4. Enable DSOs to use all flexibility options, including storage as a regular network asset. DSOs’ needs to use a range of flexibility solutions and tools should be recognised by both the Council and the Parliament. EDSO supports the approach giving Members States discretion to decide on consultation processes carried out by DSOs on network plans and disagree on their submission to external entities (NRAs or TSOs) to avoid network development fragmentation.

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5. Clarify the role of energy communities to ensure their full participation in electricity markets. Energy communities can play an important part in the energy transition, particularly in promoting renewables and new customers’ services. If they can however own and operate grids, they must in principle follow the same rights and obligations as DSOs.

6. Support an enabling framework which respects the diversity of national tariff structures. Any rules on network tariffs are best implemented at the national level under NRAs’ supervision. EDSO welcomes the definition of AC- ER’s role in helping cooperation between national regulators through the drafting of a best practice report on tariff methodologies.

7. Ensure DSO’s access to all necessary data, maintain data formats already in place. A common EU data format set in place without having first carried out a thorough cost-benefit analysis is a concern. It would increase costs given the heterogeneity of national practices and market processes.

8. Implement cost-efficient smart metering functionalities. EDSO welcomes Council and Parliament’s proposed frameworks where already-installed smart meters are exempted from complying with technical requirement, if they are not cost-efficient. Since, in most countries, DSOs are responsible for metering, while customers’ energy awareness falls under the scope of market parties, DSOs should not be obliged to provide validated data through in-home displays.

9. Boost DSO’s roles in risk preparedness to guarantee security of supply. As operators of critical infrastructures, DSOs need to be involved at all stages in risk preparedness planning. Cyber-attacks have revealed systems’ vulnerabilities, highlighting the need for better coordination.

10. Fully involve DSOs in ACER’s decision, including network codes. When revising network codes, it is essential for DSOs to be fully involved before ACER submits its proposal to the Commission.

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In the end, from the 300 articles that constitute these eight legislative files, only a few were selected for amendments propositions by the European DSOs. This small figure shows that the sector concurs to a large degree with the vision of the European electricity system as proposed by the Commission. Nevertheless, it must be ensured that regulation is not too rigid, thereby hindering system innovation. System operators must have all necessary tools at their disposal to deal with the challenges lying ahead and to make full use of the opportunities that go along with them.

Therefore, in my role as chairman of E.DSO and in view of the upcoming Euro- pean parliamentary elections in May 2019, followed by the installation of a new Commission, I would like to propose the following three key recommendation to the European legislators:

1. Acknowledge the key role that DSOs play in the energy transition. They are neutral market catalysers, enabling new services and empowering customers to play an active role in the energy system. They are digital players, handling a variety of data, always concerned with the highest network security standards and safety of their customers’ data.

2. Continued dialogue between legislators and the different stakeholders is crucial. DSOs are eager to work closely together and provide their expertise to the European legislators. This expertise can be seen today through various European projects and through achievements on the ground, i.e. in the realms of open data, new services such as flexibility, e-mobility, and strong cooperation with other stakeholders, e.g. with the TSOs on data management and active system management.

3. Regulation should be dynamic and not inhibit innovation. It is important to acknowledge that innovation in a regulated environment is always different from innovation outside of it. However, regulation should be flexible enough to allow and even incentivize regulated entities such as DSOs to be innovative and use new technologies and models. At the same time, new players must be subject to fair and proportional rules and covered by appropriate regulation where necessary.

To conclude, the author would like to express his conviction that a collaboration between DSOs and TSOs is essential. Although a shift in network management responsibilities has occurred from transportation system operators (TSO) to DSOs, the decisions of both DSOs and TSOs regarding flexibility solutions affect their respective tasks: it is crucial that both sides agree on procedures rela-

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tive to grid management and network codes. It is with this idea in mind that was put together a TSO/DSO platform which I have the honor to preside. Its vocation is to define concretely our positions and work together on determining our roles in managing flexibility.

Tomorrow’s electric system, while becoming an enabling platform for energy transition, will take less and less into account networks voltage levels. The cooperation between TSOs and DSOs will be essential for the energy transition and for maintaining the security and quality of supply. If networks were, until a few years ago, a historic industry of the past, they are becoming an industry of the future with new competences and a huge contribution to innovation, an industrial sector in which Europe could lead.

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Part 2 – Chapter 14 – The Energy Community: ready for the Clean Energy Transition?

CHAPTER 14 THE ENERGY COMMUNITY – READY FOR THE CLEAN ENERGY TRANSITION?

Dirk Buschle

1. The Energy Community – mission accomplished?

The Energy Community’s mission has evolved since the time when its founding document, the so-called Athens Treaty of 2005,1 was drafted and signed. Its objectives were multi-fold from the beginning and broadly correspond to European energy policy’s famous trilemma – market opening and integration, security of supply and sustainability. This is not surprising given that the Energy Community was designed to export European policy and law to a number of non-EU countries (at the time all located in South East Europe). As the Energy Community operates in the context of enlargement and external energy policy, promoting these objectives is not entirely altruistic but (also) in the self-interest of the European Union. The motivations driving the European Union to engage in the process, and ultimately to sign up to the Energy Community Treaty as a Party, can be seen through the lenses of two different policies, enlargement preparation and external energy relations.

In the following, we will assess to what extent the Energy Community’s objectives have been accomplished some 13 years later. We will look at that from both the (non-EU) Contracting Parties’ perspective and the European Union’s. From the perspective of the Contracting Parties, the process of achieving the Energy Community’s objective by implementing the acquis communautaire may be referred to as the Energy Community’s first energy transition, as opposed to the

1 Thenegotiations for the agreement on establishing the Energy Community for South Eastern Europe began in May 2004. On 25 October 2005, the Treaty establishing the Energy Community was signed in Athens. It entered into force a good six months later, on 1 July 2006.

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second, the clean energy transition, on which Europe and the world has em- barked more recently.

1.1 Creating and integrating energy markets

With regard to market liberalization, one needs to keep in mind that back in the early 2000s, South Eastern Europe was yet to begin its first energy transition: the transformation of energy sectors under full dominance by the state in various forms (the legacy of socialism) and fragmented along national borders (the legacy of disintegration) to a regional market, integrated in the European Union’s own internal market. The challenge was of Herculean dimension. Dec- ades of non-investment in power plants and lines had left the Balkan region extremely vulnerable. The wars had brought the energy sectors to the verge of collapse. In this situation, the Energy Community offered one remedy: Euro- pean law, yet not much more. The Energy Community budget is not designed to provide direct support in infrastructure or generation investments. Instead, the expectation was that the implementation of the Second, and as of 2011 the Third Energy Package, would encourage private investors to engage in rebuild- ing destroyed and neglected energy sectors and, based on the axiomatic belief that markets enhance consumer welfare, improve quality and prices of energy supplied for the benefit of individuals and the economy as a whole.

As may have been expected, the reality did not quite live up to the textbooks. As the Energy Community Secretariat’s annual implementation reports show,2 the first energy transition is far from being achieved. The assumptions made earlier were optimistic and may have underestimated vested interests in keeping the structures of the energy sectors unchanged. Interests of the elites, but also the fear of price shocks of a population which got used to state-regulated prices. Addressing poverty by price regulation instead of through the social systems was and is still quite common in the Contracting Parties. This policy puts the burden on the incumbents by expecting them to make profit on the one hand while keeping (regulated) prices below market prices, and sometimes even below costs, on the other hand. Utilities respond to that stress by further postpon- ing investments, which in turn affects their fitness for the market economy and for the ongoing energy transitions, first and second. Where the state essentially functions as one vertically integrated undertaking, the Third Energy Package instruments like ownership unbundling remain relatively edgeless. Utilities which had been privatized (in Albania, Macedonia or Moldova for instance) resorted

2 The most recent report (Secretariat’s Implementation Report 2017/18, https://www.energy-community. org) concludes that the average implementation ratio in the Contracting Parties is at 43%.

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to arbitration and, to avoid lengthy, expensive and paralyzing legal battles, mediation by the Energy Community Secretariat (which in many cases turned into a crucial tool for the reform process).3

The whole design of the energy sectors in the Contracting Parties historically was, and still often is meant to maintain exclusive supply chains between upstream and downstream state incumbents and to secure the ultimate goal of keeping the electorate’s energy prices low. Hence the impact of liberalization in many countries has been limited to imports, for periods when domestic generation does not suffice to satisfy demand. And even in this segment, trade is -or ganized through a (day-ahead) power exchange only in one country, Serbia. The reluctance to create transparent markets in South East Europe seems not to be limited to the energy sectors though. The European Commission recently concluded that “none of the Western Balkans can currently be considered a functioning market economy”.4 Nor is this typical for South East Europe only. The energy sectors of the Contracting Parties which have joined the Energy Community since 2010 – Moldova, Ukraine and Georgia – are characterized by similar inertia. The mindset behind these policies follows a pattern which makes accom- plishing the Energy Community’s liberalization mission a particularly difficult task: to focus on short-term electoral victories at the price of neglecting necessary investments, or relying on international support instead. If this pattern already delayed the achievement of the first transition, it certainly endangers the green energy transition determined by features such as innovation, digitalization and decentralization.

Besides the arduousness of domestic energy sector reforms, regional integration has proven an equally difficult objective to achieve. Under a mindset which considers autarchy, at least in electricity generation, as the ultimate goal, the promotion of market coupling is cumbersome. Electricity market coupling is still to materialize in the Energy Community, a regional balancing market does not exist and even bilateral trade is often made difficult by heavy licensing requirements. That said, it is a neighbouring EU Member State, not an Energy Com- munity Contracting Party, which still applies export fees in electricity trade and imposed an outright export ban during winter 2017.5

3 For successfully settled disputes by the Dispute Resolution and Negotiation Centre see https://www.energy- community.org/ 4 A credible enlargement perspective for an enhanced EU engagement with the Western Balkans, European Commission Communication of 6 February 2018, COM(2018) 65 final, p. 3 (in the following: “2018 WB6 Strategy”). 5 European Commission, Quarterly Report on European Electricity Markets, Volume 10, Issue 1 – First Quarter of 2017, p. 3.

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To be fair, the course of the events affecting the implementation process from outside the Energy Community were not always in favour of the Contracting Parties. The financial and economic crises after 2008 led to a double-dip recession and affected the appetite of investors for engaging in the energy sectors of the Energy Community. More importantly, the European Union’s enlargement fatigue6 dampened what in 2006 was and still remains the Contracting Parties’ – at least in the Western Balkans – primary motivation for taking upon themselves the hardship of deep energy sector reforms. After a long period of stagnation, accession negotiators are well aware that the most difficult concessions – and overcoming key obstacles to energy sector reform may well fall within this category – should not be made too early, and not without getting anything in return. This differentiates the situation of the Energy Community Contracting Parties from the situation of neighbouring EU Member States with a similar socio-economic structure and not necessarily a better implementation record. The fact that progress, or rather the lack of progress, on the “meta-level” of EU accession negotiations affects the implementation success within the Energy Community also reminds us of the limits of sectoral integration. We will come back to this below.

But the Energy Community’s market integration mission was never limited to its non-EU Contracting Parties. The Treaty’s ambition goes further, as far actually as the “Creation of a Single Energy Market” (in its Title IV) between the EU and its neighbours. In this dimension, the Energy Community is an organization of pan-European nature. Yet the achievement of this particular objective has so far been blocked by what could be called a bug in the Community’s governance: the export of EU acquis to non-EU countries does not allow for the imposition of reciprocal obligations on the EU, while the non-EU countries are requested to assume such obligations. This creates an imbalance. The problem is currently being addressed by negotiations for Treaty amendments. We will also come back to this, at point II below.

1.2 Security of supply and the export of European energy law

The Energy Community’s contribution to ensuring security of energy supply affects the EU more directly than market opening in the Contracting Parties. In its 2018 WB6 strategy, the European Commission noted that the “prospect of EU membership for the Western Balkans is in the Union’s very own political, security and economic interest. It is a geostrategic investment in a stable, strong and

6 Despot/Reljić/Seufert, SWP-Aktuell 23, April 2012.

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united Europe based on common values.”7 Rewinding the time twelve years back, this was precisely the argument made for the establishment of the Energy Com- munity, aside from the assumption that EU membership could be surrogated, at least for some time, by membership in a sectoral Treaty.

Among the specific motivations for the European Union to engage in redesign- ing the Balkan energy sectors at the time was bringing the Southern Gas Corri- dor under the rule of European law. The Southern Gas Corridor was and remains a centrepiece of the European energy security and diversification strategy. Secur- ing that Corridor was high on the agenda in the heydays of European pipeline diplomacy in the late 2000s, which saw a flurry of projects of which eventually one, the Trans-Adriatic Pipeline saw the light of day. And that project, especially when comparing it to one of its main rivals back then, the South Stream project, maybe shows the impact of the Energy Community, of European law on infrastructure projects affecting the EU’s supply security best. While the En- ergy Community Secretariat challenged South Stream’s compliance with the Second and Third Energy Package, it played an instrumental role in approving an exemption from those rules on which the construction of TAP depended.8 European energy law, exported by the vehicle of the Energy Community, thus played the role intended for it in the Southern Corridor.

Mission accomplished indeed, but not the end of the Energy Community’s contribution to ensuring Europe’s energy security. In 2011, Ukraine, traditionally the most important transit country for Russian gas and an arena for a succession of gas crises which would subsequently shape the EU’s security strategy and eventually lead to the establishment of the Energy Union, joined the Energy Community. This accession, as well as that of Moldova and Georgia, moved the geographical and geopolitical focus of the organization to the East. In doing so, it not only affected its historical purview in the Balkans region but also changed the character of the Energy Community. The membership of Ukraine increased and perpetuated the importance of the Energy Community’s contribution to help ensuring pan-European energy security.

At the same time, the impact of European energy law also changed the energy sectors of the new members of the Community profoundly. In the case of Ukraine, this impact would materialize only after the Maidan revolution. Yet since then, it has changed the legal framework governing Ukraine’s gas sector profoundly. The Gas Market Law of 2015 is almost a carbon copy of the Third

7 2018 WB6 Strategy, p. 1. 8 Opinion 1/2013 of 14 May 2013.

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Energy Package. The same holds true, albeit to a lesser extent, for the electricity legislation. The fact that Ukraine’s energy DNA is harmonized with the Euro- pean Union’s is a major game-changer in East-Western geopolitics of energy. But here as well, there is still plenty of potential for improving the implementation record and hence impact. The gas market, for instance, remains substantially distorted and the lack of unbundling does not help when it comes to the country’s reliability as a transit partner.

The harmonization of the rules governing the electricity and gas sectors in the Union’s neighbourhood is the Energy Community’s most visible achievement. It is a manifestation of Europe’s power to integrate beyond the borders of the EU in one of the most crucial policy areas. The foreign policy aspect of the Ener- gy Community has been highlighted by the European Union’s institutions time and again.9 But the export of European rules without the Union’s own commitment would not have worked. In fact, its success is largely owed to a smart combination of external policies and access to the internal market.10 We will come back to the aspect of reciprocity below.

Being the most advanced building block for a united European foreign energy policy, the Energy Community may also be considered the governance template for the external dimension of the Energy Union. The Energy Community creates a common energy sphere of shared values and rules between Europe and its neighbours. The scope of the rules covered, as well as the institutional architecture and the procedures tel quel correspond to what is expected from any third country in Europe having an interest in participating in the Energy Union and accessing the internal energy market. Most important is the reliance on the law as the code or glue for such relations. The law can serve as a (relatively) neutral pivot where policy fails. In European external energy policy, the fervent struggles about competence and the difficulty to come to joint positions suggest a need for such an alternative pivot.

1.3 Sustainability

The third pillar of European energy policy, sustainability, is developed in the En- ergy Community’s acquis only rudimentarily. Of all the many pieces of EU en-

9 Notification by the Commission to the energy security and international cooperation, COM(2011) 539 final, p. 7; Council conclusions on strengthening the external dimension of the EU energy policy, 24 No- vember 2011, p. 3 et seq. See also the Council conclusions after its meeting on 12 December 2013. 10 See in more detail Dirk Buschle, Die Energiegemeinschaft, in: Armin Hatje/Peter-Christian Müller-Graff, Enzyklopädie Europarecht, Volume 1: Europäisches Organisations- und Verfassunsgrecht, Baden-Baden 2014.

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vironmental law not more than four made it into the 2005 version of the Treaty, namely the directives on environmental impact assessment,11 sulphur in fuels,12 on large combustion plants13 and one article on wild birds.14 It was soon to become clear that with this minimalistic approach to environmental legislation, the Energy Community would lose touch with its EU “mother ship” before the long. In the EU, environmental protection and subsequently the fight against climate change and decarbonisation have more and more been occupying the leading part within the EU’s trilemma and are now informing the energy transition. Faced with the risk of being reduced to an organisation with a one-sided remit – market reform – the Energy Community had to and did follow suit. It incorporated first the renewables directive of 2009,15 a set of directives on energy efficiency,16 more and stricter environmental laws,17 and finally climate change legislation such as the so-called Monitoring Mechanism Regulation (MMR), 18 and even elements of the Clean Energy Package,19 albeit non-binding yet.

European environmental and climate law differ fundamentally from the ordo- liberal energy market packages. The former are based on thresholds or targets respectively, and thus have a much more direct and quantifiable impact on countries’ economies than the latter. This necessarily affects the export of such rules through the Energy Community as well. Whereas unbundling rules for instance can be rolled out to the Contracting Parties without much adaptation, the adaptation of renewables or energy efficiency targets-based legislation requires appropriate methodologies which take into account the national circumstances such as potential and economic strength, on the one hand, and the politically determined level of ambition, on the other hand. In the Energy Community, the point of reference for the ambition level is naturally the EU. The Energy Com- munity gained valuable experience in striking the delicate balance already when

11 Directive 85/337/EEC on Environmental Impact Assessment, OJ L 175, 5.7.1985, p. 40. 12 Directive 1999/32/EC on Sulphur in Fuels, OJ L 121, 11.5.1999, p. 13 13 Large Combustion Plants Directive 2001/80/EC, OJ L 309, 27.11.2001, p. 1 14 Art. 4 (2) of the Wild Birds Directive 79/409/EEC, OJ L 103, 25.4.1979, p. 1. 15 Renewables Energy Directive 2009/28/EC, OJ L 140, 5.6.2009, p. 16. 16 Energy Efficiency Directive 2012/27/EU, OJ L 315, 14.11.2012, p. 1, Energy Efficiency in Buildings Directive 2010/31/EU, OJ L 153, 18.6.2010, p. 13, Energy Labelling Directive 2010/30/EU, OJ L 153, 18.6.2010, p. 1. 17 Directive 2001/42/EC on Strategic Environmental Impact Assessment Directive, OJ L 197, 21.7.2001, p. 30, Directive 2004/35/EC on Environmental Liability, OJ L 143, 30.4.2004, p. 56, Industrial Emissions Directive 2010/75/EC (Chapter III, Annex V and Article 72(3-4), OJ L 334, 17.12.2010, p. 17. 18 Regulation No 525/2013 on a Mechanism for Monitoring and Reporting Greenhouse Gas Emissions, OJ L 165, 18.6.2013, p. 13. 19 Recommendation 2018/1/MC-EnC on preparing for the development of integrated national energy and climate plans by the Contracting Parties of the Energy Community of 3 January 2018, Policy Guide- lines 03/2018-ECS on the development of National Energy and Climate Plans under Recommendation 2018/01/MC-EnC.

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incorporating the 2009 renewables directive and the 2012 energy efficiency -di rective. The unreliability of data turned out to be a key weakness in that process. Changes in the data related to biomass consumption, for instance, affect the implementation of the 2020 renewables targets in Bosnia and Montenegro, and required a target revision for Macedonia.20 The discussion on Energy Commu- nity targets for 2030 corresponding to those in the EU is already in full swing. The Ministerial Council in 2017 “underlined the need of 2030 targets in the Energy Community for renewable energy, energy efficiency and greenhouse gas emission reduction and requested the Secretariat to discuss and develop proposals for the Ministerial Council in the first half of 2018”.21 The fact that all Con- tracting Parties which are members to the UNFCCC have submitted nationally determined contributions (NDCs) pave the way also for the setting of overall emission reduction targets in the Energy Community.

While the Energy Community, just as the European Union, had treated sustainability and the fight against climate change as one of the three pillars its policy rests on, and has been trying to keep up with the EU, the commitment to decarbonize, as reflected for example in the Paris Agreement or the Clean Energy Package, amounts to a real and deep paradigm shift. Decarbonisation is not any longer one out of three objectives but the centre of our joint energy policies. This hits the Energy Community Contracting Parties badly prepared. On the one hand, they have not yet finished their first energy transition, as described above. On the other hand, many Contracting Parties heavily rely on (outdated) coal and lignite plants for their generation adequacy without any robust plans on how to replace them. The social and societal impact of the transition will be, once again, monumental. And once again, Energy Community membership will help the Contracting Parties wither the storms.

2. Governance challenges

In line with Jean Monnet’s’ maxim, “Rien n’est possible sans les hommes, rien n’est durable sans les institutions”,22 the degree of integration of a multilateral treaty is essentially determined by the existence and the design of its institutions. From a comparative perspective, the Energy Community features a high degree of in- stitutionalisation.23

20 See the Secretariat’s Implementation Report 2017/18. 21 Conclusion No 6 of the Ministerial Council meeting of 14 December 2017. 22 Monnet, Mémoires, p. 412. 23 E.g. Göler/Kurze, Constructing Networks of Trust? Security and Peace, 29 (2011) No. 3, 149-155.

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The Energy Community has created a new and unique governance system, which in many respects resembles the European Union’s but in others significantly diverges.24

Experience suggests that an effective governance for an organization such as the Energy Community must be at the same time robust enough to create reliability, and flexible enough to react to changes and accommodate future developments. The robustness of the Energy Community is essentially guaranteed by the commitment to implement and respect European rules. As we have seen above, the impact of that commitment, from a European Union perspective, is maybe most evident with regard to security of supply and external energy policy. Besides rules of EU origin, reliability of the Energy Community’s governance depends on its institutions. Unlike the European Economic Area Agreement (EEA), the Energy Community Treaty did not replicate the EU’s institutional model in the non-EU member’s pillar but rather opted for common institutions with (supranational) powers over all Parties, i.e. the EU and the Contracting Parties alike. The institutional set-up displays an interesting balance of power by guaranteeing independence to the only permanent body and “Guardian of the Treaty”,25 the Secretariat, while vesting the power to take decisions exclusively in political bodies representing the interest of the members, namely the Ministerial Council and the Permanent High Level Group.26

Flexibility, on the other hand, is guaranteed mainly by procedures. The Ministe- rial Council, in multiple roles as legislature and in judicial decision-making, applies procedures which follow a supranational rather than an intergovernmental logic. This includes majority voting leading to the adoption of law which creates obligations (also) on the dissenting Party. Each Party has one vote in the Min- isterial Council (Art. 77 of the Treaty), no matter of its population or GDP. In principle, this makes the vote of a small Contracting Party, of the size of Mon- tenegro, count as much as the entire European Union’s. Contracting Parties in the Energy Community thus formally have a greater voting power than in the European Economic Area, where they must speak “with one voice” in the Joint Committee.27 Moreover, the Treaty allows for flexibility when incorporating

24 See Dirk Buschle, Die Energiegemeinschaft, in: Armin Hatje/Peter-Christian Müller-Graff, Enzyklopädie Europarecht Mueller-Graff (above). 25 Report by the Commission to the European Parliament and the Council in accordance with Article 7 of Decision 2006/500/EC, 10.3.2011, COM (2011) 105 final, p. 3. 26 Article 58 of the Treaty also establishes a Regulatory Board (ECRB) is conceived as an advisory body and cooperation platform for national energy regulatory authorities, with decision-making powers in exceptional cases. 27 Art. 93(2) of the European Economic Area Agreement. See also Dirk Buschle/Birgitte Jourdan-Andersen, Energy Law, in: Carl Baudenbacher, The Handbook of EEA Law, Springer 2016, p. 773.

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law of EU origin in the Energy Community framework. Yet considering that Article 24 of the Treaty allows for a wide discretion when designing adaptations, the body of Energy Community law applicable under Title II is still remarkably close to the respective original Directives and Regulations in the European Union. Finally, Art. 100 of the Treaty makes Treaty amendments as well as accession of new arties dependent only on a (unanimous) decision by the Min- isterial Council of the Energy Community. Compared to other international organizations, including the European Union itself or the EEA, accession and Treaty changes are thus rather easy, as they do not require a ratification by the existing Parties.

While the governance generally has stood the test of time,28 several lessons learned in the first twelve years of its existence made the Secretariat implement and further propose a number of updates. In 2014, a High Level Reflec- tion Group chaired by Prof Jerzy Buzek called for even more substantial Treaty changes.29 In the following, we will focus on two aspects, enforcement and reciprocity.

2.1 Enforcement

As we have underlined already, the Energy Community is built on the rule of law. While this is clearly its lynchpin in comparison to other, more political agreements, it also reflects its limitations in a world where impact is determined by hegemonic power or money. The Energy Community had been endowed with neither of both, and was yet facing the huge challenge of making Contract- ing Parties reform their energy sectors in accordance with the organizations’ multiple objectives. The Secretariat spent some efforts on developing the Energy Community’s unique selling point into a lever as powerful as possible to achieve impact: the power of the law.

1. The first step in this regard was to develop procedures capable to address, and if needed, sanction non-compliances of the European rules incorporated through the Energy Community. The Treaty provided a basis for an infringement procedure against Parties in its Articles 90-93. These provisions have been modelled on Article 7 of TEU, the provision sanc- tioning the risk of a serious breach by a Member State of the European Union’s fundamental values. In both the EU prototype and the Energy

28 See in more detail Janez Kopač/Dirk Buschle, The Energy Community, in: Christopher Jones, The Role of Gas in the EU’s Energy Union, Clays & Casteels, 2017, p. 203. 29 An Energy Community for the Future, Report by the High Level Reflection Group of the Energy Com- munity, May 2014.

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Community system, there is no court of involved, neither the European Union’s own or an Energy Community court (an option the EEA Agree- ment has taken).

On account of this deficiency, the decision-making by the Ministerial Council, a political body, remains essentially of a political nature. This is unworthy for a community based on the rule of law and may lead to arbitrary decisions not in line with the European Union’s standards and case law. The Ministerial Council lacks judicial independence, expertise as well as the time and resources to deal with complex cases of non-compliance.30

To reduce that risk, the Secretariat designed Rules of Procedure already in 2008, which were adopted and enhanced further in 2015 by the Min- isterial Council.31 The importance of these Rules of Procedure can hardly be overestimated, as they place the emphasis in the Energy Community’s enforcement system on the law by reducing its diplomatic elements. Un- der the Rules of Procedure, the Secretariat carries out a preliminary procedure which consists of the same three steps as the ones taken by the European Commission under Article 258 TFEU (Opening Letter, Rea- soned Opinion, and Reasoned Request). After each of these, the Party concerned may reply to the Secretariat’s factual and legal findings. The 2015 amendments to the Rules of Procedures introduced a fast-track option where the preliminary procedure can be jumped over in simple non- transposition cases.

Furthermore, the Rules of Procedure mitigate, to some extent, the conceptual flaw that the ultimate decision-maker, the Ministerial Council, is by its very nature not independent nor does it necessarily consist of trained lawyers. To that end, the Rules of Procedure created a body originally not envisaged by the Treaty, a 5-members Advisory Committee of independent and highly qualified jurists which provide an Opinion on the Secretariat’s requests to the Ministerial Council in every case.32 The Advisory Committee has been compared to an Advocate General at the Court of Justice.33

30 See in more detail Dirk Buschle, The enforcement of European energy law outside the European Union – Does the Energy Community live up to the expectations? European Energy Journal, 2016, p. 26. 31 Rules of Procedure of 16 October 2015 on Dispute Settlement under the Treaty, www.energy-community. org 32 Art. 32 Rules of Procedure. 33 Roman Petrov, Legal Issues of Economic Integration 39 (2012), 331, 343.

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Moreover, the role of private bodies in the system needed to be strengthened too. Unlike the Energy Charter, which opted for private enforcement in the form of arbitration, and thus provides classic investment protection, the Energy Community’s system is one of public enforcement. This implies a very limited role only for private parties such as investors or non-governmental organizations. While the Treaty gives private bodies the right to complain to the Secretariat, it is only the Secretariat’s policy to treat these complaints with priority, as reflected in the 2015 Rules of Procedure, which makes this right effective, and even more eminent than the corresponding rules in the European Union. For instance, under Ar- ticle 258 TFEU, complainants are not entitled to initiate infringement procedures; in the Energy Community they may submit their case directly to the Ministerial Council if the Secretariat declines to pursue it. In this manner, complainants can effectively play the role of private attorneys of the public interest.34

Finally, Article 92 of the Treaty envisages measures against Parties for serious and persistent violations of Energy Community law. They may consist in the suspension of participation and voting rights. This provision has been used several times in the Energy Community, including the imposition of sanctions against Bosnia and Herzegovina for non-compliance with the Second Energy Package (sic!) in the gas sector.35 As the sanctions remain political in nature and need to be negotiated under the conditions of unanimity voting, the current Treaty reform discussions include the proposal to apply financial penalties. An effective and proportionate sanction regime is evidently important for achieving better implementation results by Contracting Parties.36 Now that the low-hanging fruits in energy sector reform have mostly been picked, the instruments to pierce through the resistance keeping the more important achievements still out of reach need to be strengthened. Improving the enforcement system is also important for the sake of equal treatment between Contracting Par- ties and EU Member States in an integrated single energy market. In this respect, strengthening the Energy Community, an action point under the EU’s Energy Union strategy (see below), makes good sense.

Despite its deficiencies, one should not ignore the fact that the Energy Community’s infringement procedure actually leads to decisions binding on the Parties and may be subject to sanctions. The procedure has been

34 See Dirk Buschle, The enforcement of European energy law outside the European Union., loc. cit. 35 Against Bosnia and Herzegovina, in Case ECS-3/11 S. 36 See Dirk Buschle, The enforcement of European energy law outside the European Union., loc. cit.

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and continues to be routinely applied by the Energy Community institutions. It has resulted in a considerable body of case law.37 The publicity of the procedure are among its biggest assets, in line with Supreme Court Justice Louis Brandeis’ observation that “sunlight is the best of disinfect- ants”.

The Energy Community infringement procedures also complement the diplomatic character of external energy relations by a mechanism based on the binary code of legal/illegal. Experience shows that not all policy- makers are fond of that as it may reduce unfettered room for diplomatic manoeuver. Yet, the juridification of external energy relations, i.e. the gradual replacement of diplomacy by law-based and more transparent decision-making, equally works as a powerful amplifier of the European Union’s external energy policy objectives. For instance, the Secretariat had initiated infringement procedures against Serbia for an anti-competitive destination clause in a gas supply contract with Gazprom which was embedded in an intergovernmental agreement between Serbia and the Russian Federation.38 The procedure did not lead to a diplomatic row as some may have expected but, quite the contrary, to amendments to the intergovernmental agreement deleting the controversial clause.

2. The second step after building up a credible enforcement system was its interlinkage with the initiatives and mechanisms available to and used by partners pursuing similar objectives as the Energy Community. This includes a broad range of organizations, starting from the European Union and individual Member States, covering international financial institutions (IFIs) such as the European Bank for Reconstruction and Develop- ment (EBRD), the World Bank (WB) and the International Monetary Fund (IMF), and includes non-governmental organizations. In these alliances, the Energy Community Secretariat usually joins in its role as compliance watchdog. Cooperation can take place also outside infringement procedures, most notably by the Secretariat proposing and monitoring conditionalities which IFIs may want to attach to their loans and grants. Examples for such alliances include the struggle for unbundling the gas sector of Ukraine (with essentially all IFIs, DG Energy of the European Commission as well as the German and US governments), the setting of appropriate electricity distribution tariffs in Moldova (with the IMF), or reforming the electricity sector in Albania (with the EBRD). Alliances

37 All published at www.energy-community.org 38 Case ECS-18/16, available at www.energy-community.org

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may also take other forms such as joint policy recommendations on auctioning of renewables support schemes with the EBRD and IRENA,39 or the fact that Directorate-General for Neighbourhood and Enlarge- ment Negotiations of the European Commission reflects the Secretariat’s infringement procedures in its annual progress reports on the accession process in the Western Balkans. The European Commission, as well as individual Member States, also invest in the Energy Community Secre- tariat to carry out additional tasks in the mutual interest (e.g. the CON- NECTA programme for the Western Balkans, or the EU4ENERGY programme for the Eastern Partnership).

2.2 Reciprocity

The architects of the Energy Community had conceived the export of law from the European Union to the non-EU Contracting Parties as the key instrument for pan-European energy integration. The resulting parallelism in the legal orders between the EU and the rules-importing countries would create the level playing field required for the expansion of the internal market to happen. Yet it was clear already back in the 1990s that this alone would not suffice. For this reason, the Treaty includes provisions, in its Titles III and IV, which allow for the adoption of genuine Energy Community law not necessarily based on any EU model. Title III may be understood as an invitation to design a regional energy market and network operation mechanism (including the EU Member States bordering the Contracting Parties), based on broadly formulated legal bases for the adoption of secondary law. Title IV applies to the entire EU plus Contracting Parties, and mandates the Energy Community institutions to take legally binding measures “with the aim of creating a single market without internal frontiers” (Art. 42) or “necessary for the regulation of imports and exports of Network Energy to and from third countries with a view to ensuring equivalent access to and from third country markets in respect of basic environmental standards or to ensure the safe operation of the internal energy market” (Article 43). Reality, however, showed that the European Union is reluctant to make extensive use of these possibilities, which is also legally restricted under internal EU legislation.40 It is quite telling that the recent proposals by the Secretariat for Title III legislation aimed at harmonizing license regimes in East and South East Europe41 have met concerns of principle nature in some EU capitals.

39 Energy Community Secretariat and EBRD, Policy Guidelines on competitive selection and support for renewable energy. 40 See Council Decision 2006/500/EC of 29 May 2006 on the conclusion by the European Community of the Energy Community Treaty. 41 Nina Grall-Edler, Harmonization of licensing regimes, presentation available at www.energy-community.org

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Instead, the activities of the Energy Community in praxi remain limited to the export of European law under Title II of the Treaty, with only a small margin for adaptations. This export is considered as a strict one-way street. When European law is incorporated in the Energy Community any reference to “Member States” is routinely replaced by the term “Contracting Parties” in the “exported” acquis. Hence, where the original piece of EU legislation refers to relations “between Member States”, this translates into relations “between Contracting Parties”, and excludes relations between Member States and Energy Community Contract- ing Parties. The legal argument for this is that Title II does not allow for the establishment of obligations on the EU.42

The expansion of EU law as a one-way street may have been acceptable at a time when European energy law was essentially about changes in the internal market structure of individual countries. Yet, it proves to be increasingly inadequate as that law increasingly focuses on relations on all levels – national, regional and European – between all players – Member States, system operators, companies, authorities etc. – and of different nature – norms, standards, targets, consultations, peer-reviews etc. The one-way street paradigm was already incapable of matching a relation as basic as interconnectors between Member States and Con- tracting Parties under the Third Energy Package.43 Their exclusion from Energy Community law created an argumentative challenge in the exemption granted to the TAP pipeline44 and may affect future projects too. Projects which do not qualify as interconnectors under Energy Community law are per se not eligible for exemptions. Moreover, the support and construction of new (electricity, gas and oil) infrastructure between Member States and Contracting Parties is made unduly difficult by the legal gap resulting from the one-way-street paradigm. The TEN-E Regulation 347/2013,45 as incorporated in the Energy Community, excludes this category of projects from the scope of the Projects of Energy Com- munity Interest (“PECI”) label (unless they are already EU Projects of Common Interest (“PCIs”), which in turn is essentially limited to projects between Mem- ber States). This entails different treatment in terms of financial and regulatory framework on both sides of the EU/Energy Community border. The legal gap thus risks turning into an infrastructure gap which again runs counter to the idea to include the Contracting Parties in the pan-European energy network.

42 See Articles 24, 25 and 79-81 of the Energy Community Treaty. 43 Under the conditions of Title II, the definition of an interconnector in Directives 2009/72/EC and 2009/73/EC (as well as the corresponding Regulations), will read as follows: “‘interconnector’ means a transmission line which crosses or spans a border between Contracting Parties for the sole purpose of connecting the national transmission systems of those Contracting Parties”. 44 Opinion 1/2013, available at www.energy-community.org 45 Regulation (EU) No 347/2013 on guidelines for trans-European energy infrastructure, OJ L 115, 25.4.2013, p. 39.

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The problem exacerbates further with the ongoing incorporation of network codes in the Energy Community. A majority of Network Codes cannot be extended to Contracting Parties in a meaningful way. Take the Capacity Alloca- tion and Congestion Management Regulation (CACM) for instance. Several projects of market coupling between Contracting Parties and Member States are currently being discussed but cannot be brought under the umbrella of the CACM due to the gap on the interface between Member States and Contract- ing Parties. Market coupling, but also joint balancing markets or joint forward capacity allocations, create significant welfare gains also for EU customers. In- stead the current mechanism for law exports effectively creates “Energy Com- munity islands” within the same synchronized area. Moreover, Article 20(4) of the same CACM prevents “the TSOs from at least Croatia, Romania, Bulgaria and Greece” from introducing a common capacity calculation methodology until all Energy Community Contracting Parties from South East Europe participate in market coupling. This creates a catch 22 par excellence. In the same vein, the non-implementability of the Regulation on Electricity Transmission System Operation, another network code, in the Energy Community prevents the system operators of Greece and Bulgaria to participate in a regional security coordinator established in Serbia. In the gas sector, the lack of bi-directional applicability of network codes in a legally binding manner affects e.g. the conclusion of inter-TSO agreements enabling the backhaul of gas, which is particular important for Ukraine and Moldova.

The unilateral and one-directional concept of EU law export also fails to establish the legal framework required for cooperation and consultation between the authorities of Member States and Contracting Parties. Such consultation and cooperation schemes are increasingly important to address challenges such as security of supply (consultation of preventive action and emergency plans and coordination of measures in the new Gas Security of Supply Regulation46), pollution (transboundary environmental impact assessment procedures) or climate change (consultation of national energy and climate plans under the new Regu- lation on Governance in the Energy Union), which evidently do not respect the border between Member States and Contracting Parties. Moreover, cooperation between Member States and Contracting Parties requires reciprocity also with regard to concrete projects and transactions, including cooperation schemes (such as statistical transfers or joint support schemes) within the framework of the Renewables Directive, or solidarity under the Gas Security of Supply Regu- lation. The Contracting Parties’ respective potential e.g.( for renewable energy

46 Regulation (EU) 2017/1938 concerning measures to safeguard the security of gas supply, OJ L 280, 28.10.2017, p. 1.

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or gas storage available in Ukraine) could thus be made available for the benefit of Member States.

Hence, the unilateral focus on Title II and the export of law without allowing for reciprocity creates a widening gap on the interface between Member States and Energy Community Contracting Parties, while the Member States keep further integrating among themselves. Instead of creating a pan-European energy area, the Energy Community’s main objective, this gap in effect creates two parallel energy markets, policies and legal bodies, one among Member States and one among Contracting Parties. This calls into question the mission of the Energy Community to create a single energy market. The Treaty requires a new mechanism of integrating the Contracting Parties in the internal market and the Energy Union. Such a mechanism is discussed in the context of the Energy Community reform initiated already back in 2013. Strictly speaking, the introduction of a reciprocity clause does not entail the creation of materially new obligations on Member States but would extend existing commitments (vis-à-vis other Member States) to certain third countries privileged by their membership in the Energy Community Treaty. Moreover, several provisions in Energy Com- munity primary law, such as Article 6 (the duty of sincere and loyal cooperation) and Article 7 (non-discrimination) already apply to the European Union. Negotiations on a reciprocity clause to be included in Title II will allow for the introduction of safeguards in the interest of Member States skeptical about extending their commitments under EU law to Energy Community Contracting Parties, including linking reciprocity to a positive implementation record by the Contracting Party in question.

2.3 New governance challenges

Developing the Energy Community’s core asset, the rule of law, and combining it with the means available to other stakeholders for the benefit of domestic reform and pan-European integration is the essence of the Energy Community’s success story. It has increased its relevance within the non-EU Contracting Par- ties. The Secretariat – which was involved in the Contracting party’s internal energy sector governance only superficially in the beginning, with a focus on transposing EU legislation – is now often deeply engaged in the way how these rules are being applied, or not applied. But the Energy Community over time has also increased its relevance for the European Union by developing into the European Union’s chief instrument for organizing its external energy policy. The European Commission’s recent call for the establishment of “an energy

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union with the Western Balkans” 47 has thus already been answered. The Euro- pean Commission’s Energy Union Communication of February 2015 envisages “strengthening of the Energy Community, ensuring effective implementation of the EU’s energy, environment and competition acquis, energy market reforms and incentivizing investments in the energy sector. The goal is closer integration of the EU and Energy Community energy markets.” 48

The establishment of the Energy Union also influenced the European vision of what constitutes good energy governance, and thus cross-fertilizes the Energy Community. The Clean Energy Package, which took a great deal of inspiration from the Paris Agreement, redesigns European energy policy by a new governance system based on long-term strategies and synchronized national energy and climate plans. The bottom-up approach relies on national planning, regional coordination and a facilitating rather than enforcing role of the European Com- mission. Elements of the new governance scheme have already been incorporated in the Energy Community,49 and there is little doubt that the Regulation, once adopted, will also be exported swiftly. Given the manifold obstacles energy sector reform needs to overcome in the Contracting Parties of Eastern and South Eastern Europe, one may intuitively assume that the region is not ready yet for a paradigm shift which, at least to some extent, substitutes control and enforcement by cooperation. But one could argue with equal legitimacy that the unprecedented challenge of the second, the clean energy transition for our economies and societies require a more inclusive and less confrontational approach. Updating the governance systems in both the EU and the Energy Com- munity in accordance with the Clean Energy Package, may help rebalancing the roles and responsibilities of different stakeholders in a multilayer legal order.

In any event, even without the Clean Energy Package, a trend away from strictly vertical relations towards more complex networks of dialogue and cooperation is evident. In the enforcement of EU law, this trend has always been manifest for instance in the cooperation schemes between national and European courts, and has gained further momentum in 2003, when European competition policy was modernized.50 Since the establishment of the ENTSOs and the adoption

47 2018 WB6 Strategy, p. 14: “To strengthen the EU’s Energy Union, all of its dimensions should be expanded to the Western Balkans: supporting energy security, market integration and energy transition, including energy efficiency and renewable energies. In this context, each country should complete all necessary reforms and streamline their policies fully in line with the five pillars of the Energy Union.” 48 Commission Communication, A Framework Strategy for a Resilient Energy Union with a Forward-Look- ing Climate Change Policy, COM/2015/080 final. 49 See above. 50 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, OJ L 1, 4.1.2003, p. 1.

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of network codes, it also influences energy policy. The Energy Community has contributed to this trend in original ways. The Rules of Procedures in 2015 introduced the possibility for national administrative authorities and courts to refer questions concerning the interpretation or application of Energy Com- munity law to the Secretariat for an opinion.51 This cooperation scheme is used quite frequently. Moreover, the Secretariat established a Dispute Resolution and Negotiation Center,52 which does not only mediate investor-state disputes but also offers third-party mediation in infringement cases between the Secretariat and a Party to the Treaty.

3. The Energy Community and the clean energy transition

The Energy Community has originally focused on liberalization of structurally foreclosed electricity and gas markets, and only marginally on environmental issues. Yet the main driver of the clean energy transition is not market liberalization but decarbonization (an objective markets alone fail to achieve), and the fight against climate change more than “classic” environmental protection. Yet in the Energy Community, the clean energy transition started with the entry into effect of the Large Combustion Plants Directive (for SO2, NOx and dust emissions from existing power plants) and the Industrial Emissions Directive (for the same emissions from new power plants) on 1 January 2018. While the European Union was busy fixing its emission trading scheme and discussing the clean energy package, in many Contracting Parties this date marks the beginning of the end of the coal and lignite era. Existing coal-fired power plants can only be operated for a transitional period, and new ones can only be built in compliance with highest European standards, and often only at the cost of non- compliant State aid distorting the markets. Without even discussing the uncertainties of future carbon prices in the Contracting Parties, coal and lignite have become highly problematic natural resources. This is reflected by the practice of many international banks to not finance coal-fired generation, and insurance company’s practice not to insure them anymore.53

On account of the unfinished first, the structural transition, the clean energy transition hits the Contracting Parties not in their optimal shape. As we saw above, many markets are still being largely foreclosed, overregulated and distorted, and the potential of regional integration is only marginally used. In this

51 Article 2 of the Rules of Procedure. 52 www.energy-community.org 53 See the Energy Community Secretariat’s “Wachau Manifesto” of June 2018, available at www.energy-community.org

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condition, Contracting Parties risk to end up on the losing side of the clean energy transition. The price of these shortcomings will translate in higher costs. The high country risk of Contracting Parties, to some extent the result of under- staffed and sometimes partial authorities, is reflected in higher than necessary capital costs for new investments. Subsidies schemes for coal but also non-carbon generation need to be brought in line with the State aid rules applicable under the Energy Community Treaty, to achieve cost-optimal and non-distorted generation investments. The lack of cross-border integration and organized day- ahead and intraday markets limit liquidity and also turn into handicaps for new investments. And delayed price reforms and investments in the reinforcement of (distribution) networks and the reduction of losses come at a cost as well.

Implementation of existing Energy Community acquis is thus a crucial step to reap the Energy Community’s great opportunities. With one traditional natural resource – coal – turned toxic, the clean energy transition opens the view to the Contracting Parties’ other natural resource, renewable energy. The Energy Com- munity has one of the greatest untapped potential for the fuel of the clean energy transition.54 The technology costs have been dropping significantly over the last years, and there is sufficient positive experience with competitive schemes such as auctions all over the globe to suggest that also the Energy Community Contracting Parties can obtain a maximum of renewable energy at much lower prices. This starts happening in countries such as Albania or Montenegro. These examples also show that it is not possible to jump over one transition and go right into the next one with a good chance of success.55

One of the most pertinent and at the same time difficult challenges is how to provide the necessary back-up energy to balance an increased share of intermittent renewable energy, and thus securing supply especially in winter times. There is no one-size-fits all answer but a relatively high risk of creating sunk costs. In its 2018 Wachau Manifesto, the Secretariat recommended exploring the following options:

– For some Contracting Parties, more gas-fired electricity generation (or gasification) may be an answer. We should be careful, however, to not encourage stranded costs for infrastructure and installations.

– Biomass could play a bigger role also in electricity generation, but should be accompanied by sustainable forestry.

54 IRENA, Cost-competitive renewable power generation: Potential across South East Europe, January 2017. 55 Janez Kopač/Dirk Buschle, Introduction to the Secretariat’s Implementation Report 2017/18.

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– Hydropower may sound obvious in certain Contracting Parties, but should not be installed at the cost of environmental damage.

– In our view, a no-regret solution is stepping up efforts in better regional market integration.

– Beyond what has been explored and partially implemented so far, the Secretariat will explore possibilities for regional capacity mechanisms, ensuring security of supply without distorting the energy markets.

To make sure that the Contracting Parties come out as winners of their second energy transition, the transformation process requires a governance upgrade which we already discussed. The Clean Energy for All (sic!) Europeans Package should be incorporated in the Energy Community immediately after its adoption in the European Union, and most notably the Governance Regulation.56 An Energy and Climate Committee, which discusses 2030 targets as well as national energy and climate plans in the Contracting Parties, operates since 2017 and supports the national experts. But maybe most of all, the transition requires open minds to make use of the great potential and endorse change rather than trying to protect the status quo.

4. Conclusion and recommendations for policy-makers

The Energy Community links the European Union and nine Contracting Par- ties based on a shared legal DNA, but also trade, transit, connecting infrastructure etc. The fight against climate change and the clean energy transition constitutes a new common denominator, one of overriding importance. This requires the Energy Community to turn into an ‘Energy Transition Community’, a process which is already well underway. As always in international relations, maybe the most important feature to decide about success or failure in achieving the Energy Community’s multiple objectives is governance. We believe that with a number of corrections – some of which require changes of the Treaty, others can be achieved e.g. by the incorporation of the Clean Energy Package - the En- ergy Community can be made fit for the clean energy transition, in which it has much to offer after all. The next European Parliament and Commission would be well advised to put even greater focus on using the Energy Community as a powerful multiplier of the impact of its internal policies.

56 Janez Kopač/Dirk Buschle, Introduction to the Secretariat’s Implementation Report 2016/17.

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As in the European Union, the required governance upgrade must, on the one hand, preserve (and in the Energy Community’s case: reinforce the enforcement of ) values such as liberalization, integration, transparency and legal certainty and, on the other hand, become more holistic and recalibrate the role of institutions and stakeholders. As a result of this challenging task, a well-balanced network of stakeholders with clear competences and robust procedures should emerge. Models for such networks can be found in the Energy Community Sec- retariat’s cooperation mechanism with national authorities and courts, or the mechanisms envisaged by the Governance or Gas Security of Supply Regula- tions. They could also include a more systematic cooperation between the Ener- gy Community institutions and IFIs (when it comes to conditions, monitoring achievements etc.) rather than the current ad hoc collaboration.

Reciprocity is a key instrument to finalize the Energy Community’s single energy market with the EU. Developing this concept further and complementing it with the possibility of Contracting Parties to participate early in the EU legislative procedure (with a consultative role), and to participate in EU institutions such as ACER could make the pan-European legal and regulatory space as a whole more effective. It could also make the Energy Community attractive for new countries such as Switzerland or the UK. So far, the European Union has been reluctant in subscribing to the concept of full reciprocity, possibly under the impression that the participating countries could ‘free-ride’ on the internal market and its main principles such as solidarity. This view is short-sighted and prevents the Energy Community from tapping into its full potential in the energy transition. Yet it is indeed important that reciprocity is always and clearly conditioned on the Contracting Parties assuming and actually implementing the same level of commitments. That follows from the rule of law, the Energy Community’s most important contribution to real reforms and the energy transition in the European neighbourhood.

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PART 3 – COMPETITIVE ENERGY FOR ALL EUROPEANS

CHAPTER 15 A CLIMATE AND ENERGY UNION FOR THE FUTURE OF EUROPE: WHAT COMES AFTER THE « CLEAN PLANET FOR ALL » EU STRATEGY?

Sami Andoura & Philipp Offenberg

Responding to the 93% of Europeans who believe climate change is a reality caused by human activity,1 the European Commission just released its “Clean Planet for all” strategy ahead of COP24. In this context, we draw your attention to the recent publication of the European Political Strategy Center (EPSC) “10 Trends Reshaping Climate and Energy”.2 It highlights the massive political, economic, social and technological challenges that will make or break the Commissions vision for a prosperous, modern, competitive, and climate-neutral économe by 2050.

The question that citizens will ask in the next elections is whether these long term European goals can be turned into opportunities for them here and now. The green economy is growing fast, but its benefits are spreading unevenly between higher and lower income groups. Electrification, renewables and digitalisation are giving rise to a new generation of industries; but it is not without challenges to the system. Innovation is gradually delivering on the promising clean technologies needed for a climate neutral economy, but it is in Asia that the largest investments in clean technologies and their manufacturing is increasingly taking place. New supply risks are merging as energy value chains go global and the clean tech increases reliance on new materials.

1 European Commission, Special Eurobarometer 479, ‘Future of Europe – Climate change’, October – No- vember 2018, p. 12 http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/survey/getsurveydetail/instruments/special/surveyky/2217 2 https://ec.europa.eu/epsc/publications/other-publications/10-trends-reshaping-climate-and-energy_en

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It is time to reflect on the best set of policy tools, regulations and governance frameworks that will boost that transition and build on the existing portfolio of instruments. In order to prepare the policy discussion and to give guidance to the discussion on the next European legislature and work programme, this chapter outlines some key trends that are going to shape Europe’s future Climate and Energy policies. It also aims at feeding the debate on the best European solutions to turn the Energy Union and the fight against climate change into a vector of unity in Europe, and a game changer for other priority policy goals on economic modernisation, social justice and strategic autonomy.

1. As the impacts of climate change are becoming more visible, citizens do not tolerate inaction anymore

Weather-related disasters – from hurricanes and wildfires wiping out forests and towns, to typhoons and heavy floods, or severe droughts and extreme heatwaves – are already proliferating around the globe. Worldwide weather-climate disasters caused a record-breaking loss of 290 billion euro in 2017 and are set to increase significantly with higher temperatures.3 While these events are increasingly affecting Europe, citizens also worry about other environmental damages. Air pollution – which already causes more than 400,000 Europeans to die pre- maturely each year – is set to get worse as climate change further magnifies the effects of pollutants.4

While climate and environment are becoming key topics in elections throughout Europe,5 citizens are also taking their governments to court over climate change. A new wave of strategic court cases is emerging, linking climate change to human rights, and aimed at holding governments and greenhouse gas emitters accountable for climate change and pushing them to increase their action on climate change.6 Political decision makers now still have the choice between embracing a smooth and organized transition towards climate neutrality in the mid-century. However, as weather events become extreme, public support for more radical and immediate measures to stop climate change is going to increase in the years to come.

3 Munich RE Group, ‘Natural catastrophe review’, January 2018. 4 European Environment Agency. 5 Politico, ‘5 lessons from Europe’s busy electoral weekend’, October 2018, https://www.politico.eu/article/ decoding-europes-weekend-elections/ 6 London School of Economics, Grantham Research Institute on Climate Change and the Environment, ‘Global trends 2018’.

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As migration remains among the top concerns of many Europeans, even those political actors who do not prioritize the fight against climate change have to acknowledge the fact that climate change impacts will further amplify migration from the global South to Europe. Climate-related disasters have begun causing alarming peaks in numbers of displaced people in recent years.7 As popula- tions in the developing world will feel future climate impacts disproportionally strongly, this is likely to drive unprecedented migration flows.8 At the same time, the opportunities for the African continent – which is a natural fit for renewable energies given the available resources there, and where some 650 million people still do not have access to electricity – are also immense.9

2. Climate change is about to become a socially dividing issue

While large parts of the society demand more climate action, the implementation of concrete measures such as CO2 taxes creates resistance among those most affected by them. There is a growing discontent among consumers and taxpayers as new regulatory frameworks and taxation policies supporting the climate neutral economy transition cause hikes in fuel prices and constrain their mobility (e.g. as older, more polluting cars are banned from cities). The ‘gilets jaunes’ movement in France epitomises the growing social discontent and highlights the need for policies that not only champion the sustainable transition, but do so in a way that is fair and manageable for lower-income groups.

The transition to a climate neutral economy economically benefits certain groups of employees, but it puts at risk the livelihoods of others. The total number of people employed in the renewable energy industry worldwide (including large hydropower) surpassed 10 million for the first time in 2017.10 In the EU, the number of renewable energy jobs reached 1.4 million in 201711 and is expected to increase, with the creation of up to 1.5 million net jobs by 2030.12 On the other hand, many traditional, fossil fuel-based industries are struggling: While the fossil fuel sector provided jobs for 30 million people globally in 2017, it is set to lose 8.6 million jobs by 2050.13 Carmakers will also be affected as the switch to electric cars risks making one in four jobs in the production workforce

7 European Commission, European Political Strategy Centre, ‘10 Trends Shaping Migration’ 8 Ibid. 9 Brookings, ‘Building the Grid of the Future’, https://www.brookings.edu/blog/africa-in-focus/2017/10/10/ building-the-grid-of-the-future-today/ 10 IRENA, ‘Renewable Energy and Jobs - Annual Review 2018’. 11 EurObserv’ER, ‘The State of Renewable Energies in Europe’, 2017. 12 Duscha, de Visser, Resch, Nathani, & Zagame, 2014. 13 IRENA, ‘Renewable Energy and Jobs - Annual Review 2018’.

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redundant. Jobs in the ‘garage next door’ could also suffer given that electric cars require fewer components and are easier to maintain than complex internal combustion engines. In most cases, new jobs created in the clean economy will be created for different skills profiles to those jobs that will become obsolete. In the automotive sector for instance, jobs are already shifting in favour of IT specialists, power electronics, and recycling and battery technologies.

A further challenge will be to train Europe’s workforce to have the needed specialists on time. The renewable energy and clean tech industry is already facing shortages – whether in the wind sector, where there is a shortage of maintenance skills, or the solar photovoltaic industry, where manufacturing experts and installation technicians are lacking. Of course, many traditional skills will remain relevant, in particular in areas such as building retrofits and the construction of new public transport infrastructure.14

3. The world needs a robust global governance on climate change

Stricter regulations in Europe compared to other parts of the world could result in carbon leakage, i.e. businesses transferring production outside Europe due to costs related to climate policies – leading to job losses, and potentially intensify- ing social unrest. There is however so far no solid evidence of carbon leakage. Creating a global level playing field is all the more urgent in this context, and requires both adapting the global trading framework (and World Trade Or- ganisation rules) and reaching a global price for carbon. Currently there are 53 carbon-pricing initiatives implemented or scheduled for implementation worldwide, covering roughly 20% of global emissions.15

Since the renewal of global commitments to tackle climate change with the De- cember 2015 Paris Agreement, only sixteen countries out of the 197 signatories have actually defined national climate action plans ambitious enough to meet their pledges.16 And although diminishing, the world still allocates tens of billions in fossil fuel subsidies each year. In Europe, some 112 billion euro are estimated to have been allocated annually to the production and consumption of fossil fuels between 2014 and 2016.17 The value of global fossil fuel consump-

14 European Trade Union Confederation (ETUC), ‘Resolution ahead of the Katowice Climate Conference’, November 2018. 15 World Bank, ‘Carbon Pricing Dashboard’. 16 London School of Economics, Grantham Research Institute on Climate Change and the Environment, ‘Cli- mate targets’, 2018. 17 International Energy Agency, CAN Europe,

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tion subsidies worldwide was roughly 75 billion dollars in 2017 alone.18 These are issues that need continued addressing on EU, G7 and G20 level.

Frustration with the ‘top-down grand deal approach’ and lack of action at national level continues to drive new grassroots and local initiatives focusing on action on the ground. One example of this is the C40 Global Leadership on Climate Change, a network of world cities committed to take action against climate change. This is opening new opportunities for actors that were not able to play more influential roles in climate change negotiations. The EU should explore further ways of engaging cities in climate action.

4. Asia is becoming the global centre of clean tech investment and innovation

Stronger growth in renewable energy is buoyed by the fact that both solar and wind power are becoming significantly more competitive. Costs of solar have fallen by 70% since 2010.19 Grid parity for wind power, i.e. the moment when these technologies can compete without subsidies, is imminent – or already happening in some countries, like Germany.20

The fall in technology costs is strongly driven by investments and innovation in renewables and in energy efficiency in Asia, as China and other countries in the region seek to keep their swelling energy bills under control and their citizens demand cleaner air. China and India are set to stand for almost half (46%) of the projected growth in renewable energy markets between 2015 and 2021.21 China has become the world’s largest destination of investment in the energy sector, standing for one-fifth of global energy investment in 2017.22 Combined with an ambitious – sometimes aggressive – government-supported industrial strategy – this has enabled the country to rapidly transform itself into a leading global centre for clean tech manufacturing. It has already taken over the solar photovoltaic sector. It leads by far on electric vehicles sales.23 And is set to dominate global battery cell manufacturing, feeding about 70% of the global Li-ion batteries market by 2020.24

18 Ibid. 19 Financial Times, ‘The key energy questions for 2018’, December 2017. 20 Joint Research Centre, based on Bloomberg New Energy Finance. 21 International Energy Agency, https://www.iea.org/renewables2018 22 International Energy Agency, ‘World Energy Investment 2018’. 23 Institute Delors, ‘Electric cars: A driver of Europe’s Energy Transition’. 24 European Commission, Joint Research Centre, ‘Li-ion batteries for mobility and stationary storage applications’, 2018.

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5. Europe needs to shift from moral to technological leadership

Technological leadership is key as those who set the standards are also those who later control the markets. Yet, the EU is at risk of losing the early-mover competitive advantage it has benefitted from thus far. It lags behind Asian competitors in terms of numbers of low-carbon inventions – although it ranks second after Japan in numbers of high-value patent filings, i.e. inventions that seek protection in more than one country or market. This is also because China’s innovations mainly target its internal market at the moment.25

The private sector has been raising the game in recent years, consistently accounting for more than 75% of EU investment in clean energy research and innovation, and increasing annual spending from some 10 billion euro to over 16 billion euro in the past decade. Yet, despite its strong research base and its large public research budget for clean energy technologies (second largest after the United State), the EU ranks last among major economies in terms of investments per GDP. Furthermore, insufficient access to finance, in particular -ven ture capital, combined with high capital costs and excessive red tape mean that Europe all too often fails to bridge the gap from research to market.

6. Europe needs to think more strategically when it comes to investments and access to resources

The large-scale production and deployment of batteries, wind turbines and other clean tech solutions will require uninterrupted supply of specialised raw materials like rare earths and cobalt at low cost,26 most of which, however, are not produced in Europe but must be imported – in some cases from countries with less stable political regimes. In this context, trade partnerships are expected to play a central role, as is the application of circular economy principals (recycling and reuse of materials and components).

China is investing massively in energy infrastructure and resources abroad, namely through its Belt and Road initiative, as well as in Africa (although relative to Europe, its presence still remains limited). But also in Europe, Chinese foreign direct investment in the energy sector shows rapid growth after 2008,

25 European Commission, Joint Research Centre, ‘Energy R&I financing and patenting trends in the EU’, 2017. 26 European Commission, Joint Research Centre, ‘Cobalt: demand-supply balances in the transition to electric mobility’, 2018 and ‘Assessment of potential bottlenecks along the materials supply chain for the future deployment of low-carbon energy and transport technologies in the EU’, 2016.

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increasing from 155 million euro in 2010 to 3.7 billion euro in 2017, making Europe the fastest- growing destination for Chinese brownfield foreign direct investment.27 The EU accounted for 77% of the total Chinese stock during this period.28 Chinese investments in the European energy sector reflect a commercial and political strategy to secure the position of state-owned energy companies. Chinese investors benefit from an investment-friendly environment and the undervaluation of assets resulting from the economic crisis. This contrasts with existing restrictions to inward foreign direct investment in energy companies in China.

The combination of new and increasingly complex risks and threats, as well as the growing interaction between sectors and actors calls for more anticipatory capabilities to facilitate political steering and enhance preparedness with respect to alternative future scenarios. Yet, currently, the EU relies heavily on external foresight, planning and economic modelling capabilities, as well as on data and intelligence from the private energy sector, foreign government agencies or international organisations of which it is not a member.

7. Can Europe use the energy transition to catch up on the digital revolution?

Digital technologies will profoundly transform the consumer markets of the future through the combination of services to consumers (e.g. energy, mobility, health, advertising), in particular in conjunction with decentralised production of renewables. In 2016, global investment in digital electricity infrastructure such as smart grids – which use digital technologies to enable two-way communication between utility providers and customers – amounted to 40 billion euro. This was almost 40% higher than investment in gas-fired power generation worldwide (30 billion euro).29 Energy tech start-ups are popping up the world over, attracting some 5 billion euro in 2017 in corporate venture capital and growth equity.30 Digitalisation creates new opportunities for citizens to engage and invest, and new opportunities for the energy and digital industry. However, Europe needs to ensure that this benefits the EU’s economy, including SMEs and start-ups with new services and apps, and does not promote a market where large corporates control the markets and platforms where the data are exchanged, as well as the consumer interface.

27 European Commission, Joint Research Centre, based on data from FT/fDi Markets and BNEF 28 Ibid. 29 International Energy Agency, IEA Digitalisation, 2017 http://www.iea.org/digital/ 30 Ibid.

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Today, the aggregation of distributed energy resources is one of the few areas of the digital economy where innovative European firms are expanding in the United States – and not the other way around.31 However, regulatory regimes need to be adapted. Current distribution systems and regulatory frameworks were primarily designed for a centrally-controlled reality, in which power flowed one way and market participants were large corporations. System operators are finding it increasingly difficult to integrate the growing diversity of electric supply into existing grids, as well as to balance it with demand. At the same time, the proliferation of off-the-grid assets make regulatory control all the more difficult. In a decentralised context, the question of security of supply is also being transformed, making it necessary for governments to invest in ‘safety nets’, such as capacity mechanisms. The challenge will then be to close them once they are not necessary anymore.

8. Europe needs to prepare for the new risks coming with the new energy world

In past years, several major cyberattacks have targeted energy companies – whether for economic espionage, blackmail, vulnerability mapping or sabotage. To date, such state-sponsored cyberattacks have mostly been used to test the waters and see how affected governments and organisations would react.32 The manipulation of the Ukrainian power grid in 2015, for instance, came across as primarily designed to signal and demonstrate an ability to disrupt.33 But in the future, such attempts could serve more destructive – or indeed political – purposes (e.g. attacks on nuclear power plants; or the triggering of major blackouts days before pivotal elections).

Both power plants and the growing number of individual installations are at risk: Cyber security researchers have demonstrated that hackers need physical control over just one turbine to take over the operation of (or indeed paralyse) an entire wind farm.34 The strong interconnection of energy systems across Eu- rope and well beyond EU Member States mean that the cascading effects of such attacks could be significant. Unlike other IT systems, control systems in the energy sector cannot be easily shut down, and an outage of an energy sector in a region might easily spill over to other sectors or regions. Finally, a more wide-

31 Navigant Research, European Utilities’ Activity in New Energy Platforms, 2018. 32 European Commission, European Political Strategy Centre, ‘Building an Effective European Cyber Shield: Taking EU Cooperation to the Next Level’, May 2017. 33 Ibid. 34 Dark Reading, ‘Hacking the Wind’, July 2017.

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spread use of digital technologies not only raises cybersecurity concerns, but also raises questions relating to data privacy and information protection, with risks of uncontrolled use of customer data.

9. Conclusion

Initially seen as a distant, next-generation problem full of uncertainties, climate change is now an observable phenomenon that Europeans increasingly attribute to the heat or cold waves and floods that they experience. As the IPCC’s Fifth Assessment Report35 points out, global warming has already reached 1°C above preindustrial levels and is increasing at approximately 0.2 °C per decade.

The “2050 – A Clean Planet for all” strategy36 proposed by the European Com- mission in November 2018 lays out a vision towards a climate neutral economy and for a Europe that uses this agenda for its own economic modernisation, while ensuring a fair transition for all citizens, workers and regions. But is it possible to turn these challenges into opportunities? This a crucial question for the future of Europe, because citizens expect action and the EU has to proof that it is a credible actor and can deliver.

The new strategy opens the debate on the best European Climate and Energy policies in the EU27. The transition to a climate neutral European economy is a massive challenge across many different policy fields. Addressing it does require mainstreaming policy tools from other fields such as social and economic policies to achieve climate goals.

The transition to a climate neutral European economy is a massive challenge across many different policy fields. Addressing it does require mainstreaming policy tools from other fields such as social and economic policies to achieve climate targets.

35 IPCC Fifth Assessment Report, October 2018, https://www.ipcc.ch/report/ar5/syr/ 36 European Commission, 2050 long-term strategy, 2018, https://ec.europa.eu/clima/policies/strategies/2050_en

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When the heads of states and governments convene in Sibiu, Romania on the 9th of May 2019 to renew their vows and set the direction for the EU27 as a new political project, will they embrace the Commission’s vision and make the Energy Union and the fight against climate change a key priority for the future of Europe? Will they empower the next Commission with the necessary energy and climate toolbox?

The energy transition and the fight against climate change will be a key issue in the upcoming European elections. The fight against climate change benefits from large public support and can thus become a game changer for other policy priorities such as economic modernisation, social justice and strategic autonomy at global level. Europe’s citizens will expect answers from all party families and a solid working programme from the next Commission that demonstrates that the European Union can deliver on the things that matter to them.

274 Part 3 – Chapter 16 – “EU Electricity Market: the Good, the Bad and the Ugly”

CHAPTER 16 EU ELECTRICITY MARKET: THE GOOD, THE BAD AND THE UGLY

Konrad Purchała

Liberalization of EU electricity markets, initiated at the end of the XX century, has led to substantial changes in the way electricity is generated and used. It created competition in a traditionally monopolistic and conservative industry, allowing new business models to emerge and new players to challenge incumbent utilities. The simultaneous shift in policy toward more sustainable and -en vironmentally friendly energy supplies, along with significant incentives for renewable power investors, has led to tremendous innovation in these generation technologies. Now, after some 20 years after liberalization, the EU’s electricity market conditions are completely different from those at the start of the century. Competition brought more efficiency, as well as new challenges for today’s market players, including generators, system operators and traders. Against this background it is worthwhile to reflect on the main achievements of the Euro- pean market model, as well as on the key challenges facing the industry today.

1. The good

1.1 No barriers to electricity trade among all European countries

The European electricity market is a unique undertaking. It is unprecedented to see 28 EU member states willing to significantly redesign the way how essential services such as energy supply for all sectors of economy is are delivered. Na- tional electricity markets have been progressively harmonized across all market segments to form a single electricity market to the benefit of over 500 million EU citizens. European legislation has mandated the so called Network Codes,

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facilitating the transition towards more efficient and more harmonized market and system operation solutions. While market integration and market maturity are different across all EU countries there is a clear trend towards market-based mechanisms, allowing to create more welfare for all Europeans. Cross-border capacity allocation mechanism have evolved from explicit auctions, where transmission rights and energy were traded separately, towards market coupling, where cross-border capacity is allocated implicitly in function of energy prices, facilitating thereby energy trade via power exchanges. As a result, available cross- border capacities are used more efficiently, as showed on Figure 16.1 below.

Figure 16.1. Percentage of cross-border capacity nominated in the direction of Day- Ahead price differences on 37 European interconnectors, 2010-2016. [Source: ACER Market Monitoring Report 2016].

1.2 Coordinated price formation under European-wide market coupling mechanism

The integrated transnational electricity market is indeed an important achievement of the EU. It is worth noting that, there is no restrictions on cross-border trade of electricity between the European countries other than the technical requirement to acquire cross-border capacity rights albeit explicitly or implicitly. Exchange possibilities are determined by available cross-border capacities calculated by TSOs according to progressively more and more harmonized cross-border transmission capacity calculation methodologies. Cross-border capacity allocation takes place under European-wide coordinated processes, covering practically the whole continent (see Figure 16.2). Multi-Regional Coupling MRC organized by European power exchanges is clearing day-ahead markets and determining in a coordinated manner the day-ahead prices in all involved

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countries, contributing to more efficient price formation and thereby more efficient use of energy resources. Similar mechanisms apply to long-term hedging organized by Joint Allocation Office JAO, acting as the European Single Alloca- tion Platform for such products, as well as XBID (‘Cross Border Intraday’), being the single intra-day platform for all EU member states. Upcoming balancing platforms, which are currently being developed by European Transmission Sys- tem Operators, strive at reaping the benefits of integration also at the real-time market segment.

Figure 16.2. Market Coupling in Europe. [Source: ENTSO-E, PKEE].

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2. The bad

2.1 More market integration and more transmission investments, but cross-zonal capacities remain low

The European electricity industry can be proud of the achievements of last two decades. However, the electricity market design in Europe is by no means flaw- less. Europe employs the zonal market concept, which is based on the fundamental assumption that trading opportunities within bidding zones are unlim- ited, while trade between bidding zones is allowed only up to the level given by cross-border capacities.1 Cross-border capacities are thus the means of expressing market boundaries for cross-border trading, allowing trade up to the level which is technically feasible without affecting secure power system operation. In contrast to cross-border trade, internal trade within bidding zones does not see such limitations, even though both types of transactions use the same generation and transmission resources. This different treatment of internal and cross-zonal trade has recently became an issue of particular attention of European Regula- tors and policy makers. Although it is an inherent feature of the zonal market design2, implicit prioritization of internal trade over cross-border trade might raise concerns over foreclosure of national markets and impediment to competition. This is reflected in recent Recommendation on Capacity Calculation No 02/2016 issued by the Agency for the Cooperation of Energy Regulators (ACER) on 11 November 20163 followed by draft revision of the Electricity Regulation proposed by the European Commission under legislative package “Clean Energy for all Europeans” (CEP) in November 2016.4 Heated discussion about calculation of cross-border capacities that followed might eventually change the way European zonal market is organized.

The inability to achieve significant progress in this field is one of the greatest challenges for the European market, impeding the integration process. Although the need for coordination and efficient use of transmission infrastructure is legally embedded in the Network Codes, these provisions are yet to be implemented in

1 In continental Europe, bidding zones are generally equal to political country borders (with some exceptions). 2 Under zonal market, there are no restrictions for internal trade within bidding zones (copper plate approach), while trade between bidding zones requires acquisition of cross-border capacity rights and is by definition restricted (cross-border capacity is a scarce good). 3 https://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Pages/Recommendations.aspx 4 https://ec.europa.eu/energy/en/topics/energy-strategy-and-energy-union/clean-energy-all-europeans

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practice. As a result, loopflows5 and unscheduled transit flows6 are undermining the efficiency of cross-border trade. According to ACER Market Monitoring Report 2016 published in October 2017, availability of European transmission infrastructure for cross-border trade is very low. In order to assess congestion management efficiency, ACER established the notion of “benchmark capacities” that should be made available for market participants’ cross-border trading activities given the current legal-regulatory framework. For AC synchronous grid, available cross-border capacities reach not more than 40-60% of ACER benchmark capacities, while for DC dominated Nordic power system this utilization ratio is higher, exceeding 80%. While the methodology applied by ACER to establish benchmark capacities can be questioned, discussions around this issue are an indication that the cross-border capacity calculation approach applied currently throughout Europe is challenged.

2.2 Zonal market model leads to decoupled market and system operations

Well defined bidding zones should constitute or at least be close to copper plates, so that internal transactions should be technically feasible without significantly affecting neighbouring zones. However, bidding zones in European are not designed based on technical criteria, but rather by political country borders. Nonetheless, administrative regulations guarding the zonal market architecture have little relevance for power flows in the interconnected European power system. Physical power flows result from the laws of physics, i.e. Kirchhoff ’s laws. In meshed grids, internal transactions within bidding zones will inevitably cause power flows in neighboring bidding zones and cross-zonal market transactions will cause power flows across multiple paths and borders. Moreover, cross-zonal transactions can be realized in many different ways depending on the location of generation and load resources involved. By means of example, energy transaction between Germany and Poland can have a complete different effect for power flows in Czech grid depending on whether its sources are located in Southern or in Northern Germany. As a result, cross-zonal market trading and resulting exchange schedules in Europe significantly diverge from the observed power flows (see Figure 16.3).

5 “Loopflows” can be defined as physical flows on a line located in a particular zone (i.e. in Poland), caused by transactions of which both the source and sink are located in another zone (i.e. in Germany). In Clean Energy Package, loopflows are defined as “power flows resulting from transactions internal to bidding zones”. 6 “Unscheduled transits” are power flows caused by cross-border transactions between bidding zones (i.e. between Germany and France), which are not scheduled for the use of cross-border capacity in other bidding zones (i.e. in Belgium and Netherlands).

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Figure 16.3. Unscheduled power flows7 on German-Polish border. [Source: PSE].

2.3 Technically infeasible market outcome requiring large-scale redispatching measures

Externalities of the zonal system, materializing in unscheduled power flows, cause physical power flows to significantly diverge from the market schedules on most European borders. In many cases these unscheduled power flows not only exceed market-based flows by an order of magnitude, but are often in different directions. This is for example the case of Polish synchronous borders, where cross-border market schedules are marginal compared to the observed unscheduled power flows. Consequently, TSOs need to anticipate such uncoordinated power flows and are often forced to reduce available cross-zonal capacities to keep the power system secure, which confines cross-border exchange possibilities and negatively affects market efficiency. In 2014-2016, significant power flows observed on Polish synchronous borders caused the need to initiate TSO remedial measures in form of cross-border redispatching8 on a massive scale. Since costs of such remedial measures are transferred via grid tariffs to all Polish end-customers, they bear costs of supporting trading activities outside Poland9, while not being able to benefit from market integration due to Polish

7 Both loopflows and “unscheduled transits” are commonly referred to as “unscheduled power flows”. 8 Measures activated by the concerned TSOs outside of the wholesale markets, resulting in increasing generation in Poland and decreasing in Germany. 9 These costs can reach significant amounts, i.e. in 2015 the redispatching costs to ensure secure operation of

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export and import capacities being used by unscheduled transits and loopflows. Figure 16.4 shows the volume of redispatching activated over the course of last few years. Clearly visible upward trend of these measures was contained thanks to installation of Phase Shifting Transformer (PST) in one of the border substations in Poland, allowing to reduce the level of loopflows and other unscheduled power flows through the Polish power system. Similar issues, though with lower impact in terms of available capacities and redispatching costs, are experienced on other European borders, leading to deployment of similar PSTs in other parts of European grid.

Figure 16.4. Cross-border redispatching (bilateral XBR and multilateral MRA) measures necessary to ensure secure operation of the German-Polish border, monthly volumes. [Source: PSE].

2.4 The zonal market does not facilitate correct incentives for efficient behavior

The ability to “game” against the system operator as to exploit zonal market inef- ficiencies is a very important deficiency of the European market model. What is even more worrying is that this strategic gaming10 can be quite profitable for market participants, as it can allow to exercise market power without manifesting it on the quite transparent and publicly scrutinized wholesale market. Imple- mentation of the European Network Codes, especially improved coordination

the Polish-German interconnector exceeded 100 mln EUR. 10 “Gaming the system” means using the rules and procedures meant to protect a system to, instead, manipulate the system for a desired outcome. In power markets, gaming often refers to exploiting market rule differences between the general wholesale market and the technical congestion management market.

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of cross-border capacity calculation and allocation aimed for under flow-based approach will address the issue of unplanned transits, but will not address the issue of loopflows and changing generation patterns inside bidding zones. In zonal models and under portfolio bidding,11 one is not able to know what will be the impact of market transaction cleared under market coupling – one is only able to estimate how market participants might use their generation fleet to ship energy across the zones, but market participants are by no means bound by these estimations. On the contrary, financial balancing commitments relate to portfolios only and market participant can change the generation schedules used to fulfill their commitments at any time without any restrictions. If restrictions are imposed, the financial consequences of such restrictions are borne by the TSO, not by market participant. All the above uncertainties related to cross-border capacity calculation process render it more like a task to be conducted by using a crystal ball, than a technically sound, engineering process.

2.5 Insufficient price signals to facilitate generation adequacy

Finally, another important issue of the EU market is the low quality of price signals and their inability to trigger market-based generation investments for long-term generation adequacy. At the eve of liberalization, Europe was generally speaking characterized by generation overcapacity. Over the last decades, big chunk of new generation investments was renewable, mainly wind and solar. This capacity was build based on various incentive schemes (financial supporting mechanisms), reducing risk for project developers to attract capital, allowing for this sector to flourish and driving down the technology costs. However, an important side effect of this renewable generation success story is that a significant part of energy generation in Europe does not react to market price signals because it has a different remuneration scheme. Moreover, conventional generation that is subject to energy price signals as their main source of revenue has difficulties to compete in this new market place, where wholesale prices are driven down by generous subsidies. As a result, Europe has not seen a lot of new stable, conventional generation capacity, except of the ones resulting from investment decisions taken before the renewable boom. This new conventional capacity is often immediately written-off or even mothballed due to inability to compete with very low wholesale prices. This raises important concerns regarding generation adequacy, since today there are less structurally exporting countries and more structurally importing countries than 20 years ago. Figure 16.5 shows the evolution of installed generation capacities in EU over the last

11 Portfolio bidding means, that the bids and offers submitted to Power Exchanges and other organized trading platforms come from combined portfolios of generation and load resources (instead of individual resources), so that it is impossible to know where the energy will be physically generated or consumed.

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years. It is quite clear form that figure that net capacity additions in last years are basically only renewables, for which investment decision are taken based on dedicated support schemes. To some extent this reflects technology transitions and falling costs of renewable generation. However, limited conventional generation investments, important from security of supply point of view, at least until utility-scale seasonal storage is technologically and economically viable, reflect lack of sufficiently strong market based investment signals. This problem has been observed in many of those European countries having introduced various generation capacity remuneration mechanism, such as capacity markets. In other countries generation reserves are secured in form of dedicated strategic reserves contracted by TSOs.

Figure 16.5. Installed generation capacity in Europe (EU-28). Source: PSE analysis based on Eurostat data.

3. The ugly

3.1 Course correction is very difficult, if possible at all

Unfortunately, the above European market design flaws are very difficult to overcome without fundamental market design changes. While generation adequacy can in principle be improved through scarcity pricing,12 demand flexibility and dedicated adequacy-related remuneration schemes, the utilization

12 In theory, well implemented scarcity pricing should allow prices to raise to high levels during supply shortages. However, practical evidence suggests that even moderately high prices trigger lots of controversies, so that acceptability of high prices by consumers should not be treated as a given.

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of transmission infrastructure and organization of cross-border trade remains problematic at present and most probably in the future. Zonal market design has been relatively simple to implement and allowed quick wins to benefit from market integration. However, it is increasingly evident that the zonal market is a dead-end path. Market design simplifications that have been beneficial for initial integration are now becoming an obstacle to more efficient use of generation and transmission resources. Prominent example is the quality of bidding zones, which is a decisive factor for the success of zonal markets and flow-based allocation. Current bidding zones in Europe are unfortunately not designed on technical bases. With the noble exemption of a few countries like Norway, Sweden, Denmark and Italy, European zones are based on country political borders. Bidding zone definition is considered as a highly political issue, as many countries are not ready to consider splitting their national bidding zones even if this process is foreseen by EU legislation as fundamental to the efficiency of flow-based capacity allocation. Experience from the First Edition Bidding Zone Review13, published by ENTSO-E in April 2018, is that proposing new bidding zones is a highly challenging task, with multiple criteria to be weighed against each other so that no clear conclusion can be drawn. Successful bidding zone changes in Europe were implemented only by countries, which already decided to split their bidding zones and were just periodically re-assessing optimal bidding zone configurations.

Given the above, it seems that the currently applied zonal market and cross-border trade organized based on ex-ante defined cross-border capacities has reached its efficiency limits. Substantial improvements in terms of more efficient use of generation and load resources and better price signals are simply not possible under large zones. Market and system operations will thus remain to be detached from each other, even more so in the light of increased intermittency driven by renewable generation and demand response. Regulatory attempts to artificially increase cross-zonal capacities by ignoring physical power flows phenomena will only give raise to this detachment. Experience from zonal market reforms in other parts of the world, like in particular the US, show the complexity of the challenge. In fact, the attempts at implementing more efficient zonal solutions seem impossible to implement in practice.

13 https://www.entsoe.eu/news/2018/04/05/first-edition-of-the-bidding-zone-review-published/

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4. Clean Energy Package: the swan song of the zonal market?

In December 2018, the last element of the “Clean Energy Package for All Euro- peans”, the new “Regulation on the internal market for electricity”, was adopted following intensive trilogue discussions between the Council of the European Union, European Parliament and European Commission. This long awaited legislative act provides the foundation for the new, improved electricity design, putting focus on empowering consumers, who will be able to opt for alternative energy supply choices such as self-provision, energy communities, energy service companies, etc. However, while the policy makers are proud of the level of “ambition” regarding requirements imposed on TSOs and Member States with respect to the way transmission capacities between European countries is offered to the market, CEP does not question the fundamental assumption of the European market model – the zonal approach to markets. While “local markets for flexibility” is a new buzzword in European electricity market discussions, very few is able to see that these “local” markets will need to be coordinated with the wholesale market. Additionally, the requirements on minimal cross-border capacities imposed on TSOs will lead to even more needs for out-of-wholesale- market transactions to ensure secure system operation following the wholesale market trades. And the zonal market deficiencies will be managed using dedicated local redispatching markets, fragmenting the electricity market into zonal wholesale market, nodal redispatching market and nodal/zonal balancing markets. All of them using virtually the same generation and demand flexibility resources.

To say that such combination of fragmented market segments is prone to gaming is quite an understatement. Given advances in automated and Artificial In- telligence (AI)-based trading, it is the invitation for DEC game.14

14 “DEC game” is the flaw of the market design, exposed first in the US in the early days of electricity market liberalization. In European conditions, the DEC game manifest itself when the generation resource in a constrained area is scheduled for generation of electricity (in self-dispatch markets, it is the sole decision of the generation owner) and provides a relatively low bid in the redispatch market, in anticipation of being called by the TSOs to down-regulate (reduce the generation output). As a result, the generator does not need to produce the electricity he sold on the wholesale market, while it is obliged to give back to the TSOs only the relatively low bid submitted to the redispatch market. The difference constitute the profit. Similar scheme exists also for the INC game, where generators charge much higher premiums for up-regulation to relieve transmission constraints than the wholesale market prices. These problems plagued the US zonal markets, leading adopt locational marginal pricing (LMP).

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5. The new power system requires new market solutions!

Nonetheless, even if fixing the zonal market model would be possible, there is a question whether the emerging power system is best served with such zonal market model. The renewable revolution, together with more customer empowerment and demand flexibility, is shaking up the electricity industry. Advances in IT solutions allow for complete redefinition of the way electricity market and system operations are organized. New technologies challenge the traditional ones, for example, provision of primary frequency response services restricted for large synchronous generators with large rotating masses is now also possible by power electronics and batteries, with better response characteristics and already now moderate costs. All this innovating technologies are getting technically and economically viable, translating into business opportunities. It is however crucial to ensure that new businesses can develop under correct regulatory framework, so that the resulting innovation serves the needs of all end users to the benefit of society at large, without prioritizing particular sectors of the industry at the costs of others.

The new power system will require new market solutions. Price signals will become even more fundamental to system operations, as there will be no other way to manage the distributed generation resources than by means of locationally differentiated prices. In order to do so, these prices should reflect the needs of the power system and all its consumers. All activities contributing to satisfying these needs should be rewarded by getting higher prices, while all activities against the needs of the system should be financially discouraged, so that gaming against the system and against the needs of all its consumers becomes a bad business. Locational Marginal Pricing LMP applied in US (also referred to as nodal pricing) and price-based coordination, is long established in academic literature as the reference for efficient electricity market organization. In opinion of PSE, LMP is the precondition for managing future challenges, related to operating new power system. LMP is the foundation, based on which other challenges can be efficiently addressed. Capacity markets to facilitate generation adequacy are best paired with efficient scarcity-pricing system to value -en ergy and reserves at all locations, allowing all generation and load resources to compete with each other on equal footing without unnecessary differentiation between internal and cross-border transactions. Local congestion management required to improve operations of the distribution grid will be best paired with the market design where services from TSO grid could be efficiently used to help resolving DSO network problems and vice versa. Zonal markets are not able to tackle these challenges without fragmentation into special dedicated segments that are non-transparent and prone to gaming, while LMP supports

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all these developments thanks to inherent feature – coherent price formation across all market segments from forward until real-time. No doubt implementing such nodal markets would be a major challenge, but it would offer material benefits to all consumers, effectively integrating all member states and getting rid of the unnecessary cross-border vs internal lines differentiation. There is no need to re-invent the wheel. It would be much better to focus the talent and brainpower of European experts on effectively addressing existing EU market problems and finding ways to implement a new generation of markets suitable for the challenges and technological opportunities of the XXI century: Local marginal pricing (LMP)-based market.

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Part 3 – Chapter 17 – The European Electricity Market Integration Process

CHAPTER 17 THE EUROPEAN ELECTRICITY MARKET INTEGRATION PROCESS

Christophe Gence-Creux

1. Introduction

Over the last two decades Europe’s energy policy has consistently been geared towards achieving three main objectives: energy in the European Union should be affordable and competitively priced, environmentally sustainable and secure for everybody. The completion of the internal energy market is a fundamental pre-requisite to achieve these objectives in a cost-effective way and therefore used to be very high on the European political agenda.

This chapter provides an overview of the status and challenges associated to the wholesale market integration process in the electricity sector and is structured as follows: section 1 will take stock of the main achievements over the last ten years and assess their impact on the functioning of the Internal Electricity Market; section 2 will focus on the most critical area to be urgently dealt with for an effective and successful completion of the European market integration process; section 3 will sound the alarm and highlight the risk of political interference and its possible consequences for the European electricity market integration process.

2. Main achievements in the European electricity market

Since the very first day after its official establishment in March 2011, the Agency has been gearing towards the completion of the Internal energy market. Surfing on – at that time – a very clear political mandate (Conclusions of the European Council of 4 February 2011: ‘The EU needs a fully functioning, interconnected

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and integrated internal energy market. Legislation on the internal energy market must therefore be speedily and fully implemented by Member States in full respect of the agreed deadlines’, ‘The internal market should be completed by 2014 so as to allow gas and electricity to flow freely. This requires in particular that in cooperation with ACER national regulators and transmission systems operators step up their work on market coupling and guidelines and on network codes applicable across European networks’), the development of European harmonised rules (so called Network Codes1) and their early implementation across Europe was considered as a top priority.

Since then, 8 sets of European-wide harmonised rules have been developed and eventually enshrined into European law between July 2015 and November 2017 (see table 17.1). These Network Codes cover a large spectrum of critical issues, from the various technical grid connection requirements to the very detailed market and operational rules for an efficient and secure operation of the Europe- an network. The effective implementation of these rules constitutes important building blocks of a fully integrated internal electricity market.

Market Grid Connection System Operation Capacity Allocation and Con- Requirements for Grid Con- System Operation Guideline gestion Management (CACM) nection of Generators (RfG) Guideline Network Code Publication in the Official Publication in the Official Publication in the Official Journal: 2 August 2017 Journal: 24 July 2015 Journal: 14 April 2016 Forward Capacity Allocation High Voltage Direct Current Emergency & Restoration (FCA) Guideline (HVDC) Network Code Network Code Publication in the Official Publication in the Official Publication in the Official Journal: 26 September 2017 Journal: 26 August 2016 Journal: 24 November 2017 Balancing (BAL) Guideline Demand Connection Net- Publication in the Official work Code Journal: 23 November 2017 Publication in the Official Journal: 17 August 2016

Table 17.1. The 3 families of European Network Codes.

1 For clarity, the term “Network Codes” (NC) is mainly used in this document to define any set of common rules for electricity markets, be it “network codes” or “binding guidelines”, as defined by Regulation (EC) N°714/2009. The term “network codes and guidelines” is used on very specific occasions when it actually contributes to a better understanding.

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With the full support of Regulatory Authorities and market participants, the Agency also strived to speed-up the earlier voluntary implementation process of these Network Codes. 4 cross-regional roadmaps focusing on the implementation of the target models for CACM across Europe were discussed and eventually endorsed by the Florence Forum2 in December 2011.3

Despite some delays and difficulties, this early implementation process contributed to delivering a number of results, which are briefly summarised in Box 1 below.

Box 1. The main achievements from the earlier implementation process Areas Achievements Day-ahead timeframe

2 The Florence Forum is the traditional, most important meeting organised by the European Commission, with the purpose to discuss the development of the internal electricity market and in particular the functioning of cross-border interconnection. Participants include national regulatory authorities, Member State governments, the European Commission, TSOs, electricity traders, consumers, network users, and power exchanges. Since 1998 the Forum has met once or twice a year. 3 Each cross-regional roadmap was dedicated to one particular timeframe or topic: 1) Implementation of a single European price market coupling model, 2) Implementation of a cross-border continuous intraday trading system across Europe, 3) Implementation of a single European set of rules and a single European allocation platform for long and medium-term transmission rights 4) Implementation of fully coordinated capacity calculation methodologies and particularly the flow-based allocation method in highly meshed networks. For more information see this link.

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Intraday timeframe

Forward timeframe

Balancing timeframe

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The impact of these achievements is colossal. Market coupling in the day-ahead timeframe by itself has so far delivered benefits to EU energy consumers estimated at approximately € 1 billion per year, which mainly stems from a better utilisation of the existing cross-border capacity (see Figure 17.1) and, therefore, a better price convergence (see Figure 17.2). The completion of this process, with the extension of market coupling to the remaining borders, is expected to deliver additional benefits at a rate of approximately €250 million per year.

Figure 17.1. Progress made on the efficient use of electricity interconnectors in the Day-Ahead market timeframe over the last 8 years – percentage of available capacity (NTC) used in the ‘right direction’ in the presence of a significant price differen- tial (>1 euro) on 37 European electricity borders – 2010 (Q4)–2017 (%). Source: ENTSO-E, Vulcanus, Nord Pool Spot and ACER calculations (2018).

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Figure 17.2. Day-Ahead price convergence in Europe by Capacity Calculation Re- gion (CCR) (ranked) – 2008–2017 (% of hours). Source: ENTSO-E and ACER calculations (2018). Note: The numbers in brackets refer to the number of bidding zones included in the analysis per CCR.

Further benefits were delivered in the other timeframes. For example, in the balancing timeframe, despite the persistence of large disparities in the balancing energy and balancing capacity prices in Europe in 2017, the various projects to increase the exchange of balancing services across borders initiated in recent years are starting to yield positive results. An example of these initiatives is the Frequency Containment Reserves (FCR) cooperation, a common market for the procurement and exchange of balancing capacity, which currently involves ten Transmission System Operators (TSOs) in seven countries.4 Figure 17.3 shows that, since 2014, balancing capacity prices have been steadily decreasing and converging across the markets involved in the FCR cooperation project.

4 These are the TSOs in Austria (APG), Belgium (Elia), Switzerland (Swissgrid), Germany (50Hertz, Amp- rion, TenneT DE, TransnetBW), Western Denmark (Energinet), France (RTE) and the Netherlands (Ten- neT NL).

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Figure 17.3. Average prices of balancing capacity (from FCRs) in the markets involved in the FCR cooperation project – 2014 to 2017 (euros/MW/h). Source: NRAs and ACER calculations (2018). Note: The prices refer to the joint procurement of 1 MW upward and 1 MW downward capacity when the product is symmetric or to the sum of prices to procure 1 MW upward and 1 MW downward capacity when the products are procured separately. Western Denmark is not shown in the figure, as it had not yet joined the project by the end of 2017.

The efficiency gains ultimately result in a reduction in the overall costs of balancing services that are to be borne by final consumers. The overall costs of balancing compared to electricity demand in a selection of EU markets are displayed in Figure 17.4.

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Figure 17.4. Overall costs of balancing (capacity and energy) over national electricity demand in a selection of European markets – 2017 (euros/MWh).Source: NRAs and ACER calculations (2018). Note 1: The overall costs of balancing are calculated as the procurement costs of balancing capacity and the costs of activating balancing energy (based on activated energy volumes and the unit cost of activating balancing energy from the applicable type of reserve). For the purposes of this calculation, the unit cost of activating balancing energy is defined as the difference between the balancing energy price of the relevant product and the DA market price. Imbalance charges applied in the Nordic market are not included in the figure, as data were not available for all Nordic countries. Note 2: The procurement costs of reserves reported by the Polish TSO comprise only a share of the overall costs of reserves in the Polish electricity system. This is due to the application of central dispatch in Poland, which makes it difficult to disentangle balancing and redispatching costs.

The current (pilot) market integration projects in the balancing timeframe are delivering benefits estimated at a rate of approximately € 680 million per year,5 while the full integration of the balancing markets across the EU, as envisaged by the Electricity Balancing Guideline, is expected to deliver benefits in the order of € 3 billion per year.

5 € 220 million from the Replacement reserve project in the Nordic region, € 260 million from the Common reserve netting and common merit order projects across Germany, €80 million from the pilot project on Imbalance netting within and around Germany and € 120 million from the TERRE pilot project on replacement reserves across the Continent.

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With the entry into force of the Network Codes, this earlier voluntary implementation process is progressively replaced by a formal binding one. According to a study commissioned by the EC (Booz&Co, ‘Benefits of an Integrated Euro- pean Energy Market’, 2013), the integration of electricity national markets, once completed, is estimated to deliver benefits in the range of €12.5bn to €40bn per year by 2030 to EU energy consumers.

3. Completion of European market integration and need for paradigm shift in European TSO mindset…

Despite all the outstanding progress obtained over the last ten years in the area of capacity allocation in the different timeframes, the European market integration process will never see the lights at the end of the tunnel without a significant increase of the amount of cross-zonal capacity offered to the market.

Yet, on most European borders (see Figure 17.5), the actual transmission capacities values (or the size of the Flow-Based domain) are significantly lower than what could be expected. According to ACER’s calculations, on average, only 49% of commercial capacity on High-Voltage Alternative Current interconnectors is offered to the market (see section 3 of the electricity wholesale chapter of the Market Monitoring Report 2016 for more details).

Figure 17.5. Ratio of available tradable capacity to benchmark capacity on High-Volt- age Alternating Current borders per Capacity Calculation Region – 2017 (%). Source: NRAs, Nord Pool Spot, ENTSO-E’s CGM (2017) and ACER calculations (2018).

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The low amount of cross-zonal capacity offered to the market is the direct consequence of, on the one hand, an inefficient bidding configuration (which nowadays reflects more the political borders than the physical reality of the network), and, on the other hand, inefficient, non-coordinated, non-transparent and discriminatory methodologies to calculate cross-zonal capacities and to share redispatching and countertrading costs across Europe (which incentivises TSOs to consider the amount of cross-zonal capacity made available to the market as a mere adjustment variable in the overall network security equation).

This ‘’état de fait’ represents a significant barrier for the integration and the -ef ficient functioning of the internal electricity market (see the Agency’s Recom- mendation N. 02/2016 for more details) and can only be remedied with a major paradigm shift either in the definition of bidding zones in Europe (which is unlikely to happen given the ‘main mise’ of Member States on the bidding zone reconfiguration process foreseen in the CACM Regulation) or, more likely, in the way cross-zonal capacity is currently considered in Europe.

Luckily, the implementation of the CACM Regulation provides a formidable opportunity for the NRAs and the Agency significantly to promote such a paradigm shift through the approval of new regional methodologies to calculate cross-zonal capacities and to share redispatching and countertrading costs, which will have to be developed and implemented by the TSOs pursuant to Article 20(2) and 74(1) of the CACM Regulation.

In order to ensure that the future common methodologies to be developed by the TSOs pursuant to the CACM Regulation will reflect transparent, non-discriminatory, market-based solutions, which give efficient economic signals to the market participants and TSOs involved, the Agency, in the course of 2016, developed and proposed a few high-level and common-sense principles (see its Recommendation N. 02/2016 available here).

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Box 2. The 3 high-level principles of the Agency High-Level Principle No. 1: As a general principle, limitations on internal network elements should not be considered in the cross-zonal capacity calculation methods. If congestion appears on internal network elements, it should in principle be resolved with remedial actions in the short term, with the reconfiguration of bidding zones in the mid-term and with efficient network investments in the long term.

Any deviation from the general principle, by limiting cross-zonal capacity in order to solve congestion inside bidding zones, should only be temporarily applied and in those situations when it is: (a) needed to ensure operational security; and (b) economically more efficient than other available remedies (taking into account the EU-wide welfare effects of the reduction of cross- zonal capacity) and minimises the negative impacts on the internal market in electricity. High-Level Principle No. 2. As a general principle, the capacity of the cross-zonal network elements considered in the common capacity calculation methodologies should not be reduced in order to accommodate loop flows. Indeed, loop flows are significantly reducing the amount of cross-zonal capacities and have a negative impact on the functioning of the market and cross-border trade and their volume should be therefore minimised.

Any deviation from this general principle, by limiting cross-zonal capacity in order to accommodate loop flows, should only be temporarily applied and in those situations when it is: (a) needed to ensure operational security; and (b) economically more efficient than other available remedies (taking into account the EU-wide welfare effects of the reduction of cross-zonal capacity) and it minimises the negative impacts on the internal market in electricity High-Level Principle No. 3: As a general principle, the costs of remedial actions should be shared based on the ‘polluter-pays principle’, where the unscheduled flows over the overloaded network elements should be identified as ‘polluters’ and they should contribute to the costs in proportion to their contribution to the overload. As the primary purpose of a capacity allocation procedure is to ensure that cross-zonal exchanges do not create overloading in the network, cross-zonal exchanges should not be considered as the ones causing congestion and thus should not be considered as ‘polluters’ (doing otherwise would lead to penalising cross-border exchanges twice; once via the ex ante limited volume of cross-zonal capacity made available to the market and a second time via their contribution to the cost recovery of the remedial actions).

The implementation of this recommendation shall ensure that discrimination between internal and cross-zonal exchanges is prevented - or at least minimised and duly justified – and that ‘the maximum capacity of the interconnections and/or the transmission networks affecting cross-border flows shall be made available to market participants, complying with safety standards of secure network operation’.

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The implementation of these high-level principles should also ensure that each Member State properly internalises the costs of the externalities a non-coordinated, nationally focused, energy policy could induce at regional or European level, while leaving to them the full flexibility to implement their preferred remedies, be it through higher redispatching costs, a bidding zone reconfiguration, more investment in the grid or a combination of these solutions.

The resulting increase of cross-zonal capacity should also have positive side- effects in terms of European cooperation: TSOs and NRAs will indeed have a stronger incentive to better coordinate the short-term operation and development of the network (in order to limit the costs of remedial actions necessary to increase cross-zonal capacity), while Member States will be more inclined to move towards a more coordinated energy policy (in order to limit its overall cost for their consumers).

Last but not least, these high-level principles have the big advantage to be ‘imple- mentable’ in the framework of the CACM Regulation implementation process, i.e. a process a priori free from any political interference…

4. … which might be put into question due to political interferences

Unfortunately, we assist, in the framework of the Clean Energy Package’s discussions, to an attempt of a few Member States to take over the control on these ongoing developments, which could have far-reaching consequences for them if not urgently stopped.

The Agency recently expressed is deepest concerns that the last developments in the legislative process for the recast of the Electricity Regulation – especially in respect to Articles 13 and 14, as they are emerging from the current negotiations, might derail the implementation of efficient cross-border capacity calculation and the Market integration process as a whole. In particular, serious concerns were raised about the setting of an arbitrary minimum target for cross-border commercial capacities for all European interconnectors, along with the possibility for Member States to opt out until 2026 from the framework provided by the CACM Guideline if they are unable to meet this target.

The Agency strongly believes that this approach goes against some fundamental principles and obligations under the Treaty on European Union and the Third Energy Package, such as efficiency, transparency, non-discrimination and regulatory independence.

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The same concerns were expressed by the Agency and regulatory Authorities at the last Florence Forum on 30-31 May 2018. There, the Agency highlighted that the Internal Energy Market is based on the well-established principle that electricity shall be allowed to move freely across the Union, in line with the freedom of movement of goods and services established by the Treaty of Eu- ropean Union. This relies on the right of transparent and non-discriminatory access to electricity grids. Articles 13 and 14 in the Electricity Regulation recast should indeed serve the same free-movement principle, which is a prerequisite for cross-border electricity trade in the Internal Energy Market and, thereby, for delivering benefits to consumers. The aim of these provisions, as the European Commission’s proposal reiterates, should be to address the persisting problem of significant national limitations to cross-border electricity flows and to ensure that electricity exchanges are not unduly restricted.

Therefore, the Agency called upon the European Institutions to reaffirm the cross-border capacity calculation approach as defined in the CACM Regulation and, thus, to reinstate the text of Articles 13 and 14 of the Electricity Regulation recast as initially proposed by the European Commission (which reflected the two first high-level principles established in the Agency’s Recommendation N. 02/2016).

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Part 3 – Chapter 18 – Vulnerable Customers and Energy Poverty

CHAPTER 18 VULNERABLE CUSTOMERS AND ENERGY POVERTY

Marina Cubedo Vicén

1. Understanding energy poverty and its causes

According to the International Energy Agency, to this day 1.2 billion people lack access to electricity on a global level and more than 2.7 billion do not have access to clean energy for cooking.1 These individuals suffer from what is known as energy poverty. The concept of energy poverty most commonly refers to the situation in which a household is unable to achieve basic levels of energy services at an affordable cost.2

Energy poverty is caused by three key drivers which take place individually or in combination. These drivers are; low incomes, high energy costs, and poor thermal efficiency of buildings.3 Low incomes force people to prioritize other basic needs on top of energy-related needs and energy prices affect mostly those who have a lower income. In relation to the tenure status, this can impact the implementation of measures to increase efficiency. For example, individuals may be trapped in housing arrangements that do not permit switching to less expensive centralized heating systems. In addition, the type of dwelling can influence the energy demand of a building. The lack of awareness or knowledge on the efficient use of energy and high consumption of energy due to climatic factors can

1 Energy Access Outlook 2017 (International Energy Agency) < https://www.iea.org/access2017/ > accessed 20 August 2018 2 François Grevisse & Marie Brynart, ‘Energy poverty in Europe: Towards a more global understanding’ [2011] European Council for an Energy Efficient Economy (ECEEE), p.538 3 Steve Pye & Audrey Dobbins, ‘Energy poverty and vulnerable consumers in the energy sector across the EU: analysis of policies and measures’ [2015] InsightE Policy Report, p.1

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also be considered as further causes of energy poverty. In the following section of the chapter, we will dive into energy poverty in Europe.

2. Energy poverty in Europe

At present, there is no common definition for energy poverty at a European level. Less than a third of EU countries officially recognise the concept and only a few have an official definition in their national legislation.4 Furthermore, several EU countries do not currently identify or quantify vulnerable consumers and therefore cannot adequately target energy poverty measures.

Although so far harmonisation in terms of defining the issue on an EU level has failed, it is estimated that about a staggering 50 to 125 million people, which are around 10-25 percent of Europe’s population, suffer from energy poverty.5 These millions of Europeans struggle daily to attain adequate heating/cooling in their homes, pay their utility bills on time and live in homes free of damp and mould. Consequently, the energy poor population is more likely to report poor health and emotional well-being than the non-energy poor population.6

Although the causes of energy poverty are often similar across Europe, each country faces different circumstances in terms of building stock, climatic conditions, energy prices, or overall economic situation which can help increase or diminish the risk of suffering energy poverty. For e.g., even though countries with colder climates would be expected to exhibit a greater incidence of energy poverty, the size of the population affected by domestic energy deprivation is estimated to be the lowest in the Scandinavian countries.7

Countries deal with energy poverty in their own ways as they have different indicators and hurdles to tackle. The main issue in a consistent understanding within Europe underlies in the diversity amongst Member States circumstances and consequently, it has been a challenge for EU legislators to define common indicators and to find relevant quantitative data to characterize energy poverty.

4 Claire Dhéret & Marco Giuli ‘The long journey to end energy poverty in Europe’ [2017] European Policy Centre, p. 1. 5 Energy Atlas 2018, Heinrich Böl Stiftung 2018, p. 20. 6 Harriet Thomson, Carolyn Snell & Stefan Bouzarovski, ‘Health, Well-Being and Energy Poverty in Europe: A Comparative Study of 32 European Countries’ [2017] Vol 14/6 MDPI < www.ncbi.nlm.nih.gov/pmc/ articles/PMC5486270/ > accessed 20 August 2018. 7 Stefan Bouzarovski, ‘Energy poverty in the European Union: landscapes of vulnerability’ (2014) WIREs Energy Environ, Vol 3: p. 276.

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From a geographic perspective, predominantly eastern and southern (Mediter- ranean) European countries are affected by energy poverty. The highest shares of population with insufficient capacity to keep domestic warmth are concentrated in the countries which joined the EU in 2004 (the EU 10). In this geographic area, people have low incomes, the building stock has poor standards, and the population has to rely on inefficient heating technologies often powered by electricity.8

In the case of energy poverty in Mediterranean countries, the issue has been attributed to the lack of adequate heating systems, poor quality of thermal insulation, and high energy prices.9 In addition, unemployment and the failure of the state’s safety net to assist the energy poor population aggravates the overall situation. But not only low incomes affect the region, it is also that the electricity prices are disproportionately high when considering the real purchasing power. A good example of this is Spain, which has the third highest electricity prices in the EU with the 14th highest GDP per capita.10

So far there has been a lack of integrated discussion and interpretation of the problem within relevant scientific and policy communities. This has prevented the development of systematic understandings and effective policy responses. However, awareness of energy poverty is growing across Europe, as policymakers have started to include this topic on their political agenda.

3. How to address energy poverty: measures and the creation of the EU Energy Poverty Observatory

In the context of existing EU legislation, the EU deals with this issue most directly through the Electricity and Gas Directive, which requires Member States to define vulnerable customers in their energy market and protect them. Energy poverty and vulnerability considerations were integrated within the Directives 2009/73/EC11 and 2009/72/EC.12 Among other issues tackled in these directives, it includes that Member States are required to adopt a definition of ‘vul-

8 Katja Schumacher, Johanna Cludius, Hannah Forster, et al., ‘How to end Energy Poverty? Scrutiny of Cur- rent EU and Member States Instruments’ [2015] Directorate General for Internal Policies. Policy Depart- ment A: Economic and Scientific Policy, p. 37. 9 Bouzarovski (n 7) p. 276. 10 Schumacher, Cludius, Forster, et al, (n 8) p. 44. 11 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC [2009] OJ 001/112L. 12 Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC [2009] OJ L 211/55.

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nerable costumers’ and consequently, protect them13 by prohibiting the discon- nection of gas and electricity in critical time periods.14

Moreover, energy poverty is also addressed in Directive 2010/31/EU15 in terms of building stock and energy efficiency. At this stage, 75% of the building stock in the EU is not energy efficient.16 The mentioned directive states that better energy efficiency of buildings could potentially help reduce energy poverty. Better insulated homes, for instance, prevent cold from entering the home and consequently reducing the energy needs and resulting bills. On energy efficiency, -Di rective 2012/27/EU17 likewise states that investments in energy efficiency that can help prevent energy poverty should be a priority in energy-poor households.

In the Clean Energy for all Europeans Package, the European Commission came up with a set of provisions which would oblige Member States to define, measure, and periodically report on energy poverty. The Energy Union has also made it mandatory for Member States to share their plans to help those suffering from energy poverty such as their energy efficiency measures and other policy measures. They also have to assess the number of households facing energy poverty and share a national objective to reduce this number in the case that the figure is significant.18

Beyond implementing legislation, the European Commission has created the EU Energy Poverty Observatory (EPOVOBS) as part of its efforts to address energy poverty across EU countries. The Observatory is a Web portal, meaning that it has no physical office. It aims to provide a user-friendly and open-access resource that will play a key role in developing indicators to measure energy poverty, as well as in developing a common definition for it. It acts as a data collector hub, which also disseminates information and best practices, facilitates knowledge-sharing among stakeholders, as well as supporting informed decision-mak-

13 Bouzarovski (n 7) p. 276. 14 Pye & Dobbins, (n 3) p. 4. 15 Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings [2010] OJ L 153/13. 16 Marianna Papaglastra, ‘EU support for (deep) energy renovation of buildings’, Build Up, 6 December 2017. accessed 21 August 2018. 17 Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC [2012] OJ L 315/1. 18 ‘Energy Union: deals on efficiency targets and governance’ (European Parliament press release, 20 June 2018) < http://www.europarl.europa.eu/news/nl/press-room/20180619IPR06146/energy-union-deals- on-efficiency-targets-and-governance> accessed 21 August 2018.

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ing at local, national and EU level.19 EPOVOBS and EU Fuel Poverty Network both play a role in disseminating information on this issue for people to become informed facilitating public and stakeholder engagements.20 The Observatory is being developed by a consortium led by the University of Manchester and includes, as core partners, Ecofys, National Energy Action, the European Pol- icy Centre, Intrasoft International, and the Wuppertal Institute. @EPOV_EU Twitter will be the best way to engage with them.

The EU Energy Poverty Observatory is facing several challenges, mainly when attempting to integrate data without a common definition or defined indicators. In addition, ensuring that information is presented in a commensurate and accessible manner and the task of finding and offering new ways to identify and monitor the condition of energy poverty across Europe have presented considerable challenges.21

For about the last decade, EU institutions and Member States have begun to care more about energy poverty but have failed to prioritize the topic. Based on what has already been done, five core measures are identified that will jointly support all Member States in effectively combatting energy poverty. These are; agreeing on a harmonized definition of the concept, financial interventions (long and short-term), improving energy efficiency, raising awareness and exchanging best practices, and regulating energy prices.

A harmonized definition – At this moment, the European Commission leaves it up to Member States to define criteria and policies to alleviate energy poverty whilst strengthening their reporting obligations. But, to tackle the problem from a EU-level, agreeing on a definition of energy poverty amongst all Mem- ber States is necessary. A starting point would be to identify the common de- nominators for all countries. This requires a common understanding of what dignified living conditions, adequate heating levels, and affordable costs are.22 Obtaining a harmonized definition at EU level would allow to identify the issue’s different natures and specify the criteria that can measure it, which will help Member States to improve policies and tackle the issue at the level where it is most efficient to do so advised.23

19 Energy Atlas 2018, Heinrich Böl Stiftung 2018, p. 20. 20 Ibid. 21 Stefan Bouzarovski, Launch of the EU Energy Poverty Observatory, 29 January 2018. 22 Grevisse & Brynart, (n 2), p. 538. 23 Pye & Dobbins, (n 3), p. 46.

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Financial interventions – these occur mostly as short term relief measures that support the energy poor by improving equity, achieving energy security, cor- recting externalities and supporting domestic production and the associated employment.24 Over 40% of Member States use financial intervention measures as the primary basis for support to vulnerable costumers.25 Possibilities include; affordable and reliable energy supplies, the granting of a free amount of the energy consumption, a lump-sum reduction on the amount of the bills, innovative forms of energy supply, or investment in energy efficiency.26 The subsidies can range from universal subsidies, subsidies targeted to the poor, subsidies to rural or remote communities, and subsidies to particular industries or firms. It would be advisable to continue this practice and further focus on long-term investments.

Investing into energy efficiency – the International Energy Agency World -En ergy Investment report of 201727 defines energy efficiency investment as the- in cremental spending on efficient equipment or on building refurbishments that reduce energy use. Strong incentives to encourage low income households to put energy efficiency measures in place (from energy using appliances to -im provements to the efficiency of building stock), are needed. For instance, thanks to building renovation programs, South Eastern Europe has drastically reduced the need for spending on supply infrastructure.28 This not only helps reduce the bills, but it also helps to reduce the vulnerability towards energy poverty.

In the long-term, improvements in energy efficiency and prioritizing renewable energy sources play a major role in reducing energy poverty in the EU.29 To this day, buildings are responsible for approximately 40% of energy consumption 30 and 36% of CO2 emissions in the EU. Enhancing home energy retrofit by improving existing buildings with energy efficiency equipment, building smarter buildings, providing financial support to support renovations, will lead to reduced energy costs, reduced CO2 emissions, and less illnesses related to ther-

24 ‘Subsidies in the Energy Sector: An Overview’ [2010] World Bank Group < http://siteresources.worldbank.org/EXTESC/Resources/Subsidy_background_paper.pdf> accessed 21 August 2018. 25 Manuel Welsch, Europe’s Energy Transition: Insights for Policy Making, (Academic Press 2017). 26 François Grevisse & Marie Brynart, ‘Energy efficiency first: The foundation of a low-carbon society’ [2011] European Council for an Energy Efficient Economy (ECEEE), Summer Study: Conference Proceedings, 2011, p. 546. 27 ‘World Energy Investment’ [2017] International Energy Agency accessed 21 August 2018. 28 ‘Market Report Series: Energy Efficiency’ [2017] International Energy Agency accessed 21 August 2018. 29 Ibid. 30 Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings [2010] OJ L 153/13.

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mally unhealthy homes. This will consequently help combat energy poverty by reducing the household energy bills through improved energy performance buildings.

Raising awareness and exchange of best practices – Improving the understanding of consumer rights and information on market tariffs and energy saving measures will allow consumers to better allocate their finite resources. The energy poverty observatory serves as a good example, serving as a data hub for sharing experiences and best practice amongst users and Member States.31

Income and energy prices – Energy prices have slowly but steadily increased in the past years in comparison to incomes in the EU, which have not grown at the same pace.32 This gap puts more consumers in danger of energy poverty. Therefore, promoting initiatives to increase job creation and better salaries will always mitigate the poverty level and in consequence, energy poverty. Energy price regulation would also be an important factor to mitigate this danger or at least ensuring guaranteed energy supply in critical periods.

In conclusion, one has to acknowledge that energy poverty will not be completely eradicated in the foreseeable future. Nonetheless, implementing the five core measures across Europe will substantially reduce energy poverty and thereby improve living standards for those worse off. To achieve this, the first step will be to raise awareness amongst legislators and to agree upon a common definition of energy poverty in the EU.

31 ‘Subsidies in the Energy Sector: An Overview’ [2010] World Bank Group < http://siteresources.worldbank.org/EXTESC/Resources/Subsidy_background_paper.pdf> accessed 21 August 2018 32 Vasileios Ntouros, ‘Energy poverty in Europe: Policies and recent initiatives’ (Build Up, 1 December 2017) accessed 21 August 2018

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4. References

Primary sources

– Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC [2009] OJ 001/112L. – Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC [2009] OJ L 211/55. – Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings [2010] OJ L 153/13. – Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/ EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/ EC [2012] OJ L 315/1. – Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings [2010] OJ L 153/13.

Secondary sources

Academic Sources

Books – Manuel Welsch, Europe’s Energy Transition: Insights for Policy Making (Academic Press 2017).

Articles – François Grevisse & Marie Brynart, ‘Energy poverty in Europe: Towards a more global understanding’ [2011] European Council for an Energy Efficient Economy (ECEEE). – Steve Pye & Audrey Dobbins, ‘Energy poverty and vulnerable consumers in the energy sector across the EU: analysis of policies and measures’ [2015] InsightE Policy Report. – Claire Dhéret & Marco Giuli ‘The long journey to end energy poverty in Europe’ [2017] European Policy Centre. – Harriet Thomson, Carolyn Snell & Stefan Bouzarovski, ‘Health, Well- Being and Energy Poverty in Europe: A Comparative Study of 32 Euro- pean Countries’ [2017] Vol 14/6 MDPI < www.ncbi.nlm.nih.gov/pmc/

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articles/PMC5486270/ > accessed 20 August 2018. – Stefan Bouzarovski, ‘Energy poverty in the European Union: landscapes of vulnerability’ (2014) WIREs Energy Environ, Vol. 3. – Katja Schumacher, Johanna Cludius, Hannah Forster, et al, ‘How to end Energy Poverty? Scrutiny of Current EU and Member States Instru- ments’ [2015] Directorate General for Internal Policies. Policy Depart- ment A: Economic and Scientific Policy. – François Grevisse & Marie Brynart, ‘Energy efficiency first: The foundation of a low-carbon society’ [2011] European Council for an Energy Efficient Economy (ECEEE), Summer Study: Conference Proceedings, 2011.

Non-academic sources – Energy Access Outlook 2017 (International Energy Agency) accessed 20 August 2018. – Energy Atlas 2018, Heinrich Böl Stiftung 2018. – Marianna Papaglastra, ‘EU support for (deep) energy renovation of buildings’ (Build Up, 6 December 2017) accessed 21 August 2018. – ‘Energy Union: deals on efficiency targets and governance’ (European Parliament press release, 20 June 2018) < http://www.europarl.europa. eu/news/nl/press-room/20180619IPR06146/energy-union-deals-on- efficiency-targets-and-governance> accessed 21 August 2018. – Stefan Bouzarovski, Launch of the EU Energy Poverty Observatory, 29 January 2018. – ‘Subsidies in the Energy Sector: An Overview’ [2010] World Bank Group < http://siteresources.worldbank.org/EXTESC/Resources/Sub- sidy_background_paper.pdf> accessed 21 August 2018. – ‘World Energy Investment’ [2017] International Energy Agency accessed 21 August 2018. – ‘Market Report Series: Energy Efficiency’ [2017] International Energy Agency accessed 21 August 2018. – Vasileios Ntouros, ‘Energy poverty in Europe: Policies and recent initiatives’ (Build Up, 1 December 2017) accessed 21 August 2018.

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Part 4 – Chapter 19 – What Future for Gas and Gas Infrastructure?

PART 4 – SECTURITY OF SUPPLY FOR ALL EUROPEANS

CHAPTER 19 WHAT FUTURE FOR GAS AND GAS INFRASTRUCTURE IN THE EUROPEAN ENERGY TRANSITION?

Christian Schülke

1. Introduction

With a share of 20 to 25 percent of primary energy consumption, natural gas plays a significant role in the energy mix of the European Union (EU).1 It is a versatile fuel that is used in many applications, like residential heating, industrial processes and power generation. It can be burned to generate heat or power, but also be used as a raw material in industry. The EU’s yearly gas consumption reached levels between 4,000 and 5,000 TWh during the last decade – nearly double the EU’s electricity demand, which has been between 2,700 and 2,900 TWh per year during the same period.2

Natural gas is mostly transported through pipelines. The high-pressure, long- distance transmission network in the EU consists of about 200,000 kilometres of pipelines.3 In addition, the low-pressure distribution network brings the gas to the consumers. In large parts of Europe, the distribution network is very dense; in Ger- many alone, gas distribution systems have a length of around 500,000 kilometres.4

Gas storages are another distinct feature of the European gas infrastructure. The total storage capacity in the EU is about 1,000 terawatt hours (TWh), which rep-

1 The author would like to thank Equinor colleagues Trond Enge, Johan Leuraers and Olav Skalmeraas for stimulating discussions on the topic of this contribution and valuable comments to draft versions. 2 Data source: Eurostat. 3 Data source: European Network of Transmission System Operators for Gas (ENTSOG). 4 Data source: Vereinigung der Fernleitungsnetzbetreiber Gas (FNB Gas).

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resents 20 to 25 percent of yearly gas consumption.5 This allows gas storage to be used to balance seasonal demand swings.

Gross gas consumption Share of gas in energy mix (TWh) (percent) European Union (EU28) 4454 23.3 Germany 818 22.2 United Kingdom 809 36.7 Italy 675 37.5 France 445 15.4 Netherlands 350 38.4 Spain 291 20.5 Poland 170 14.6 Belgium 166 24.9 Romania 105 27.8 Hungary 93 31.2 Austria 84 21.2 Czech Republic 82 16.8 Portugal 50 18.5 Ireland 49 28.6 Slovakia 45 23.6 Greece 41 14.5 Denmark 34 16.6 Bulgaria 31 14.8 Croatia 25 25.3 Finland 24 6.0 Lithuania 21 26.2 Latvia 13 25.2 Sweden 10 1.7 Luxembourg 8 17.0 Slovenia 8 10.4 Estonia 5 6.9 Cyprus 0 0.0 Malta 0 0.0 Table 19.1. Gas consumption and share of gas in energy mix of EU member states in 2016. Data source: Eurostat.

5 Data source: Gas Infrastructure Europe (GIE)

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The well-developed gas infrastructure is a major flexibility provider to the -Eu ropean energy system. Consequently, it is a key asset in the European energy transition – under the condition that it will, in the longer term, be used for decarbonised gases. Today, most of the gas consumed in Europe is natural gas, i.e. a fossil fuel. Natural gas emits less greenhouse gases and other pollutants than any other fossil fuel. Still, if used the same way as today, natural gas does not have a space in a European energy system that, by 2050, meets the decarbonisation ambition of the Paris Climate Agreement.

Therefore, a discussion about the future role of gas has started in recent years. An abundant number of studies has been published on this topic recently.6 What makes it so interesting to discuss the role of gas and gas infrastructures in the energy transition? First, gas can contribute to a stepwise and cost-effective transition to a low carbon economy. Second, and in a longer-term perspective, gas itself can decarbonise: this allows gas and the gas infrastructure to play a significant role in the European energy transition towards 2050, and beyond. This chapter first looks at the options gas offers in the years until 2030. It then discusses the role gas can play in a 2050 perspective: this question is very much linked to the opportunities and challenges related to the decarbonisation of gas.

2. The role of gas and the gas infrastructure up to 2030

What could be the role of gas in the next decade of the European energy transition? While 2050 is the main milestone in current climate policy, the EU has set intermediate targets for 2030, regarding greenhouse gas emissions, renewable energies and energy efficiency. Natural gas can make a significant contribution to reaching all three targets, if certain conditions are fulfilled.

Fuel switching to gas away from higher carbon content fuels delivers substantial climate and clean air benefits, bringing Europe closer to meeting the 2030 greenhouse gas target. For instance, a switch from coal to gas in power production reduces CO2 emissions per kilowatt hours (kWh) by about 50 percent. Phasing out coal and replacing it by renewables and natural gas hence seems a sensible step in the decarbonisation effort. As of mid-2018, eight European countries have decided to phase out coal by 2030 or earlier, while other countries are considering such a step.7 Consequently, the installed coal capacity in Europe will go

6 See literature list at the end of this chapter for a selection 7 Austria, Finland, France, Italy, the Netherlands, Portugal, Sweden and the United Kingdom have decided to phase-out coal during the 2020s or by 2030 at the latest. Further countries like Germany are in the process of taking a decision to phase out coal. Even Europe’s “coal champion” Poland has announced that the share

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down significantly and could halve by 2030. Some of it will likely be replaced by gas-fired plants, meaning that the contribution of gas to the European electricity mix towards 2030 should be at similar or higher levels than today.

In heating, a switch from coal or oil to natural gas also brings significant emission reductions at comparatively low costs. This first and foremost applies to -ex isting buildings, where a switch to electric heat pumps requires more significant and costly changes in the heating infrastructure. In new, highly efficient buildings, we can expect electric heat pumps to increase market share.

In transport, a switch from diesel or petrol to gas (compressed natural gas –

CNG or liquefied natural gas – LNG) can reduce CO2. More significantly, gas- fuelled cars, buses and trucks are emitting virtually none of the air pollutants (particulate matter and nitrogen oxides or NOx). They are hence well placed to address air pollution in the short term, as they are based on mature technology, offer long ranges and are available at affordable cost. Looking at current market trends, we can expect gas to take a larger share of the European transport market in a 2030 perspective, especially in the heavy vehicles and maritime sectors.

An increased use of gas at the expense of coal or oil allows to reduce greenhouse gas emissions quickly and in a cost-effective manner. What is more, natural gas appliances can help Europe to improve its energy efficiency: gas-fired power plants have a higher efficiency than coal plants (62 percent vs. 48 percent for the world’s most efficient gas and coal plants respectively). Modern gas heating technologies offer efficiencies of close to 100 percent: you can achieve a significant energy efficiency improvement when replacing a 25-year-old boiler by a new, state-of-the-art gas boiler.

Finally, with increasing levels of variable renewable energies in power generation, the role of gas as flexibility provider in the power sector is becoming increasingly important. Compared to coal or nuclear plants, gas plants have faster ramp-up times and lower capital costs, meaning they can be in the money with lower running hours. While batteries can back up renewables during seconds and hours, gas plants can provide flexibility for as long as needed.

The increased interaction between the gas and electricity sector is currently being promoted by many industry and government actors, under headings like “sector coupling” or “integrated energy transition”. The advantages of increased integration are obvious, as both infrastructures are complementary. Many links

of coal in power generation should decrease significantly by 2050.

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exist and can be multiplied in the future: gas can be used to produce power and heat, and power can be turned into gas and stored as gas. An integrated approach can make best use of existing infrastructures and reduces the cost of the overall system. Additional existing infrastructures like heat networks should be included in such integrated approaches. While some of the early contributions to the discussion saw sector coupling mostly as a means to speed up electrification, the strength of an integrated approach is in using the respective advantages like the efficiency of electricity in some applications, and the ease of transporting and storing energy in gaseous forms.

Thanks to its characteristics, gas can be expected to defend or even increase its share in the European energy mix in a 2030 perspective. The role of gas during the next decade will be favoured if energy and climate policies incentivise the use of cost-effective decarbonisation measures. Increasing carbon prices would, for instance, support the competitiveness of gas compared to coal and oil. Price developments in the global market will be another decisive factor. This is particularly relevant for a switch from hard coal to natural gas in power generation. The latter can happen purely based on market developments, as we observed in the United States in the recent past. The declining costs of renewable energies, however, also put pressure on natural gas.

Already today, renewable gases are fed into the European gas network. The production of biogas and biomethane in Europe has increased continuously since the 1990s. There are plans to scale up these existing green gas options: to make a difference, it will be important to demonstrate that sustainable biomethane production at large scale is possible. Besides the relatively well-established biomethane production from upgrading biogas (anaerobic digestion), the development of gasification and pyrogasification (a thermo-chemical method allowing production of syngas from organic matter) has significant potential.8 The European biogas industry has a target of covering 5 percent of European gas demand from biogases and biomethane by 2020, and 10 percent by 2030. In the most ambitious scenario of their 2018 network development plan, the European Net- work of Transmission System Operators for Gas (ENTSOG) see a biomethane potential of roughly the same level, i.e. 10 percent of total gas demand or 530 TWh. A recent Ecofys study identified a potential to increase EU renewable gas production to around 1,200 TWh per year by 2050.9 Reaching as much of this target as possible in a sustainable and affordable manner is a key to delivering on the ambition to “green the gas”.10

8 See ADEME (2018) for a more detailed discussion of the biogas and biomethane potential 9 Ecofys (2018) 10 See Lambert (2018) for an overview on biogas, biomethane and power-to-gas in Europe

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Moreover, in the years to 2030, it will be important to progress the development of decarbonised gas, i.e. power-to-gas and clean hydrogen (hydrogen from natural gas with carbon capture and storage (CCS)).11 Several power-to-gas pilot plants exist throughout Europe: the challenge is to bring down cost and scale up during the 2020s, so that in the future, green hydrogen can be produced from renewable power at reasonable cost. Clean hydrogen from natural gas with CCS is a different approach, based on reforming of gas. First projects like Leeds/North of England H21 (conversion of distribution networks to hydrogen) or Magnum H2M (conversion of a gas-fired power plant to hydrogen) are currently in the development phase. Progress with these projects during the 2020s will be crucial to demonstrate that gas can be effectively decarbonised.

Box: Methane and carbon emissions in the gas value chain

For gas to realise its decarbonisation potential in the next decade and beyond, it is important that gas is used as efficiently as possible. In addition, industry and policy-makers should focus on greenhouse gas emissions that happen in the gas value chain before the gas reaches the final consumer, i.e. emissions during production, processing and transport of natural gas. Exam- ples include carbon emissions from the use of gas-fuelled compressors and methane emissions from gas venting or leakages.

Methane emissions (sometimes called “methane leaks”) are the central element in this context, as methane has a high global warming potential

(GWP). Methane has a shorter atmospheric lifetime than CO2: around 12 years compared to centuries for CO2. But during these 12 years, it has a higher impact on the climate than CO2. The United Nations Framework Convention on Climate Change (UNFCCC) works with a GWP for a time horizon of 100 years; the Intergovernmental Panel on Climate Change (IPCC) assess the GWP100 for methane to be between 28 and 34.12

Methane emissions are often measured in relation to total delivered gas: if emissions are lower than 5.5 percent of total delivered gas, then using gas will be better for the climate than using coal.13

11 See below for a more detailed description of both technologies 12 IPCC (2013) Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change 13 Again considering a timeframe of 100 years for the GWP; the threshold would be 3 percent with a timeframe of 20 years.

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The International Energy Agency (IEA) in 2017 estimated that at global level, methane emissions from natural gas operations correspond to 1.7 percent of total delivered gas. This means that on average, natural gas generates significantly fewer greenhouse gas emissions than coal. The IEA noted that uncertainty in methane emissions levels is high and more efforts should be undertaken to measure them.14

The emission intensity of natural gas delivered to European consumers is significantly lower than the global average, with recent studies putting the average methane emissions of all gas consumed in Europe at 0.6 percent. Domestic European production has a particularly low methane footprint: for instance, the methane emissions associated with Norwegian gas delivered to European consumers are below 0.3 percent.15

The IEA pointed out that options to reduce methane emissions exist all the way through the value chain. The agency found that 40 to 50 percent of them can be avoided just by implementing approaches that have no net costs, as reducing methane emissions results in additional gas volumes available for marketing.16

The gas industry has started several initiatives to address the issue of methane emissions, like the methane activities within the Oil and Gas Climate Initiative (OGCI) and the Methane Guiding Principles.

To conclude, if natural gas is to play its role as transition fuel and partner of renewable energies, then the gas industry needs to act rapidly and transparently to reduce methane emissions. Also in the context of overall increasing decarbonisation ambitions, reducing emissions in the whole gas value chain will become ever more important.

14 International Energy Agency (2017) 15 Statoil (2017) 16 International Energy Agency (2017)

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3. What can be the role of gas and the gas infrastructure in a 2050 decarbonisation perspective?

While the contribution of natural gas in the next decade of the European energy transition is acknowledged by most stakeholders, the picture is getting more blurry post 2030. If the EU decides to set a 95 percent greenhouse gas emission reduction target for 2050, little, if any, natural gas can be consumed unabated, i.e. without its CO2 being captured and used or stored. The use of decarbonised or green gases, however, could be a key enabler for reaching such a climate ambition. This means that significant changes need to happen in the gas value chain to give gas a place in the European energy system of 2050 and beyond.

The yet outstanding political decision about the emission reduction level for 2050 – minus 80 percent or minus 95 percent compared to 1990 levels – will have significant impact on the way natural gas can contribute to the European energy mix in 2050. With a target closer to the lower end of the range, unabated natural gas can be the main partner of then dominating renewable energies. In scenarios meeting a 95 percent decarbonisation ambition, there will be no space for natural gas as we know it today. But today’s gas infrastructure might still play an important role in such a scenario, transporting and storing different types of gas than today.

In line with the Paris Climate Agreement, we assume a 95 percent scenario in the following paragraphs. In such an environment, gas will need to fully decarbonise. There is no clear conclusion in recent literature nor is there a consensus among policy and industry stakeholders regarding the role of gas in a largely carbon-free Europe. However, several recent studies assessed the potential of gas and the gas infrastructure, and found that decarbonisation pathways with a prominent role for decarbonised gases have clear cost benefits compared to full electrification scenarios.17

While there has been good progress over the last years to reduce greenhouse gas emissions in power generation, electricity today only accounts for a bit more than one fifth of the EU’s final energy consumption. One could observe a trend towards electrification over the last decades, but it is progressing at slow speed.18 Even if we assume faster electrification in the decades to 2050, decarbonising the non-electric part of final energy use will be the main challenge.

17 For example Dena (2018), Enervis (2018), Pöyry (2018) 18 According to Eurostat, the share of electricity in EU final energy consumption increased from 17.2 percent in 1990 to 21.6 percent in 2016.

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In this perspective, the importance of decarbonising gas becomes clear. Assump- tions vary widely, but three major avenues seem to emerge to decarbonise gas in a 2050 timeframe:

– A switch from natural gas to clean hydrogen, produced from natural gas with CCS;

– A switch from natural gas to green hydrogen, produced from renewable electricity (power-to-gas);

– A significant increase of biogas/biomethane production.

The following paragraphs will describe the two first options to decarbonise gas in more detail, as the potential of biogas and biomethane has already been discussed in the previous chapter.

The “clean hydrogen” pathway (sometimes called “blue hydrogen”) makes use of the well-established reforming technology and couples it with pre-combustion CCS. Clean hydrogen is produced from natural gas and water: through the process, natural gas (CH4) and water (H2O) are transformed into hydrogen (H2) while the CO2 is captured and eventually stored. This pathway allows large-scale production of clean hydrogen, but it is dependent on the development of a CCS value chain in Europe. The natural gas price and the cost of storing CO2 will be the main drivers for the competitiveness of this pathway. The United Kingdom is the leading European country for this approach; public funding is available and several projects are currently underway.

Various aspects related to carbon capture and storage remain challenging, like public acceptability, availability of storage capacities, and not least cost and commerciality of CCS solutions. It is, on the other hand, difficult to imagine how climate goals can be met without CCS, especially when considering that it will be necessary to achieve negative emissions at a later stage. Bioenergy with CCS will be one of the few options available for this. Developing clean hydrogen today can pave the way for such applications.

In the “power-to-gas” pathway hydrogen is produced from water through electrolysis. Several dozens of pilots are in operation in Europe, with most of them installed in Germany. Electrolysis technology has been available for many decades, but units typically remain small: the world’s largest electrolysis unit, scheduled to start operation in 2020, will have a peak capacity of 10 megawatt. Consequently, costs are still high today. To qualify as green, hydrogen produc-

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tion from electrolysis needs to use renewable electricity. The competitiveness of this path will hence very much depend on future power prices and technological breakthroughs in electrolysis technology. For green hydrogen to become widely available, one needs to assume that large volumes of renewable electricity will be available at low cost.

The clean hydrogen pathway could typically be the right solution for large-scale industrial uses of hydrogen and conversion to 100 percent hydrogen, e.g. of a power plant or the whole distribution grid with all connected end-consumers. Converting the gas grid to hydrogen is dependent on existing pipelines being able to transport hydrogen, which is generally not too difficult if the network consists of plastic pipes, but gets more complex with metal pipes. Appliances need to be able to burn hydrogen, which means that most boilers and turbines will have to be changed. Safety concerns related to a switch from gas to hydrogen are an important aspect in this context, which industry and regulators need to address in a proactive manner.

From today’s perspective, the power-to-gas approach is mostly suitable for decentralised hydrogen production and consumption, or for blending of hydrogen into the gas grid. Blending of green hydrogen or biomethane into the gas grid reduces emissions, but there are technical limits: blending up to 5 or 10 percent seems possible. As long as “traditional” natural gas is the main fuel in the gas grid, blending can achieve only relatively modest overall emission reductions. Consequently, it can be a useful component in a 2030 or 2040 perspective, but less so in a 2050 perspective.

To realise the potential of clean hydrogen and green hydrogen, as well as biogas and biomethane, cooperation at European level will be essential to overcome various technological and socio-economic challenges. The scale of the task and the complementarity of European energy markets call for a common approach, e.g. when it comes to launching new research initiatives, creating frameworks and standards, and establishing new value chains.

The most promising way of using the existing gas infrastructure in a complete decarbonisation scenario is a 100 percent switch from gas to hydrogen. In such a system, clean hydrogen and power-to-gas provide the fuel for residential heating, industrial heat, transport and flexible power generation. What is more, hydrogen can be stored in a way similar to gas, meaning that it can be a viable solution for seasonal storage. Hydrogen and the hydrogen infrastructure (i.e. the converted gas infrastructure) would play a key role in making energy supplies climate-friendly, flexible and reliable.

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Below chart illustrates the seasonal fluctuations in power and gas demand in Europe and thereby underlines the flexibility challenge of energy supplies. As much of the residential heat demand is covered from gas, gas demand shows a strong seasonal pattern, while power demand is more constant throughout the year. If a larger share of heat demand was to be covered from electricity, the need for seasonal flexibility in electricity would increase significantly. As described above, keeping gas, and in the longer run switching to hydrogen, might be a more adequate solution to cover heat demand and to deal with the seasonal flexibility challenge. In addition, gas and hydrogen can become the main back-up fuel in electricity generation if electricity demand does become more volatile, given the relative ease of storing gas and hydrogen.

Figure 19.1. Daily EU gas and electricity demand during 2015. Source: ENTSOE and ENTSOG.

4. The way forward

How does the future for gas and the gas infrastructure in Europe look like? The answer depends very much on the assumptions one makes on climate policy. If one assumes, as we did in this contribution, that Europe will manage to reduce emissions by about 95 percent by 2050, then Europe’s gas sector of 2050 will look very different from today’s. Gas demand might be significantly lower: the “Renewal” scenario in Equinor’s Energy Perspectives 2018, which meets the

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two-degree target, puts EU gas demand in 2050 at around 2,300 TWh, which is around half of today’s level. What is more, an important share of the gas still transported, stored and consumed in Europe could be quite different from the traditional, fossil natural gas. The higher the amount of decarbonised gases, the higher the total gas consumption will likely be. This means: to have a future in Europe, the gas industry needs to decarbonise. The carbon content of gas needs to get on the same downwards track as the carbon content of electricity. This requires innovation, supportive frameworks, courageous investments and cost reductions in the field of decarbonised gas.

The challenge is considerable, and the gas industry will have to act fast. If it does not, market developments and political decisions in favour of electrification could limit the space for gas-based solutions. Already today, we can observe examples of government policy, e.g. in the Netherlands, where economic incentives are being designed to disconnect households from the gas grid.

The challenge is considerable, but the advantages of gas are considerable, too. When one takes a holistic approach, and looks at the infrastructure aspect of energy supply, including transport and storage, gas and hydrogen have a lot to offer. An energy system based on two (or more) decarbonised energy carriers reduces the risk of supply disruptions and offers higher redundancy than an energy system based on only one energy carrier and infrastructure (that is, electricity). The recommendation of this chapter is hence to “keep options open” and develop the decarbonised gas option. Compared to electricity, gas and hydrogen are much easier and cheaper to transport and store. Instead of massively investing in new electricity infrastructure and storage, the existing gas infrastructure should be used – while in parallel the energy carrier gas is gradually decarbonised.

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5. References

– ADEME (2018) A 100 percent renewable gas mix in 2050? – CEER (prepared by DNV GL) (2018) Study on the future role of gas from a regulatory perspective. – Dena (2018) Dena-Leitstudie Integrierte Energiewende. – Ecofys (2018) Gas for climate: How gas can help to achieve the Paris Agreement target in an affordable way. – Enervis (2018) Meta-Studie Sektorenkopplung: “Analyse einer komplex- en Diskussion”. – Equinor (2018) Equinor Energy Perspectives 2018. – Equinor / Northern Gas Networks (2018) H21 North of England report – International Energy Agency (2017) Outlook for natural gas – excerpt from World Energy Outlook 2017. – Keay (2018) Decarbonisation of heat and the role of ‘green gas’ in the United Kingdom, OIES Paper: NG 128. – Lambert (2018) Biogas, biomethane and power-to-gas in OIES Forum (issue 116, September 2018). – Pöyry (2018) Fully decarbonising Europe’s energy system by 2050. – Statoil (2017) Minimizing greenhouse gas emissions: Greenhouse gas emissions of the Norwegian natural gas value chain 2016. – Stern (2017) Challenges to the future of gas: unburnable or unafford- able? OIES Paper: NG 125.

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Part 4 – Chapter 20 – Russia-EU Relations and the Energy Transition

CHAPTER 20 RUSSIA – EU RELATIONS AND THE ENERGY TRANSITION

Kirsten Westphal

1. Introduction

Energy Relations between the Russian Federation and the EU are based on hydrocarbons. However, at the same time both have committed themselves under the Paris Agreement to address climate change. European Member States and Russia/ the Soviet Union have a long-standing energy relationship which originated in the 1950s for oil deliveries and for natural gas supplies in the 1970s.

The official energy dialogue between the Russian Federation and the EU was inaugurated in 2000. Since then, EU-Russian energy relations have experienced ups and downs till today. Natural gas trade has received most of attention because of its historical relevance as part of the rapprochement and détente during the Cold War, diverging historical experiences in Eastern and Western member states and the Russian-Ukrainian gas crises. Since the annexation of Crimea in 2014 and the ongoing fights in Eastern Ukraine, the geopolitical dimension of natural gas trade and pipelines has been predominant in the relationship.

This chapter aims at looking into EU-Russian energy relations between 2000 and 2018. It starts with figures and facts about the development of Russian hydrocarbon imports to the EU. In a second step, it takes a historical retrospective. Whilst it is evident that Russia’s aggression against Ukraine and the consequential security crises in Europe has been a caesura in EU-Russian (energy) relations, the energy transition itself will also be impacting on the trade relations dominated by hydrocarbons.

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In sum, EU-Russian energy relations are at turning point. Yet, the geopolitical circumstance inhibit the EU and Russia to push forward ideas to de-carbonize and modernize the energy relations, which where formulated in the common roadmap till 2050 in 2013.

2. Quantifying EU-Russia Energy Trade

Quantifying Russia’s position in the energy landscape can be done in a straightforward manner1: Russia is and will remain among the biggest energy exporters in the world. It produces 12.2 percent of world oil and 16.3 percent of gas and 5.3 percent of coal.2 Accordingly, Russia is the most important energy supplier to the EU with 43 percent of its gas, 30 percent of its crude and 42 percent of its oil products originating from Russia in 2017 (see graphs below). Last but not least, the share of Russia in the EU uranium supplies accounted for 18 percent3 and uranium enrichment services for 25 percent.4 This is of strategic relevance, given the fact that the replacement of specific fuel rods cannot easily be realized. Russia is also a major supplier of coal to the EU. At the same time, the EU is also the major destination for Russian energy exports (see graphs below).

1 This contribution builds upon the past analysis and provides a synthesis of the publications: Gusev, Alexan- der and Kirsten Westphal, Russian Energy Policies Revisited. Assessing the Impact of the Crisis in Ukraine on Russian Energy Policies and Specifying the Implications for German and EU Energy Policies, SWP- Research Paper 2015/RP 08, December 2015; Bros, Aurélie, Tatiana Mitrova and Kirsten Westphal, Ger- man-Russian Gas Relations: A Special Relationship in Troubled Waters, SWP Research Paper 2017/RP 13, December 2017; Chukanov, Denis, Petra Opitz, Maria Pastukhova, Gianguido Piani and Kirsten Westphal, Renewable Energy and Decentralized Power Generation in Russia: An Opportunity for German-Russian Energy Cooperation, SWP Comments 2017/C 45, November 2017. 2 BP, Statistical Review of World Energy 2018 (London: BP), 14, 28 and 38. 3 “Purchase of Natural Uranium by EU Utilities by Origin in 1992–2014”, European Commission, Nuclear Observatory, http://ec.europa.eu/euratom/observatory_data.html (accessed 16 September 2015). 4 “Providers of Enrichment Services Delivered to EU Utilities in 1993–2014”, European Commission, Nu- clear Observatory, http://ec.europa.eu/euratom/observatory_data.html (accessed 16 September 2015).

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Figure 20.1. Source: https://ec.europa.eu/energy/sites/ener/files/documents/ quarterly_report_on_european_gas_markets_q4_2017_final_20180323.pdf and http://www.gazpromexport.ru/en/statistics/(for 2017).

Figure 20.2. Source: https://ec.europa.eu/energy/sites/ener/files/documents/quar- terly_report_on_european_gas_markets_q4_2017_final_20180323.pdf

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Figure 20.3. Source: Eurostat Trade.

Figure 20.4.

Even though the close energy relationship between EU and Russia stretches beyond natural gas, to oil, hard coal, nuclear fuel cycle and the power sector, the EU-Russian gas relations receive most of the political and public attention as these supplies are pipeline-bound. This creates closer and more rigid (inter)de- pendencies. Crude oil and hard coal are traded globally.

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Electricity cooperation is decisive for modernization of the network and generation capacities, related to renewables and energy efficiency. Yet, the trade between the EU and Russia is limited to Finland and the Baltic States. The plans to de-synchronize the Baltic States from the former Russian/ Soviet UPS/ IPS and synchronize them with the ENTSO-E grid by 2025 will diminish cross-border electricity trade.

Figure 20.5. Source: Federal Customs Service, Customs Statistics of Foreign Trade.

Russia is a hydrocarbon exporting country, and the energy sector is of systemic relevance for the Russian economy and Russian politics.5 Export tariffs and taxes on the production of oil and gas have been the major income source for the Russian budget since the mid-2000s, standing for half of the federal budget.6 All revenues from taxation and export duties, which exceed an oil price of 40 US Dollar per barrel are feeding the national wealth fund. The accumulated sum is increasing again.7

5 See in more detail: Tatiana Mitrova, “The Political and Economic Importance of Gas in Russia”, in The Russian Gas Matrix: How Markets Are Driving Change, ed. James Henderson and Simon Pirani (Oxford: Oxford University Press, 2014), 6–38. 6 Janis Kluge, Russlands Staatshaushalt unter Druck. Politische und finanzielle Risiken der Stagnation. SWP- Studie 14 (Berlin: SWP, 2018), p.7. 7 Eduard Steiner, “Russlands neuer Ölreichtum”, in: Die Welt, 14 Juli 2018, p.19.

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Figure 20.6. Source: Federal Customs Service, Customs Statistics of Foreign Trade.

President Putin has also used the energy sector as an instrument of its power preservation. The ‘old system of oligarchs’ which had dominated the oil industry in the 1990s under then President Yeltsin has been substituted by a web of ‘loyalists’ to President Putin. This “network state capitalism”8 builds upon close control of the Kremlin and personal ties to President Putin. The big companies are managed by Putin “Loyalists”. Moreover, in particular the 100 percent state owned holding Rosneftegaz, which in turn controls the state’s shares in Gazprom and Rosneft, has served as a funding source to subsidize other economic activities of a circle close to the leadership.9

3. In retrospective: The development of institutionalized EU-Russian energy relations

3.1 The first phase till 2000

In 1994, the EU and Russia signed a Partnership and Cooperation Agreement (PCA) that came into force in 1997. The PCA is a fundamental agreement, concluded for ten years, that structures EU-Russian cooperation and defines the main areas for common activities among those energy with a reference to the

8 Jonas Grätz, “Russia’s Multinationals: Network State Capitalism Goes Global”, in Multinational Corpora- tions from Emerging Markets: State Capitalism 3.0, ed. Andreas Nölke (Basingstoke: Palgrave Macmillan, 2014), p. 90–108. 9 Janis Kluge, Russlands Staatshaushalt unter Druck. Politische und finanzielle Risiken der Stagnation. SWP- Studie 14 (Berlin: SWP, 2018), p.39/40.

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European Energy Charter and its norms. Since 2007 it is renewed every year. The PCA was based on the declaration of common values such as democratic governance, human rights and the commitment to market structures. This way, the PCA established three dimensions of political dialogue, economic cooperation and culture which opened the opportunity to tie the Russian Federation to the European Union and to deepen their relationship. The PCA had a clear emphasis on the political dimension. The “respect for democratic principles and human rights (...)”10 and the compliance with political conditions, norms, rules, and regulations of the OSCE and the GATT/WTO was defined as a precondition to political and economic cooperation. Article 65 on energy affirms the principles of the market economy and the European Energy Charter, as well as emphasized environmental issues.

The year 2000 became a crystallizing point in EU-Russian relations: The then Russian President Yeltsin stepped down on 31 December 1999 and passed on his office to Prime Minister Putin, who was approved in the presidential elections with almost 53 percent on 26 March 2000.11 In the first term as President, Vladimir Putin had developed and strengthened a pragmatic policy course towards the EU. By then, Putin’s foreign policy was characterized by an ‘econo- mization’ of Russian foreign policy, which means a reappraisal of the relations with other newly independent states and a re-evaluation of the cooperation with the EU as the main trading and economic partner.12 Two factors contributed to that, namely 11 September 2001 and the ‘war on terror’ that had brought Russia back into the international arena as an important partner for the ‘West’ in both political, as well as security and military terms, and EU’s enlargement which was making Russia a neighbor of the EU. In the EU as well, economic cooperation and trade matters were moving upward on the agenda. One sign was that the EU acknowledged the market-economy status in 2002, for which Russia had been pushing for a long time in order to start negotiations on joining the WTO. The idea of ‘a single economic space’ with the European Union emerged and was translated into the ‘four common spaces’ at the St. Petersburg EU-Russia Sum- mit in May 2003. Energy was part of the economic space.13 Yet, this formal declaration had to be filled with substance and this proved to be more complicated. Already the bilateral negotiations between the EU and Russia on a protocol

10 EU-Russian Agreement on Partnership and Cooperation, http://www.europa.eu.int/ comm/external_rela- tions/ceeca/pca/pca_russia.pdf (Download 04-29-2005), Art.2. 11 For further details see: Shevtsova, Lilia, Putin’s Russia, Washington D.C.: Carnegie Endowment for Interna- tional Peace, 2003, p. 44-103. 12 See: Fischer, Sabine, Russlands Westpolitik in der Krise 1992-2000. Eine konstruktivistische Untersuchung, Frankfurt a.M./ New York, 2003. 13 EC, Communication from the Commission to the Council and the European Parliament on relations with Russia, COM (2004) 106, 09/02/04, p.1.

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for the accession of Russia to the WTO revealed conflicting positions: the EU raised the crucial issues of the application of international WTO standards, the opening of Russian markets and their liberalization with a special focus on the energy sector. This disclosed profound dissension between the two partners on how and whether to institutionalize and structure a ‘common economic space’. 2004 was a crucial year: the EU enlarged towards central Europe and the negotiations on Russia’s accession to the WTO were conducted in parallel. The EU had leverage over Russia, as its consent was needed concerning the conditions of the accession, notably the provisions for the Russian energy sector. Another issue of the bilateral relations was the Kyoto Protocol. Russia itself had intertwined the dialogue with the EU’s support of Russia’s bid for accession to the WTO.

The Energy Charter Treaty transfers WTO rules to the energy trade and thus sets norms and standards for a liberalised, transparent and non-discriminatory energy market.14 However, it is important to mention that the Energy Charter Treaty was created as an international regime for liberalised trade, investment and transit but that it does not impose changes of national law and or privati- sation in the energy sector or – even more important – Third Party Access to pipeline networks on the national level. It also reaffirms national sovereignty over energy resources, respectively the right of national governments to determine the territory to be exploited, depletion and reservoir policies and taxation, and the right to participate in exploration and production. Yet, Russia refused to fully apply and ratify the Energy Charter Treaty because of the Protocol on Transit. Finally, Russia stepped back from it in 2009. The reason for this maneu- ver was the investor-state dispute between former Western shareholder of the Russian oil company Yukos and the Russian Federation. The treaty with the Transit Protocol would have obligated Russia to implement the principles of freedom of transit without distinction of the origin, destination or ownership of the energy, and of non-discriminatory pricing. This had not been perceived as being in the interest of Russia.

3.2 The EU-Russia Energy Dialogue

A sign for the pragmatic and economy-driven policy course was the creation of the EU-Russia Energy Dialogue. The EU-Russian Energy Dialogue was established in September 2000. At an EU level, the degree and structure of external dependence was first and explicitly made subject of the discussion during the

14 Götz, Roland, Die russische Energiewirtschaft und die Energieversorgung Europas, in: Gorzka/ Schulze, Wohin steuert Russland unter Putin?, p.95/96.

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preparation of the Green Paper ‘Towards a European strategy for the security of energy supply’ in autumn 2000,15 which had also heightened the awareness of the importance of energy deliveries from Russia. In Autumn 2000, the then President of the EU Commission, Romano Prodi, announced the plan to double gas imports from Russia and to increase oil imports. Energy cooperation moved upwards on the agenda of the relations.

The EU-Russian Energy Dialogue16 has had a two-fold objective from the beginning: First and foremost it was intended to gear the flows of energy trade and investment, but second also to overcome certain antagonisms between the two differently structured markets. Second, the dialogue was directed at developing the ‘energy partnership’ in order to achieve a situation of mutual advantage. Therefore, the dialogue was organized as a multi-level attempt to govern energy relations by integrating participants from the political and the economic side into the several working groups and round tables. The EU and Russia had defined short and long-term issues for the Energy Dialogue: the functioning of markets and their harmonization, sustainable development, predictable and stable supply.17 Already at that time, the principles of market transparency and competition were emphasized by the EU as well as the issue of long-term contracts and their destination clauses. Russia was primarily interested in maintaining and securing its strategic position as the major single energy supplier to the EU. With this objective, Russia had put pressure on the EU to extend the acceptance of the existing long-term contracts for gas supplies. Because of the structural characteristics of the gas infrastructure and the huge investments which had to be undertaken to build pipelines the EU finally accepted the Russian arguments.18 In turn, Russia had to relent its position on the destination clause that was originally linked to the long-term contracts in order to determine the destination of the gas sold to the EU and to avoid a re-selling on the EU market. Russia exerted pressure on the EU to give up any plans of limiting imports to the EU or to member states from a single non-European supplier to 30 percent of the overall consumption.19 Moreover, Russia had been interested in advanced technologies and financing. A pilot project on energy savings in Archangelsk were kicked off. The safety of infrastructure was mentioned as a common concern. Under the header of ‘predictable and stable supply”, a gas pipeline through

15 Commission of the EC, Green Paper - Towards a European strategy for the security of energy supply, COM (2000)769final, Brussels, November 2000. 16 See the Progress Reports of the Energy Dialogue: http://www.europa.eu.int/comm/energy/russia/overview/index_en.htm 17 The following is adapted from the Communication (2004) 777 final, The Energy Dialogue between the European Union and the Russian Federation between 2000 and 2004, Brussels 12-13-2004. 18 EU-Russia Energy Dialogue, Second Progress Report, Brussels/ Moscow, May 2002, p.2. 19 EU-Russia Energy Dialogue, Third Progress Report, Brussels/ Moscow, November 2002, p.2.

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the Baltic Sea, which links the UK with Russia via Germany had been defined as a priority axis within the trans-European networks.20 An interconnected electricity network was mentioned as a common priority. The joint use of the two satellite navigation systems GALLILEO and the Russian GLONASS in order to reinforce the safety of infrastructure and production was formulated as a long term objective. Last but not least, the improvement of the investment climate in Russia was an important issue because of the high investment needs identified at this time; also in order to develop new production sites to meet the growing European demand.

In this initial phase between 2000-2004, the EU-Russian energy dialogue had been successfully used by Russia to ‘monopolise’ its position as a strategic energy supplier, as the EU gave up two important principles of diversification by accepting the Russian demand for the maintenance of long-term contracts and the absence of quantitative restrictions on fossil fuel imports. This was later extended to the new member states in the Joint Statement on EU enlargement.21 After EU enlargement the EU integrated new member states with a different historical background in their relationship with Russia. Energy security issues were increasingly subsumed through the lens of import dependence. The reliability of Russia as an energy supplier was more and more questioned, especially in the light of the Russian-Ukrainian transit crises in 2006 and in 2009/2010 raised the question of energy security. The most incisive change in the gas business were the Internal Energy Market Packages. Since 1998, the EU has been going through a sensitive transition that has gripped on policies, market structures, companies and commercial transactions as part of the Internal Market Packages. When the EU Commission started to revise long-term delivery contracts and to bring an end to ‘bundled’ business models with the Internal Market Packages of 2003 and 2009, the market structures and business models changed fundamentally. In particular the Third Energy Market Package of 2009 (together with the Lisbon Treaty of 2009) to implement a really competitive, functioning and integrated EU market for electricity and natural gas has changed the consecutive bilateral energy relations on different layers.

A first big change was induced by the EU with the Third Energy Market Pack- age and the Lisbon Treaty in 2009 that fundamentally changed the regulatory and legal framework in the EU and highly affected the business model of all gas undertakings. Its fundamental impacts were even intensified by the gas glut which enfolded in 2009/2010 as a consequence of the fracking revolution in the

20 The gas pipeline Nord Stream was later realized under harsh criticism of Poland. 21 EU-Russia Energy Dialogue, Fifth Progress Report, Brussels/ Moscow, November 2004, p.2.

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US and surplus of LNG volumes available. This turned natural gas markets into a buyers’ market.

Russia’s Gazprom was affected by the ramifications of EU market reforms. The company had always been very clear about its historical preference for the traditional organization of the gas market, fitting with its market order. Moreo- ver, the business cases and economics e.g. for Gazprom’s infrastructure projects Nord Stream and South Stream changed under the Third Market Package. At the same time, Gazprom has also profited from the changes, because it enabled the company’s downstream expansion in Europe.

Since then, despite the stated common goal of market harmonization, diverging positions over gas trade and gas transit and investment moved to the fore in EU- Russia energy relations. The transit countries that are geographically and physically part of the market, had not been included into the bilateral dialogue. This is even more important because of the fact that the Energy Charter Treaty was never fully applied by Russia. At the same time, the EU favoured the export of the Acquis Communautaire to the neighborhood within the European Energy Community which reaches out to Ukraine, Moldova, Albania, Serbia, Bosnia- Hercegovina, the FYR of Macedonia, and Montenegro, and Georgia as candidate member. In a nutshell, the Energy Community involves the promotion of EU energy law beyond the EU borders intending to bring Eastern Southern Eu- ropean and Black Sea Region countries closer to the standards of the EU energy market. This requires Energy Community member states to transpose EU internal market rules into their domestic context. As a consequence, regulatory fault lines and grey zones became more evident (in)between Russia and the EU.22

During the first period of the institutionalized EU-Russia energy dialogue it was guided from the EU side by the idea of positive interdependence which not only builds upon physical trade and financial flows from both sides, but also construc- tively builds upon a common definition and implementation of norms and rules up to legally binding arrangements, which are highly valued by the EU. Conse- quently, the EU had been pushing for regulations and the application of international law in order to facilitate trade, commerce and investments in the energy sector. The dialogue was geared towards establishing a common norms and rules for a level playing field or even one common market for energy. Of course, this approach was also aimed at allowing western companies full access to the Russian energy market, but it is a crucial element to secure energy supply to Europe.

22 See: Indra Øverland, Ellen Scholl, Kirsten Westphal and Katja Yafimava, Energy Security and the OSCE: The Case for Energy Risk Mitigation and Connectivity, SWP Comments 2016/C 26, May 2016.

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Yet, the tension between conflicting and convergent interests between supplier and consumer became more evident: Russia as a hydrocarbon rich country has pursued a strategy to maximizing resource rents and ensuring national sovereignty over natural resources. The EU as a consumer market has had contrasting interest in cost-efficient energy supplies and implementing competition. The Internal Energy Market Package for Electricity and Gas have been dedicated to this end. The challenge for gas supplies lies in the geology as most of the reserve base is outside EU jurisdiction. The Internal Market Packages of the EU23 meant a rupture of long-standing, traditional (contractual) relationships, because they brought an end to bundled business models and initiated a revision of long-term contracts.24 In sum, the energy market of the EU and Russia already drifting apart, have developed in different directions: Russia remained a state-dominated ‘market’ and companies even experienced a reinforcement of ties to the political elite, the EU moved toward a neoliberal competitive and integrated internal market. Therefore, the once envisaged common energy space has become more fragmented instead.

Regarding environmental and climate policies, the ratification of the Kyoto Pro- tocol by Russia on 22 October 2004 was a landmark in the Energy Dialogue, as both committed themselves to climate protection measures. As the Russian ratification was crucial for its coming into force after the US withdrawal, the EU pushed Russia to ratify the Kyoto Protocol. Yet, a competition over zones of –then economic- influence became visible on the horizon.

Yet, it was less a consequence of Russian commitment to fight climate change, than a result of a package deal. In other words, it reveals that the do ut des principle and the wish to produce a mutually beneficial situation worked in the bilateral negotiations on Russia’s WTO accession – the EU had already signed the protocol in May 2004.

23 The Internal Energy Market Reforms – the Directive 1998 (Directive 98/30/EC), the Internal Market Package 2003 (Directive 2003/55/EC) and 2009 (2009/73/EC) – are intended to create a new order and establish a liberalized, competitive, well-functioning and integrated EU gas market. With the Third Package regulation has been reinforced by ownership unbundling as the preferred model, antitrust enforcement, the abolishment of destination clauses in long-term contracts, access tariffs and network codes and favours short-term dealings (see in more detail: Kim Talus, “United States Natural Gas Markets, Contracts and Risks: What Lessons for the European Union and Asia Pacific Natural Gas Markets?”, Energy Policy 74 (2014), 28–34). With the Lisbon Treaty of 2009 (Art. 194) energy security (and in particular supply security) became a field of shared competencies, requiring coordination among the Union and its member states. The shift from state-regulation and monopoly power to markets and contracts is profoundibid. ( ) and changes the underlying organizational structures in the gas market industry. 24 See in more detail: Kirsten Westphal, “Institutional Change in European Natural Gas Markets and Implica- tions for Energy Security: Lessons from the German Case”, Energy Policy 74 (2014), 35–43.

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The first (and so far last) document which clearly focuses at the necessity of a decarbonisation of the relationship is the EU-Russian common roadmap until 205025 of 2013. Russia and the EU had confirmed this roadmap on the basis of their energy strategies and with regard to existing energy ties and future relations. The document was published a few months prior to the outbreak of the crises in and over Ukraine.

In the Roadmap for EU-Russia Energy Cooperation until 2050 both outline the political significance and the economic relevance of the energy relations which have always been perceived as having “most potential to lead the Euro- pean subcontinent into deeper, mutually beneficial integration”.26 The document contains chapters on electricity, gas, oil, renewables, energy efficiency plus cooperation regarding energy scenarios and forecast. The long-term dimension of an albeit transforming partnership is emphasized by both partners, as energy markets have become more globalized, and as the EU is aiming to a low-carbon energy system and the Russian Federation is “on path of an innovative and efficient energy sector development”.27 Cross-sectoral issues of common interest and activities are energy demand developments, price volatility, the climate challenge and the Roadmap vision to deepen and intensify energy cooperation with steps till 2020, 2030 and 2050. The strategic target identified in the paper is a Pan-European Energy Space. This underlines the outstanding role of Russia for the continent’s energy supply.

Focusing on energy efficiency and renewable energy sources (RES) was not a new idea – it was rather part of the modernization partnership of Germany and the EU with Russia in 2009/2010. Yet, by then, it had not produced the wished-for results. Since then, however, the overall environment has changed significantly in the energy and climate realm with the global oversupply and the consequent price decrease of hydrocarbons as well as the signing of the Paris Agreement.

The transitory character of EU energy policies towards a more sustainable energy system e.g. with the German ‘Energiewende’, adds to growing uncertainties, because the demand for fossil fuels is very difficult to foresee.

25 European Commission (EC), Roadmap: EU-Russia Energy Cooperation until 2050, March 2013, http:// ec.europa.eu/energy/international/russia/doc/2013_03_eu_russia_roadmap_2050_signed.pdf (accessed 28 November 2014). 26 Ibid., 3. 27 Ibid.

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Yet, over the years the diverging positions were manifesting. In some issues - as market harmonisation and market transparency - the strategies fall apart. More- over, Russia was increasingly requesting for a special role. Russia was not willing to become part of the EU Neighbourhood Policy. Competition over sphere of –then economic- influence rose.

The relationship became fraught with differences concerning legal norms, rules and guiding principles. The fate of the Energy Charter Treaty and the establishment of the European Energy Community witness that Russia and the EU were facing more and more differences in their bilateral relationship. This happened against the backdrop of profoundly a profoundly changing international environment, tipping the power balance between producer and consumer. Whilst the 1990s saw a relatively low oil price level enabling consuming countries to set the rules (partly), the price rose with increasing demand from China and Asia till 2013. Since then, the shale oil and shale gas revolution in the US has tipped the power balance, making them buyers’ markets again.

3.3 EU’s Energy Union and EU-Russian Energy Relations in times of geopolitical crises since 2014

The wish to diversify away from Russia was the major impetus behind the political launch of the Energy Union by then-Polish Prime Minister Donald Tusk in 2014. This was put forward in reaction to Russian annexation of Crimea and aggression in Eastern Ukraine. The crises in and over Ukraine became a breaking point – the security crises and the loss of trust resulted in a significant de- terioration of the “multi-layered architecture of Russia-EU political dialogue” established over the last decades and the end of EU-Russia energy strategic partnership established in 2011. The official energy dialogue between the EU and Russia has been suspended with the exception of the trilateral talks between Russia, the EU and Ukraine to secure natural gas supplies to Ukraine.

In the EU’s Energy Union, energy security ranked on top. Only over the course of 2014/2015 the Energy Union’s five dimensions were fleshed out by integrating the energy objectives of all EU-28 member states. The remaining four dimensions encompass creating a fully integrated internal energy market, improving energy efficiency, decarbonising the economy (not least by using more renewable energy), and supporting research, innovation and competitiveness. The Annexation of Crimea by Russia in March 2014 and the ongoing warfare in Ukraine has resulted in a securitization of energy relations. Energy relations have become an issue of high politics.

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Against the background of the annexation of Crimea and the situation in the Eastern parts of Ukraine, Germany and other EU member states have faced a dilemma between political principles as well as market realities. In 2017, Gazprom exported record volumes to the EU (see graph 1). This means, that the pure commercial, geographic and geological facts still persist: The proximity of Russian energy sources, existing and planned infrastructure as well as the complementarity of Russian resource abundance and the EU as the biggest net importer of fossil fuels. Politically, the functional logic of complementarity and interdependence is less compelling in face of Russia’s course in Ukraine.

The crisis in and over Ukraine since 2014 had not translated into an energy crisis. However, the political framing of the gas relations is questioned with regard to functional interdependence, easy rapprochement and positive spill-overs. The West reacted with sanctions on Russia’s aggression. The above described topography of Russian energy elites and their ties to the Kremlin are reflected by Western sanctions which have been tailored to companies and key members of the elite. The EU has imposed sanctions in September 2014 that are also targeted at Russian shale oil and deep-water Arctic off-shore oil development.28 Specific equipment may no longer be exported. Sanctions on the financial sector target Rosneft, Transneft and Gazprom Neft, which are prevented from raising long-term funds from European capital markets. As major Russian banks are also on the list, refinancing is getting more complicated for the whole energy sector. The EU sanctions have been prolonged ever since then for each half year (as of August 2018).

Whilst the EU and the US administration under Obama pursued a concerted approach towards sanctions, the new wave of US sanctions following the Rus- sian interference in US elections and other allegations has been no longer coordinated with the EU. These sanctions have enlarged the grey zone for business activities for European companies. Russia reacted to Western sanctions by counter-sanctions, which reinforced the isolationist economic and autocratic political course by cutting imports. A silent disintegration might enfold.

28 See in more detail: Peter Rutland, The Impact of Sanctions on Russia, Russian Analytical Digest, No. 175 (17 December 2014), 2–7.

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4. Conclusions and recommendations

To conclude, the severe security crises in Europe as well as hybrid threats e.g. cyber-attacks associated with Russia are overshadowing the bilateral energy relations at the dialogue level as well. Moreover, a consensus in the EU over the future of energy relations with Russia is lacking.

The EU and Russia are for their part revisiting the energy relationship, not only with respect to the future, but increasingly with respect to present trade relations and vulnerabilities. Russia has abstained from multilateral agreements such as the International Energy. The creation of the Eurasian Economic Union may add to further fragmentation of the markets.

At the same time, paradoxically, a strong disconnect between political discourse and market realities can be observed, as Russia is delivering gas to the EU at an all-time high as a function of prices and existing infrastructure. In sum, the relationship centers around hydrocarbons, electricity and renewables are less in focus. Both sides are diversifying away from each other, which might be a chance for a normalization in the energy relationship.

The bilateral gas relations have seen the most dramatic change and the conflicts centre on pipelines and the future of the Ukrainian transit, EU regulation under the Third Market Package as well as Gazprom’s dominance in Eastern European markets. Natural gas, as the cleanest fossil fuel has (so far) not been identified as part of the energy transition. Instead, the geopolitical burden on natural gas seems to prevent discussions about decarbonizing natural gas or green gas.

EU’s integrated energy and climate policies, as well as national programmes such as the German “Energiewende” have already had and will have an even deeper impact on the bilateral relationship, too. They have changed the outlook for fossil fuels and raised uncertainty about demand.

If we assume that the geopolitical and security crises do not further deteriorate significantly, there are good arguments to rethink EU-Russian sectoral interfaces and redesign energy relations, as both have signed the Paris Agreement. Moreo- ver, business relations as well as interconnections between the European continental grid and the Russian Unified Power System and the synchronized integrated power system with Ukraine, Kazakhstan, Kyrgystan, Belarus, Azerbaijan, Tajikistan, Georgia, Moldova and Mongolia UPS/IPS exist. This underscores the argument to engage in a low-key regulatory and technical dialogue.

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If an energy transition is to be accelerated globally, it makes much sense to develop partnerships between “frontrunners” and hydrocarbon-abundant countries. In order to implement and speed up the energy transition, international cooperation is key to exploit markets of scale and further reduce costs. The slow but steady shift in Russia toward supporting RES opens a window for cooperation. There is considerable room for improvement and European expertise in the areas of renewable, local, and decentralized energy; in technology- and know-how exchange; but also in the business-to-business format, which could contribute to a more transparent, flexible, and business-friendly environment for the Russian RE market.

Overall, it is advisable to flank existing energy trade with projects to decarbonize energy sources imported from Russia. Regarding innovative technical solutions, mutual and cross-sectoral benefits can be exploited if synthetic/ green gas /biogas and/ or hydrogen solutions are bilaterally backed in lighthouse projects in order to make them marketable and scalable in cooperation. Meanwhile, small-scale liquid-/compressed natural gas backup solutions can be taken into consideration for transport and backup solutions. Another area of cooperation are ‘smart and sustainable cities’. Both, the EU and Russia have experience with district heating. Small, local CHPs with the flexibility to shift between power and heat production for large public buildings, shopping malls, etc., provide opportunities as well. Overall, there is more added value to be explored for if these issues can be lifted to a “stronger partnership in political responsibility,” to produce global public goods.

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Part 4 – Chapter 21 – The Cybersecurity Challenge

CHAPTER 21 THE CYBERSECURITY CHALLENGE

Sonya Twohig

1. Introduction

With the level of renewables connecting to transmission and distribution grids, there will be an exponential increased in electronic devices on the power system compared with that seen only 5 or 10 years ago. Risks to power systems in terms of cybersecurity is therefore a real and ever-present challenge to the security and reliability of supply to consumers. Every day electricity networks are bombarded by ‘attacks’ from sources which are trying to disrupt and stop electricity from following across the network. As electricity networks are Criti- cal Infrastructure1, their availability on 24/7 365 days per basis is considered the basis of a strong economy. Disrupting supply means disrupting a country from doing business and ensuring its citizens can live their lives.

At a European Level there has been a significant advancement of a Cyber security strategy with the European Union Agency for Network and Information Security (ENISA) is playing an effective lead role across multiple sectors and working with the many EU organisations who are active in the field of cyber security. The Network Information Security (NIS) Directive focuses on bringing together cross-sectoral development and in terms of agencies, strong links are being made between the EU and NATO.

1 Critical infrastructure is an asset or system which is essential for the maintenance of vital societal functions. The damage to a critical infrastructure, its destruction or disruption by natural disasters, terrorism, criminal activity or malicious behaviour, may have a significant negative impact for the security of the EU and the well-being of its citizens. https://ec.europa.eu/home-affairs/what-we-do/policies/crisis-and-terrorism/ critical-infrastructure_en

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In terms of Energy legislation and the Clean Energy Package for all Europeans, the European Commission established a working group (COM/2016/0860 final) in spring 2017 under the Smart Grids Task Force which is tasked with preparing the ground for a new network code on Cybersecurity.2

However, at jurisdictional level, how does one utility compare with another? Do utilities agree on the extent of the risk to be managed? In terms of digital technology, because the resource mix is changing, power is going behind the meter to the distribution level. Therefore, cooperation is needed to ensure utilities and others “see” everything together and so they can do something. The sense of urgency around this topic on an international basis is one where everyone needs to be engaging and adapting.

In addition, attacks on critical infrastructure are likely for geopolitical reasons and used as a form of electronic warfare. Indeed, the UK government has recently stated “We definitely have the power to shut down power grids.”3 and is preparing to launch a new cyber warfare unit to counter the increasingly hostile online actions of adversaries including Russia, North Korea and Iran. Technically the UK is one of the world’s top four or five cyber powers and could “We may look to deny [internet] service, disrupt a specific online activity, deter an individual or a group, or perhaps even destroy equipment and networks.

In this chapter, we explain the following how to understand the risk of Cyber, we present cases studies of cyber-attack on power grids in Ukraine and PJM, in the US and the lessons learned from these attacks. We then explore how utilities are addressing this problem in the US and in Europe. We explain how cybersecurity is affecting the Energy Transition and in particular take the case of the Common Grid Model in ENTSO-E. Finally, we explain that managing effectively a sound cybersecurity strategy, energy policy makers and utilities working together will ensure that the Energy Transition can be implemented. Cooperation between TSOs and interconnections can hamper links. Cybersecurity is one such risk which TSOs need to adapt and manage effectively especially in the context of high power electronics connecting to the Grids by renewable technologies and smart devices.

2 https://ec.europa.eu/energy/sites/ener/files/documents/eg2_-_tor_cyber.pdf 3 Britain preparing to launch new cyber warfare unit UK wants to counter online threats posed by adversaries (London SEPTEMBER 21, 2018)

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2. How to assess the problem

The rule book on Cybersecurity has not been written, mainly due to the fact that the risk keeps changing. An organization that considers itself as protected is not realistic or even knowledgeable about this risk.. Cyber security has no boundaries and therefore normal control measures cannot apply. From a utility perspective, it is inconceivable not be in control of your own network. The cyber security challenge can be best likened to one’s own ability to withstand a cold or flu virus. It’s not a question of not having a cold or flu but when and for how long one can recover.

Even applying mitigations to manage this risk are also being attacked. For utilities who operate the high-voltage transmission systems, operators use traditional methods such as ‘cause and effect’ but the Cybersecurity risk is continuously changing leaving such methods weak and open to further attack. For example, determination of indicators for monitoring and detection can be highly subjec- tive and dynamic. It therefore requires a new technique and methodology for assessment.

While the threats/risks for critical infrastructure are increasing rapidly, the security state of utilities is alarming as there is no physical and separate logical security. Checks and balances are essential and cybersecurity is a hygiene factor that cannot be ignored by utilities.The problem however is also a lack of understanding from utilities and regulators who have only recently started to appoint personnel with specific skills in handling Cybersecurity. Often such appoint- ments have been made following a cyber-attack.

For utilities who operate critical infrastructure security of supply and risk preparedness are now indelibly interlinked. Where once a power system engineer was revered in a utility now it is the cyber security expert that has an important and critical role for the operation of the power system. Utilities are now actively recruiting experts in the field and security vetting is often a prerequisite for hir- ing these experts. Investment by utilities on cybersecurity is becoming a significant area of expenditure and of course, regulators are asking the question as to what level this spend is necessary.

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In the 2016 a Cyber Security Strategy report was produced for the ITRE com- mittee4 in which it was reported that global spending on cyber security products and services to exceed USD1 trillion cumulatively between 2017 and 2021, representing 12-15% year-on year growth. This strong forecast reflects recent rapid increase in cyber security spend across the world; for instance, the US Govern- ment has increased its annual cyber security budget by 35%, from USD14 billion budgeted in 2016 to USD19 billion in 2017.35 On the European side, the EC has pledged to invest EUR450 million into a public-private partnership on cyber security that is expected to further trigger EUR1.8 billion of investment.

In the following case studies for Ukraine and the US, highlight a utility with basic security prevention and a utility with a significant investment in cyber security prevention. The Ukraine case study reveals a lack of preparedness, lack of awareness of the risk changing, and lack of coordination. For PJM, it is continuously attacked and must stay vigilant 24x7 basis. These case studies provide a learning and are an important warning to others.

3. Case Study – Grids Under Attack

According to TSOs across the world, the networks are under attack on a second by second basis. TSOs have tried to put in place best practice but often the practices are weak and not updated regularly to ensure robust. In this section we outline the experience of two utilities as in each the vulnerability and protection can be examined.

3.1 Case Study – Ukraine

In 2015, hackers brought down the power supply to hundreds of thousands of homes in Ukraine in a cyber-attack which was believed to be the first ever to result in a power outage.5 The Ukrainian energy ministry said it was probing a “suspected” cyber-attack on the power grid, targeting several regional power companies, which the country’s intelligence service blamed on “Russian special services”.

It was 3:30 p.m. last December 23, in the region of Western Ukraine where a regional control center which distributes power to the region’s residents. What happened was that the cursor on an operator’s computer suddenly skittered

4 http://www.europarl.europa.eu/RegData/etudes/STUD/2016/587333/IPOL_STU(2016)587333_ EN.pdf 5 https://www.ft.com/content/0cfffe1e-b3cd-11e5-8358-9a82b43f6b2f

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across the screen of its own accord. The cursor navigated purposefully toward buttons controlling the circuit breakers at a substation in the region and then clicked on a box to open the breakers and take the substation offline. A dialogue window popped up on screen asking to confirm the action, however the operator found his own actions unresponsive. Then as the cursor moved in the direction of another breaker, the machine suddenly logged him out of the control panel. Although he tried frantically to log back in, the attackers had changed his password preventing him from gaining re-entry. All he could do was stare helplessly at his screen while the ghosts in the machine clicked open one breaker after another, eventually taking about 30 substations offline. The attackers didn’t stop there, however. They also struck two other power distribution centers time, nearly doubling the number of substations taken offline and leaving more than 230,000 residents in the dark. And as if that weren’t enough, they also disabled backup power supplies to two of the three distribution centers, leaving operators themselves stumbling in the dark.

The successful assault holds many lessons for power generation plants and distribution centers in the US and Europe. The control systems in Ukraine were surprisingly more secure than some in the US, since they were well-segmented from the control center business networks with robust firewalls. But in the end, they still weren’t secure enough – workers logging remotely into the SCADA network, the Supervisory Control and Data Acquisition network that controlled the grid, weren’t required to use two-factor authentication, which allowed the attackers to hijack their credentials and gain crucial access to systems that controlled the breakers. Ukrainian and US computer security experts involved in the investigation say the attackers overwrote firmware on critical devices at 16 of the substations, leaving them unresponsive to any remote commands from operators.

This type of attached is believed to have been already successfully demonstrated into US and European systems so the fact they have just demonstrated they have the wherewithal to turn the lights off is a pretty big deal,” he said. Destructive malware is becoming more popular with hackers. It was used in the infamous 2012 attack on oil producer Saudi Aramco,6 which wiped 35,000 computers across its network. However, it is now also being used by cyber criminals demanding ransoms from companies and individuals by threatening to destroy key data on their networks.

6 https://www.reuters.com/article/saudi-attack/saudi-arabia-says-cyber-attack-aimed-to-disrupt-oil-gas- flow-idUSL5E8N91UE20121209

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The TSO in Ukraine, Ukrenergo, is at present implementing a Catalogue of Measures which are to satisfy pre-requisites for future connection to the Con- tinental Europe Power System7. Since the series of attacks, Ukrenergo has invested heavily in its training and measures to address cyber risks to ensure it can demonstrate it is able to manage this risk. For utilities, that border the Ukrain- ian power system, further breaches of security in this country affect the future interconnection and cooperation between European TSOs and Ukrenergo. When a country has aspirations to access the European Internal Energy Market, the implications when this cannot be facilitated due to concerns on cyber security mean have real economic consequences for a country.

3.2 Case Study – US the Trendsetter?

In the US, utilities such as the ISO, PJM is leading the way on cybersecurity and takes their responsibilities to provide services critical is to the life, health and safety of customers providing reliable power to over 65 million people.

However, PJM is regularly subjected to a significant number of cyber-attacks per day and has responded by making security a priority to ensure optimum preparedness and response. PJM’s cybersecurity team monitors system performance 24 hours a day, seven days a week to protect against events and is prepared to minimize disruptions that could threaten the reliability of the power grid.

What is important to realise compared with Ukraine is that PJM follows the Cybersecurity Framework (PDF), which is a set of industry standards and best practices developed by the National Institute of Standards and Technology to manage cybersecurity risks.8 Having a strong regulatory framework supports and encourages the utilities to take steps accordingly.

The PJM security management approach has security objectives which:

– Identify threats and develop the organization’s strategy to manage cybersecurity risk

– Protect and fortify systems.

– Detect events through 24/7 monitoring.

7 https://www.entsoe.eu/news/2017/07/07/entsoe-ce-agreement-conditions-future-grid-connections- with-ukraine-moldova/ 8 https://www.nist.gov/cyberframework

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– Respond quickly using well-defined plans.

– Recover quickly from an event using multiple contingency plans to minimize impact.

Figure 21.1. Reference to PJM Cybersecurity framework – https://learn.pjm.com/ three-priorities/keeping-the-lights-on/safeguarding-the-grid.aspx

PJM complies with North American Electric Reliability Corporation (NERC) CIP standards. NERC Reliability Standards9 define the reliability requirements for planning and operating the North American bulk power system and are developed using a results-based approach that focuses on performance, risk management and entity capabilities.

In addition, PJM has procured an independent third-party auditing firm to assess the design and operating effectiveness of controls and processes in place regarding PJM’s market settlements and associated information technology systems. This report provides market participants reassurance that the millions of dollars flowing through the market every day are handled with accuracy, consistency and transparency.

By using a variety of tools, resources, exercises and partnerships, PJM strengthens its cyber and physical security capabilities against potential events. PJM also collaborates and coordinates with government, industry and other critical infrastructures to gain additional expertise and enhance cyber and physical security. Information sharing helps to strengthen security. PJM, seeks to notify its members and other industry leaders when there is questionable activity such as a suspicious email or phishing attempt.

9 https://www.nerc.com/pa/Stand/Pages/default.aspx

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PJM has taken a responsible role to inform utilities and agencies of the dangers. The PJM Manager, Corporate Information Security stated “A year and a half ago I would have said [hackers] haven’t touched the energy sector. Now they are touching the energy sector,” he said. “It’s not a matter of if [PJM is attacked] but when.”

As in the case of Ukraine, PJM is concerned with private computers infected with malicious software and controlled as a group — taking control of thousands of smart meters and the risk that suddenly someone is switching on and off that load, making it nearly impossible to control the system

4. Risk Preparedness and the Energy Transition

As mentioned in the introduction, there will be an increase of significance of electronic devices. The future is digital but cyber knows no boundaries. In the case of Ukraine, it was fortunate that at the time of this incident, the power network in Ukraine was not fully digitalized and the utility could isolate the problem and eventually take back control of the system manually. In power systems with significant digital devices which are managed centrally rather than regionally or locally, this risk of a cascade effect is real and must be addressed by utilities and regulators.

Within ENTSO-E, there are 43 TSOs who all share this risk to varying degrees and who at present have in effect 43 approaches to cybersecurity. The challenge with these TSOs is to agree a minimum approach which all countries adhere to. Even in building new infrastructure to support the energy transition, ENTSO- E has had to develop new security frameworks and define levels of confidential- ity between its members. As these members include EU and non-EU countries, this framework can be a challenge.

In building the Common Grid Model under the Network Codes, ENTSO-E and its member TSOs are developing a single representation of the network and in so doing have had to agree on a minimum standard for securing the pan-Euro- pean model. This has led to considerable discussion with TSOs as the minimum or maximum standard to apply.

In this case, cyber security is an isolated risk which is contained by one or two TSOs but multiple TSOs simultaneously affected by an incident that could cause power system disruption or failure. The effects by cyber-attacks are not fully represented and addressed in the security design rules of the existing power

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grid; in other words, the n-1 principle for the secure design of energy systems may not be enough to cover effects of cyberattacks. The new legislation under the Clean Energy Package called the Risk Preparedness Regulation serves to address this problem to the establishment of a new Risk Methodology.

The new European Risk Preparedness Regulation is aimed at ensuring that all Member States put in place appropriate tools to prevent, prepare for and manage electricity crisis situations. The Regulation focuses on the risk of an electricity crisis as a result of a variety of circumstances such as extreme weather circumstances, malicious attacks including cyber-attacks and fuel shortages. The Risk Preparedness Regulation in particular focuses on electricity systems which are integrated and when crisis situations occur, they often have a cross-border effect. Some circumstances (e.g., a prolonged cold spell or heat wave) might affect several Member States at the same time and even incidents that start locally they may rapidly spread across borders.

Currently, Member States behave very differently when it comes to preventing, preparing for and managing crisis situations. The Regulation aims to address the fact that national rules and practices tend to focus on the national context only, disregarding what happens across borders. The assessment of the national legal frameworks and current practices across Europe has shown that:

(a) Member States assess different risks;

(b) Member States take different sets of measures to prevent and manage crisis situations, and that such measures are triggered at different moments in time1;

(d) there is not common understanding as to what constitutes a crisis situation.

In addition, there is very limited sharing of information and transparency in Member States’ preparations for and handling of electricity crisis situations. For instance, when realising that their electricity systems might be under serious stress in the months ahead, Member States often take action in conjunction with their transmission system operators (TSOs), without systematically informing others. ENTSO-E has addressed recent experience with the Cold Spell in Janu-

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ary 2017 by creating defining a Critical Grid Situation Procedure10 for all TSOs and supporting Regional Security Coordinators to follow in preparing for a probable risk to the power systems.

5. The Solution?

The most important aspect: start with a good strategy and then ensure there is a mandate/legislation. It is important as one can’t regulate without a strategy. Then put everyone around the table to collaborate so they understand what is possible.

Given the type of risk we are dealing with and the challenges faced by Utilities and agencies, the question is should we approach the topic first from standard/ regulatory step or from a more operational perspective in terms coordination peer to peer? A big question for system operators at present is how does a system operator know/trust who they are sharing information with?

For starters, cybersecurity needs to at least start with a standard, which will constantly need to evolve. From a supply chain perspective, NERC doesn’t have authority over vendors, but regulators have asked NERC to come up with a standard over supply chain, but it is a very difficult issue. NERC is engaging the vendor community through a consensus approach with the standard being developed based on best practices and guidelines.

European legislation with focus on cyber security for critical infrastructure providers includes the Network and Information Security (NIS) Directive, the European Programme for Critical Infrastructure Protection (EPCIP) Directive and the Contractual Public-Private Partnership. The EU Energy Security strategy in 2014 which applied stress tests whilst the NIS directive approved in 2016 in which all Members States have to implement and which will bring modifications to grid infrastructure procedures as well.

In 2016, the European Commission published the Clean Energy Package for Europeans in which there are proposals regarding smart grid activities, digitalization, new technologies, innovation, effects on security of supply, assessment of cyber risks, mitigation measures and potentially a network Code on cyber security.

10 https://docstore.entsoe.eu/Documents/News/170530_Managing_Critical_Grid_Situations-Success_ and_Challenges.pdf

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The best possible world, regulators would have clear mandates, but regulators don’t have that in all cases. There is a public responsibility to recognize a problem that clearly exists. Even without clearer mandates, there is a lot that can be done through existing mandates (for example the IEC has developed several hundred standards on cyber security for critical infrastructure). It would be highly risky to wait for a clearer mandate as we need to move things forward now that everyone is aware of the risk.

5.1 Roles and Responsibilities

The strategy should set out who should lie awake at night worrying about cyber risks. Security and reliability go hand in hand so there is a need for strong collaboration with those to have this responsibility for system reliability such as the operators of the power system. Governments realize that they need to set policies and the EU is now working internally and externally with other governments to look at how to tackle cyber communication channels. The DSOs are sometimes even more exposed than TSOs and this needs to be acknowledged. Often times it takes a major event to get people motivated to act. Cyber-attacks are a real threat, but this is a complicated problem to solve because it involves several layers of actors operating together to develop solutions and take action.

In Europe, ENTSO-E as itself a critical system protection group focused on sharing information of cyber incidents and US, Canada and Mexico have created agreements and structures to work together because they are interconnected. NERC was given the responsibility and jurisdiction to write mandatory standards. From the European perspective, everyone is responsible. This is a problem that can only be solved internationally, not on a national basis. The reality of the vulnerability is what brings us here today.

5.2 Standards, Network Codes & Over-regulation

As seen in the US case study, standards play an important role but are not the final answer. There is a role for international consensus around technical issues and minimum standards to be adopted. there is now a European task force that is writing a network code (EU secondary legislation) that establishes minimum rules for how to deal with cybersecurity within the EU. Standards are a good first step because the network codes will take a few years and allows more flexibility as the technical situation evolves. While the US wanted non-binding options and is focused on risk management, the EU is considering binding rules.

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The EU want to send the message that the EU expects TSOs and DSOs buy sufficient equipment to be secure for several years. The importance of risk assessment, the most crucial part of the network code. In an interconnected grid, you should not expect an attack only from one side. The attack in Ukraine actually affected 3 TSOs and was highly coordinated.

There are simple solutions that can be done to improve cybersecurity (cyber hygiene). The EU is trying to balance the network code (regulation) vs what should be left for industry/operators to do themselves.

5.3 Investment, Incentivization, Prudency of Costs

Many measures (such as limiting access and background checks) that are common cyber hygiene that are very low cost to implement. Certainly, some elements can be costly, but using risk assessment measures allows utilities to make good decisions.

Regulators could give a real value to how important cyber security is, if they can see the costs. What is the value of not having a blackout compared to the cost of some of these low-cost investments. Consumers need to understand how the operators are using the costs from investments in cybersecurity. He noted that there is very little academic research on the prudency of cyber investments to date.

From the bulk power system, the utilities understand how their systems work and so they have to persuade their regulators for cost investments. The coordination between Canada, Mexico and the US gives a platform to address the reasonable of investments (ex. have firewalls and other security measures in place) and realize that these systems have those cyber prevention measures in place. Increased activity at the regulatory level to increase education and knowledge.

5.4 In terms of what are the two things a system operator can do now

Training – staff need to be able to identify and respond to what they see happening. Cyber hygiene – this will help solve 80% of potential threats. NERC, France, Germany, Japan, Korea all have similar concepts. Fishing – NERC runs false fishing emails to see if staff understand not to open certain things. Most incidents gain access through executive and staff levels. Protect physical perimeter

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Many countries/organizations cannot afford to bring in outside experts so they try to do it internally which may not be very secure or appropriate. This is the case within ENTSO-E where experts need to be vetted and their security clear- ance monitored. This is a dilemma, but there are plenty of international forums in which all countries can participate and receive education on best practices. This problem cannot be solved individually on a nation-by-nation basis; there is strong need to exchange information.

6. Conclusion and recommendations

There is a need for policymakers around the world to understand the importance of the cyber security threat to critical infrastructure such as the European Power System and its 500M customers. We need to change thinking to consider risk management, costs, security and information sharing around the world. Solidarity is key together with a robust regulatory framework with all agencies, regulators and utilities fully aligned. What is very clear, there is not a single solution to solve this type of risk as instead it is a combination of risk assessment, education of system users and information-sharing partnerships with government and industry.

From a European perspective and in particular for ENTSO-E and its 43 TSOs, the cyber security challenge must be addressed together and our role is to now define the Risk Methodology to be applied by Member States and TSOs. For the new Commission, the recommendation is to stay focused on this risk and support national member states, regulators and agencies in their risk management frameworks. The implementation of the Risk Preparedness Regulation11 is an imperative leading to pan European alignment on classification of risks to electricity infrastructure and so its importance to addressing the cybersecurity challenge is key. Having regulations which support the Member States and harmonise the minimum standards expected is now a necessary requirement. The new Commission together with all the relevant stakeholders should focus on learn and listen to ensure that no opportunity is missed.

11 https://ec.europa.eu/energy/sites/ener/files/documents/1_en_act_part1_v7.pdf

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Part 5 – Chapter 22 – Communicating the Energy Transition

PART 5 – INNOVATION AND NEW PLAYERS IN THE ENERGY TRANSITION

CHAPTER 22 COMMUNICATING THE ENERGY TRANSITION

Claire Camus

The energy sector has drastically changed over the last decades and the transformation has just about started. From an analogue, centralised, monopolistic, unidirectional to a digital, decentralised, competitive and multidirectional world. How did this transformation impact communication and branding in the energy sector? Has the change in communication and branding reached all parts of the energy sector or only those open to competition? What are the most disruptive factors to date and what could the future be like for communication professionals in the energy sector.

The following chapter is an introduction on how the communication and branding in the electricity sector have been tipped off their axis. Three main factors are pointed out (liberalisation, energy transition and digitisation) and a special focus is given to the case of transmission system operators (TSOs).

Some examples will be given of how companies but also associations have adapted their communication and brand to the new context.

1. Definitions

Communication encompasses many different fields: strategic positioning and branding, definition of audience types, of messaging and of dissemination channels. It covers customer relations, crisis communication, promotion, corporate communication, etc. Communication cannot indeed be limited to information

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dissemination. In a hyper connected society, communication is a powerful strategic tool for companies. If disinvested, it can lead to a loss of market share or of influence. If properly designed and addressed, communication creates value as it positively contributes to the shaping and deployment of a company’s or an organisation’s strategy.

In this chapter, we will mainly look at the branding of companies in the power sector. Branding1 has also a lot of different definitions attached to it. In the following lines we will define it as any action taken to define a company’s essence, to professionally and strategically translate this essence into a distinctive corporate identity, a distinctive tone of voice, values, customer experience…

The article looks at the electricity sector in Europe even if some sources may refer to studies or articles linking to experiences in other parts of the world, mainly the United States.

2. Liberalisation: from ratepayers to rateplayers

Liberalisation was a big bang for the electricity sector. Generation and supply were exposed to competition while transmission and distribution became natural monopolies. Communication-wise, this meant a complete recasting.

Before the 1990s, the relation between the vertically integrated utility and the consumer mainly concretises in the sending of a yearly bill and dealing with complaints. As the customer was hands-tied with one company, there were very few incentives to create any additional customer connectivity.

With liberalisation, customers were ‘freed’. They can now switch from one supplier to the other. From ratepayers, they became “rateplayers”.2 Generators and suppliers had now to find strategies to retain their existing and attract new customers. Questions like “what makes us different from our competitors?” and “why should consumer choose us and not another company?” became central.

Energy generators and suppliers had to shift from a purely transactional relationship to a more and more sophisticated customer relationship. Research shows indeed that how utilities brand themselves, how they are perceived by custom-

1 Hedi Cohen, 30 Branding Definitions, https://heidicohen.com/30-branding-definitions/ 2 Lisa Dolbear, Utilities and the Great Communication Challenge, https://heidicohen.com /30-branding- definitions/-great-communication-challenge/

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ers, is more efficient than offering new deals.3 A McKinsey analysis showed that branding in energy increased relevance for customers by 18% between 2010 and 2015, far more than in any other sector.4

Despite this increase in importance of branding in energy and despite energy, -and electricity in particular -, being cornerstone in our daily modern lives, utilities often do not make it to the top 10 in brand ranking.5 One ranking focuses on the relevance of a brand in the daily lives of customers. In the United King- dom, the first energy brand only arrived in 155th position.6

One of the explanations may be the lack of investment or interest for branding which could date back to the pre-liberalisation era. Another explanation may be that the way utilities brand themselves has not been efficient so far.

It is not just about selling electrons. It is about selling a service: access to security, new mobility, a comfortable way of life, etc. It is a whole experience that the power companies need to describe to their customers. Branding experts will tell you, it is no longer about what you are and what is your mission but about your customers, their needs and how you fulfil them. More than ever electricity companies need to put themselves in their customers’ shoes.

However, things are changing and the importance of utilities to position themselves in the context of a changing regulatory, economic and technological context is illustrated by more and more books dedicated to the topic of energy and branding with even a fully dedicated yearly conference taking place each year in Iceland7. Each year best energy brands are awarded during this event.

While competition is really pushed the utility to rethink itself and to invest in storytelling, customer relation management, communication and branding, other parts of the power system have not been left unaffected.

3 Richard Rutter, Konstantinos J. Chalvatzis, Stuart Roper, Fiona Lettice, Branding Instead of Product Innova- tion: A Study on the Brand Personalities of the UK’s Electricity Market, European Management Review, 2017

4 Jesko Perrey, Tjark Freundt, Dennis Spillecke, Power Brands, Wiley, 2015, https://www.mckinsey.com/ business-functions/marketing-and-sales/our-insights/the-brand-is-back-staying-relevant-in-an-accelerating-age 5 Ranking of global brands include those of Interbrand (https://www.interbrand.com/best-brands/best- global-brands/2017/ranking/) or Kantar Millward Browne (http://www.millwardbrown.com/brandz/ rankings-and-reports). For Europe, The European Brand Institute (https://www.europeanbrandinstitute. com/brand-rankings/brand-rankings-2017/) 6 https://www.prophet.com/ourfirm/relevantbrands/ 7 www.energybranding.com

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The networks transporting the electricity and connecting customers with the system and markets were equally confronted with the need to better explain their role, their position of natural monopolies and the services that the tax payers were entitled to receive in exchange of their yearly rate. “For energy networks, too, branding is critical. Although they remain (…) monopolies, gone are the days when they could get away with being faceless entities”.8 The evolution of communication in power networks is further analysed under point 4 of this article.

Liberalisation has thus pushed the energy sector in the era of branding and communication. But what and how communicate or brand oneself is influenced by two other major trends in the sector: the energy transition and digitisation.

3. The energy transition: from customer inertia to customer activism

The green revolution has affected the industry in many ways and its communication and branding in particular. In a world dominated by the climate change issue, the energy sector mainly still associated with fossil fuels needs to reinvent itself. Furthermore, renewable energy production has enabled the customer to generate its own energy and to even sell it back to the system. This is what one calls a shift of paradigm.

In Europe and the world, energy generators are in their vast majority using nuclear or fossil fuels to produce electricity. According to the latest Eurostat figures, only 17% of our energy demand is covered by renewable production. How to engage with a customer that is increasingly conscious of climate issues9 and that by 90% wants its energy to come from renewables?10

This green ‘transition’ can be illustrated with Statoil rebranding itself in Equinor in the spring of 2018. Why change a name established for almost half a century? In an interview to Reuters, Eldar Saetre, Statoil/Equinor CEO, explained: “A name with ‘oil’ as a component would increasingly be a disadvantage. None of our competitors has that. It served us really well for 50 years, I don’t think it will be the best name for the next 50 years”.11

8 https://utilityweek.co.uk/energy-branding-big-name-hunters/ 9 https://ec.europa.eu/clima/citizens/support_en 10 http://www.europeansocialsurvey.org/docs/findings/ESS8_toplines_issue_9_climatechange.pdf 11 “Statoil to become Equinor, dropping ‘oil’ to attract young talent”, Nerijus Adomaitis, May 2018, https:// uk.reuters.com/article/us-statoil-agm-equinor/statoil-to-become-equinor-dropping-oil-to-attract-young-

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Focusing more on the power sector, the case of RWE is also quite remarkable. Indeed, RWE transferred a large part of its retail, distribution and renewable production activities to a subsidiary company – Innogy. Sabine Schmittwilken, Head of Global Brand Management at Innogy, describes the creation of Innogy as follows: “We were completely ignorant of people’s needs, ignorant of global trends. At that time, RWE had invested billions in a new conventional energy park. And then all the sudden, the German Energiewende came […] All of the sudden we needed a new future and new answers”.12

The energy transition can indeed be a considerable challenge or it can be turned in a real opportunity. Indeed, the energy transition is in a way taking the power sector from a “low interest category” to a world of “positive association(s)”.13,14

Most of the communication in energy is about security and reliability – which remain of course the number one priority. However, in communication and branding this is not enough. For the CEO of Interbrand, Tom Zara, the reliability argument is not selling: “Can anyone possibly be a [public] utility and not be reliable?”15

In the 21st century more than any other era, being able to give a high-level purpose to your brand is key in fostering consumer support16 and “(…) brands with conviction are becoming more powerful, influential and relevant than ever”.17 One of the most well-known managerial gurus, Peter Drucker, summarised it as ‘‘doing the right thing is more important than doing things right”.18 There is thus a real need for the whole energy value chain to elevate the debate and associate themselves with a higher goal.

As mentioned before, another game changer brought by the green revolution is the fact that the customer is no longer fully dependant on its utility for its electric supply. Decentralised production technologies, such as rooftop panels, have turned the energy system upside down. In the future, decentralised storage,

talent-idUKKCN1IG0MN 12 https://blog.branding.energy/tag/innogy/ 13 Top 40 Utility PowerBrands, Essence Partners, https://www.utilitydive.com/news/the-top-electric-utility- brands-of-2017/508487/ 14 Leonie Roderick, E.ON launches new marketing strategy in bid to become purpose-led brand, Marketing Week, 2017, https://www.marketingweek.com/2017/05/26/eon-marketing-strategy-purpose/ 15 Tom Zara, The power of brands to combat climate change , 2017, https://www.interbrand.com/best- brands/best-global-brands/2017/sector-overviews/the-power-of-brands-to-combat-climate-change 16 Matthew Beech, How purpose can differentiate energy brands, Utility Week, 2017, https://utilityweek. co.uk/how-purpose-can-differentiate-energy-brands/ 17 The owerP Brands Index 2018, Prophet, https://www.prophet.com/relevantbrands-2018Key%20Insights 18 https://www.wideawakenv.com/dr-brands-finding-higher-purpose, 2016

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including through the smart charging of EVs, will boost the customers’ ability to even provide services to the system on top of receiving services from the system. How to reinvent the relation to this new type of customer which is not necessarily about to remain an exception? A recent survey shows indeed that 57% of consumers are considering investing in becoming power self-sufficient and 61% are interested in an online market place to sell the electricity they produce.19

The sense of a real revolution is best expressed by E.ON’s “un-utility”20 strategic communication campaign. For their Marketing & Communication Director, Belinda Moore, talking to the customer just about his/her electricity supply is simply no longer on. She highlights the need to start a conversation with customers about new and smarter ways to engage with energy through for example smarter homes or e-mobility. This mirrors the company’s shift from a pure supplier of gas and electricity to a provider of wider customer solutions.

The electricity sector has a core role to play in the energy transition, in bridging with other sectors like transport, heating, telecom, etc. The future of the sector will be in becoming service providers but also partners of services providers.21 This is underpinned by the third transforming factor: the digitalisation of the sector and of communication.

4. Digitisation: a power system at finger tips?

Another factor with decisive impact on communication and branding today in any sector including energy is digitisation. Digitisation of the energy system, of communication and of consumer relation. Today’s customers are used to sterling experience from giants like Amazon, Uber & Airbnb. These companies set up the standards for B2C experience: a level playing field, instantaneous, ‘always on’ interaction on mobile devices and social media.

Companies in the energy sector need also living up to these new standards in customer experience. Developing new interaction tools that match the customer habits.

19 Stephanie Jamison, Power surge ahead: how distribution utilities can get smart with distributed generation, Accenture Consulting, 2017. 20 Erin Lyons, E.ON looks to challenge sector norms with an ‘un-utility’ marketing approach, Marketing Week, 2018, https://www.marketingweek.com/2018/03/09/how-e-on-is-challenging-norms-within-the- utilities-sector/ 21 Norbert Schwieters, Customer engagement in an era of energy transformation, PwC global power & utilities, 2016.

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In this new connected world, digital transition specialised consultant, Gartner, identifies the customer experience22 as the new battlefield for companies.

In communication, the social media and other forms of digital communication are predominant. These new media require your tone of voice to be personal and relevant.23 Social media is indeed about one to one conversation. This is very different from a time when communication was dominated by mass media, where the message was very much top down and generic. Adapting your tone of voice also means reducing the use of jargon and avoiding acronyms. This move away from acronyms is especially noticeable in the world of European trade associations: EPIA, EWEA or SEDC became respectively SolarPowerEurope, Wind- Europe and smartEN.

In accordance with this change induced by the digitisation of the economy, society and communication, ENEL’s rebranding concept centered around Open. For ENEL, “the world of energy needs to face this reality and prepare to give people more power, to work more closely with consumers, inviting them into the energy conversation and transforming them into actors of a world that before belonged just to utilities.”24 The rebranding of ENEL included also a choice of colours for their new logo that can make one think of one the world’s internet giants.

TheOpen Power concept goes hand in hand with greater transparency and providing customers with the necessary facts & figures to make choices. Power platforms are on the rise, be it to connect customers with their peers or with markets but also to connect the power sector with transport or heating or to closer link distribution and transmission. Other platforms ensure members of the public have near to real time information on how the power sector is working, how carbon intensive it is or how competitive it is.

Other platforms are not customer facing but are equally important to connect the dots behind the scenes among the different actors. It is not only about making the data public, it is also about leveraging the data to offer the customer a “superior brand value.”25 The successful energy brands also use data to compare

22 Tom McCall, Will organizations be able to deliver transformational customer experience? Digital disrupters point the way, Gartner, 2015, https://www.gartner.com/smarterwithgartner/customer-experience-battlefield/ 23 Martin Bishop, The Push For Brands To Serve A Higher Purpose, Branding Strategy Insider, 2006, https:// www.brandingstrategyinsider.com/2016/12/the-push-for-brands-to-serve-a-higher-purpose.html 24 Amy Ryan, Energy Branding- The Basics, the sector and the consumer, Wattics, 2018, https://www.wattics. com/energy-branding-basics-sector-consumer/ 25 CHARGE Energy Branding 2018, https://branding.energy/

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themselves with their competitors and other sectors. The use of data to better serve customers needs obviously to be balanced with the need to respect data privacy and security.

Making more data open to the public is fundamental to gaining trust. Customers trust in the digital age is not an easy thing to gain and to retain. Losing customers trust is one of today’s greatest risk and in a world of digital communication, can happen very fast. Brands that do not respect ethics or their brand values can today experience severe damage (take the example of Volkswagen).

In a world of information overload and fake news, brands that are transparent and trustful will stick out. Indeed, as Edelman Trust Barometer26 shows, the customer’s trust is generally on a downward spiral. Brands need to work harder than ever to convince consumers that they are worthy of their time and money.27 For the organisers of the Energy Branding event, CHARGE, successful brands are not customer centric, they are customer obsessed.28

It is true that a digital customer does not necessarily mean an engaged customer and that not all the energy customers are connected. However, all companies in the energy sector should understand that the digital natives are their average customer of tomorrow.

5. Communication & power networks – from a nice-to-have to a must-have

Power networks are natural monopolies. They do not need to fight for customers. Is there a need then for the transmission and distribution system operators (TSOs and DSOs) to invest in B2C communication and branding? The answer is yes and this for multiple reasons. Firstly, as publicly financed and regulated companies they are under legal obligations to proactively communicate. Sec- ondly, beyond legal obligations, any organisation benefiting from public funds is in a context of high public indebtment and economic recess under moral pressure to demonstrate the tax payers’ money is returned to the community. Third- ly, natural monopolies have a strong interest to explain their specificity and their independence from the commercial parts of the value chain.

26 https://www.edelman.com/trust2017/ 27 Steve Harvey, Fabrik, 2018, Let’s be honest: Brand transparency and consumer trust, http://fabrikbrands. com/brand-transparency-and-consumer-trust/ 28 World’s Best Energy Brands 2018, Larsen Energy

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This is more acute for the DSOs that are in some cases continue to be linked to a generator or supplier. It is important that they have distinct branding between their supplier and distributor activities. The risk of a not making a distinction could disadvantage suppliers without any distribution activities (often newcom- ers). This risk was notably studied by the British energy regulator, Ofgem.29

For the TSOs, the communication challenge is to exist in the eyes of customers and/or to be positively associated in their minds. Indeed, customers often only get acquainted with their TSOs when a line is trespassing their property or when a serious incident on the network is causing households to be disconnected.

Is this lack of public awareness of TSOs and their roles an issue? One could argue that TSOs do not need to relate to household customers. Experience30 and developments in the energy sector plead for the opposite.

For the last five years, The Renewable Grid Initiative, that bridges between the TSOs and the NGOs, is rewarding TSOs that reach out to local communities.31 This Good Practice Award underlines how TSOs by invest in local and B2C dialogue experience less confrontation on the ground when building new power lines.

The benefit for TSOs to invest in communication with the public has been recognised by the European Commission which notably finances research projects like INSPIRE Grid or BESTGRID that look upon TSOs interaction with stakeholders when building a new line. A dedicated website “Grid Communica- tion Toolkit” was even created.

Beyond project communication, TSOs pay attention to crisis communication. Indeed, public’s expectations in terms of professional, accessible and updated information on a crisis is on a rise in a highly connected society. The European Commission funds a specific research project IMPROVER about improving the resilience of critical infrastructure. One of the recommendation is to have an active and regular information of the public during a crisis using the channels that most people turn to (traditional and new media).32

29 Ofgem, Open letter on Ofgem’s review of branding in the electricity and supply markets, 2005, https:// www.ofgem.gov.uk/sites/default/files/docs/2005/01/9471-branding_open_letter.pdf 30 Corinne Rochette, The public brand between new practices and public values, Sage, 2015. 31 https://renewables-grid.eu/ 32 Dr Elisa Serafinelli, Dr Paul Reilly, Rebecca Stevenson, Laura Petersen, Laure Fallou, Elisabete Carreira, A Communication Strategy to build Critical Infrastructure Resilience, 2018, http://improverproject. eu/2018/08/23/deliverable-4-5-a-communication-strategy-to-build-critical-infrastructure-resilience/

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However, project and crisis communication are not the only areas in which TSOs should be investing when it comes to communication. Explaining the TSOs distinctive role for society and the energy transition is going to become more and more important especially in a power system with increasing amount of active customers.

The communication of the TSOs is evolving. Close to half of the 43 members of ENTSO-E, the TSOs’ European association, went through one or several rebranding since their creation and most of them have communication strategies. Even if most of the ENTSO-E member TSOs’ mission statements relate in majority to security of supply, a dozen is referring to the role of power networks in innovation, the energy transition and digitisation.

In line with the general trend in brand identity and design, the TSOs that re- brand go for more simplicity.33 For instance, members have shortened their de- nomination and opted for a simpler logo and or taglines (Fingrid, Energinet, …). With regards to transparency and data richness, 19 out of 43 ENTSO-E member TSOs34 have invested in consumer connectivity and are present on social media. Some are investing in new media technologies like virtual reality (see TenneT Virtual Vision).

According to EU regulation, ENTSO-E has launched a transparency platform which registered 4.000 new users in 2017 and which is used for other data visu- alization and apps (www.electricitymap.org, https://windeurope.org/about- wind/daily-wind/ ). An average of 40.000 of data files are exchanged per day on the platform. Several TSOs have launched data platforms: Eco2Mix from RTE, the grid load map of 50 Hertz or Elering live map of the TSO in Estonia.

6. What’s next?

This article described how the energy transformation impacts the relation of the power sector with customers. Over twenty years, the power sector went from a vertically integrated and engineered focused industry mainly doing analogue communication with passive bill payers to companies having to engage with an active, volatile and demanding customer. A customer investing in its own generation, storage, e-vehicle, developing micro-grids and searching for state of the art behind the meter services.

33 Colin Finkle, Logo Design Trends for 2018, Brand Marketing Blog, 2017, https://brandmarketingblog. com/articles/design/logo-design-trends-for-2018/ 34 Figures from ENTSO-E internal survey, 2018.

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With the development of artificial intelligence, the internet of things, the customer experience will continue to evolve and what seems like limited to a small group of users will become mainstream in the next years. The Alexas, the Google homes of this world will put your energy intensive devices on or postpone the charging of your e-vehicle so that you get most value. The flows on the power system will be consultable from your fingertips. The power networks will have developed ways for individual and industrial customers to partner with the energy transition and get benefits out of it.

The power sector will be one of ecosystems interacting with others such as e- mobility, telecoms, buildings, distributed generation & flexibility, etc. From being a pure energy generator/supplier/transmission or distribution system operator, the electricity industry will have to be a “partner of partners” advancing the energy transition rather than impeding it. Questions around data privacy, cybersecurity and professional crisis communication will continue to be central. The cultural and communication shift is radical and does not only concern the generation and supply. Indeed, “unbundling has meant that grid companies are purely asset and system focused but, if the future develops in a way where the management and the sustainability of the grid requires a partnership between customers and the grid, they will need to have a strong customer interface, either directly or indirectly through intermediaries.”35

The European energy industry should embrace the new communication opportunities that liberalisation, the energy transition and digitisation are offering them. The future will require more and more partnerships between energy customers and the energy sector. Without proper communication and branding, the customers may turn to other actors to deliver the energy experience they will be more and more looking for: secure but also transparent, sustainable and connected.

7. “A picture speaks a thousand words”

The following table includes some examples of rebranding by energy companies, transmission system operators and European associations in the energy sector.

35 Norbert Schwieters, Customer engagement in an era of energy transformation, PwC global power & utilities, 2016.

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Figure 22.1. Examples of rebranding in the energy sector.

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The table includes the change in logos. A change in visual identity is the tip of the iceberg of any rebranding exercise. It marks a company’s reflection on its global positioning and value proposition. In terms of design, the trend36 is for simple and readable logos (less acronyms). This is as important as making your logo adaptable to numerous channels including mobile applications.

36 Jacob Cass, 10 Tips For Designing The Perfect Logo, 5 November 2018, https://justcreative.com/2018/ 11/05/logo-design-tips-infographic/

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Part 5 – Chapter 23 – Digital Energy

CHAPTER 23 DIGITAL ENERGY

Jesse Scott1

Of the three great revolutions that the European energy system is experiencing – market liberalisation, decarbonisation, and digitalisation2 – the digital revolution relies the least on policy to drive it forward. Market liberalisation and harmonisation are positive political choices; decarbonisation is essential but will only happen at sufficient pace if motivated and shaped by policy. In contrast, digitalisation is an exogenous force for change throughout the wider economy: it flows from technological innovation and the economic decisions of diverse actors working both inside and outside the energy sector.

This chapter will argue first that digital energy is becoming a fact of life. This has profound implications for the future of the energy system, many of which are not yet well recognised. The chapter will argue second that although digitalisation is not primarily policy-driven, it can nonetheless be a powerful tool to help achieve EU energy policy goals, in particular the transition to deep decarbonisation.

The International Energy Agency (IEA) notes that digital technologies ‘can be a means to help achieve a variety of energy policy objectives’, with benefits including ‘increased productivity and efficiency, improved safety, enhanced revenue collection, and accelerating the pace of innovation.’3 At the same time, digital

1 ThThis is chapter benefibenefits ts greatly from research and ideas developed together with colleagues for the Internation-Internation- al Energy Agency report Digitalisation & Energy, November 2017, https://www.iea.org/digital/, and for the Council on Foreign Relations report Digital Decarbonization, June 2018, https://www.cfr.org/report/ digital-decarbonization. 2 Jorge Vasconcelos, The energy transition from the European perspective, in Vicente López-Ibot Mayor (ed), 2017, Clean energy law and regulation, Wildy, Simmonds & Hill Publishing. 3 IEA, 2017.

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energy introduces important challenges and large uncertainties. These can impact the objectives of security of supply, affordability and sustainability: as elsewhere in the world, European energy policy-makers need to seek to understand and guide digitalisation.

The chapter concludes with some recommendations. It should be read together with other chapters in this book on prosumers, cybersecurity, grids, disruptive innovations, decentralised energy resources and new business models.

1. What is digital energy?

Digitalisation is the application of powerful information and communications technologies (ICT) in equipment, analytics and user interfaces.4 Examples of digital technologies in today’s energy systems include smart meters, networked sensors on grids, drones (robotics), and “digital twins” – a digital simulation of a real-life asset to enable the virtual testing of features, feasibility and durabil- ity. Older digital technologies have long been used in energy, for example in oil and gas exploration and in 1970s mainframe computers in powerplant control rooms.

Over the last decade digitalisation has accelerated into a “digital transformation” that is changing many aspects of how society, government and business function. The Going Digital project of the Organisation for Economic Co- operation and Development (OECD) is tracking this process and its drivers. Key features are the rapid fall in ICT unit costs and exponential increases in computing power and digital connectivity that have enabled the creation of new platforms for communications and market transactions, the near real-time measurement and management of equipment, and massive unprecedented data collection. Advanced analytics such as machine learning (artificial intelligence) are bringing new opportunities to better understand complex multi-source datasets and to introduce automation, for example self-driving vehicles.5 Block- chain (distributed ledgers) are facilitating peer-to-peer exchanges which cut out intermediaries. Digital energy is one part of this mega-trend.

4 See for further definitions: Gartner, OECD etc. Digitization has a narrower meaning and refers to the process of converting information into a digital format (organised in bits) for data processing, storage and transmission. 5 See OECD http://www.oecd.org/going-digital/

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Energy statistics show a surge in digital deployment. The IEA calculates that global investment in digital infrastructure and software in the power sector alone has grown by over 20 percent annually since 2014, reaching USD 47 billion in 2016 – almost 40 percent more than investment in gas-fired power generation, and almost equal to the total investment in India’s electricity sector.6 In 2017, two of the world’s largest supercomputers were being used to optimise wind farm design.7 Meanwhile at the “grid edge” of the energy system, connected devices – the Internet of Things (IoT) – installed by households and businesses are forecast to number over 20 billion worldwide by 2020,8 of which many will be larger energy-load devices such as home appliances, heating/cooling systems, and cars.

Much of the excitement about digital energy focuses on the electric power system. Digital upgrades to existing grids and powerplants can improve efficiency and resilience: a key application is “predictive maintenance” which uses ICT to closely monitor and analyse equipment so that potential problems can be identified at an early stage and repairs carried out before failures happen. This significantly reduces unplanned outages and downtime. The IEA estimates that over the period to 2040 digital equipment could deliver an average five percent reduction in power operations and maintenance (O&M) costs, and an average five percent improvement in performance. These gains would also bring savings in new investments: if the lifetime of all the power assets in the world were to be extended by five years, close to USD 1.3 trillion of cumulative investment could be deferred over 2016-40.9 As noted by the Council on Foreign Relations, however, some of the enormous value of these opportunities arises less from breakthrough innovation than because electricity systems around the world are ‘both massive and antiquated.’10

Another strong focus of interest in digital energy – looking into the near-term future – is the opportunity to widen participation in demand-response to decentralised resources such as residential thermostats and EV charging. Instead of relying on thousands of direct human decisions to reduce or shed peak loads from a few sites, billions of algorithms11 could use the combination of informa-

6 IEA, 2017. For the oil and gas sector, see Geoffrey Cann and Rachael Goydan, forthcoming 2019, Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas, see https://geoffreycann.com/book/ 7 See Envision Energy https://www.envision-group.com/en/energy.html 8 Gartner, Leading the IoT: Gartner Insights on How to Lead in a Connected World, https://www.gartner. com/imagesrv/books/iot/iotEbook_digital.pdf 9 IEA, 2017. 10 Council on Foreign Relations, 2018. 11 In its basic form an algorithm is a small simple “if/then/else” rule used to automate the treatment of a piece of data. Large complex combinations of algorithms are the basis of decision-making software systems. Al-

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tion exchange in smart grids and active control of connected devices to micro- manage numerous diverse localised sources of flexible energy demand.12 This use of ICT to orchestrate complex interactions and value chains, forecasting and managing multiple sources of supply and loads simultaneously, is being explored both in models13 and pilot projects. A leading pilot is the InterFlex smart distribution grid demonstration in five European countries, which is testing communication and coordination between various forms of energy flexibility, including synergies between different energy carriers.14

These new digitally-enabled transactions could bring significant gains for achieving EU energy goals. The European Commission estimates that by 2025 the volume of controllable smart appliances in Europe will be at least 60GW.15 The IEA sees one billion homes around the world being able to participate in digitally-enabled demand management by 2040. For the EU, which will have a majority of variable wind and solar (VRE) in the power generation mix after 2030, the IEA estimates that automated demand response combined with increased storage could reduce curtailment of VRE resources by 2040 from 7 percent to below 2 percent.16 Investment in smart infrastructure, interoperable application programming interfaces (APIs), shared datasets, and analytics will be needed to deliver on this potential.

The greatest added value and transformational impact of digitalisation, however, may be its ability to establish visibility and links not only across increasing numbers of heterogeneous energy devices, owners, operators and grids, but also to connect and integrate this data with other relevant information sets. ICT allows the creation of “big data”, defined as large amounts of ‘high volume, high velocity and/or high variety information assets’.17 A related process is the emerg-

gorithms can increasingly run themselves, learning from their environment and their results, carrying out experiments and ultimately evolving by rewriting their own code. 12 Jean-Michel Glachant and Niccol�ò Rossetto, Florence School of Regulation, 2018, BriefiBriefing ng paper: ThThe e Digi-Digi- tal World Knocks at Electricity’s Door: Six Building Blocks to Understand Why, http://fsr.eui.eu/publications/the-digital-world-knocks-at-electricitys-door-six-building-blocks-to-understand-why/. See also Eric Gimon, https://energyinnovation.org/what-we-do/power-sector-transformation/. 13 Richard Hanna, Evangelos Gazis, Jacqueline Edge, Aidan Rhodes, Rob Gross, Imperial College London Energy Futures Lab, 2018, Briefing paper: Unlocking the potential of Energy Systems Integration, https:// imperialcollegelondon.app.box.com/s/0sil57fndc5tn9gfy6ypzp8v61qnv3mg 14 See https://www.enedis.fr/interflex-0 15 European Commission, 2015, Staff Working Document: Best Practices on Renewable Energy Self-con-Self-consumption: Accompanying the document Communication from the Commission to the European Parlia- ment, the Council, the European Economic and Social Committee and the Committee of the Regions Delivering a New Deal for Energy Consumers, SWD(2015) 141 final, https://ec.europa.eu/energy/sites/ ener/files/documents/1_EN_autre_document_travail_service_part1_v6.pdf 16 IEA, 2017. 17 See Gartner https://www.gartner.com/it-glossary/big-data/

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ing science of “data fusion” techniques to combine previously separate information streams into mixed datasets that can be far more powerful than the simple sum of their parts. New insights can result. For example, Geographical Informa- tion Systems (GIS) layer together data to build a single localised map, joining elements such as the plan of the electricity grid and its big data about energy-use patterns, the transport system and its traffic flows, weather data about average wind speeds at different heights together with solar radiation, and a property registry (cadastre) with information on building stocks (type of buildings, floor area, age of buildings, occupancy) and the results of energy audits. GIS can also align these elements with socio-economic indicators relevant to policy-making.18

In Europe, geospatial mapping could help show the potential for green power- to-hydrogen, identifying locations with significant curtailed renewable electricity resources, junctions between electricity and gas infrastructure, and potential industrial/transport hydrogen demand, and/or at sufficient distance from gas consumer outtake points to allow the hydrogen to blend into the methane gas grid before it reaches users. Over time, data fusion could help to optimise energy system architecture and policy design in relation to a variety of signals and goals – for example linking urban planners’ efforts to smarten cities, minimization of greenhouse gas emissions or total primary energy consumption, opportunities to reduce costs by utilising existing infrastructure assets, and enabling the circular economy.

Two further dynamics of digitalisation can have important implications for the energy sector. First, ICT businesses are not only the providers of technology but are becoming energy investors and interested parties. Google, Amazon, Face- book and Apple (the “GAFA”) are conscious of their growing energy footprint from equipment, data centres and networks19 and have set renewable goals. They are fulfilling these through large corporate power purchase agreements that have helped to maintain global growth rates in the wind sector in particular. In mid- 2018, Apple announced that it had achieved its 100 percent net renewable objective. Apple also announced a new clean energy investment fund in China that seeks to develop a gigawatt of renewable energy – the equivalent of powering nearly one million homes. Google has declared that ‘The Internet is 24x7. Car-

18 For example, the UK National Energy EffiEfficiency ciency Data-Framework (NEED) https://www.gov.uk/gov-https://www.gov.uk/government/collections/national-energy-efficiency-data-need-framework. See also Richard Dobson,- En ergy Systems Catapult: Energy Data Review, October 2018, https://es.catapult.org.uk/wp-content/uploads/2018/11/Energy_Data_Review_Summary_Final.pdf 19 IEA, 2017.

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bon-free energy should be too.’20 This means that electricity sector incumbents and policy-makers should expect that the ICT sector will increasingly want its own seat at the table in energy policy debates.

Second, digital developments in manufacturing techniques and logistics could have significant impacts on energy consumption. One example is additive manufacturing (3D printing). This is now becoming standard practice in certain industrial applications, with advantages compared to conventional manufacturing that include on-the-spot production (shorter logistics chains, lower inventory costs), material efficiency (reduction of scrap materials, less manufacturing complexity), and the ability to deliver manufactured pieces with complex shapes and geometries that are engineered for improved energy efficiency – for instance in jet turbines.21

In short, digitalisation is a game-changer for our ability to track and to control the energy system. It offers new tools to improve performance, participation and – most interestingly – insight and design choices. As a result, digital innovation is allowing the energy sector to change faster than ever before. This will continue: digitalisation is a metamorphosis with a frontier that is continuously advancing and adapting as new technologies open up new options. The IEA began its work in 2016 asking if we are seeing a fundamental transformation to “a new digital era in energy”. Today this is unquestioned: genies don’t go back into bottles.

2. How should EU decision-makers respond to the digital energy future?

Digital energy is already inevitably influencing the other – policy-made – Euro- pean revolutions in energy market design and toward clean energy, and ICT is often referenced as a positive enabler for these objectives. Yet the overall impact is hard to predict: digital technologies and capabilities can bring synergies with

20 Google, 10 October 2018, Blog: The Internet is 24x7. Carbon-free energy should be too, https://www. blog.google/outreach-initiatives/sustainability/internet-24x7-carbon-free-energy-should-be-too/. Another example of ICT companies advancing the renewable power market is Microsoft’s development of a new ‘volume-firming’ contract with the insurer Allianz in order to risk manage its exposure to VRE electricity price variations: see Bloomberg, 16 October 2018, Microsoft Transfers Risk of Prices that Vary with Wind, https://www.bloomberg.com/amp/news/articles/2018-10-16/microsoft-transfers-risk-of-power-prices- that-vary-with-the-wind. 21 Runze Huang, Matthew Riddle, Diane Graziano, Joshua Warren, Sujit Das, Sachin Nimbalkar, Joe Cresko, Eric Masanet, Journal of Cleaner Production, Volume 135, 1 November 2016: Energy and emissions saving potential of additive manufacturing: the case of lightweight aircraft components

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energy goals, but they also threaten misalignments, most crucially with decarbonisation. Experts convened by the Council on Foreign Relations in early 2018 concluded that ‘The one certainty from the digital wave of innovation is that the future of the energy system is becoming increasingly uncertain.’22 The rest of the chapter will discuss some of the many questions that digital energy presents for European energy policy-makers.

2.1 Market liberalisation

Digitalisation is creating new economic realities and new regulatory challenges. The implications for the European single energy market (SEM) objectives of competition, harmonisation and consumer empowerment are myriad. Two commonly debated questions are how far ICT is challenging and disrupting established energy business models and opening up the sector to new competitors, and the issue of energy data ownership with particular reference to protecting privacy. A less explored but central question in the EU context is how far digital energy is being considered coherently with the wider policy framework of the Digital Single Market (DSM).

For traditional energy businesses, ICT brings opportunities but also surprises and problems. Device-to-device automated transactions now allow my residential solar and battery system to sell electricity directly to its neighbour’s EV inside a microgrid—cutting out retailers. Big-brand service providers from other sectors are developing platforms that bundle offers for telecoms or mobility with energy supply. Cinemas are offering free EV charging to film-goers as a bonus attraction23 (in much the way that wifi which was previously pay-to-use is now usually made open access in cafes and shopping centres). Some companies are exploring revenue models based on the value of data rather than on the energy commodity that is supplied—often they are looking to the model of no-fee Hotmail/Gmail services to discover ‘ways to extract value from their customers’ data that exceeds the value of the electricity provided.’24 For incumbents this aspect of digital energy can be bewildering. It puts a premium on agility and the ability to drive rapid change in an industry often considered slow and conservative.25

22 Council on Foreign Relations, 2018. 23 See, for example, tweet by @davemne 18 November 2018: ‘Discovered today my local cinema/diner/arcade now has electric car chargers in the big car park. I can charge for free while we watch a movie, eat or go bowl- ing. It’s like someone pouring free petrol into your car while you go have fun. This is how we switch folks.’ 24 William Welser, Wired Magazine, 29 November 2019, In 2019, an energy giant will offer free, all-you-can- eat electricity: Inspired by mobile phone plans, all-you-can-eat energy will be the future for power providers – the only fee is data, https://www.wired.co.uk/article/free-all-you-can-eat-electricity 25 Financial Times Digital Energy Summit, September 2018.

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The examples of business changes given in other chapters nonetheless make clear that innovation and the digitalisation of relationships between market actors, on its own, will not be sufficient to achieve the full potential of digitalisation. In regulated industries such as distribution grids, developing new business models will require changes to the regulatory framework – including giving value to time and location in retail electricity pricing, and reform of taxes and levies. Regulators also need to address the question of what digital investments should be rate-based as capital expenditure and what should be considered operating expenses. Within all the available experimentation with ICT, it is also necessary to bear in mind what is a value proposition for customers.

As energy systems become increasingly ICT-rich, issues of data protection – encompassing privacy, ownership and portability – are of growing importance to both customers and businesses. Smart meters in houses give anyone who has access to their data a snapshot of residents’ daily routines and activities: when someone is at home, using the shower, or making tea. Industrial and commercial consumers’ energy data could reveal information about proprietary business practices and operations. Energy companies know that data breaches will reduce customers’ willingness to use new services. On the other hand, consumers and companies may wish to share their energy data with third parties – for example, in a marketplace for energy efficiency services. Providers also see opportunities to monetize energy use datasets: utilities in New York State have proposed that regulators allow a fee to be charged for making granular, ‘value-added’ data (such as aggregated customer usage information) available to local distributed energy resource providers.

Policy-makers therefore need to consider how much energy-related information people are comfortable sharing with service providers, who is the owner of consumer-specific data – the individual who generates it or the service provider who collects it – and who can use or share this data for what purposes? The EU General Data Protection Regulation (GDPR) covers all household energy data and has required significant changes to business practices for many companies.26 The proposed ePrivacy Regulation has ignited further debate about trade-offs between privacy and the information needs of companies, with system operators and retailers arguing that flexible energy systems require fluid data flows, and that if users have to grant explicit consent for each data transmission in a smart home this will quickly erode the benefit of automated technologies.

26 Eurelectric, 2016, ThThe e Power Sector Goes Digital: Next Generation Data Management for Energy Consum-Consum- ers, http://www3.eurelectric.org/media/278067/joint_retail_dso_data_report_final_11may_as-2016- 030-0258-01-e.pdf

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The solutions to finding a balance between privacy, the operational needs of grids and creating space for innovation can include limiting data granularity by adding a time lag. In Germany, the law on smart meter data allows transmission of household data only every fifteen minutes; in France, ten minutes is considered sufficient for the purpose of smart grid operations. Customer authorization for data usage can be based on an opt-in or an opt-out approach. Opt-in programs offer customers maximum protection and require affirmative approval for certain data to be shared. Opt-out programs, however, are more likely to favour mass participation in demand response markets.27

The DSM and the European Data Economy are at the centre of European ambitions to become a digital frontrunner. Many countries around the world are actively targeting digitalisation of their economies: to date, the world-leading ICT consumer technology companies (GAFA, Alibaba and Tencent) have all been founded outside Europe, while niche successes from the EU have been the digital travel platform Skyscanner and Raisin in fintech. This wider agenda can play out in energy in a number of ways.

For the Commission, energy and digital will come together most closely ‘if Eu- ropean companies are enabled to deliver energy intelligent products and services across Europe and if the energy sector is actively encouraged to contribute to horizontal Digital Single Market policies.’28 Some headline examples of ways in which the EU has begun to explore synergies between digitalisation and energy objectives – between SEM and DSM – are Horizon 2020 funding for IoT pilot projects that target smart home applications and standards, and for research into the big data use-cases for predicting electricity grid flows.29 In the context of the recent Clean Energy Package and DSM mid-term review, the Commission has underlined the importance of ‘bridging energy and digital economy’ with smart grids, seeing this as a key opportunity ‘for future energy-and-digital market design to come together.’30 The Energy Performance in Buildings Directive (EPBD) establishes for the first time in EU legislation the – optional – concept of ‘smart-readiness’ in buildings.31

27 IEA, 2017. 28 Robert Viola and Dominique Ristori, 2 August 2017, Blog: Digitising the energy sector: an opportunity for Europe, https://ec.europa.eu/digital-single-market/en/blog/digitising-energy-sector-opportunity-europe 29 European Commission, 12 November 2018, Press release: Big Data prizes awarded to most accurate elec-electricity grid flow predictions, https://ec.europa.eu/digital-single-market/en/news/big-data-prizes-awarded- most-accurate-electricity-grid-flow-predictions 30 Viola and Ristori, 2017. 31 Directive (EU) 2018/844 of the European Parliament and of the Council of 30 May 2018 amending Direc-Direc- tive 2010/31/EU on the energy performance of buildings and Directive 2012/27/EU on energy efficiency.

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This, as yet, falls short of the DSM being part of a European industrial strategy for digital energy leadership. An objective of the clean energy transition is to secure European leadership in technology, skills and in regulation. The DSM has similar objectives in the digital space, and there is clearly on opportunity for the two to come together. Examples such as the InterFlex pilot can point to a future where a clearer European industrial strategy ensures that the benefits of digital energy either accrue on EU territory or are within our economic reach.

2.2 Decarbonisation

Deep decarbonisation of the economy in line with the UN Paris Agreement requires a clean energy transition that is fast, affordable, and built on systems that both rely on clean energy sources and are highly energy efficient. The clear policy timeline and destination for this objective distinguishes it from market design development and from the uncertain direction of digitalisation.

Digital tools can be an enabler of energy transition, as in the above example of reducing wind and solar curtailment. The IEA also sees large potential wins from digital technologies for energy savings in buildings, and for the level of emissions and energy savings from transport. In buildings, equipment that includes smart lighting and heating, ventilation and cooling (HVAC) could cut total energy use in residential and commercial premises worldwide between 2017 and 2040 by as much as 10 percent compared with a business-as-usual scenario. In road transport, vehicles that are automated, connected, electric and shared (ACES) ‘could fundamentally transform how people and goods are moved’.32 However, digital energy also carries risks for climate change goals: neither smart homes nor autonomous cars are inherently positive for decarbonisation. Achieving digital energy savings in buildings relies on smartness also delivering energy efficiency, and on limited “rebound effects” in consumer energy demand. Similarly, in transport, while emissions per kilometre driven can be radically reduced, if the convenience of self-driving vehicles results in substantially more travel, the IEA assesses that energy use compared with current levels could actually double.33 Recent analysis suggests that it is the ‘S’ of ACES – the sharing – that will matter most in reducing energy demand in transport:34 vehicle occupancy rates may be far more important to overall emissions, and to cost outcomes, than the choice or speed of adoption of cleaner fuels.

32 IEA, 2017. 33 IEA, 2017. 34 George Kamiya, Kate Palmer, and Jacob Teter. 21 November 2018. IEA Commentary: Do automated cars dream of electric sharing? https://www.iea.org/newsroom/news/2018/november/do-automated-cars- dream-of-electric-sharing.html

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Experts note that ‘autonomous vehicles will not immediately be fully electric – the digital equipment required for autonomy, such as sensors, can overtax the battery capacity of EVs – but a gradual merger between electrification and autonomy could take place as batteries, sensors, and computation all improve.’35 Meanwhile, the development of shared transport solutions won’t necessarily be a matter of energy policy: urban management, social and fiscal policies that implement congestion pricing on roads, or parking strategies and restrictions, or tax incentives away from car ownership, are likely to be at least as effective as energy policy. Social and generational change, in the form of more habitual use of ride-hailing and ride-sharing apps, will also be significant. The important principle for energy policy makers is to note the trends, and to make sure that energy policies work with-the-grain of other policies and of social and technological developments.

Some digital tools can directly promote sustainability. Drones and satellites can contribute to more precise accounting of greenhouse gas emissions and sources, greatly improving existing mechanisms for the monitoring, reporting and veri- fication (MRV) that is critical to ensuring integrity in schemes such as carbon markets.36 The transparent and trustworthy characteristics of blockchain could make it a helpful tool for tracking carbon consumption in complex global supply chains. Meanwhile, millions of solar facilities have joined a project to post live solar data to blockchain for use by scientists and researchers.37

Digital and decarbonisation should be ‘good companions’ as both actively promote profound changes to today’s energy system.38 For the German energy agency dena,’digitalisation represents a key possibility for the successful design of the second phase of the energy transition.39 Enthusiasm and optimism about digital decarbonisation, however, has been increasingly tempered by observation. Many now consider that digitalisation is ‘an equal opportunity revolution’ as the same digital forces that facilitate clean energy are improving every other segment of the energy industry – including fossil fuels.40

35 Council on Foreign Relations, 2018. 36 Carbon Tracker, 11 October 2018, Nowhere to hide: Using satellite imagery to estimate the utilisation of fossil fuel power plants, https://www.carbontracker.org/reports/. Satellite technology can also help monitor deforestation and the role of forests as carbon sinks: NASA, 7 November 2018, A new hope: GEDI to yield 3D forest carbon map, https://climate.nasa.gov/news/2825/a-new-hope-gedi-to-yield-3d-forest-carbon- map/ 37 See www.electricchain.org/ 38 Vasconcelos, 2017. 39 See dena, digitalisation homepage, https://www.dena.de/en/topics-projects/energy-systems/digitalisation/ 40 Council on Foreign Relations, 2018. David Victor writes: ‘IT is transforming complex energy systems. Re-Re- newable sources of energy are assumed to be environmentally friendly. Greener energy systems are essential to mitigating climate change. Therefore, the logical fallacy follows, the IT revolution will help energy sys-

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3. Recommendations

Digital energy is at a very early stage, raising many questions and few answers. This analysis suggests five main points.

The energy system has a long history of adopting and then being changed by technologies that have been developed in other sectors of the economy: nuclear power uses technology created for military submarines, a gas CCGT powerplant uses an airplane jet engine, solar PV comes from satellite technology. The use of ICT and data science to measure and predict events ahead of time similarly owes much to advances in weather forecasting.41 Digital energy is gaining momentum at astonishing speed, and as a result, policy-makers, business executives and other stakeholders will increasingly see new possibilities and also face new and complex decisions. As they do this they will often have to work with incomplete or imperfect information.

At both European and global levels, policy perspectives on energy and climate are still usually considered separately from the emergence of the digital economy.42 In this respect, the digital energy agenda of the Estonian EU Presidency in the second half of 2017 was a pathbreaker and sets an example to follow. There is also an increasing recognition in Brussels and in some member states that the forces of digitalisation can help policy-makers to achieve energy goals. At the same time it is also recognised that digital potential will need to be ‘harnessed and fine-tuned to adjust to European laws and traditions.’43 This chapter has em- phasised in particular that energy policy-makers should seek to understand how the digital energy “genie” can facilitate or put at risk decarbonisation. Other no regrets strategies include designing-in updatable and cybersecure digital communications infrastructure as an integral part of all new energy infrastructure: smart-readiness should no longer be an afterthought.

Digital data collection and analysis can empower energy policy-makers with sophisticated and timely information. One simple and important example is the use in China of machine-readable quick response (QR) codes on household appliances to facilitate energy efficiency compliance checks and market analysis. These QR codes connect to online registration systems where manufacturers

tems fix the climate crisis. The reality is different.’ 41 On weather forecasting, see Michael Lewis, 2018. The Fifth Risk. W W Norton and Co. Inc. 42 For example, G20 Leaders Declaration, July 2017, Shaping an interconnected world, http://europa.eu/ rapid/press-release_STATEMENT-17-1960_en.htm 43 European Commission, European Political Strategy Centre, 28 September 2017, Strategic Note 27: Back in the Game – Reclaiming Europe’s Digital Leadership, https://ec.europa.eu/epsc/sites/epsc/files/epsc_stra- tegic_note_27_-_back_in_the_game_-_reclaiming_europes_digital_leadership.pdf

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and importers are required to register products before they can be sold into the market. In turn, the database allows the regulator to check changes in the market over time and to compare standards with global best practice by means of “web crawling” algorithms that automatically collect information from online sources. The QR codes also allow consumers easy access to product information—including efficiency and running costs.44 A similar use of QR codes could be on cars: cities such as Paris are introducing air quality restrictions, adding QR codes to cars would enable easy monitoring of city-access permits, and also tracking of the re-sale within Europe of older, higher-emitting, vehicles for use in regions with lower environmental standards.

Linked to the potential of new datasets, there is a strong public interest case – viewed from an overall energy systems perspective – for balancing privacy rights and commercial protections with a policy of open data access wherever possible. A key barrier to understanding the possible benefits of digital energy is the scarcity of non-proprietary datasets available to the academic research community. Research studies often rely on data from companies for which they are asked to sign nondisclosure agreements, with the consequence that study results cannot easily be shared with other researchers for the purposes of replication.45 Mean- while many energy operators are collecting vast “data lakes” that they do not yet have the capability to analyse.

Researcher access to aggregated and anonymised individual energy use data could improve our knowledge of clean energy systems, ultimately helping to lower costs for individual consumers. In 2016, French legislation established a broad concept of public interest data, enabling the government to request data from commercial entities to establish public statistics.46 The Commission’s proposal to revise the Public Sector Information Directive (PSI) also takes a step in the right direction by recognising that data generated by the utilities and in the transport sector has tremendous re-use potential while many entities active in these sectors are fully or partly funded by public money.47

Finally, a clear theme emerging from this chapter is that digitalisation moves faster than policy processes. Among the greatest challenges posed by digital energy is likely to be the speed of real-world change in relation to our institutions for energy policy-making and regulation. This may be a particular concern for the EU,

44 IEA, 2017. 45 Council on Foreign Relations, 2018. 46 Republic of France, Article 19 of Law No 2016-1321 Of October 7, 2016, for a Digital Republic (1), http:// legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000033202746&dateTexte=20180323 47 See https://ec.europa.eu/digital-single-market/en/policies/76011/3502

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where the multi-layered and iterative structure of Brussels decision-making – while high quality and effective in building consensus – tends to be slow-moving. Policy does not wish to act as a break on innovation. Nor should it fail to manage digital problems because it cannot keep pace. In this regard it is a positive that the EU climate and energy legislative process seems to be moving from a model of once-per-decade decisions (as envisaged at the adoption of the 20/20/20 En- ergy and Climate Package in 2008) to a rolling-approach based on interim target reviews and the new National Energy and Climate Plans (NECPs).

Readying regulation to cope with digital energy will also require new skill-sets: legislators and regulators need to recruit ICT knowhow, and they need to make efforts to educate digital experts about energy policy goals and the operational specificities of the energy system.48 “Regulatory sandboxes” which suspend all but basic market rules in a defined zone, for an experimental purpose for a limited time, should be considered as a way to explore the implementation of innovative technology at scale – for example the role of artificial intelligence in energy management.

Perhaps this chapter and these conclusions discuss developments and challenges that are not yet present today or even that will be present tomorrow, but they are coming soon and can be crucial to shaping the Europe energy system of “the day after tomorrow”.

Figure 23.1. What is digitalisation? Source: Solar Power Europe.

48 Sometimes ICT entrepreneurs looking at energy projects seem not to fully realise that infinite algorithmic transactions and “device democracy” may not be compatible with the physical integrity and reliability of energy grids.

386 Part 5 – Chapter 24 – New Digital Grid Architectures and Platforms

CHAPTER 24 NEW DIGITAL GRID ARCHITECTURES AND PLATFORMS

Laurent Schmitt

1. The Current Grid transformation paradigm

DigitalGrid technologies are fundamental to transform today’s electricity grids to address the decarbonization of the Energy System through the integration of intermittent renewable – whether centralized remote or distributed within the system while introducing new electricity usages such as Electrical Vehicules as well as Power to Gas to produce Green Gas Molecules.

By 2020, over 50 billion electrical devices of various kinds will most likely be connected electrically to the system as well as integrated through the Internet turning into new Internet of “Electrical Things” capable to coordinate and interact with each other.

As a consequence of both trends Electricity Grids will progressively turn into new Systems of Systems, composed of “Constellations of Sub-systems transactive with each other,” able to supply power to practically everywhere horizontally across European countries as well as vertically from devices into Home Nanogrids and city Microgrids into aggregators interacting with Transmission and Distribution System Operators to exchange electrons and associated En- ergy management services throughout the system. While interactions where historically complex to organize as requiring the setting of large legacy ICT architecture new internet based technologies have fostered connectivity of devices throughout the systems enabling new layered transactive controls across operators of the Grid system.

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The sum of these systems interacting with each other can be considered as the overall DigitalGrid system whose end to end operating system shall allow the optimal system-wide energy dispatch through the coordination of millions of Subsystems coordinating with each other. Evolving to this new era of systems does require to fundamentally reconsider the way control principles have been historically designed taking advantage of new bi-directional communication while changing Grid operation code to allow to take full advantage of power flow exchanges horizontally and vertically across generation sources (conventional and renewable), demand responsive loads (including electrical vehicules and associated Smart Charging infrastructures) as well as new storage assets.

This transformation also requires to evolve the associated electricity market design reconsidering how transactions are organised along the energy value chain – progressively integrating wholesale and retail markets together – and enable any consumers within the system to turn into an Active Prosumer leveraging the Internet of Electrical things existing in its own controllable environment.

Associated concepts have already been largely prototyped throughout Europe with pilots establishing first communities of Prosumer early adopters. The next decade challenge will mostly consist in scaling up associated concepts, turning on one side prototype early adopter communities into larger scale user community while conducting necessary transformation within Grid operator to migrate historical legacy ICT architecture into newer multisided platforms capable to orchestrate transactions within the electrical system, while maintaining the same reliability and resiliency standards on their Grid infrastructures.

Grid have historically been operated through simple one-way real-time communications requiring connections with a limited number of dispatchable generating points while considering IT architectures where dispatch optimisation is run through a limited number of Central Computing platforms interacting with each other through specific flow based market coupling algorithms. Most of the consumption data has been forecasted through the measurement of flows at the boundary between Transmission and Distribution Grids averaging errors across large grid areas and population of customer load profiles. The electricity bills were therefore reconciled on the basis of few index readings throughout the year reconstituting load profiles out of theoretical consumption baselines. Distribution grid operators had very limited access to real-time metering data from their gridedge.

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With DigitalGrid technologies, communication becomes multi-dimensional and close to real-time across all level of the Grid, with the possibly to flow information across all layers of the actors of the energy systems from devices into Prosumer, aggregators, Grid Operators as well as wholesale market participants. Data exchanges will ultimately only be limited by the data ownerships and associated rules and obligations across stakeholders of the energy system. This new approach will ultimately enable to consider Prosumer flexibility similarly to the flexibilities provided by other generation or storage assets within the system and settle associated electricity transactions according to real Prosumer interactions with the Grid. One can furthermore envisage that every Electrical Thing connected over internet will in the future play an automated role within the Electri- cal System.

The ultimate objective of this new approach is to allow the entire system to be operated more flexibly, facilitating the penetration of larger amount of intermittent renewable generation through more interactive grid infrastructures enabling customer demand response as well as storage and electric vehicles. This evolution opens new roles for Grid operators – both at Transmission and Distri- bution level – becoming orchestrator of data exchanges facilitating data integration through Open Application Programable Interfaces (APIs).

Ultimately digital grid technologies will aim at co-ordinating the needs and capabilities of all centralised as well as distributed “Electrical Things” over In- ternet, interconnecting transmission and distribution grid infrastructures, end- users and other electricity market stakeholders to enable transactions at various scales of the Electrical system – horizontally across coupled markets as well as vertically from Nano and Microgrids into Distribution and Transmission areas. Their purpose is to optimize the overall European Energy system social welfare in consideration of operating costs of the various components, environmental impacts and physical constraints related to the operation of the Grid (related to the management of congestions and necessary reliability margins particularly).

2. Evolutions of Grid Systems and technologies at Gridedge

Considering the evolution described in the previous section, Grid controls cannot anymore be considered solely through the prospective of the assets connected at Transmission level but also through the new “Electrical Things” introduced within the Distribution System as well as at the Prosumer premise.

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New concepts of Microgrids have therefore been introduced throughout the energy system as to identify subsystems of the broad Electrical system requiring particular coordination of “Electrical Things”. A Microgrid is theoretically composed of a contiguous section of the grid and its inter-connected distributed energy resources (i.e. generators, loads, storage devices, electric vehicles) in a business arrangement such that they can operate in a coordinated way to respond to specific Grid constraints – typically related to Grid congestions or stability constraints. Microgrids can operate as totally independent disconnected electrical islands in scenariis where the main Grid requires it, however Microgrid systems are operated as interconnected as base case.

Microgrid resources located behind Grid meters are typically managed through Balancing Responsible Parties or Virtual Power Plant (VPP) operator managing and aggregating Resources into the market, while resources located within the Grid asset are directly managed by the Grid operator managing the asset.

The convergence of the growing demand for distributed renewables, technology shift in ICT architecture towards distributed architectures and growing prosumer empowerment for demand response services are usually the main drivers towards these new Microgrid approaches offering new distributed interactions with Grid operators. Microgrids offer the following benefit to the main Grid System:

– They naturally encourage end users to self consumer their privately owned distributed renewables installed within the MicroGrid boundary hence minimizing dispatch losses and impact on Main Grid congestions.

– They bring new opportunity of service continuity on Microgrid critical loads during periods of main grid outages.

– They allow to trade and optimize Distributed Energy Resources dispatch into Energy Markets and Grid ancillary services.

– They offer new options to defer capital investments for critical intake substation reinforcement.

– They enable the emergence of new Community energy management business models within Prosumer tenant and owner de-multiplying technology adoption from Early adopters to larger user communities.

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Qualitative and quantitative assessments of the business benefits largely depend on Microgrid Business ownership and associated operational responsibilities versus the main Grid system. They can broadly be characterized by the following market segmentation:

– Private industrial and commercial organizations

• They are privately owned, operated by facility managers with limited utility interactions.

• The primary focus is to support owners’ industrial and commercial business operations with economic and reliable power supply.

• More recently new developments have been observed in academic campuses with stronger focus on innovation.

– Government organizations

• Military base microgrids have strong focus on energy reliability.

• These organizations are interested to improve economics making use of their MicroGrid in parallel to the operation of the Main Grid system.

• Electric utility companies.

• Vertically integrated utilities have started to consider deploying Microgrids to serve customers with specific, localized requirements, in areas which are exposed to Grid constraints (refer to Fig- ure 24.1 as typically deployed by Enedis in France in the context of the Nicegrid Project around Carros).

• Deregulated utilities collaborate with Distributed Energy Re- source aggregators to improve service quality across the distribution grid and microgrid operators.

• Utilities are investigating to offer utility expertise as a service to non-utility microgrid owners to improve their Customer satisfaction.

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Figure 24.1. Microgrid architectural concept at Nicegrid. Source: GE Grid.

A major intersection between MicroGrid and main Grid infrastructures is the management of distributed energy resources (DER). Microgrid Management Systems are therefore largely derived from applications originally deployed in Grid operator control rooms which in the case of Privately owned Microgrid are operated by private entities. These ICT system typically cover the following key building blocks:

– Data Acquisition, Control and Communications.

• Industrial Communication hardware leveraging Wireless, Power Line Carriers or Secured Internet based communications.

• Electrical Things » deployed for Substations or feeder automation as well as controls of Distributed Energy ressources.

– Real-time Microgrid controls.

• Management of Microgrid operating modes: Island detection, re- synchronization, interconnected operation.

• Controls of Microgrid balancing, reserve and inertia.

• Controls of Voltage and Power quality.

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• Microgrid Topology assessement and optimization.

• Alarms and event logging.

– Microgrid Scheduling and Dispatch.

• Distributed renewable forecasts, including PV, Combined Heat and Power, Wind.

• Load forecast, Demand Response (DR) and storage availability forecast.

• Energy price forecasts.

• Distributed Energy Resource unit commitment and economic dispatch optimisation.

– Transactive controls with markets.

• Virtual Power Plant/Balancing Responsible Party aggregation: contracts, compliance, performance.

• Day Ahead, intraday and Real-time Markets interactions: bidding, instructions, settlement & billing.

The operation of future electrical Grids is therefore evolving toward the coordination of operation of Microgrids through Balancing Responsible Party aggregation as well new forms of Active System Management interactions across Transmission and Distribution Grid operators. While each of these Microgrids will be managed by its local control entity, new business aggregation layers and multi sided orchestration platforms operated by Grid operators are emerging to facilitate the coordination of all Sub-Systems of the Electrical System as per the rules and responsibility established in Grid codes.

This overall leads to the re architecting of associated ICT Systems into Platform of Platform interacting within each other as represented in the following Fig- ure 24.2. The Integrated System Control Room layer will itself be split across Transmission and Distribution Grid operators according to a set of operating principles for coordinated Grid operation. This evolution significantly increases the number of interfaces across actors, hence the crucial importance to develop a proper reference architecture – known as the SmartGrid architecture model

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establishd by the IEC – as well as set of harmonized Application Programmable interfaces across systems.

Figure 24.2. Microgrid integration with Grid Control Rooms.

3. The new Smart City integration layer

Looking few years ahead, Microgrids will emerge as critical cornerstones to interconnect community users at Grid edge with infrastructures and markets through new layers of intelligence and Internet of “Electrical Things”. Advanced information and communication infrastructures are playing a decisive role in supporting the overall integration of these systems together, while allowing distributed control and optimization decisions through multiple tiers of the Elec- trical System infrastructure, from Transmission Grid Operators into Distribu- tion Grid Operators, Balancing Responsible Parties and Prosumer communities. In cities where energy systems are particularly constrained new architectures will expand beyond the boundary of the electrical system, interconnecting together Gas, Heat and systems for electromobility. These new systems will expose anonymised information to Prosumers to allow the benchmarking of their individual carbon efficiency as well as enabling smarter decisions related to their energy and transportation usage. In the same time cities will expect the same information to be put at their disposal to better plan their investment strategy, thereby improving their overall service quality.

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A significant challenge to deploy these new architectures is the possibility to use sufficient openness to interconnect historically siloed information while matching end user privacy regulations and mitigating cyber security risks. These new systems will facilitate deployment of optimal operational plans across energy infrastructures which have traditionally been planned individually as per their own intrinsic information and constraints while linking with Grid operator expansion plans.

In the past years IT system specifications and industry standardization for data exchanges have remained confined within single infrastructure silos with highly customised and proprietary system platforms in each domain. Moving forward, the unbundling of several markets such as telecom, energy and transportation is redistributing roles and responsibilities of service companies while raising new expectations for cities to monitor and benchmark performance of service operators. The IT industry is in the meantime also evolving toward new Industrial Internet Platforms leveraging new Big Data Cloud-based architectures opening new system deployment opportunities.

Overall, these new IT platforms will allow to infinitely scale intelligence within layers of Grid infrastructures (from the Cloud to millions of “electrical things” distributed within city assets) and organization levels according to roles and actors within future Smart Energy ecosystems. Ultimately, we see transactive controls across constellations of Microgrids becoming the new foundations of future energy systems, requiring Grid operators to develop new System of Sys- tem orchestration capability.

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Part 5 – Chapter 25 – Thirteen Disruptive Innovations to Accelerate New Business Models

CHAPTER 25 THIRTEEN DISRUPTIVE INNOVATIONS TO ACCELERATE NEW BUSINESS MODELS IN THE ENERGY SECTOR

Alicia Carrasco

1. Definition

“Disruptive innovation” was defined by Christensen in 1997 in his book The Innovator’s Dilemma.1 Later on, in December 2015, Harvard Business Review’ issue published an article on “Disruptive Innovation”,2 which according to the authors “describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses“ and which “originate in low-end or new market footholds”. Since more than a decade, the energy sector is experiencing a profound change led by disruptive innovation such as electric vehicle, storage, renewable or smart metering. These innovations profoundly change the way energy is generated, transported, managed and consumed. This chapter will consider Disruptive Innovation as innovation that facilitates Energy Transition and new business models.

In 2009, the Third European Union Energy Package was approved and entered into force. This initiated among other things mandatory guidance to provide effective and properly regulated competition aiming to offer the best deals for consumers and easiness to switch suppliers within three weeks, guaranteeing therefore that energy consumers enjoy high standards of consumers protection.

1 Special thanks to Wilfred Daunt of Siemens Digital Grid, Constanze Adolf- Environmental Fiscal Reform Expert & Project Coordinator at Lumenion; Ignacio Porto, CTO of olivoENERGY; Simone Accornero, CEO of Flexidado; Ignacio Osorio, CEO of Ampere Energy. 2 https://en.wikipedia.org/wiki/The_Innovator%27s_Dilemma, https://hbr.org/2015/12/what-is-disruptive-innovation (cached 14 July 2018)

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Figure 25.1. Articles using “disruptive innovation” and “disruptive technology” in recent years.3

It targets that all EU citizens have the right to have their homes connected to energy networks and to freely choose any supplier of gas or electricity offering transparent services in their area.

Under the energy market legislation in the Third Energy Package EU Member States are required to ensure the implementation of smart metering to consumers. Although subject to a Cost Benefits Analysis, when positive there is a rollout target of at least 80% market penetration for electricity by 2020.

Taking this legislative momentum as the starting point on time, the following analysis aim to highlight specific detailed 13 disruptive innovations that enable spurring new business models in the energy sector:

1. Demand response and consumption side interest.

2. Virtualization of metering and distributed energy.

3. Massive amount of information.

4. Digitalization.

5. Energy frameworks and political leadership.

3 http://pedrotrillo.com/wp-content/uploads/2016/01/Whatisdisruptiveinnovation.pdf

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6. Private sector and people lead clean energy investment.

7. Diversification to decarbonize.

8. Cities are shaping our future.

9. Industry development.

10. Evolution of stakeholders’ roles and functions.

11. Agile innovation scene.

12. Better technology performance at lower cost with data flows adding valuable functions.

13. IT layer.

2. The innovations

2.1 Demand response and consumption side interest

Back in 2010, the consumption side was seen as a point where the electricity had to be delivered. However, demand response and consumption side interests started to shake the basic foundation of unidirectional electricity flows. Since the last decade consumers are becoming more active, Distributed Energy Re- sources (DERs) have being installed and final consumers have been incentivized or awarded by changing their consumption patterns. Figure 25.2 uses traffic signals to highlights the one direction electricity flows back them.

2.2 Virtualization of metering and production of distributed energy

Kicked off new concept and technology that facilitates access of consumption data and provides flexibilities for utilities due to load shedding will optimize investment in the grid and better planning.

In June 2017, the Portuguese grid operator REN unveiled an investment plan program until 2027 to upgrade network infrastructure. The plan that will be reviewed by the regulator every two years, will cost around 70 million euros and

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considers 1.3 GW of extra photovoltaic capacity connected.4 This amount considered is less than the actual production permits queue what can be resulting in a problem when integrating new capacity.

Fortunately, the integration of new renewable capacity might have an efficient solution: the UK and Germany have taking advantage of batteries to provide frequency response projects and Ireland is procuring fast-response services from batteries. These cases can be seen as an example of how grid operators can save plenty of money thanks to distributed energy resources.

Other companies like the French Energy Pool is benefiting both final electricity users and network operator RTE by providing flexible demand response to the network operator. Final consumers offering flexibility decrease their electricity bill by either being paid or reducing their electricity consumption. For instance, Winoa, steel manufacturer, saved 4% on their annual electricity bill which is quite significant for an industrial like them.5

Figure 25.2. Unidirectional electricity flow in the traditional power system. Source:www.olivoENERGY.com

4 https://www.pv-magazine.com/2018/02/19/portuguese-grid-operator-to-invest-e70-million-to-accommodate-more-solar/ 5 https://www.energy-pool.eu/en/enduser3/

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2.3 Massive amount of information

Virtualization leads to another disruptive major change: massive amount of information of the electricity sectors and the capability to put intelligence into the data.

An interesting case study in which it can be seen the value that data can bring is what the startup called FreshEnergy6 is doing in Germany. FreshEnergy is offering its customers a smart meter for free. The business model of FreshEnergy is taking advantage of the data the smart meter provides and then focusses on analysing the data and bring new services to the consumers. For instance, through the software FreshEnergy has developed, the startup can identify the different appliances the consumer has and provide advice on how to increase the efficiency.

2.4 Digitalization…

…Is, as further detailed in the contributions by Jesse Scott and Laurent Schmitt, a key disruption. According to the IEA report “energy and digitalization”7 published in November 2017, utilities investments have been very much focused, since 2014, on digital infrastructure.

Figure 25.3. Investment in digital electricity infrastructure and software.8

6 https://www.getfresh.energy/ 7 http://www.iea.org/publications/freepublications/publication/DigitalizationandEnergy3.pdf 8 http://www.iea.org/publications/freepublications/publication/DigitalizationandEnergy3.pdf

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All utilities have to change their strategy on what is the benefit of having data and analysing it. Data grid control combined with metering enable better load forecasting, better planning of the sources of your reserves and better portfolio management. This will lead to have a competitive advance as utilities know their customers betters and can offer new services. This is a trend in all industries: with better customer data better service can be provided.

2.5 Energy frameworks and political leadership

Parallel to technological and data innovation, political development started to put together important regulatory pieces. Previous regulatory requirements and recommendations, as per the EU 3rd Energy Package might deliver or not,9 but it is definitive that current energy frameworks and political leadership that different geographical areas have decided for, are translating economic, energy and transport challenges into actionable steps forwards.

Policy-makers take renewable energy and energy conservation efforts as one of the main resources when they have to fight climate change. International policy conferences like the 2015 Paris Climate Summit, as well as the independent regulations of countries and trade accords are taking a more deliberate approach to disruption in trying to get ahead of the trends. These regulations will likely influence trends and innovation all around the world. This could be taken as an innovative disruptive approach, providing way-forward-transparency and therefore fueling more certainly to investment.

In 2015, the EU launched the Energy Union Strategy, which aims to transform Europe energy supply, complying with security of supply, sustainability, competitiveness and affordability. Narrowing down to steps on how to achieve Paris Agreement, and following Energy Union strategy, DG Energy launched in No- vember 2016 a new legislative proposal: The Clean Energy for All Package. The package includes 8 directives, expected to be passed by December 2018, and which aims:

– to support the growth of renewable (up to 32% in gross final energy consumption by 2030),

– to integrate consumers allowing them to consume and sell electricity, and thus to become “prosumers” or active consumers,

9 EU Third Energy Package, About Infringement – Internal energy market (http://europa.eu/rapid/press- release_IP-18-4487_en.htm, cached 24 August 2018)

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– to aggregate storage, demand response and/ or the charging- discharging of the electric vehicle,

– and how to prepare infrastructure to enable the introduction of decentralised, digitalised and consumer-own energy resources.

Different countries react to different challenges and paradigms to establish their energy framework. For instance, in Germany the energy framework “Energiewende”10 together with political leadership has to support the way forward considering:

– The challenges: Narrative of grid extension, we need more grid and more powerful grid. Germany needs more grid and more powerful grid, as renewable production is in the north and nothing in the south were larger consumption occurs. Citizens do not want grid infrastructure in private property. Therefore, there is need of more intelligent grid management.

Figure 25.4. Milestone of the Energiewende: 100,000th solar energy storage installed. Source: BSW Solar. Translated by olivoENERGY.

10 Germany has decided to switch its entire energy supply to renewables and to become increasingly energy efficient. www.energiewende-global.com

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– New paradigms: Regional Energy Communities that combine decentralized energy system that includes disruptive innovation, prosumers and digitalization. According to German national solar trade group BSW by August 2018 Germany has reached 100.000 home grid connected storage installations, and earlier in June 2018 BSW announced that 1 million homes have installed their own PV system.

2.6 Private sector and people led clean energy investment

No disruptive innovation without adequate finance! The private sector and private people lead the clean energy investment. They are becoming more and more aware that climate change is moving from an environmental issue to an economic challenge and they realise the need to change financial markets and investment practices in order to help bridging the gap between the large pools of existing investment capital. The divestment movement becomes powerful, pull- ing investments out of fossil fuels which are considered as stranded assets. Funds that were putting money into oil are redirecting towards renewables.

An increasing number of businesses and industry sectors are asking for significant improvements towards clear carbon pricing mechanisms to make the most of potential emission reductions at a low cost while remaining competitive. Current low and volatile emissions prices do not provide clear guidelines for low-carbon investments. The annual investment gap in clean energy amounts to 177 billion.11 However, national jurisdictions are no yet drivers for disruptive energy transformations. In the contrary, Fossil fuels are subsidised up to € 329 billion annually in the EU,12 hence, more than twice than the entire EU budget, including up to € 42.8 billion that Member States and citizens have to pay to compensate for the negative social and health impacts.13 These subsidies come in the form of tax breaks, reduced prices and state contributions that result in the increased use of coal, oil and gas and should be reformed.

In addition to reform fossil fuel subsidies, a substantial shift of taxation from labor and income towards resource use in Europe is less detrimental from a macro-economic perspective and is more socially equitable than other taxes,

11 Financing Europe’s low carbon, climate resilient future, https://www.eea.europa.eu/themes/climate/financing-europe2019s-low-carbon-climate/financing-europes-low-carbon-climate (cached 1st September) 12 International Monetary Fund (2015). How large are global energy subsidies? IMF Working Paper (WP/15/105). https://www.imf.org/en/Publications/WP/Issues/2016/12/31/How-Large-Are-Global- Energy-Subsidies-42940 13 https://www.env-health.org/IMG/pdf/heal_report_the_unpaid_health_bill_-_how_coal_power_plants_ make_us_sick_finalpdf.pdf

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such as VAT or income taxes.14 However, only a small number of EU Member States makes efficient use of public finance to accelerate energy transitions, to decarbonise their economies, to improve security of supply, and create a more predictable investment framework in order for clean technologies to become a driver of economic competitiveness. For example, France adopted a Carbon Tax in 2014, and the UK adopted a carbon floor price (CFP) as a mechanism towards better functioning of the EU-ETS. This Minimum price for carbon emission is 18 Pounds a ton of CO2 today. The revenue will be paid into companies that innovate. In 2018, Ireland became the EU’s first frontrunner in divesting all its public funds from fossil fuels.15

When looking at the breakdown of tax revenue in percentage of GDP, environmental taxes are not visible. They decreased in percentage of GDP over the last decade and remain a small source of tax revenues at around 2.5% of GDP against labor taxes which account for more than 54% of tax revenues. An increase of carbon or energy taxes could help to lower the excessive average energy dependence of more than 50% of the EU-28 which makes the EU the biggest energy importer in the world. The €450 bn spent for energy imports could be an important driver for the energy transition. As a consequence, not enough capital is channeled into the real economy and activities with longer time horizons like green investment projects with very high capital costs at the beginning facing particular challenges.

At the EU level, one possible instrument to overcome this gap beyond the existing Horizon 2020 and other funding lines would be to allow the European Se- mester to live up to its full potential. The European Semester is based on the idea that because EU economies are highly integrated, enhanced policy coordination can help boost an environmentally sustainable and socially inclusive economy in the EU. The European Semester is the driving decision-making process and the central instrument to coordinate the fiscal and economic policies of the EU Member States in response to the ongoing crisis. It could act as the main driver to influence national environmental fiscal reform strategies and concrete policy measures, i.e tax reform, carbon and energy pricing, or subsidy reform through both the National Reform Programmes (NRPs) developed by Member States and the Country-Specific Recommendations (CSRs) developed by the Com- mission.

14 Vivid Economics (2012). Carbon taxation and fiscal consolidation: the potential of carbon pricing to reduce Europe’s fiscal deficits. http://www.vivideconomics.com/publications/carbon-taxation-and-fiscal- consolidation-in-europe 15 https://www.nytimes.com/2018/07/12/climate/ireland-fossil-fuels-divestment.html

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2.7 Diversification to decarbonize

Companies and economies are diversifying from fossil fuels to decarbonize and offer services and product that fight climate change.

The Shell Energy Transition Report16 states its ambition to halve the Net Car- bon Footprint of the energy products they sell by 2050, which means not only reducing emissions of their operations but most of the reductions will come from charging their portfolio of products they sell focusing on new fuels for transport and building an integrated position in power markets. Up to date, this has translated into actions such as:

– An agreement with IONITY- high-powered charging network operator, to offer charge points in Shell’s biggest highway stations across 10 Euro- pean countries.

– Leading a financing round of 60 million into Sonnen, a German provider of residential solar storage solutions.

– Acquisition of UK retailer First Utility in 2017 and interest in acquiring Dutch retailer Eneco, one of the most proactive European retailers.

Repsol Strategy Report announced on the 8 June 2018 included an area on New Initiative to Energy Transition, with 2.5 billion euros investment to 2020 aimed to support increasing electricity demand and key role of gas in the energy transition. Their target is to reach 2.5 million retails gas and electricity customers in Spain by 2025, with a market share above 5% Repsol’s commitment to develop new capabilities and become a long-term profitable position in this area. It has already translated into actions such as buying the retail and non-regulated CO2- free generation business from Spanish utility Viesgo.

2.8 Cities are shaping our future

Cities are taking ownership to fight climate change, playing a key role in accelerating widespread clean energy innovation both for mobility and energy. Cities are becoming incubator for new green technologies, and are engaging in public private partnerships and leading air quality measure such as diesel cars ban. Cit- ies are actively auctioning 100% renewable electricity supply contract to power

16 https://www.shell.com/energy-and-innovation/the-energy-future/shell-energy-transition-report.html (cached 31st August 2018)

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its facilities and public buildings. Madrid City Hall auctioned and awarded 100% renewable supply contract in May 2018, which has led to other cities to consider replicating the similar tender process.

2.9 Industry development

Disruption is not only about technology innovation alone, but also about taxation disruptions, financing, jobs creation, and creating local industry development that accompany the process. We are moving from not in my backyard to “Not in-spite my industry” NIBY to NIMI.17 An example is battery production, which according to EU DG Growth is a “strategic imperative for clean energy transition and the competitiveness of its automotive sector. Therefore, the Com- mission’s “New Industrial Policy Strategy” goal is to make the EU the world leader in innovation, digitisation and decarbonisation”.18

A Fraunhofer Institute Study: “Effects of vehicle electrification on employment in Germany (ELAB)” published in May 2018,19 considers EV as a great challenge for employment in Germany estimating that by 2030 100.000 jobs in Germany will be directly or indirectly affected and disappear. By contrasts, around 25.000 jobs will be created for components such as batteries or power electronics. There is strong political commitment to support alignment of local industry re-design to drive the change and deliver energy transition solutions.

With the objective to create a competitive battery value chain in Europe, EU Vice President Šefčovič launched the cooperative platform European Battery Alliance in October 2017, which gathers European Commission, interested EU countries, the European Investment Bank, key industrial stakeholders and innovation actors. The aim is to prevent a “technological dependence on our competitors and capitalise on the job, growth and investment potential of batteries, Europe has to move fast in the global race. According to some forecasts, Europe could capture a battery market of up to €250 billion a year from 2025 onwards. Covering the EU demand alone requires at least 10 to 20 ‘gigafactories’ (large- scale battery cell production facilities).

17 “NIMI” is a term created by Alicia Carrasco that aims to combine the current trend of supporting national and local industries to provide the services, equipment and products of the Energy Transition. 18 European Battery Alliance, DG Growth https://ec.europa.eu/growth/industry/policy/european-battery- alliance_en (cached 2nd September) 19 https://www.igmetall.de/27474.htm (cached 1 September 2018)

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2.10 Evolution of stakeholders’ roles and functions

Integrating DERs, renewables and prosumers has led to an evolution of stakeholders’ roles and functions: what does the future of the utilities look like?

If we have a look at the study carried out by the International Energy Agency, in the last 6 years utilities have moved their core business from conventional generation to regulated businesses. The following figure shows how the evolution has taken place.

Figure 25.5. Aggregated earnings of the top 20 European utilities by business segment.20

There has been a clear strategy to shift towards regulated business model. How- ever, this can only be a short-term strategy because the boom of decentralized generation and flexibility on the demand side will increase the uncertainty of possible network reinforcement and then grid investments.

In addition, renewables investment still depended in many cases on subsidies schemes as Feed-in-tariff, but tendering mechanism are nowadays more common which are actually reducing subsidies. For example, in Germany the average subsidy for onshore wind dropped from 5.71 c€/kWh (May 2017) to 3.82 c€/kWh (November 2017).21

20 http://www.iea.org/publications/freepublications/publication/DigitalizationandEnergy3.pdf 21 https://www.enerquire.com/blog/european-utilities-focus-on-regulated-business-models-paradigm-shift- yet-to-come

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It may be that some specialized utilities might be able to be successful with conventional generation in the future, but most of the utilities need to focus on the supply sector in order to develop a sustainable business model that guarantees their future.

But how DSOs in Europe see their future?

The Vlerick Business School published an ‘Outlook on the European DSO Landscape 2020’, and that represents a survey of 108 executives from DSOs questioned abput the future of DSOs at the 2020 horizon. The majority of the executives believe in a shift from an asset-based to a service-based approach; at once they identified three areas in which they want to become active as providers of energy services:

– DSO as a Data Hub: around 90% of the participants bet that DSOs will be the data hub to manage market access.

– Active control of DERs and demand response: 80% of participants think that DSO will control DERs or will coordinate demand response mechanism. This is supported by the fact that the active management of distribution grids can reduce the cost for the grid expansion for RES integration by up to 40%.22

– Balancing responsibilities: 80% of the respondents mentioned that they see the DSO gaining Balancing responsibility in the short future.

2.11 Agile innovation scene

Figure 25.5 shows utility investments in Distributed Energy Companies in the US and EU, from 2010 to 2016. According to the study carried out by GTM research utilities not only in Europe but also in the US have raised their acquisition and venture capital investments since 2013. But the most notorious action took place in 2015 and 2016 when both acquisition and investment increased dramatically.

22 https://www.bmwi.de/Redaktion/EN/Publikationen/verteilernetzstudie.pdf?_blob=publicationFile&v=

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Figure 25.6. Utiliy Investments in Distributed Energy Companies in the US and EU, 2010-2016.23

But why this has changed since then? There might be some reasons to explain it. According to the paper “Evaluation of Strategy of Power Generation Business under Large-Scale Integration of Renewable Energy”24 before 2015 utilities, and this paper focuses in the German ones, did not invest in Renewable Energy Sources or in companies that their technology had to do with RES. The reason was that investment by utility in RES or any RES business would probably decrease the revenue from the traditional generation plants utilities own, basically because RES reduces the average price of wholesale market which decrease the revenue of traditional generation plants. This is usually called “the Cannibalism effect”.

There is evidence from 2015 onwards that big Utilities are changing their strategy. For instance, the two biggest utilities in Germany, E.on and RWE decided to divide their companies into two independent ones: one is focusing on the traditional generation business and the other on RES, grid operation and supply. With this movement, they have freedom to focus on their core business eliminating the Cannibalism effect.

In addition, many utilities in Europe have established accelerator programs for startups. for example Repsol, Iberdrola, E.on, Innogy. This is just the beginning of their future strategy to become a more innovation-oriented business.

The reality is that the new strategy utilities are taking today is a win to win, since big utilities usually with lack of agility to adapt to new environments can now be at the top in innovation, and on the other side, startups and cleantech that some years ago failed and did not meet the expectation, have now a good support to become successful.

23 source: GTM Research, 2017 24 http://b-e-r.user.jacobs-university.de/bewp/bewp23.pdf

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2.12 Better technology performance at lower cost with data flows adding valuable functions

As renewables’ economics are becoming more attractive, EVs drive more kms, there is a better technology performance at a lower cost, data flows adding valuable functions, more and more distributed renewable resources are appearing, which pushes for changes in the existing electricity system and business model. Penetration of renewable is not only happening at large scale but also at small scale what means that generation assets are owned by private household which significantly alters the supply structure. As it can been seen in the Figure 25.7 which relates the number of power plants to the amount of new capacity installations in Germany, the structure of new capacity installations has changed from large-scale to small-scale power generators.

Figure 25.7. Number of power plants per MW additional capacity.25

From the starting Renewable Energy Act in 2000 each MW of newly installed capacity has corresponded to a growing number of power plants. This observation corresponds with the increasingly fragmented investor landscape for renewables as it has been discussed before: Private households increase investments in small-scale renewable generators, which in turn reduces the average size of the installed generators.

25 Source: https://www.enerquire.com/blog/how-third-parties-forced-the-utilities-in-germany-to-change- strategy

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Electric vehicles have developed and shaken gas motors Internal Combustion Engine, have pushed bettering batteries performance and lowering their cost. Driving an electric car, and having batteries at home are increasing realities. Ac- cording to the Bloomberg New Energy Finance study and as Figure 25.8 shows the electric vehicle is expected to take the lead on car sales by 2038.

Figure 25.8. Evolution of Electric vehicle car sales vs oil-fueled car sales.26

In addition, battery prices are decreasing at a pace that anyone expected, due to the growing market for consumer electronics and demand for electric vehicles (EVs). Major players in Asia, Europe, and the United States are all scaling up lithium-ion manufacturing to serve EV and other power applications.

Integration of three solutions solar, EV and batteries and allowing all different devices to talk among them will push the increment of consumers’ participa- tions. The idea of combining solar with storage and EV to enable households to make and consume their own power on demand, instead of exporting power to the grid, is beginning to be an attractive opportunity for customers. This market will continue to expand, creating a significant challenge for utilities faced with flat or declining customer demand. Eventually, combining solar with storage and a small battery or EV will make economic sense.

26 Source:Bloomberg new energy finance.

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2.13 IT layer

As mentioned above, what really will spur the full potential on improving hardware as PV, EV, and storage, and others, is not only improving the performance and lowering the cost, but also adding an IT layer to all different equipment and devices. Adding IT layer will facilitate different new dimensions:

– Artificial Intelligent, automatic learning algorithms, prediction models and big data analysis tools.

According to Ignacio Osorio, CEO of smart battery-energy management systems company Ampere Energy 27 batteries are able to learn consumers’ habits, track in real time electricity tariff and optimize their use to provide maximum savings for consumers.

– Connectivity, tracking distributed transactions and energy settlements.

Each device’ IP can be connected to each other, and be used to program a software, internet or blockchain means of locating devices and sharing information and actions commands, to enable energy transactions or energy settlement. Internet communication and distributed renewable energies, allows that after programming the chosen sharing-transaction-tool that when electricity is not needed different layers of energy uses managing the surplus to other users.

Jeremy Rifkin already in his book “The Third Industrial Revolution” published in 2013, described as one of the five pillars for the “new energy economy”28 the converging of internet communication and distributed energy resources.

In this sense, blockchain is the hottest topics in energy business. On 18-19 April 2018 energy and blockchain experts met in Berlin on the Event Horizon 2018 to discuss the potential of the blockchain technology for the energy sector. The aim of this event is discussing how a decentralized ledger technology like the blockchain can be applied to the electricity system that currently develops towards an increasingly decentralized structure (due to DERS, new applications on the demand side, like electric vehicles).

27 http://www.ampere-energy.es 28 Rifki, J (2013) The Third Industrial Revolution

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Although the technology is not ready yet and far away from entering the mass- market, at least in the energy sector, there are potential applications of blockchain for different user cases. For instance, blockchain technologies offer the potential to address one of the most important barriers renewables are facing today, especially the small-scale assets which is the access to markets. For example, those markets where flexibility provided by renewable energy resources or demand response from renewables or demand are not accessible for small-scale distributed resources.

In Europe for instance, the capacity to participate in the flexibility markets is usually 500 kW, 1 MW or even 5 MW. Taking into account that an average household solar installation has a capacity lower than 50kW, they cannot access the existing flexibility markets. So blockchain, especially P2P trading can decrease the barriers and in some cases create new markets (e.g. selling electricity to neighbors) for distributed generators.

A representative example is The Brooklyn Microgrid in New York and Power- Ledger in Australia in which P2P applications is allowing neighbors to trade with electricity between each other. Other examples like the recent cooperation between Tennet and Sonnen aim at a blockchain-enabled aggregation of distributed battery storage for ancillary services. If this application can be demonstrated as feasible, they might become a potential disruptor of generators business model.

3. Conclusion

The most disruptive innovation is the add up of all technology breakthroughs combined, together with connectivity, integration and flexibility which are the key pillars of the new energy service-based business models. At the same time the relationship between energy and consumers is changing and electricity providers are reassessing the traditional power system and the way they provide energy products and services using data-driven decision-making to meet consumer demand.

The ones capable to adapt to the fast changes innovation brings and at the same time focus their business model on the consumer side, will be probably who will take the lead in the coming decentralized, innovative and digitized service-based power system.

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Figure 25.9. The power system of the future. Source olivoENERGY 2018.

To summarize, the following graph reflects how all different disruptive innovations could make the power system looks like in the near future. A system much more decentralized that we have today. Although the big generation plants will coexist with the small-scale decentralized RES, the new power system will be predominated by DER which will facilitate new energy business model thanks to digitalization.

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Part 5 – Chapter 26 – Tomorrow

CHAPTER 26 TOMORROW

Olivier Corradi

Tomorrow1 is a tech start-up taking its roots in the most pressing and challenging problem of our time: climate change. Our mission is to make the carbon cost of things ubiquitous, such that our decisions as citizens and policy-makers will be more rational, data-driven, and will bring us to a pragmatic and efficient energy transition that frees us from fossil fuels. Firstly, a brief overview of the challenges we face will be summarised. Secondly, we’ll present our vision of a sustainable world alongside the insights that sparked the creation of Tomorrow. Finally, we’ll present what Tomorrow already has done to mitigate climate change and what we plan to do next.

1. Climate change is the most important problem of our time

Barack Obama famously said that “we are the first generation to feel the effect of climate change and the last generation who can do something about it”. It is hard not to agree, especially when the Intergovernmental Panel on Climate Change (IPCC) writes in its fifth assessment that “warming of the climate system is -un equivocal, and since the 1950s, many of the observed changes are unprecedented over decades to millennia”. We have now achieved a temperature increase of 1°C since the end of the 70s. A change of 1°C in just 50 years is unprecedented and the speed at which this change is taking place is worrying. Historically, a change of 1°C seems to happen in thousands of years – not decades.

1 https://www.tmrow.com

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CO2 emissions from burning fossil fuels (oil, coal and gas) are the most important source of this temperature increase as CO2 stays in the atmosphere for hundreds to thousands of years.2 Getting rid of them is not an easy task. Histori- cally, the world’s energy has come from burning trees (biomass) for heat and tool manufacturing. The invention of an efficient steam engine enabled us to convert existing fossil fuels into intensive mechanical work (lifting heavy objects or turning the wheels of a heavy train for example). Furthermore, it enabled us to build machines to dig up even more fossil fuels, enabling an exponential growth of our energy usage, at the centre of our modern economy. In fact, we see that we currently still get 80% of our energy from fossil fuels, which surprisingly is exactly the same as in 1980:3 the growth of renewables has been matched by (or even outpaced by) a similar growth of fossil fuels.

Fossil fuels pack an intense amount of energy in a small volume and mass. Oil in particular, being light and dense, enabled the invention of modern transportation. The energy released when burning 1 litre of oil is equivalent to 25 professional athletes cycling for one hour (roughly 10 kWh). That single litre of oil weighs under 1 kg and costs 100 to 1000 times less than the equivalent human labour. Thus it is no mystery that intensive human labour got replaced by machines, propelling humanity into the age of abundance. An average person on Earth uses roughly 60 kWh of energy per day.4 That means that every day, we each have an equivalent of 15 professional cyclists dedicated to us 10 hours a day to support our living standards. The current quality of life that we are enjoying has been enabled by the efficient use of fossil fuels, freeing us from intensive human labour.

The Paris climate agreement (COP 21) has set the world an objective of limiting global warming to well below 2°C by the end of the century. Reaching that objective limits us to using only 34% of the proven fossil fuel reserves, leaving the rest of it in the ground. It is unfortunately highly unlikely that the free market, without any regulation, achieves this result. So how do we reach that objective? Some pragmatism has to be introduced in the form of a sober quantification of the impact of the different choices we make as individuals and as policy-makers.

2 https://www.tmrow.com/climatechange.html 3 IEA 2014, https://data.worldbank.org/indicator/EG.USE.COMM.FO.ZS 4 IEA 2014, https://data.worldbank.org/indicator/EG.USE.PCAP.KG.OE

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2. The need for an ubiquitous carbon signal

Creating Tomorrow first meant having a realistic vision of a low-carbon world. The first thing we acknowledged is that our Earth is finite, and that although there’s no limit to our ingenuity, there is a limit to the resources we are consuming, specifically because we need to keep ⅓ of proven fossil fuel reserves in the ground.. Our mission is to use those resources most efficiently, without putting our future in jeopardy.

The role of growth therefore needs to be discussed. There are two types of growth: The first is the increase of economical output due to an increase of -in put, as for example the increase of the amount of cars produced caused by an increase of labour, capital and resources (including energy) provided. This type of growth is difficult to sustain in a finite system, where resources are limited. The second type of growth is one that is based on increasing efficiency, which is the ability to produce more value using the same input (labour, capital and resources). As the input is kept constant, this type of growth can be sustained in a finite system as long as we keep finding ways to improve existing processes without increasing the amount of resources consumed.

The growth our societies have been experiencing is a mix of both. It has unfortunately been very difficult to have growth emanate exclusively from efficiency without having an increase in total resources consumed. This is due to the so- called rebound effect, stating that a technological innovation (such as a the improvement of the fuel efficiency of a car) often has a negative effect as overall usage increases due to more people gaining access to the good or service. For example, a 5% improvement in vehicle fuel efficiency is likely not to result in a 5% drop in fuel use. This is because, on aggregate, more fuel is consumed by being able to by drive faster or further than before. Unfortunately, owners of fuel-efficient cars tend to drive them more often.

In order to stimulate the right kind of growth, a resource cost must be introduced. Currently, our basic resources (our Earth, its metals, its air, its ability to keep a stable temperature etc ..) are counted without value in our accounting books. A sustainable economy would give non-zero value to these so-called externalities, which would put natural resources on an equal footing with capital and labour, naturally incentivising sustainable growth centred around efficiency, and not volume increase.

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Hence we postulated that the quantification of these resources must be made ubiquitous and accessible, in a way that permeates our lives. It could take the form of a separate currency or a carbon tax that corrects the bias that our monetary system currently has, but in both cases it must be a signal that is felt by the end consumer. We citizens are very good at criticising oil companies, but much less at flying less further away on vacations or leaving the car at home. There are strong cognitive dissonances that partly have to do with the fact that most people do not have the faintest idea of the footprint of their daily activities.

Policy-making also suffers from this lack of quantification. Ideally, a pragmatic and efficient climate policy would start by optimising one key metric: the amount of fossil fuels consumed. Unfortunately, policies nowadays do not focus sufficiently on the amount of carbon avoided, and do not sufficiently incentivise consumers to take part in that optimisation. This is dangerous, as the end result is that technologies that yield the maximum carbon reduction are not supported, and the full potential is not unlocked. For example, installing new renewables in countries where the electricity generation already is low-carbon (such as Norway or France) yields little carbon reduction. Instead of pointing at technologies, we should be instead be pointing at a decision-process which would be make sure the technology yielding the highest carbon reduction is chosen. This would make sure we don’t simply install more wind turbines, but actually install them in places where it reduces the usage of coal power plants. It would incentivize other types of technologies such as energy storage, carbon capture etc..

In both cases, we identified that externalities are not sufficiently quantified and taken into account, partly due to the complexity and inaccessibility of the matter. This is what motivated us to start Tomorrow, a tech start-up that has the mission of quantifying, and making widely accessible, the carbon impact of the daily choices we make. Our hope is that by making the carbon cost of things ubiquitous, our decisions as citizens and policy-makers will be more rational, data-driven, and will bring us to a pragmatic and efficient energy transition that frees us from fossil fuels.

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3. How Tomorrow contributes to mitigating climate change

The electrification of heating and transportation has become one of the key solutions to reduce our dependence on fossil fuels. As the world still mostly produces electricity using fossil fuels5, quantifying emissions from electricity (and making that signal ubiquitous) became our starting point at Tomorrow.

To that end we created the electricityMap6 in 2016. It’s an app that showcases, in real-time, where one’s electricity comes from, and how much carbon was emit- ted in the process. It takes into account imports and exports between countries, effectively tracing electricity back to its sources of production. The ambition was to provide a single, global and real-time signal that enables consumers and connected devices to consume electricity at the best time. Secondly, we wished to create a unique database enabling the tracking of the electricity decarbonisation progress using a comparable methodology across countries.

Figure 26.1. The online electricityMap.

5 IEA Key World Energy Statistics 2016 6 https://www.electricitymap.org

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In order to be a trusted information source, we open sourced the code describing how we calculate carbon emissions. Anyone can read and make suggestions to our data sources or carbon emission factors. Furthermore, in order to achieve global coverage, we incentivized visitors to contribute with knowledge of where data for new areas could be accessible. This enabled engaged coders to extend the system to cover those new areas. So far, over 70 contributors have contributed to electricityMap, which now covers over 150 areas worldwide including Europe, North America, India and Australia. In the process, a community was built, and we regularly discuss issues and new ideas on our open Slack communication platform.

The impact was certainly much larger than what we initially anticipated. elec- tricityMap has been seen by millions of visitors, spurred an incredible amount of debates on social media, the app being used as a data-driven fact base when comparing energy transition strategies of various countries. The app is used as teaching material in high-schools and at universities, being an exploration tool for understanding the advantages and drawbacks of different energy transition strategies.

At Tomorrow, we envision a world where every connected device uses its flexibility to consume electricity at times when the electricity is greenest. To that end, we created the electricityMap API, which contains an estimation of the marginal CO2 intensity of the grid in the next 24h. Using that data feed, connected devices can plan ahead and consume at times when the additional electricity they will require is low-carbon. It is also a signal that enables storage systems to decide optimal charge and discharge times. We have started to apply this technology to optimise the charge of electricity vehicles in the Parker Project7. After all, no-one buys an electric vehicle to have it charged with coal-based electricity. However, incentives to consume electricity when it is low-carbon are being prevented by regulatory hurdles. It has been too easy to claim to be 100% green independently of time of use, as Guarantees of Origin do not take into account the time of production of electricity. For intermittent sources, it is crucial to factor in the production time to ensure production and consumption are matched at all times. Furthermore, Guarantees of Origin represent an alternative to the physical carbon accounting methodology, thus opening the door to double counting and ambiguous communication causing the confusion of citizens wondering how they can buy wind energy when the wind doesn’t blow8. Having smart consumers requires re-thinking the role of Guarantees of Origin.

7 http://parker-project.com 8 https://blog.tmrow.co/why-green-electricity-contracts-fail-to-deliver-green-electricity-e0d66ca31d88

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We’re not stopping at electricity however. As the urge to decarbonise our entire energy system becomes greater, we are in dire need of a CO2 signal that spans across all energy sources – not just electricity. This would enable better decision- making when deciding between using an electric vehicle, a hydrogen fuel cell or a highly efficient conventional combustion engine. It would also enable tracking the carbon content of energy transferred from the electricity system to the heating system, and vice versa. Once again, we hope to foster a community of engaged individuals and professionals to collectively build the tools required and centralise scientific knowledge already available. Transparency will be key to adoption and consensus, and we plan to open source as much as possible.

We believe building a quantified signal is only one part of the solution. The second part is to make it seen and used by enough people. One thing we discovered when building the electricityMap is how powerful visualisation can be when done properly. As policy-making and citizen implication must go hand-in-hand, the need to build engaging apps and visualisations that empower citizens and consumers to learn and change behaviours is key. The installation of smart meters for example, enables us to display personal carbon emissions of one’s electricity usage. By connecting to the APIs of electric vehicle, we can show drivers of electric cars how clean the electricity in their battery is. Before we know it, our whole carbon footprint will be made available, in a fun and visual way. It will enable a global consciousness shift, and, we hope, a more pragmatic day-to-day decision making.

Climate change mitigation is first and foremost about setting up a decision- process assuring that every time a decision is taken, be it at policy-making level or at individual level, the solution yielding the lowest carbon impact is chosen. The digital age has provided us with data about everything. We now are collecting more data than ever: physical flows of materials, corporate activities and personal actions. This presents an opportunity: using all of this data, we can automate the quantification of resource usages that we so desperately need, and make it ubiquitous such that anyone can take better and more informed decisions. As information precedes action, our goal is to make available to everyone the carbon footprint of their actions and create the tools needed to rationalise decision-making.

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Part 5 – Chapter 27 – How Innovation Can Accelerate the Energy Transition

CHAPTER 27 HOW INNOVATION CAN ACCELERATE THE ENERGY TRANSITION: LESSONS LEARNT AT KIC INNOENERGY

Pierre Serkine & Diego Pavia

The energy transition supported by the Member States, the European Parlia- ment, and the European Commission, notably with the Energy Union launched in February 2015, is an opportunity to boost the European economy, creating jobs and growth, while showing effective European leadership in implementing the planet commitments coming out of COP21. For the ambition of having a low carbon economy by the end of the century, it is necessary to understand the vital role innovation has to play in the Energy transition, and how the European Union is addressing it. The first clear signal was sent when publishing the architecture of the “Clean Energy for All Europeans Package – 2016”, which identified research and innovation at the same level as the upcoming new regulation and directives on renewables, security, energy efficiency and market design.

Already then KIC InnoEnergy was formally identified as one of the key players in the research, innovation and competitiveness dimension. This chapter intends to share the lessons learnt from the first 8 years of achievements of the Knowl- edge and Innovation Community dedicated to Energy, aka KIC InnoEnergy, which can be relevant elements to be considered in the current negotiations on the 2021-2027 EU budget and on its Energy and Research & Innovation dimensions (Horizon Europe).

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Figure 27.1. Extract from the Commission Communication on the Clear Energy for all Europeans package.

1. Innovation: an imperative for companies and countries, and the throttle for energy transition

Innovation is the action of introducing something new to a given organisation, creating value as a consequence. It differs from invention, which is “the generation of newness or novelty, while innovation is the derivation of value from that novelty.”1 Research and Innovation are also closely related, but differ from each other. Indeed, “Research is the transformation of money into knowledge. In- novation is the transformation of knowledge into money.” as described by the Post-It’s father, Geoffrey Nicholson from 3M.

Synthetically, the innovation process management in organisations has evolved over the last decades. Initially, by acknowledging that innovation was not the exclusive realm of the research department, and that each department or function within the organisation had to play a role in the innovation process. Then, the importance of maintaining links in the wider ecosystem, through formal and informal interactions with external entities, has been recognised as essential to develop and valorise innovation. With the emergence of Open Innovation (Chesbrough-2003) and of Active Innovation Paradigm (2016), it is commonly

1 Du Preez, Niek, Louis Louw, and Heinz Essmann. “An Innovation Process Model for Improving Innovation Capability.” Journal of High Technology Management Research, 2009: 1-24.

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accepted that entrepreneurship and intrapreneurship (i.e. harnessing the value of each individual empowered to take part in the innovation process) in open ecosystems are a business “must” for survival, not a “nice to have”.

As rightly stated by Donald Kuratko2, innovation, entrepreneurship and dynamic ecosystems are not simply options, but an imperative for companies and economies to keep an edge on competitors and stay in the game; although companies and countries must truly walk this talk, and not only adopt a narrative grounded on these three dimensions. This indeed requires to dramatically upgrade the business culture and to implement profound changes to create a working environment prone to entrepreneurial initiatives, based on collegiality, openness, flexibility, but also proactivity and responsibility. Only the EU businesses embracing this challenge will be more competitive, i.e. able to do what no one else can do, and not only do what everyone does while spending less.

In this vein, the European Union created the European Institute of Innovation and Technology (EIT) back in 2008, to reinforce innovation, entrepreneurship and building enabling structural ecosystems in Europe in specific topics, called societal or global challenges (i.e. Energy, Climate, Digital, Health, Food, Raw Materials, Advanced Manufacturing and Urban Mobility). The special gist of the EIT is that those open pan European ecosystems have been built around three key organizations, bound structurally initially for 15 years: Research Cen- ters, Higher Education Institutions and Businesses (big and small).

In addition, energy transition is the realm of Innovation par excellence. On the generation side, energy transition usually refers to the substitution of primary energy sources, such as the substitution of fossil fuels by renewable energy sources. Such phenomenon never occurred over the past centuries, which have only seen additions of successive energy sources, from traditional biofuels (wood) to coal (enabling the massive use of steam engine as of 1850s and the Industrial revolution), and successively to oil, gas and eventually to nuclear and variable renewable energy sources. But the energy transition, accelerated by the “Clean Energy for All Europeans” regulatory package, is also known by its five “D”: Decarbonisation, Decentralization, Digitalization, Democratization and Deregulation. The transition had started already and the package is only setting the compass and enabling its acceleration. And rightly so, as introduced in the opening paragraph of this article, the EU has identified innovation as one of the key tools to make it happen. If Europe wants to succeed genuinely in the energy

2 Kuratko, Donald. “The entrepreneurial imperative of the 21st century.” Business Horizons, no. 52, 2009, 421-428.

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transition, lead all the other world economies, and grab the energy transition as one of the topics to stay as a reference society, it will require to innovate at a scale and speed that has never been done before.

We are not announcing something that will happen, but describing something that has started to happen already. Over the last 5 years we have seen a dramatic (r)evolution of the energy sector in the EU, both on the B2B (Business to Busi- ness) and the B2C (Business to Customer) sides: decrease of both the EU primary energy and electricity consumptions, increased electrification of energy uses (especially mobility and heating), growing penetration of variable renewable energy sources (and the falling wholesale prices), increasing decentralisation of the electricity system, deployment of smart metering infrastructure allowing for new business models, autarkic energy communities, …. The consequences are that the European energy incumbents are currently struggling (shrinked balance sheets, lower credit ratings, outdated traditional business models), endangering utilities’ survival as we know them today. Yet, it is a sound driver to transform their activities via innovation, be it technological, business model or social.

Many examples are already happening in the Corporate world such as: the various acquisitions made by Total (notably of Saft in batteries, SunPower in PV, Lampiris and Direct Energie in electricity retail activities, and Greenflex in energy efficiency), the planned asset swap deal between RWE and E.on in Ger- many, the new positioning of several European electric utilities in aggregation and new energy services (acquisition of EnerNOC by Enel, of REstore by Cen- trica, development of Sowee and of Agregio by EDF), the new organizational structure at ENGIE as of 2016 based on 24 Business Units and 4 “Métiers”, the creation of Enel X for e-solutions by Enel Group around 4 fields (e-Mobility, e-Home, e-City and e-Industries), the write-down (4,9B€) of Naturgy (former Gas Natural) of its conventional generation assets, and more generally the emphasis of “Digital” in the Utilities’ strategy. Beyond the inclusion of digital as a topic into their strategies, a recent study from PwC3 based on interviews of senior-level executives from 29 leading utilities shows that 70% them said their companies want to be digital leaders (and 20% envisioning a day when they will match the capabilities of leading digital players across all industries).

At the same time a myriad of challengers, more dynamic, with less stranded assets, with an open innovation culture in their DNA, are popping up in all steps of the value chain, even in the CAPEX intensive ones linked to generation, grids (e.g. Tesla in Ancillary Services for grid operators). And still the announced in-

3 PwC, “The digitalization of utilities: There is a will, but is there a way?”,Strategy&, September 2016.

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cursion of global players from other sectors (e.g. banking, GAFA) has not yet happened at big scale.

All in all, the energy transition started some years ago, has been given a societal generational dimension by COP21, is been enabled and accelerated by the “Clean Energy for All Europeans”, and innovation is identified as one of the key tools for succeeding and for making Europe the reference worldwide is innovation. How is the EU facilitating the innovation landscape?

2. The European cleantech innovation landscape: what role for the EU?

In terms of innovation, Europe has undeniably many strengths and assets to claim: a front-running research community, a well-positioned energy industry in corporate venturing, a vibrant ecosystem to accompany innovative start-ups and SMEs, attractive public programmes to support innovation, fora already in place at the EU level (e.g. the SET Plan –generic-, the European Battery Alliance –topical-) which provide a good compass in terms of technological and industrial priorities in Europe, and a strong industrial base to be leveraged. There are also obstacles to the European leadership in Cleantech, to name two: (1) compared to other sectors with similar investment profile (such as the pharmaceutical industry), large corporates of the field do not sufficiently sustain this ecosystem, and VCs are more and more reluctant to fund high-risk, capital-intensive ventures, and progressively disengage from “deep technology” companies; (2) a policy framework sometimes perceived as insufficiently stable or too fragmented, which frightens investors.

This context sensibly raises the question of the specific current and future policies implemented at EU level to support clean energy uptake, and the role the EU has to play to bring the clean energy leadership to life. This role is threefold: to set a clear strategy to move forward, to provide suitable tools to implement the strategy, and to play an essential diplomatic role on the international scene to establish this leadership.

So far, the EU has designed its strategy, through the Energy Union policy, and is on the path to a comprehensive and coherent approach, as exemplified by the Strategic Energy Technology (SET) Plan, which is also well aligned with the Energy Union political ambition, one of the 10 political priorities of the Junker Commission.

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In terms of tools, and on supply side tools, the EU institutions (European In- vestment Bank Group and the European Commission) have deployed a full set of programmes and instruments (see Figure 27.2), notably the Framework Pro- grammes and the new funding schemes like InnovFin EDP aiming to address the “Valley of Death”. For the current period (2014-2020), the overall budget of the EU is €960 billion, including €80 billion dedicated to R&I in Horizon 2020 (H2020), not forgetting that the total EU-level R&I budget (covering all research areas) represents only around 5% of the total European R&I budget (from both public and private sectors). The current Framework Programme, so-called Horizon 2020, remains the main EU instrument to support R&I (by granting funds) in the cleantech sector, with a dedicated budget of 5.9 b€ (2014- 2020) for the “Societal Challenge” called “Secure, Clean and Efficient Energy”. Granting is not the only form of support, and other EU-funded instruments intend to increase synergies and collaborations between the public and the private sectors, and leverage private resources. This is notably the case of contractual Public-Private Partnerships (cPPPs) and of Joint Technology Initiatives (JTIs).

Figure 27.2. Overview of the main supply side EU instruments supporting innovation in energy.

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Beyond the European Commission, the European Investment Bank Group (made of the EIB and of the EIF) has a crucial role to play in the clean energy transition landscape. Beyond the indirect products which are mainly equity- based products or the recent Funds-of-Funds programme named VentureEU to boost VC investment in the EU, the EIB created a loan-based instrument specifically dedicated to Energy Demonstration Projects called InnovFin EDP. This instrument, which is guaranteed by some H2020 budget, provides loans between 7.5 m€ to 75 m€ to energy demonstration projects.

Finally, at strategic and diplomatic level, we acknowledge the commitment taken within the context of Mission Innovation by the EU institutions, which is clearly a very positive initiative. This leadership is provided by showcasing Eu- ropean success stories in international fora, which in turn contributes to create a sense of pride and self-confidence in Europe and can help in attracting brains and investment into Europe. By participating/leading this initiative, the EU commits itself to maintain a high level of funding to support cleantech in Europe in the coming years.

All these strategic, supply side tools and diplomacy activities should continue and be boosted, yet from InnoEnergy, after 8 years in innovation in sustainable energy, we identify two additional demand side structural ones, which are at marginal cost, which would accelerate the energy transition tremendously:

– Demand side measures 1: Innovative Public Procurement: One of the key “customers” in the energy value chain is the public sector (e.g. energy efficiency of public buildings, urban public transportation, water distribution and cleaning, waste management, district heating, …). The total energy services related cost amounts to a staggering 150B€ per year. What if 50% of the public procurement in the coming years would go imperatively to innovative products? It will be a virtuous circle: no need to create more deficit – the cost is already occurring today-, innovators – incumbents and challengers- will have a huge potential “local” market for their new products, upon success these players could become exporters of their products to other economies, the research centers and universities will have more fields to develop, surely the energy cost and the GHG emissions of the new services will be lower, …). And the decision will cost nothing, just to decide it and hedge the risk profile of the procurement offices.

– Demand side measures 2: Homogeneous regulation in the 27 Member States. Today, when InnoEnergy is deciding whether to invest

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or not in an innovation, one of the checks and balances we do is to verify how many different regulatory environments the innovative product or service will face when selling in Europe. And we paint European countries with colours depending on similar regulatory environments or different. The more colours we have in the map, the less appetite we have to invest. And our attitude is the same that any other supporter to innovation would have. Innovators require a non-fragmented market of 500Million Europeans, and not the aggregation of fragmented 27 markets.

3. The 3 winning cards for value creation innovation: Lessons learnt by KIC InnoEnergy since 2010

This last chapter is structured in three part: (1) InnoEnergy innovation model and our track record since 2010, which legitimates the top 3 key lessons learnt, described subsequently; (2) the need to have a multidimensional and systemic approach to innovation, even more relevant for energy; (3) the need of a one stop shop where the innovator – start-up, SME or big company – finds the six services required by an innovator to succeed; (4) the importance of a creating, managing and maintaining a trusted pan-European innovation ecosystem that enables and accelerates innovation;

3.1 A brief description of KIC InnoEnergy and its track record since 2010

The EIT is an independent body of the EU, set up in 2009, to address the EU’s innovation paradox: Europe has a lot of top-notch publicly funded research, while the translation of knowledge into innovation that can be marketed and be commercially successful creating growth and jobs is seriously lagging behind. The objective of the EIT is to bridge that gap, and the uniquenes lies in the method to fulfil that goal: the knowledge triangle integration (research, higher education and business). A KIC (Knowledge Innovation Community) is a long term (minimum 15 years) public private partnership, that fully integrates the knowledge triangle. KIC InnoEnergy was the winner in 2010 of all the proposals for becoming the selected KIC in sustainable energy.

A vehicle like InnoEnergy could follow three of the possible Innovation models which implement different levels of integration, namely coordination, broker- age or integration (see Figure 27.3). Because we are innovators, we also innovate in this regard and have created a fourth, more demanding model of innovation, which is an extension of the integration model, by designing and creating a new

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space which is structural and has its own entity. It is ambitious and requires a strategic approach from the partners, a long-term vision and the ambition to explore outside the “Business as Usual”. As a consequence, it takes longer but is structural.

Figure 27.3. Innovation models depending on their degree of integration.

The targeted financial model of a KIC is that 1€ of public EIT support should leverage at least 3€ of private investment; and that in the medium term a KIC should be financially autonomous, and thus independent from EIT/EU funds. That is the reason why InnoEnergy is a private company (SE: Societas Euro- paea), for profit and not for dividend (all profits are reinvested), with 24 Euro- pean shareholders from the three dimensions of the knowledge triangle. Since 2010, more than 370+ additional partners – mainly SMEs – have joined our activities, and now we have activities in 17 of the 27 EU Member States.

KIC InnoEnergy’s vision is to become the leading engine for innovation and entrepreneurship in the field of sustainable energy by leveraging the potential of the knowledge triangle: higher education, research, and industry.

For KIC InnoEnergy, sustainability in energy is achieved by contributing to three objectives:

1. Decrease the cost of energy (€/kwh).

2. Increase the security of the energy system (operation of assets and autonomy in supply).

3. Reduce greenhouse gas emissions (GHG/kwh).

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with measurable economic impact by (1) creation and/or maintenance of jobs; (2) increase in the competitiveness of the European industry and (3) fostering growth of the European economy.

We operate and integrate four business lines: (1) our education programmes, which create and accompany the future game changers in sustainable energy; (2) our Innovation Projects, which focus on producing incremental – and a few disruptive – technological innovations that will contribute to the above mentioned objectives; (3) our business creation services, where we nurture innovative start-ups and grow small enterprises in sustainable energy; and (4) our innovation in innovation activities, where we create new markets that do not exist (so new Euros), by leveraging our knowledge of the energy sector, the disruptive technologies of our start-ups and the unique partnership.

The legitimacy of InnoEnergy would be established if our achievements, results and impact prove that InnoEnergy model has delivered value, as the first definition we offered to the reader at the beginning of this chapter. The graphical representation of these achievements and the value created for the period 2010- 2017 is given in Figure 27.4 below, where we highlight:

Figure 27.4. InnoEnergy quantitative and qualitative outputs 2011-2017.

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– 763 “game changers” graduates populating today diverse energy institutions (94% work in energy related matters), out of more 12.000 eligible applicants. Five (5) of them hold CxO positions in medium or big business institutions, and 7 of them have been awarded the Forbes top 30 entrepreneurs under 30. Now students pay up to 12 k€/year to attend our Master programs.

– 117 new start-ups, after screening 3000+ early stage business ideas. These start-ups, up to December 2017, have raised more than 92M€ of private and public investment (78% of our start-ups have raised external financial support), and combined they have invoiced 42M€. Their valua- tion is north of 125M€, based on the last investment rounds successfully closed. InnoEnergy VC Community, created in 2013 and now holding 21 members, has a combined investment muscle of 850M€+, and have invested in 7 of our start-ups. In all these 117 start-ups InnoEnergy has equity.

– 107 innovative products and services, all of them with a Return on Investment (ROI) for InnoEnergy based on revenue royalties. These innovative products have facilitated the construction or expansion of 8 manufacturing facilities. The past and future revenues of these 107 innovations are forecasted at 9B€.

– 133 patents have been filed and awarded.

All in all InnoEnergy has invested 380M€ from the European Commission, and mobilized 2,4B€ of the ecosystem (500M€ cash, 1,9B€ in-kind). All in all, 1 € of public money has created 24€ of value.

3.2 The first winning card: A multidimensional approach, not only TRL

InnoEnergy’s approach to innovation is following an Innovation Readiness Lev- el approach (IRL®) rather than a TRL approach, meaning that the six dimensions described below in Figure 27.5 should be addressed concurrently, because they are interlinked. The key lesson learnt is that maybe 5 of the dimension for a given innovation are at the highest level, but if #6 is not then the innovation will fail because the market will not uptake it.

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The following scheme (Figure 27.5) illustrates the multidimensional feature of the challenge, made of 6 intertwined dimensions and their respective contribution to the energy transition by 3 different time horizons (InnoEnergy judgment).

Figure 27.5. InnoEnergy’s view of the Energy Union challenges.

As far as regulation is concerned, the European market is fragmented, with in many occasions as many transpositions of the Directives as member States exist. One key criterion when InnoEnergy decides to invest in a given innovation is to check whether the market uptake will be easy (same regulation all across Eu- rope) or different regulations. The more homogeneity, the easier the Innovation will be uptake by the market.

Regarding societal and individual appropriation, buzz words like demand response, prosumer, distributed generation, autarkic islands, smart … are populating the state of affairs. They all capitalise into the ability of the consumer to become an active, responsible, knowledgeable player in the new value chain. But is the consumer (i.e. the one paying the bill) prepared, or willing to become active? Does the consumer link his individual energy world to the big picture? Our answer is no, because consumers are at the bottom of the pyramid made of awareness, understanding, involvement and steering of the energy transition, but we are asking them to engage directly at the fourth level. On the contrary, we believe that the consumer has to sequentially progress along these 4 steps, which is a (long) journey with no shortcuts recommended, and public and private sectors have complementary roles to play to bring it to life.

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In terms of Supply Chain, as President Junker has clearly expressed, we have the duty to re-industrialise Europe, bringing the contribution of industry from 15% to 20% of the EU GDP. We cannot reproduce the mistakes we did with the PV industry, and we should capitalise along all the supply chain so the wealth is kept in Europe. In InnoEnergy an investment in a given innovation also takes into account whether the supply chain for the innovator exists in Europe, whether the innovator is able to fill the gaps, and to engage upstream and downstream in its supply chain.

As far as Value Chain is concerned the future will be totally different: the traditional world is gone for ever, and the new legislative framework (“Clean En- ergy for All Europeans”) is fertile for new business models, such as aggregators or local energy communities; incumbents of the past face future scenarios that are gloomy at least; the new entrants are risk averse because it is still a CAPEX intensive sector in many steps of the value chain; digitization and digitalization enable new business models, and over the last two years more than 50% of the funnel of innovation opportunities coming to InnoEnergy are based on OPEX driven business cases where the innovation is not technological but social or business model innovation.

As far as Human Capital is concerned, we need to understand that the basics of the business have changed, the traditional engineers are not anymore “fit for purpose”, so new profiles with innovation, entrepreneurial, anthropologi- cal and humanistic skills are required to drive and implement the change. This is InnoEnergy cornerstone: to feed the market with the game changers being equipped with the skills and competences (entrepreneurship, innovation, business, multidisciplinary approach) that are taught in our education programs.

Finally Technology that was in the past the key dimension, but that is not anymore. Still fundamental, but in total coordination and systemic approach with the other 5 dimensions.

Over the last eight years of implementation, this multidimensional approach has de-risked the innovations supported and shorten the time to market, which are the two of the three fundamental objectives of any innovator (the third one being scalability for growth). This IRL® method is today piloted by the European Commission to eventually adopt it for all the innovation-based instruments to be deployed in the upcoming Framework Programme, Horizon Europe.

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3.3 The second winning card: A “one stop shop” for the innovator

As described in the previous chapters, innovation is successful when it is open, systemic and approached multidimensionally. Nobody, not even the big companies can find either internally or manage externally all their needs. This has been one of the key focus of InnoEnergy: to identify all the services required by an innovator along their lifecycle, and recurrently identify who are the right and trusted suppliers for those services at European level, so the innovator can access them through InnoEnergy in a “one stop shop” trusted model, delivering three key advantages: (1) reducing the “time to service”, thus time to market; (2) increasing the reliability or trustworthiness of the service, thus reducing risk; (3) taking advantage of economies of scale when it is possible, thus reducing cost.

The 6 main services required by an innovator are described executively in Figure 27.6, namely:

– Services for technology enhancement (e.g. IP Freedom To Operate, labs services, R&D, …)

– Services for access to finance (e.g. grants, private equity, VC, commercial loans, ..)

– Services for marketing (competition, pricing, business modelling, trends, …)

– Services for industrialization (e.g. big difference to design to functional- ity vs design to cost, supply chain management, manufacturing outsourc- ing, access to suppliers, …)

– Services for human capital (e.g. team assessment, man powering, skilling, ..)

– Services for growth (e.g. access to customers, understanding other markets, other regulations, channels like VAR or OEMs, off-takers ..)

And having a “one stop shop” is of unique value in such a competitive world, even for big companies.

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Figure 27.6. The six key services required a successful innovation, in one stop shop, innovator centric.

As an example, Figure 27.7 shows the journey in four of the six service dimensions of an innovative company supported by EIT InnoEnergy in the field of energy storage (ultra capacitors), Skeleton Technologies. It shows 17 transactions, innovator centric.

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Figure 27.7. Example of the “services” obtained by a European start-up (Skeleton Technologies).

3.4 The third winning card: A trusted innovation ecosystem

In order to be able to deliver the services in the one stop shop described in 3.3, in the multidimensional approach described in point 3.2, it is necessary to develop, manage and maintain a reliable trusted innovation ecosystem of players. After 8 years of activities, InnoEnergy has been able to build and subsequently manage a trusted innovation ecosystem of partners as depicted in Figure 27.8.

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Figure 27.8. InnoEnergy trusted innovation ecosystem of players.

With Figure 27.9 giving a snapshot of some of the partners of InnoEnergy from different typologies of institutions, but all needed for serving the innovators properly, in the successive steps of R&I, from researchers in labs to entrepreneurs developing the markets, and the corresponding stakeholders shaping this innovation journey.

Figure 27.9. Illustration of some stakeholders composing the InnoEnergy trusted innovation ecosystem.

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4. Conclusion

InnoEnergy was an early mover in different ways of doing different innovation. Our lessons learnt are today formalised in practices (neither good nor bad, just practices) that are being used by other ecosystems, which can benefit to all.

Our track record over the years proves that (1) open innovation is unique tool to address systemic challenges such as the ones proposed by the energy transition; that (2) a multidimensional approach where technology is just one of the 6 key dimensions of management is the winning card; and that (3) a one stop shop managed trusted ecosystem de-risks, shortens the time to market and serves scalability of innovation better.

Beyond a moral duty imposed by climate change, the Energy Transition is a tremendous industrial opportunity for Europe bringing growth, jobs and competitiveness, as well as a genuine project for the whole society offering a second youth to the old continent and reviving a sense of pride and action in the Euro- pean peoples, to ultimately demonstrate that the European Union is undeniably a positive sum game. Europe has all the required ingredients, we just need to adopt a renewed industrial vision with a multi-scale and multi-stakeholder network-based and open innovation strategy at the core. The on-going success and impact of the European Battery Alliance is just one example of this approach.

To make a positive impact in society, there is no better time than the period we are living, no better place than Europe and no better field than innovation in energy. InnoEnergy will continue contributing to it.

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CHAPTER 28 MANAGING THE NEW REALITIES OF DECENTRALISED ENERGY RESOURCES

Frauke Thies

When Europe started decarbonising its energy sector in the 1990s and early 2000s, political actors were focussed on driving technology for emissions reductions. Shifting to less carbon-intensive fuels, developing renewable energy solutions and increasing energy efficiency were at the centre of attention. Now that renewable energy has become mainstream, digitalisation is enabling the flexible management of millions of industrial sites, homes, appliances and devices, storage technology is maturing, and electric vehicles are about to break through on the European market, it has become clearer than ever that the energy transition is about more than a change in technology. The rise of largely decentralised resources and smart management opportunities have led to a rapid evolution in the prevalent roles and actors, business models and forms of interaction in the energy system.

Consumers are evolving into generators and flexibility providers, and individuals, cooperatives, large energy users, and pension funds may now invest in owning their own energy asset. Several traditional energy companies, who previously managed portfolios of largely conventional power generation, are selling off their power plants and investing in decentralised solutions management and customer services. New market entrants, such as independent aggregators, are firmly establishing themselves as important players, specialising in the identification and pooling of on-site generation and flexibility resources, while helping their customers at industrial, commercial, and residential levels to monetise their flexibility potentials. IT companies, telecommunications and web-service providers are also entering into the energy domain, both by offering direct customer solutions and through platform services for energy businesses. Last but

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not least, the electrification of heating and transport is also leading manufacturers of automotive and heating equipment to explore integrated energy solutions and new customer services.

Most of the new actors and business models are characterised by the smart operation, management, and bundling of variable and dispatchable generation, demand response, and storage. In doing so, these upcoming market participants react to different signals and pursue different revenue streams.

1. The imperative of smart energy management

From a systems perspective, these new technologies, services and business models are particularly interesting, because they respond to the opportunities and challenges of decentralisation and variability of power supplies, brought about by the energy transition.

Various studies have demonstrated that system volatility is going to increase in Europe, with both times of limited electricity generation when renewable energy output is low, and times at which power generation from low-marginal cost resources like wind and solar exceeds regular demand. At the same time, within less than 25 years, hourly ramp rates for flexible backup resources –i.e. the rates at which generators need to change their output to keep the system in balance - are expected to double in the UK or even triple in a country like Germany, compared to today’s situation.1

Without sufficient incentives to react to the electricity system’s flexibility needs, the ongoing electrification of transport and heating could exacerbate the challenges even further. Electric vehicles, for example, are expected to reach 14% of all new car sales in Europe by 2025, growing to more than half of new sales in 2040.2 If electric vehicles were primarily charged at home at the end of the working day during the current evening consumption peak, and assuming that an electric vehicle increases a home’s electricity use by an approximate 80%, it is clear that this would add an enormous amount of strain to the electricity system at a local and wholesale level.3 On the other hand, the charging of vehicles has

1 See e.g. Bloomberg New Energy Finance, Beyond the Tipping Point: Flexibility Needs in Europe, 2017, www.eaton.com/tippingpoints 2 Bloomberg New Energy Finance, Long term electric vehicle outlook 2018, 2017, https://about.bnef.com/ electric-vehicle-outlook/ 3 This is based on the assumption that an average household without electric vehicle consumes 10kWh per day and adds the charging of an electric vehicle to drive a daily distance of 40km using 8kWh.

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the potential to be a significant source of flexibility and therefore an important support to the electricity system, provided the charging is managed smartly and in accordance to system needs.4

As with electric vehicles, the same logic applies to the management of other forms of distributed electricity generation and consumption, including energy- intensive processes and appliances, storage, and generation assets themselves. Developing a significant amount of these flexibility resources, and activating them wisely, will be essential in keeping the cost of the decarbonisation of the energy system as low as possible.5

2. Possible revenue streams for decentralised resources and services

In principle, three main approaches can be distinguished for the deployment and monetisation of decentralised resources and new energy services, which are characterised here as (I) on-site optimisation, (II) explicit market participation, and (III) implicit market participation. These approaches are not mutually exclusive; they can often be combined.

2.1 On-site optimisation

Many business models are structured around the onsite optimisation of energy generation and consumption, either behind a single connection to the grid or within a community. Home-owners, building complexes, local neighbourhoods or industrial sites install automation equipment or purchase services which help them match the energy consumption of their air conditioning, heating systems, electric vehicles charging, or indeed any storage facilities, appliances, devices or processes to the electricity they can produce onsite. Microgrids enable entire communities or enterprises to have a semi-autonomous or even fully independent energy system.

4 See for example: vivideconomics: Accelerating the EV Transition, 2018, https://www.wwf.org.uk/sites/ default/files/2018-06/Final%20WWF%20Accelerating%20the%20EV%20transition%20-%20part%202. pdf 5 For example, a study for the UK Committee on Climate Change has estimated the total gross benefits of

such flexibility deployment in a low carbon scenario of 100g CO2 per kilowatt-hour at GBP 3-3.8 billion

per year, while the system value of flexiblity for a scenario of 50g CO2 per kilowatt-hour would reach GBP 7.1-8.1 billion annually. Cf: Imperial College London and NERA Economic Consulting: Value of Flex- ibility in a Decarbonised Grid and System Externalities of Low-Carbon Generation Technologies, October 2015, https://www.theccc.org.uk/wp-content/uploads/2015/10/CCC_Externalities_report_Imperial_ Final_21Oct20151.pdf

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There are different drivers for this onsite optimisation approach, including efficiency gains, reducing electricity bills and fuel costs, as well the desire for security of supply, independence, or control.

The development of on-site optimisation approaches can be observed across Eu- rope, particularly in countries where generating your own renewable energy has become cheaper than purchasing electricity from the grid.

2.2 Explicit market participation

Electricity consumers and asset owners can also monetise their resources by “explicitly” participating in the market. Typically supported by aggregators, they are offering their energy and flexibility on various market places – be it for balancing and ancillary services to system operators, on power exchanges or directly to other market participants for portfolio optimisation. This allows asset owners and service providers to earn direct revenues in these markets while supporting the electricity system in the energy transition.

Such services are offered to industrial, commercial and residential consumers and asset owners in different European countries, depending on the openness of markets for decentralised products and innovative service providers.

2.3 Implicit market participation

Decentralised energy resources can also be employed for “implicit market participation”. If electricity consumers and owners of flexibility or generation assets receive dynamic price signals, either from the wholesale market or by receiving a dynamic electricity retail tariff, they have an incentive to shift consumption and the use of their on-site resources to minimise energy bills. Automation technology and smart devices, as well as services provided by dedicated providers or innovative electricity suppliers, can facilitate such adjustments to price signals without inconveniencing the user. In addition to the direct economic benefits for the participating consumer or asset owner, the implicit market participation supports the balancing of the electricity system and networks.

In Europe, this form of interaction with the power system is currently limited to wholesale markets and few cases where retail customers can choose a dynamic electricity.

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3. Regulatory conditions to enable decentralised and innovative solutions

While resource optimisation and market participation offer significant potential both for the market participants and the efficiency and stability of the electricity system, their effectiveness depends on being able to access the market and respond to relevant price signals. In an electricity system that has evolved over decades around a centralised supply, unidirectional power flows and largely passive consumers, significant changes of the regulatory framework are necessary to adjust to the new reality and accommodate new solutions.

European member states have started to approach this challenge from different angles. Many countries have made progress on the use of self-generated resources on site, including through tailored incentive schemes and a roll-out of storage programmes.

To allow explicit market participation of decentralised resources, governments, regulators, system operators and power exchanges have started to revisit product requirements and qualification procedures in most European countries, and the definition of European Network Codes has also led to relevant progress.6 Coun- tries like France, Switzerland, the United Kingdom, Belgium and Germany have defined regulatory frameworks to enable independent aggregators of demand response to enter the market as new service providers.7

In the area of implicit market participation for retail customers, different schemes for dynamic network tariffs as well as market-related retail-prices have been implemented in first trials and market-roll-outs. However, the wider market-uptake so far has been limited to Finland, Estonia, Denmark and Sweden.8

Despite these unfurling efforts and successes, profound changes are still required across Europe to achieve fully effective signals for the interaction of decentralised resources. The European Clean Energy Package, adopted in Decem- ber 2018, represents an important step in this direction. For the first time, the new legislation has put the active role of the consumer in the focus of European energy policy.

6 See for example: The smartEn Map: Balancing Markets Edition 2018, https://www.smarten.eu/thesmarten- map/balancing-markets-edition-2018/, SEDC: Explicit Demand Response In Europe – Mapping the Mar- kets 2017, http://www.smarten.eu/wp-content/uploads/2017/04/SEDC-Explicit-Demand-Response-in- Europe-Mapping-the-Markets-2017.pdf 7 See for example: ibid. 8 See e.g. European Commission: Impact Assessment, SWD(2016) 410 final

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4. The European Clean Energy Package: opening markets for new technologies and business models

A central part of the Clean Energy Package concerns market access for new technologies, services and business models. In particular, the following elements will play an important role in allowing decentralised generation, storage and demand-side flexibility to participate in the energy markets in the first place.

4.1 The right for self-generation and community ownership of electricity

The revision of the Renewable Energy Directive has created a favourable framework for the self-generation of renewable energy by largely eliminating charges or fees for self-consumed electricity from small installations, and by entitling the so-called “pro-sumers” to receive a remuneration for the excess renewable electricity they feed into the grid.

The Electricity Directive has set additional provisions to empower final- cus tomers to engage with the system, thus becoming “active customers” who are entitled to participate in flexibility, directly or through aggregation. The EU legislation has also introduced the legal concept of “energy communities” to enable a voluntary and open participation of citizens in the installation of (renewable) energy sources, storage facilities, charging stations for electric vehicles, their community management and community sharing of electricity produced by units located on-site.

4.2 Market access for decentralised resources and service providers

Crucially for explicit market participation, the European legislative package introduces the principle that all markets and mechanisms should be open to all technologies, not only generation but also storage and demand response. Prod- uct definitions and minimum bid sizes in wholesale and balancing markets are to be adapted to facilitate access for decentralised and aggregated resources.

The legislation also obliges all member states to introduce a regulatory framework to facilitate market access for independent demand response aggregators, so that they can offer their services to customers without depending on bilateral negotiations with suppliers, who might be their competitors.

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4.3 Choice of dynamic retail prices

To enable implicit market participation, the market design legislation stipulates that consumers in all European countries should have the opportunity to access a dynamic electricity retail tariff that reflects the price developments on the wholesale market, provided the consumer has access to a smart meter. This access, however, depends on different national frameworks. In countries where meters do not have the necessary functionalities, consumers may have to wait for up to 12 years until an upgrade is implemented, or they have the right to obtain a suitable a meter at own cost.

4.4 The procurement of flexibility at distribution level

As discussed above, the uptake of decentralised resources makes it necessary to actively manage distribution networks and requires a fundamental change of approach for Distribution System Operators (DSOs). The European Electricity Directive requires an adjustment of incentive structures, to encourage the market-based procurement of flexibility resources for distribution system management. The successful realisation of such an approach would naturally increase the opportunities for explicit market participation of decentralised resources. While the legislation sticks to overarching principles on this aspect, it will be critical that the implementation respects a streamlined approach for markets at local and wholesale level fragmentation and reverse signals.

DSOs and regulators are encouraged also to enable reactions to network constraints by introducing cost-reflective and potentially time-differentiated distribution tariffs which take into account the use of the network by system users, including active customers. If signals correctly reflect the state of the network, this could both improve the opportunities for implicit market participation of decentralised resources and mitigate concerns about incentives for network- adverse behaviour. However, the definition of appropriate tariffs is not without challenges and the legislation leaves it open how this could be implemented effectively.

4.5 Relevant data access

The availability, security and access to energy data are crucial for a consumer- centric and smart energy system. The European Electricity Directive establishes that all service providers should have equal access to data relevant for their services, provided consumer consent has been given. While this is only one element in the important area of rules and initiatives for data management and security,

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it is a crucial aspect to enable new services and business models for consumers and operators of decentralised energy resources.

5. The challenge of effective price signals

Even if markets open further, new technologies and business models will reach their full effectiveness for the European economy and energy users only if prices reflect the real value of energy and system services at any moment. Today, prices at wholesale and retail level are often blunted, hampering or even distorting investment incentives for flexible and decentralised solutions for the energy transition. European climate and energy legislation includes elements to mitigate some but not all of the effects.

5.1 Investment signals at wholesale level

At a wholesale level, the uptake of renewable energy with low marginal costs has predictably contributed to lower electricity prices at times when variable wind and solar resources are widely available. Yet even at times when renewable electricity generation is low, price spikes have so far been rare, producing only limited investment signals for new capacities and flexibility in the system.

Part of this can be explained by improvements in European market integration, leading to enhanced competition and the balancing of energy supplies across borders. This effect is politically desired: the cost-effectiveness of the energy transition, including the integration of renewable energy sources, depends on an interconnected European network.9 European market integration allows for balancing regional variability, which will complement and moderate, but not replace the growing need for decentralised flexibilities and smart system management.

The price-damping effect is enhanced, however, by a prolonged overcapacity of electricity generation in many parts of the European energy system.10 The uptake of new resources has progressed -encouraged by support structures- but the retirement of old power stations has not happened at the same pace. Regulatory efforts to strengthen the carbon price signal from the European Emissions Trad- ing Scheme aim to accelerate such retirements but have not led to significant phase-outs so far.11 At the same time, the progress of the electrification of the

9 See e.g. European Commission: Impact Assessment, SWD(2016) 410 final. 10 Ibid. 11 Ibid.

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transport and heating sectors is not yet strong enough to act as an important driver for new investments in energy and flexibility solutions.

Beyond the question of overcapacity, a scattered approach towards capacity mechanisms is leading to uncertainty which can postpone investments.12 Where a mechanism is implemented, its specific design is crucial in determining which types of capacity or flexibility are encouraged, and which consequences it has for wholesale market developments.

The Clean Energy Package aims at a more streamlined approach towards system adequacy and the use of capacity mechanisms, giving priority to the development of price signals on energy wholesale markets. However, room for interpretation remains. At European level, the implementation of these principles will now depend on the revision of Europe’s State Aid Guidelines.

5.2 Retail price signals

For retail consumers, the previously described possibility to request a dynamic electricity tariff, the gradual removal of regulated retail prices also established in the Clean Energy Package, as well as the option to explicitly participate in the markets, can deliver certain price signals. However, the incentive for participation is typically limited by the blunting effect of rigidly defined taxes and charges, which in many European countries make up around two thirds of a household’s electricity retail price.13

If taxes and network charges are exclusively based on the number of kilowatt- hours consumed or on the size of a network connection, and if these cost elements outweigh other signals for explicit or implicit market participation, energy users are encouraged to minimise the electricity purchases from the system or to reduce their peak consumption respectively. As the result of an undue emphasis on on-site optimisation, resources may not be employed in the most efficient way for both the owner of on-site resources, as well as the energy system and energy consumers at large.14

12 While some European countries have put their focus on enabling price variability on energy wholesale mar-markets in order to evoke investment signals and a market-based development of hedging products, others have introduced different capacity mechanisms to drive investments. 13 ACER/CEER: Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Mar-Mar- kets in 2017 – Electricity and Gas Retail Markets Volume, 2018, https://www.acer.europa.eu/Official_doc- uments/Acts_of_the_Agency/Publication/MMR%202017%20-%20RETAIL.pdf 14 It should be noted that in certain circumstances owners of decentralised resources can also benefit from rigid taxes and charges if on-site optimisation enables them to avoid contributing to these dues. Changes to existing regimes therefore need to be assessed regarding their effects on investments and should be accompanied

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Additionally, badly distributed taxes hamper the energy transition if they coun- teract the objectives of decarbonisation. For example, if taxes on fuel oil and gas are lower than on electricity, consumers may choose to invest in fuel-based heating systems even where a heat pump could be a more efficient solution for the energy system.

While the Clean Energy Package includes initial elements to encourage national adjustments to network tariff design, taxation remains within the sovereignty of member states. Cautious debates on the topics have started in some countries, but a clear political pathway cannot currently be identified.15

5.3 Reflection of network realities

A heavily debated question in European energy policy is the reflection of system and network constraints in markets and pricing structures. The previous European Energy legislative packages were based on the notion of the electricity network as a “copper plate” in which constraints within a market zone were to be resolved by expanding the grid system, and respective market zones were to be increasingly connected and integrated. However, network expansion has been more sluggish than expected in various regions and congestion problems have led some countries to reduce the size of their price zones, while others have developed large re-dispatching mechanisms. With the uptake of decentralised resources, the role of network constraints at the medium- and low-voltage level is also coming into focus.

While maintaining the overarching objective of market integration, the Clean Energy Package therefore departs from the notion of the pure “copper plate” and stipulates the reflection of network constraints by promoting a market- based approach to re-dispatching. The abovementioned change of incentive structures for Distribution System Operators, the procurement of flexibility and the possibility of dynamic network tariffs also reflect this approach at the lower voltage levels.

However, the legislative framework remains largely at the level of principles and leaves a wide scope for implementation. Will large price zones in some parts of Europe co-exist with more regional or even locational pricing in others? How will local network services be procured while avoiding market fragmentation or

by transitionary measures where appropriate. 15 See for example Frontier/BET: Kosten und Nutzen einer Dynamisierung von Strompreiskomponenten als Mittel zur Flexibilisierung der Nachfrage, 2016, https://www.bmwi.de/Redaktion/DE/Publikationen/Stu- dien/kosten-nutzen-dynamisierung-strompreiskomponenten.pdf?__blob=publicationFile&v=4

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gaming effects? Will the focus on network services be on explicit markets or will dynamic network price signals play a more important role?

6. The way forward? Recommendations for the new European legislative cycle

Building on the progress made, the incoming European Commission and Parlia- ment will be expected to support and ensure the implementation of the newly adopted measures in the Clean Energy Package. Several principles established in the package will require regulatory follow-up as identified throughout this chapter. These include, among others, the further definition of conditions for capacity mechanisms in the revision of the European State Aid Guidelines, the development of necessary framework conditions for data access and security, as well as the effective reflection of network constraints in electricity markets and tariffs.

While some of the identified challenges can and must be tackled at the Euro- pean level, others are likely to be subject to national, regional or even local specificities and decisions. Where this is the case, European regulation, research and innovation policies should enable different sandbox approaches to be tested and scaled up. In such a context of different local initiatives across Europe, the role of an overarching system vision and clear framework conditions become particularly important. The European energy transition will succeed in an efficient, cost-effective and inclusive manner only, if local measures can develop and innovation can thrive in consistency with the overarching objectives on sustainability and market integration.

To continue on the pathway set out by the Clean Energy Package, the deployment of innovative decentralised and decarbonised solutions and new forms of consumer interaction must be reflected in the long-term vision of Europe, technical scenarios and high-level policy commitments. A clear indication of direction would not only set the necessary framework for local, national and European policy measures to come, but would also provide guidance to investors and the energy sector at large.

The outgoing European Commission has launched the process in the run-up to the Katowice Climate Conference – it will be the task of the new institutions taking office in 2019 to agree on a credible and consistent long-term strategy.

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Such a strategy must be complemented with objectives and measures to determine the framework in which the energy market evolves. Will Europe agree on measures for a strong carbon price and additional phase-out strategies to drive the retirement of the most outdated and polluting power stations, thus making room for clean and innovative alternatives?

Will new policy objectives and measures for the transport and heating sectors promote the transition of these sector? Is Europe ready to review energy taxation rules to overcome existing barriers to smart electrification?

Only with ambitious decisions on these measures will the new rules on market design show their full effect for a cost-effective and successful energy transition that embraces the full potential of decentralised solutions, new business models and consumer empowerment.

454 Part 5 – Chapter 29 – The Power of Collaboration

CHAPTER 29 THE POWER OF COLLABORATION: THE CASE OF THE RENEWABLE GRID INITIATIVE

Antonella Battaglini, Andrzej Ceglarz & Theresa Schneider

1. Introduction: “If you want to go fast, go alone. If you want to go far, go together.”

Almost ten years ago, in 2009, three developments opened a window of opportunity for building new bonds. The European Climate and Energy Package1 with its 20-20-20 targets had just been adopted. National expansion plans and support schemes to reach the renewable energy (RES) targets started to change the energy landscape in several Member States. In parallel, the EU Third Energy Package2 entered into force. It contained the requirement for unbundling which resulted in new legal entities owning and operating high voltage electricity grids – transmission system operators (TSOs) - separately from power generation Finally, ageing infrastructure and the need for integrating RES required the modernisation and expansion of the grid. However, the few projects that had started were slowed down by severe opposition from people living nearby the planned powerline.

Under these specific circumstances, two important actor groups – environmental and social NGOs and TSOs – came together under the roof of the newly set up Renewables Grid Initiative (RGI) with the aim of finding common ground in supporting the implementation of climate and energy policies. Thanks to the newly adopted RES targets NGOs started to move away from the question if the energy transition was an option at all and focused on how to imple-

1 European Council Presidency Conclusions 17271/1/08 [2009] 2 Directive 2009/72/EC of the European Parliament and of the Council concerning common rules for the internal market in electricity [2009]

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ment it. Some NGOs realised that sustained renewable expansion could only be achieved with sufficient grid infrastructure in place. However, many NGOs were opposing new powerlines locally because of their negative impacts on nature and non-transparent planning procedures. Many of the newly established TSOs “inherited” projects of their predecessors – mostly big utilities – and were surprised by the severity of local protests.

Very often, it takes a mediator to build new alliances. In the case of RGI, it was Antonella Battaglini (the first author of this article) who showed these two groups that they would have more benefits if they worked together instead of against each other. Four pioneering organisations listened and helped to establish RGI: the NGOs Germanwatch and WWF International and the TSOs 50Hertz and TenneT.

They committed to work together in order to address questions, such as: “How can we improve the acceptance of new powerlines for the energy transition?”; “How can we minimise environmental impacts of new powerlines”, or “Can we find a joint narrative on why new powerlines are needed?”

2. How to collaborate: a learning process

The collaboration of such different actors – NGOs representing civil society and TSOs representing industry – posed several challenges. RGI Members had to find a common language. While they were often sharing the same overarching goal, narratives and sources differed substantially. It therefore took a whole year to come up with a text that would serve as a common ground and reference point for further collaboration. In 2011, more than 30 organisations agreed upon the European Grid Declaration on Electricity Network Development and Nature Conservation.3 Another year was needed to develop a second set of principles defining issues of transparency and participation.4

Mutual understanding and trust are usually the result of common experiences. In the process of finding a common language to describe the ongoing collaboration and its drivers, RGI Members learned that personal relationships could make a real difference. People working within RGI met regularly at public workshops or internal meetings and consistently gathered experience on how to collaborate on small projects, position papers or events.

3 Renewables Grid Initiative, European Grid Declaration on Electricity Network Development and Nature Conservation [2011]. 4 Renewables Grid Initiative, European Grid Declaration on Transparency and Public Participation [2012].

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Core activities of RGI in subsequent years revolved around the question how the principles set out in the European Grid Declaration could be best implemented in grid development projects. To achieve that, existing best practices throughout Europe were identified and analysed to find out drivers and obstacles of projects on the ground. Afterwards, some RGI Members decided to jointly develop, implement and evaluate their activities in four pilot projects within the EU-supported project BESTGRID.5 This project was a milestone for participating organisations: TSOs opened up for input on their communication and participation strategies and, together with the NGOs, they organised roundtables and information events; NGOs could understand how TSOs work and which constraints they have. Because the organisations involved appreciated benefits of this collaboration, RGI has developed this idea further and started three similar projects in Germany and Italy under the banner “Implementing RGI Declarations”.6

3. New beginnings: changing perceptions

The discussion how to address local opposition to grid projects is often led -un der the buzzword “social or public acceptance”. There are numerous research activities and debates aiming at finding out how acceptance can be improved.7 RGI, too, has posed this question in its publications and events. Over time and with more knowledge gained, it became clear that the question “How to improve public acceptance” is biased and has hidden implications: it frames the public as a passive mass that has to accept something, whereas decision-makers (including project developers and authorities) are active players. Moreover, it assumes that the public needs to increase its understanding and accept that project developers are the ones who have all the knowledge.8 In such a framing, it is very difficult to speak with each other as equals. Moreover, citizens usually do not

5 http://www.bestgrid.eu/ accessed 29 June 2018. 6 https://renewables-grid.eu/activities/ird.html accessed 29 June 2018. 7 Cain, N.L., Nelson, H.T., “What drives opposition to high-voltage transmission lines?”, Land Use Policy 33 [2013], 204-213; Ciupuliga, A.R., Cuppen, E., “The role of dialogue in fostering acceptance of transmission lines: the case of a France–Spain interconnection project”, Energy Policy 60 [2013], 224-233; Cohen, J.J., Reichl, J., Schmidthaler, M., “Re-focussing research efforts on the public acceptance of energy infrastructure: A critical review”, Energy 76 [2014], 4-9; Cotton, M., Devine-Wright, P., “Making electricity networks ‘visible’: Industry actor representations of ‘publics’ and public engagement in infrastructure planning”, Pub- lic Understanding of Science 21 [2012], 17-35; Devine-Wright, P., “Explaining ‘NIMBY’ objections to a power line: The role of personal, place attachment and project-related factors”, Environment and behavior 45 [2013], 761-781; Soini, K., Pouta, E., Salmiovirta, M., Uusitalo, M., Kivinen, T., “Local residents’ perceptions of energy landscape: the case of transmission lines”, Land Use Policy 28 [2011], 294-305. 8 Batel, S., Devine-Wright, P., Tangeland, T., “Social acceptance of low carbon energy and associated infra-infrastructures: A critical discussion, Energy Policy 58 [2013], 1-5.

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believe that their input is valued, recognised and implemented nor that they can influence the outcome of the consultation and decision-making process. This lack of real active participation can lead to doubts about the entire process and reduce its overall legitimacy. Similarly, measures, such as financial compensation for adjacent communities, can be misunderstood as bribe, increase the conflicting environment and are therefore not always appreciated.9

Lessons learned from RGI’s best practice work, experiences gathered in the EU- supported projects BESTGRID and INSPIRE-Grid10 as well as insights from other sectors and literature resulted in the willingness of RGI Members to experiment with new approaches that could contribute to overcome this framing. Instead of trying to improve public acceptance, RGI Members started to work together to improve the quality of public participation and engagement procedures. Efforts have been put in place for all parties to meet as citizens with different, but equally valued expertise. In this context, grid operators have expertise in details of grid operation and markets, policymakers know the legislative framework, and the public and local stakeholders have knowledge about their local environment. If everyone shows willingness to learn from each other and meets with respect, it becomes more likely to find a compromise satisfying all actors involved. In such a setting, stakeholders value the process, feel that they have been treated fairly and that different interests have been balanced out.

Since it is not easy to change attitudes and mind-sets, this requires a long-term commitment and much more still needs to happen. However, initial good results serve as stimulus for a larger commitment and steady progress.

Based on the experiences gained so far, the following principles have proven to be indispensable for good public participation:

– Project developers should take into account that decisions and processes regarding the development of new powerlines are embedded in a broader reality of socio-technical systems, in which the energy transition takes place.11 For example, project developers may focus their discussion only

9 Cowell, R., Bristow, G., Munday, M., “Acceptance, acceptability and environmental justice: the role of com-community benefits in wind energy development”, Journal of Environmental Planning and Management 54 [2011], 539-557. 10 http://www.inspire-grid.eu/ accessed 29 June 2018. 11 Cherp, A., Vinichenko, V., Jewell, J., Brutschin, E., Sovacool, B., “Integrating techno-economic, socio- technical and political perspectives on national energy transitions: A meta-theoretical framework”, Energy Research & Social Science 37 [2018], 175-190; Chilvers, J., Pallett, H., Hargreaves, T., “Ecologies of participation in socio-technical change: The case of energy system transitions”, Energy Research & Social Science 42 [2018], 199-210; Miller, C.A., Richter, J., O’Leary, J., “Socio-energy systems design: a policy framework

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on one specific project, but participating citizens generally make the link to (national/European) energy policy. Their attitude towards energy policy or the overall performance of the government can heavily influence their level of support for the specific project; changes in the general socio- political landscape have an impact on discussions on the ground.

– One of the key factors that determines whether citizens perceive a process as fair is how their input is being treated: engaged stakeholders need to see how their feedback has shaped the decision. This implies that the project developer follows up with consultees throughout different process stages and avoids periods of non-communication. Even if not much is happening for a longer time (e.g. environmental studies are undertaken), it is important to keep stakeholders regularly informed.

– Flexibility throughout the process is crucial – project developers should be ready to adjust their communication and participation strategy any- time. However, this needs to go hand in hand with adhering to agreements already made with stakeholders. Changes in the process need to be communicated and explained properly and stakeholders, ideally, are already involved in decisions about these changes.

– Probably the most decisive factor in public participation procedures are personal relationships.12 Project managers or spokespeople, the “faces of the TSO”, determine how citizens perceive the whole company and their role within the process. If citizens trust this person, it is more likely that they will trust the whole decision-making process.13 Therefore, it is important for project developers to identify few key spokespeople that represent the project throughout all planning phases and who have personal skills and abilities to build up trustworthy and strong personal bonds. These spokespeople need to be senior and able to bring relevant issues to the attention of the management board, so that strategies can be adjusted when needed. This approach does not call for sophisticated advertising and PR strategies, but to treat citizens in a serious and coherent way.

for energy transitions”, Energy Research & Social Science 6 [2015], 29-40. 12 Ceglarz, A., Beneking, A., Ellenbeck, S., Battaglini, A., “Understanding the role of trust in power line devel-development projects: Evidence from two case studies in Norway”, Energy Policy 110 [2017], 570-580. 13 Ibid, p. 572.

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4. The art of staying relevant

More than nine years of successful collaboration, shared experiences and well- established relationships between TSOs and NGOs can raise the question whether a platform like RGI is still needed. There are at least three reasons why the answer is positive: firstly, the field in which RGI operates in is undergoing a massive transformation; new technologies, market products and approaches change the energy landscape, which becomes increasingly complex. It is important for RGI Members to exchange their experiences in a trusted environment, where they can share what has worked and what has not. Having the “other side” present during these discussions gives them the added value they don’t have outside of RGI. Secondly, new Members joining RGI give new impulses to the rest of the group because either they represent new geographies, like the first Bal- kan TSO HOPS from Croatia, or they represent new areas of expertise, like the NGO Transport & Environment. Thirdly, the organisation is still unique in its structure: it acknowledges that attention should be given not only to drivers or processes, but also to roles of actors involved in order to fully understand public acceptability and of and participation in energy infrastructure planning.14 Thus, bringing these two key actor groups, TSOs and NGOs, together is nowadays more relevant than ever.

14 Dermont, C., Ingold, K., Kammermann, L., Stadelmann-Steffen, I., “Bringing the policy making perspective in: A political science approach to social acceptance”, Energy policy 108 [2017], 359-368.

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5. References

Primary sources

– Directive 2009/72/EC of the European Parliament and of the Council concerning common rules for the internal market in electricity [2009] – European Council Presidency Conclusions 17271/1/08 [2009] – Renewables Grid Initiative, European Grid Declaration on Electricity Network Development and Nature Conservation [2011] – Renewables Grid Initiative, European Grid Declaration on Transparency and Public Participation [2012]

Websites

– INSPIRE-Grid, http://www.inspire-grid.eu/ accessed 29 June 2018 – BESTGRID, http://www.bestgrid.eu/ accessed 29 June 2018 – Renewables Grid Initiative, https://renewables-grid.eu/activities/ird. html accessed 29 June 2018

Secondary sources

– Batel, S., Devine-Wright, P., Tangeland, T., “Social acceptance of low carbon energy and associated infrastructures: A critical discussion, Energy Policy 58 [2013], 1-5 – Cain, N.L., Nelson, H.T., “What drives opposition to high-voltage transmission lines?”, Land Use Policy 33 [2013], 204-213 – Ceglarz, A., Beneking, A., Ellenbeck, S., Battaglini, A., “Understanding the role of trust in power line development projects: Evidence from two case studies in Norway”, Energy Policy 110 [2017], 570-580 – Cherp, A., Vinichenko, V., Jewell, J., Brutschin, E., Sovacool, B., “Inte- grating techno-economic, socio-technical and political perspectives on national energy transitions: A meta-theoretical framework”, Energy Re- search & Social Science 37 [2018], 175-190 – Chilvers, J., Pallett, H., Hargreaves, T., “Ecologies of participation in socio-technical change: The case of energy system transitions”, Energy Research & Social Science 42 [2018], 199-210 – Ciupuliga, A.R., Cuppen, E., “The role of dialogue in fostering acceptance of transmission lines: the case of a France–Spain interconnection project”, Energy Policy 60 [2013], 224-233

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– Cohen, J.J., Reichl, J., Schmidthaler, M., “Re-focussing research efforts on the public acceptance of energy infrastructure: A critical review”, Energy 76 [2014], 4-9 – Cotton, M., Devine-Wright, P., “Making electricity networks ‘visible’: In- dustry actor representations of ‘publics’ and public engagement in infrastructure planning”, Public Understanding of Science 21 [2012], 17-35 – Cowell, R., Bristow, G., Munday, M., “Acceptance, acceptability and environmental justice: the role of community benefits in wind energy development”, Journal of Environmental Planning and Management 54 [2011], 539-557 – Dermont, C., Ingold, K., Kammermann, L., Stadelmann-Steffen, I., “Bringing the policy making perspective in: A political science approach to social acceptance”, Energy policy 108 [2017], 359-368 – Devine-Wright, P., “Explaining ‘NIMBY’ objections to a power line: The role of personal, place attachment and project-related factors”, Environ- ment and behavior 45 [2013], 761-781 – Devine-Wright, P., Batel, S., Aas, O., Sovacool, B., Labelle, M.C., Ruud, A., “A conceptual framework for understanding the social acceptance of energy infrastructure: Insights from energy storage”, Energy Policy 107 [2017[, 27-31 – Miller, C.A., Richter, J., O’Leary, J., “Socio-energy systems design: a policy framework for energy transitions”, Energy Research & Social Science 6 [2015], 29-40 – Soini, K., Pouta, E., Salmiovirta, M., Uusitalo, M., Kivinen, T., “Local residents’ perceptions of energy landscape: the case of transmission lines”, Land Use Policy 28 [2011], 294-305

462 Part 5 – Chapter 30 – Training for the Energy Transition

CHAPTER 30 TRAINING FOR THE ENERGY TRANSITION: COMMUNITY LEARNING AT FLORENCE SCHOOL OF REGULATION

Leonardo Meeus & Jean-Michel Glachant

In this chapter, we illustrate how training at Florence School of Regulation evolved together with the energy transition. We first discuss the training challenges that emerged during the energy transition in Europe (section 1). We then describe the different training formats that have been developed in the School to address these challenges (section 2). We finally focus on the importance of training partnerships at Florence School of Regulation (section 3).

1. Training challenges

In this section, we discuss the three training challenges that gradually emerged during the transition. In the first phase, the main challenge was to work in multidisciplinary teams with engineers, economists, and lawyers. In the second phase, new entrants and consumers became more important. These phases have not yet been fully completed, but a third phase is already accelerating. In this third phase, the borders between the energy sector and other sectors are fading.

1.1 Multi-disciplinary engineers, economists, and lawyers

In the first phase of the energy transition in Europe, the vertically integrated companies were broken up into pieces to separate the monopolistic transmission and distribution network activities from the competitive production, trading, and supply activities. Different players emerged for each of these roles. Initially, most of the debate was on who is responsible for what, and on how to organize competition at the national and European level.

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Many new topics and debates emerged for which there was no existing experience or independent academic knowledge to rely on. Most of these topics were also multidisciplinary, while the available experts were typically trained in one discipline. This was the case for the practitioners, as well as the academics following the sector. They did not speak the same language; it was hard to have a constructive debate.

There were two important training challenges in this phase. First, the sector needed more economists and lawyers to make the liberalization process a success, but most of them were not trained in the technicalities of the sector, they had very limited sector-specific knowledge. Second, the sector needed more engineers with an affinity for economics and law, but most had hardly been -ex posed to these disciplines. The two issues also strongly interacted. The scepti- cism of the engineers was reinforced by the lack of technical knowledge of the economists and lawyers.

To deal with these challenges, two solutions emerged. The first solution was to change the education of the engineers, economists and lawyers flowing into the sector. At the start of the energy transition, many universities reacted by introducing masters on energy economics and energy law. The existing masters for electrical engineers have also been refurbished to include energy economics and energy law courses. The second solution was to provide multi-disciplinary training to the professionals already working in the sector.

Both required the creation of new schools and departments at universities with academics that were willing to collaborate across disciplines. These initiatives typically combined academic knowledge creation with training activities. In each country, you had one or several universities taking the lead. In addition, to these national initiatives, the founders of the Florence School of Regulation also wanted an international initiative.1 The ultimate objective was to create a European energy market, so there was a need to develop a shared language, and shared body of knowledge, based on the different country experiences. They decided to host the school at the European University Institute because of its unique international status in Europe. The training offer that emerged was initially face-to-face, with academics and practitioners from different countries.

1 The FSR was founded in 2004 by three European regulators in the energy sector: Pippo Ranci (co-founder of Council of European Energy Regulators CEER and former chairman of the Italian Regulatory Authority); Ignacio Pérez-Arriaga (MIT and University of Comillas); Jorge Vasconcelos (co-founder and chairman of CEER). Since its creation the FSR has been providing a unique forum where European and national regulators, utilities, policy-makers and academics meet, discuss and get trained. Pippo was originally an economist. Jorge and Ignacio both engineers, while Ignacio also taught economics of power regulation at MIT. Later Leigh Hancher, a lawyer, did join Florence School and opened its “Law area” – today “Energy Union Law” area.

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1.2 New entrants and consumer representatives

In the second phase of the energy transition, the incumbents have been and are increasingly challenged by new entrants and consumer representatives.

First, the new entrant companies. The first challengers of the incumbent energy producers have been renewable energy project developers. Around 2009, the EU boosted the renewable energy ambitions in every member state by introducing targets for the year 2020. Every country introduced support mechanisms for renewable energy sources, which allowed these new players to develop their projects. The incumbent energy producers also had access to the support, but the competition with their legacy assets made them hesitate to join the renewable energy train. More recently, the incumbent energy retailers have been challenged by independent aggregators. Aggregators source the flexibility that consumers have and help them to valorise this flexibility as a service to the electricity system. Incumbent retailers have been slow in embracing demand response because it can conflict with their interest to sell more energy.

Second, the consumer representatives. Consumer organizations have increasingly started to scrutinize the conduct of the companies in the energy sector, both at national and European level. Consumers are also more and more engaged in energy communities. Many communities take matters in their own hands out of frustration with the incumbent companies, or because they want a more local and/or social or sustainable approach for their energy needs.

The training needs in this second phase of the energy transition changed significantly. The new entrants and increased engagement by consumer representatives meant that new issues and topics needed to be addressed. It also meant that a broader ecosystem of energy players had to catch up with the legacy rules and practices of the first phase of the energy transition. They therefore had and still have a high need for training, but limited resources because many are smaller players.

To be more accessible, Florence School of Regulation developed a portfolio of online trainings in addition to the face-to-face trainings that also continue to be organized. Since the online school started, the number of people we train on an annual basis increased exponentially, and our training offer also became more diverse. We still provide training on the fundamentals of energy engineering, economics, and law, but we also provide specialized trainings on new topics that matter for new entrants and consumers. These more specialized trainings continuously need to be updated with the latest insights from academia and

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practice. As we will discuss in more detail in Section 3, we also developed partnerships that allow us to offer free training to specific target groups, such as consumer organizations, energy communities, and non-governmental organizations.

1.3 Sector convergence

The third phase of the energy transition in Europe is characterized by convergence between the energy sector and other sectors. There are two trends that drive this convergence.

The first trend is the decentralization of the energy system. Consumers can produce their own energy, and can also increasingly store that energy locally so that they become more autonomous, and a more active stakeholder in the ecosystem. This decentralization trend is very disrupting for the business model of energy utilities, while it also offers a lot of opportunities for more innovative approaches. Will utilities become tech companies, or will tech companies become utility companies to access the data from smart homes? Will energy retailers become service companies that sell you comfort at home instead of a commodity, or will they disappear?

The second trend is rather opposite: going to new kinds of larger energy ecosystems. We are increasingly harvesting renewable energy resources locally and small-scale. But, at the same time, increasingly larger scale projects are being developed offshore for wind power and in open space for solar power. These projects typically require transportation of energy. Will energy transport over large distances grow so much in the future, as to use hydrogen or green gas pipelines? Or will we have direct-current super grids? Will electric vehicle companies become electricity retailers, or will retailers start to lease electric vehicles as part of their service offering. Will the oil and gas giants continue to act upstream and take over some existing electricity utilities?

These latest trends are again challenging the Florence School of Regulation to evolve further in the topics and the formats of the trainings we have. The School as a whole has several branches that address different sectors, i.e. energy, climate, telecoms and media, transport, and water. Following the sector converge in practice, the School might also evolve towards more integrated trainings combining the expertise of the different areas in the School. Whatever happens, we look forward to continue to transform the School in support of the energy transition in Europe.

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2. Online training formats

The Florence School of Regulation has a diverse online training portfolio with very different learning formats that range from “sharing knowledge where it is created” to “community learning”. Of course, each training has elements of both, but some are positioned more at one end of this spectrum and others more at the other end. Typically courses also evolve across this spectrum over the years, as we will discuss at the end of this section.

2.1 Sharing knowledge where it is created

The best example of sharing knowledge where it is created is the flagship online training directed by Ignacio Pérez Arriaga based on his book “Regulation of the Power Sector” (Springer, 2013). This online training was launched in 2015 at Florence School.

Ignacio is one of the founders of the School, and he has been teaching the fundamentals of energy regulation at the School since its beginning. After a long and successful research and teaching career, both in Spain at Comillas Madrid, and in the US at MIT, Ignacio bundled his knowledge together with his colleagues in the book. The online team at Florence School of Regulation then used this book to design an online training to share the accumulated knowledge.2

The different chapters of the book became training modules, and each module has a combination of quizzes to test knowledge, video lectures with the authors of the different chapters, forum discussions, and live classes to interact with the course instructors. The course also includes group work in which participants describe the power sector in their own country. In other words, there is also a community of participants that can learn from each other; however the learning journey is centered around the expertise of the instructors, and the book.

It has been the first online training at Florence School of Regulation, and very successful with already 8, and almost 700 participants from 80 countries. An interesting side-effect of going online with this training on fundamentals is that it has been attracting participants from all over the world. As a result, the school created a dedicated team to further develop its global presence.

2 For a more detailed account of the creation of the Florence online school, please refer to the book by A. Zorn, J. Haywood and J.M. Glachant (2018) “Higher Education in the Digital Age. Moving Academia On- line” published at Edward Elgar. Annika led the team that co-created the online course with Ignacio and other instructors.

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2.2 Community learning

The best example of community learning is another flagship online: the training directed by Leonardo Meeus on the EU electricity network codes. This online training was launched in 2017 at Florence School, shortly after the final approval of the codes.

The network codes are a set of regulations that harmonise the market rules, system operation rules, and grid connection rules across Europe. They have been developed by the industry in interaction with the regulatory authorities, and their level of detail is unprecedented in the world. The implementation of these codes (some of them being called “Guidelines”) includes the development of even more detailed methodologies. The codes and these methodologies represent hundreds to thousands of pages. It is hard to even get an overview of these methodologies because if some are truly European, many others are only developed for specific regions within the EU.

The organisations that contributed to the development of the codes only have a few experts and need to train many more to ensure that the codes get implemented properly, while other stakeholders are struggling to follow. In 2016, Florence School of Regulation and the European Network of Transmission Sys- tem Operators for electricity (ENTSO-E) initiated a training on the EU Elec- tricity Network Codes. In 2017, that collaboration was extended to the Euro- pean Commission and the Agency for the Cooperation of Energy Regulators (ACER) for the online version of the training.

All the partners involved agreed that it was important to have a neutral academic organiser for the training, rather than involving the developers of these codes. Some stakeholders were already complaining that they had not been involved “enough” in the development of the network codes. The process needed to be improved.

Florence School was happy to take the lead, but we did not have the luxury of an established and organised knowledge base or book for this topic. It was simply not available anywhere. Out of necessity, the training format we came up with to address this challenge was innovative. In what follows, we illustrate two innovations.

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The first innovation is the course text on network codes. The text is an open document that participants can contribute to. They can add comments or suggest changes to the text, and many did so very actively in the first edition of the training. This community push feeds into the new version of the text, together with the additional research we or other academics will do on the topic.

Such an open and collaborative “Wikipedia-like” process was very useful because the knowledge on this topic is still very scattered and full of holes, so our training participants are helping us to fill our own gaps. We actually had many senior professionals attending the course with expertise on specific parts of the network codes. They joined to learn about other parts and see the big picture. For each subtopic we therefore had a set of experts among the participants that directly contributed to upgrade the learning. Other participants were really starting from scratch, but very good at asking questions to challenge the current thinking on the topics.

The second source of innovations, were the Mastery Challenges. Towards the end of the course, participants work in groups on some of the most controversial and open issues regarding the network codes. In groups, participants are asked to develop their own views, and provide recommendations. These recommendations are then used to organize an online panel debate with the experts that are responsible for these topics. This is where the partnership with ENTSO-E, European Commission, and ACER is essential. They contribute to the course by sending their best experts to the panels. They even use the panels to test some of their own ideas for the ongoing implementation of the codes. The fine line between knowledge creation and knowledge sharing then starts to blur. Mixing both is essentially what “community learning” is all about.

The role of Florence School in this community learning is to reach outand bring together the experts, to organise and moderate the debate, and to add the academic perspective to the extent that it is available. Community learning is therefore also a good way to define our own research agenda. Researchers play an important role in the online trainings at Florence School, as they co-author the course texts, follow-up the forum discussions and mastery challenges, and co-teach during the live classes.3

3 We thankfully acknowledge the important contributions given to this “EU Codes Community” and other learning communities by researchers Nico Keyaerts, Tim Schittekatte, Athir Nouicer, Pradyumna Bhagwat, Ariana Ramos, Valerie Reif, and Nicolò Rossetto

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Figure 30.1.

2.3 Evolving across the spectrum

When Ignacio started to teach the fundamentals of energy regulation, teaching multidisciplinary in energy economics and engineering was something rather new. There was no book available to teach that way, he has been one of the pio- neers. The regulatory authorities were also new in the European energy sector, so there was not even a common view among practitioners on how to approach what we refer today as “fundamentals”.

By teaching and researching the topic for many years with other academics and practitioners, Ignacio was able to produce his book that became the first online training at Florence School of Regulation. His training started as a form of community learning because he was the first to bring together a community of experts working on these energy regulation fundamentals. Over the years the training naturally evolved from primary community learning to sharing knowledge where it is created. We could expect a similar evolution for the newer online trainings at Florence School of Regulation. Indeed, as discussed above, the training on network codes already includes a course text that we will develop into a book. And, there are new trainings in the pipeline on topics for which the knowledge base is even less developed than for network codes.

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Having a full team working on the design of the online trainings is key to the success. Online experts have their own expertise that knowledge experts do not master. Do not leave the design of online training to knowledge experts. It is essential to work on it with multimedia experts, user experience designers, web developers, communication specialists and e-learning designers.4 We did also learn that it is equally important to have a team of people continuously involved during the delivery of the course: the “online facilitators”. Too often online courses are put online for individuals only, left alone from the beginning to the end of the learning journey. It is not the most efficient way to learn, while it is good to offer flexibility for each to undertake the whole process at her own pace. At Flor- ence School of Regulation we prefer to create community journeys with such flexibility, helping all participants and each with continuous engagement by the course instructors, the researchers, and the online course facilitators.5

3. Training partnerships

In this section, we first provide an example of the importance of partnerships to produce knowledge, and we then illustrate the importance of partnerships to share knowledge and organize community learning.

3.1 Partnerships to produce knowledge

A good example of partnerships to produce knowledge is the research project THINK. This project was directed at Florence School by Jean-Michel Glach- ant, for three years, from 2010 till 2013. The Directorate General for Energy at the European Commission used the project for advice on some of the most pressing energy policy issues in that period. The project was organized to be able to respond on short notice, and produce every six months two new reports syn- thetizing the academic and practitioner knowledge on each issue, with clear recommendations supported by the council of academics belonging to the project. Florence School was the coordinator of the project, being developed by a whole group of leading academics in the field. The group was balanced in terms of na- tionalities and backgrounds, i.e. engineers, economists, and lawyers.6

4 We thankfully acknowledge the creative contributions by Annika Zorn, Salla Sissonen, Daniela Bernardo, Chiara Canestrini, Matthew Langthorne, Christine Lyon, Jessica Dabrowski, Drazen Nenadic 5 A. Zorn, J. Haywood and J.M. Glachant “Higher Education in the Digital Age. Moving Academia Online” published at Edward Elgar (2018): “Pedagogical changes are seen as tiresome or – in the worst case as not proper learning – not only by many instructors but by learners too. People often have strong (implicit) assumptions about what learning is. The presence of a course facilitator and her constant motivation of the instructors and learners ensured that learners engaged in more demanding forms of learning activities.” 6 The academics involved were: Ronnie Belmans (Science & engineering, Belgium), Pantelis Capros (Sci-

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The project produced 12 reports on very different topics; ranging from smart cities to transmission tariffs, energy efficiency in buildings, energy technology policy, offshore grids, electricity storage, demand response, and distribution networks. For each of these topics, we were helping a different unit at DG En- ergy, European Commission.

Most of these topics have been integrated into our training offer, and are sometimes taught by the same academics that we collaborated with for the production of the knowledge. Florence School has always been a “platform for academics” that are connected to their national universities while collaborating in a more international setting. With many contributing from all over Europe, it was easier going online.

3.2 Partnerships to share knowledge and organize community learning

A good example of partnerships to share knowledge and organize community learning is the online training directed by Leonardo Meeus for consumer organizations, energy communities, and NGOs. This online training was launched in 2018 at Florence School.

We already mentioned the importance of the partnership with ACER, ENTSO- E, and the European Commission for the training on network codes. Another illustration of the importance of partnerships is how we worked with BEUC, the European Energy Consumer Organization, and RES-COOP, the European association for energy communities. With the support of ENTSO-E, we were able to offer these stakeholders, together with NGOs, a free training that was knowledge-wise related to the training on network codes, but tailor made for them.

The challenge here was to know how to tailor, and to be able to reach these very specific groups of stakeholders. By working closely with our partners, we managed to understand how to reach then, and we successfully ran the course. We also noticed that by discussing the topics of network codes and network tariffs

ence & engineering, Greece), William D’haeseleer (Science & engineering, Belgium), Ottmar Edenhofer (Economics, Germany), Matthias Finger (Regulation, Switzerland), Dörte Fouquet (Law, Germany), Jean- Michel Glachant (Regulation, France), Manfred Hafner (Economics, Italy), Leigh Hancher (Law, UK), Thomas B. Johansson (Science & engineering, Sweden), Peter Kaderjak (Regulation, Hungary), François Lévêque (Economics, France), Wladyslaw Mielczarsky (Science & engineering, Poland), Peter Mombaur (Law, Germany), David Newbery (Economics, UK), Ignacio Pérez-Arriaga (Regulation, Spain), Pippo Ranci (Regulation, Italy), Jorge Vasconcelos (Regulation, Portugal), Nils-Henrik von der Fehr (Economics, Norway), and Christian von Hirschhausen (Economics, Germany).

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Figure 30.2. with new stakeholders, beyond the “usual suspects”, new questions were asked for which we did not have answers yet. The process of community learning was continuing by expanding the community via new partnerships.

Partnerships are very useful, but it is far better to only partner with entities that respect your independence as an academic entity. We can agree to disagree on some topics with every partner, as long as we both believe in the importance of a constructive debate with independent academics that challenge engaged practitioners, and vice versa.

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Part 6 – Chapter 31 – Facts and Statistics on the Energy Transition

PART 6 – FACTS, MAPS AND SCENARIOS

CHAPTER 31 FACTS AND STATISTICS ON THE ENERGY TRANSITION1 . Tom Howes

1. Historical picture of the energy sector in the EU

Whilst there have been some major changes and transformations of different sectors in economies around the world over the last decades, the transformation that has begun in the EU energy sector is one of the most significant and far reaching.

The EU energy sector has by tradition consisted of publicly owned monopolies managing each countries national energy resources, predominantly coal, and striving to provide access to sufficient levels of energy to provide the fuel needed for economic growth.

Given the critical nature of energy as fundamental for both the daily existence of citizens and of all industry, primacy was given by governments and their voters, to provide affordable and reliable energy. This chapter outlines with statistical evidence the transitions occurring: (1) market liberalisation and the creation of the single market/coupled markets; (2) the transition in the energy mix to become sustainable, as well as affordable and secure energy; including the particular transformation in the electricity sector.

1 All data is from Eurostat unless otherwise stated. (https://publications.europa.eu/en/publication-detail/-/ publication/99fc30eb-c06d-11e8-9893-01aa75ed71a1/language-en).

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2. Transition 1

2.1 Market liberalisation

For various reasons, the 1980s and 1990s in western Europe saw the rise of theo- ries of market liberalisation of traditional public and monopolistic sectors. This change was embraced by the EU with the creation of European single market legislation, including market liberalisation packages of legislation opening up national gas and electricity markets. Beginning in some Member States in the 1990s, electricity and gas market liberalisation has been evolving across the EU since the beginning of the century. Again, the focus was on the cost effective delivery of reliable energy, with an emphasis on the need to harness private sector incentives to maximise efficiency and to keep energy affordable. Over the years, monopolies have generally given way to competitive markets, with (varying degrees of ) competition.

Figure 31.1. Source: Eurostat (https://publications.europa.eu/en/publication-detail/-/publication/99fc30eb-c06d-11e8-9893-01aa75ed71a1/language-en).

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2.2 Transition of market coupling and security of supply

The theme of ensuring an economically efficient (and more competitive) energy sector and affordable energy has also long been coupled with the need for secure energy. Since the 1970s threats to energy supply, or affordable energy supply have challenged Member States to varying degrees. Whilst the North Sea energy supplies turned some Member States into significant energy producers, the EU’s energy production from fossil fuels has peaked and imports, even of coal, are rising.

Figure 31.2. Import Dependency by Fuel. EU-28 - Imports from Extra-EU - 1990- 2016 (%). Source: Eurostat (https://publications.europa.eu/en/publication-detail/-/publication/99fc30eb-c06d-11e8-9893-01aa75ed71a1/language-en).

The overall European trend does not reveal the wide range of differences across Member States. Access to indigenous resources and size of the economy significantly alter the degree to which security of supply is a policy priority in a given Member State. A key role of the EU has been to address national concerns regarding supply, including through the creation of the single market, which, apart from the market liberalisation legislation necessary, has also included the facilitation of investments in critical infrastructure, including reverse flow capacity in gas pipelines. The EU’s identification of and support for European

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projects of common interest helps develop energy networks from a more optimal, European perspective. Such projects contribute to all energy policy goals, increasing access (improving security and affordability) as well as to the energy transformation requiring integration of renewable energy.

Figure 31.3.

Security of supply is a complex concept. Various metrics exist to try to capture reliability, affordability and fundamentally, the measure reflecting whether or not the taps or generators are turned off. The commonest and simplest measure is the net imports of a given fuel or set of fuels, per country. Such an indicator is imperfect, as trade is generally advantageous, and imports are not automatically unreliable. However, net imports, out of simplicity, remains a common short hand indicator of security of supply. The data below reflects the least and most dependant on imports of different fuels, in absolute terms.

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Figure 31.4a. Imports – solid fuels – mtoe.

Figure 31.4b. Imports – petrol and products – mtoe.

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Figur 31.4c. Imports – gases – mtoe.

In the same way as the growth in the number of domestic energy suppliers is seen as beneficial, both in terms of improved efficiency resulting from competition and in terms of greater reliability of supply, efforts have also been made to diversify the number and location of energy suppliers from beyond the EU. Whilst there are differing degrees of liquidity in the global markets for coal, gas and oil, some diversity in main supplying countries has been achieved over time, although Russia continues to be the predominant supplier for all three fossil fuels.

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Figure 31.5. EU-28 – Imports from Extra-EU – Hard coal – 1990-2016.

Figure 31.6. U-28 – Imports from Extra-EU – Crude oil and NGL – 1990-2016. Source: Eurostat (https://publications.europa.eu/en/publication-detail/-/publication/ 99fc30eb-c06d-11e8-9893-01aa75ed71a1/language-en).

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Figure 31.7. Imports from Extra-EU – Natural gas – 1990-2016. Source: Eurostat (https://publications.europa.eu/en/publication-detail/-/publication/99fc30eb- c06d-11e8-9893-01aa75ed71a1/language-en).

3. Transition 2

3.1 A sustainable energy mix

Traditional government motivations of ensuring affordable and secure energy in Member States have stimulated the major energy transition of developing liberalised electricity and gas internal markets. A newer motivation was added in the early 2000s with the need to deliver the third point of the “energy triangle”, adding sustainable energy to the need for affordable and secure energy. External costs such as environmental concerns have been shaping European energy regulation for some decades – such as through reducing fuel sulphur content, adding filters to power station chimneys, improving nuclear waste and nuclear safety regimes. Such regulatory regimes improved the environmental performance of the existing fuel mix but do not necessarily alter the fuel mix. This changed when the policy drive for sustainable energy began. EU Climate policy and the drive for emissions reductions necessarily requires a reduction in fossil fuel consumption and thus a shift in the fuel mix.

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Figure 31.8. Production by fuel. Source: Eurostat (https://publications.europa.eu/ en/publication-detail/-/publication/99fc30eb-c06d-11e8-9893-01aa75ed71a1/ language-en).

This change in energy mix is clear across the EU. Most notable is the reduction in the use of “solid fuels” (coal and lignite) and the growth in renewable energy production. Also evident is the decline in oil and gas production.

Figure 31.9. Consumption by fuel. ource: Eurostat (https://publications.europa.eu/ en/publication-detail/-/publication/99fc30eb-c06d-11e8-9893-01aa75ed71a1/ language-en).

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In contrast, (due to rising imports), the change in energy mix of the EU’s energy consumption is less marked; though clearly the increase in renewable energy consumption and the more recent reduction in oil consumption (chiefly in the power production sector) are key trends.

3.2 Transition in the electricity sector

Within overall energy production, the electricity sector stands out as the production sub sector which has changed most dramatically in the last years, in relation to all three aspects of the energy transition. Liberalisation, competition, the number of market players, the improved security (reduction in disruptions/ interruptions), the entry of large quantities of micro generation, have all been extremely significant in electricity generation.

Figure 31.10. Gross electricity generation by fuel EU (TWh). Source: Eurostat (https://publications.europa.eu/en/publication-detail/-/publication/99fc30eb- c06d-11e8-9893-01aa75ed71a1/language-en).

Certain trends had begun already in the 20th century. Gas and renewable energy had started to grow from a low base; oil and solid fuel use was continuing to decline. These trends continued until the EU’s first “energy and climate” package of 2008, setting the 20-20-20 objectives of reducing greenhouse gas emissions by 20% by 2020, increasing the renewable energy share of energy consumption to 20% by 2020 and improving energy efficiency 20% by 2020. The ongoing

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reduced use of coal was joined by a decline in gas use, mirroring a rise in renewable energy production.

Figure 31.11. Gross electricity generation by fuel (renewable) (TWh). Source: Eurostat (https://publications.europa.eu/en/publication-detail/-/publication/ 99fc30eb-c06d-11e8-9893-01aa75ed71a1/language-en).

The constituent elements of this rise in renewable energy are visible in the above graph: strong increases in the rate of growth of wind and solar power and growth also in the use of biomass.

The penetration of “variable renewable energy”, ie wind and solar power has been quite rapid, but, in most Member States, from a very low base:

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Figure 31.12. Source: Eurostat (https://publications.europa.eu/en/publication- detail/-/publication/99fc30eb-c06d-11e8-9893-01aa75ed71a1/language-en)

Average annual wind penetration exceeds 10% in Denmark, Germany, Ireland, Spain, Lithuania, and Portugal. Average annual solar penetration exceeds 5% in Germany, Greece, Italy and Malta.

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In contrast to annual data, daily penetration rates of wind and solar can be much higher, and in a few extreme cases have reached 100% in Germany and Spain on windy or sunny days. Whilst such extremes are a test of the resilience of an electricity system and grid, there is no relationship between such high penetration rates and grid outages; indeed the number and duration of forced outages is more associated with larger conventional, centralised power production:

Figure 31.13. Average MWh of planned and forced outages, 2010-2016. Source: Copenhagen Economics based on data from the ENTSO-E Transparency Platform and survey answers.

Note: Croatia and Cyprus did not report any outages. Malta did not report whether its outages were planned or forced.

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Whilst major developments have occurred in the electricity sector, other sectors are also evolving. In the heating sector, the fuel mix has also been changing over time:

Figure 31.14. EU Gross heat generation - PJ. Source: Eurostat (https://publications.europa.eu/en/publication-detail/-/publication/99fc30eb-c06d-11e8-9893- 01aa75ed71a1/language-en).

The trend here is the same as in the electricity sector but less sharply defined by the 20-20-20 package, other than to note the decline in the use of gas for heating in 2010. Otherwise, the trends of the rise in the use of renewable sources of heating and the decline of solids use for heating are clear.

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4. Keeping the transition affordable

Improvements to the single fuel and electricity markets within the EU and attempts to diversify supply and increase the diversity of reliable suppliers globally are all measures that, through increasing competition, help keep prices for consumers and for businesses affordable. The transition in the fuel mix however implies, and has required, significant capital investment in new power and heat generation and transport fuel production.

Figure 31.15. Global New Investment in Renewable Power and Fuels. Source: REN21.

In addition to the above investment for renewable energy and fuels, ongoing investments are also needed for maintenance and replacement of existing capital stock, as well as for grid and other investment needed to facilitate the creation of the internal market (transmission lines and inter-connectors etc.), to maintain adequate security of supply. The European Commission has estimated that achieving the agreed EU 2030 GHG reduction, renewable energy and energy efficiency targets will require an extra €177bn per year, between 2021 and 20302.

2 European Commission 2016 Impact assessment on the proposal for revision of the energy efficiency directive.

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Despite such large (and growing) investment needs, the feedthrough into both wholesale prices and retail prices has been gradual rather than sudden or spiked. The trend in global oil markets follows major macro-economic shocks of both supply and demand; gas markets are slightly more regional and there has been a move away from oil based contracts leading to differing trends in regional markets. Investment in the electricity sector is subject to multiple different factors: The electricity wholesale market is dealing with liberalisation, greater interconnectivity and market coupling and the penetration of wind and solar power (with low operating costs affecting the merit order price curve) as well as higher investment costs. In all three markets prices rise and fall for multiple reasons, but there is not a visible long term trend, fluctuation or rise that is attributable to the cost of transition.

These trends in wholesale markets at European level may mask different trends in regional or national markets; as regional markets become more integrated, such differences should diminish. Similarly, intra-day or spot markets may have different trends, particularly in countries with high levels of wind and solar power (such as Germany, Denmark, Spain and Italy), where low marginal cost technologies can dampen prices.

In retail markets over time, there is a more visible rise in price over time. Howev- er this has been driven less by rises in wholesale prices – the “energy component” of retail prices – and more by increases in taxes and levies and network costs. It is in retail markets in fact that the rise in investment needs - for low carbon new investments as well as for, increasingly, new or even existing conventional plants, has become visible. Support schemes for renewable energy and capacity mechanisms for conventional power generators as well as grid fees are largely financed by levies on retail prices3. In electricity prices therefore there is a visible rise in prices between 2010 and 2015 in many Member States.

3 In Germany in 2018 the cost of the transmission distribution component of grid fees has exceeded the renewable energy levy component of the EEG Umlage for the first time (source BDEW 2018).

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Figure 31.17. Source: Eurostat (https://publications.europa.eu/en/publication- detail/-/publication/99fc30eb-c06d-11e8-9893-01aa75ed71a1/language-en) (n.b.: the different coulours/lines represent individual Member States).

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5. Cementing the direction of travel – market design and (45)-32- 32.5

The statistical trends outlined above show how the first energy and climate package and the market liberalisation packages of the EU have begun the transformation of the European energy sector and the electricity sector in particular. The number of market entrants, the cross border trade have increased; the energy mix is clearly being decarbonised. The 20-20-20 targets of 2008 were not widely seen as credible and yet the EU is on track to meet them, whilst maintaining adequate generation and without astounding price spikes.

It is on this basis that EU Member States are pushing to go further and have recently agreed a 2030 package. The initial European Commission proposal was to set 2030 targets of at least 27% for energy efficiency, at least 27% renewable energy and at least 40% greenhouse gas reductions. The final targets agreed by EU Member States, of 32.5% energy efficiency and 32% renewable energy in fact are expected to generate a 45% reduction in greenhouse gas emissions by 2030. These targets have been explicitly complemented by electricity market design legislation to improve the functioning of electricity markets, to increase the reliability and the soundness of market driven investment (instead of relying on levies on retail prices). With this “clean energy for all Europeans” Package to be adopted by the end of 2018, the prospects are set for solid ongoing transformation of the energy sector. The improved market design is intended to facilitate the entry of new market players and new technologies into the electricity sector in particular. With the aggregation of micro generation from renewable energy, the aggregation of demand side response energy savings and other energy storage technologies , price troughs can be more managed and the system becomes more flexible. At the same time, traditional dispatchable electricity (gas in particular) is becoming more flexible.

6. Climate neutrality by 2050

The 20-20-20 targets are on the verge of being delivered and the change triggered evident in the historical data and statistics. Think ink is now drying on the new EU legislative framework for the 2030 objectives. And more recently still, in November 2018, the European Commission published its long term strategy for 2050. This extends the logic of the established energy transition and, in the context of delivering on the agreed Paris Climate Agreement, sets out the possible pathways to a complete transition, of “climate neutrality” by 2050. This includes net zero carbon emissions in the energy sector. Eight different possible

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technology pathways have been presented illustrating different but feasible energy transition pathways:

Figure 31.18. EU energy mix in final demand - trends to 2050 according to different scenarios. Source: European Commission A clean planet for all” support document COM(2018)773.

Figure 31.19. EU power generation capacity trends to 2050 according to different scenarios. Source: European Commission A clean planet for all” support document COM(2018)773.

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With historical trends in energy mix clear, and the security of supply, sustainability and affordability concerns illustrated with data, the state of play has been established. The Clean Energy For All Europeans Energy Package confirms the magnitude, ambition and direction of the energy transition. The new Long Term Strategy of A Clean Planet For All signals that the direction will not change and that the credible and reasonable expectation is that total decarbonisation is feasible and to be delivered by 2050. With these introductory facts, figures and trends, the rest of this book explores in detail these various aspects and explains how the transition is underway.

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CHAPTER 32 A FOREST OF SCENARIOS – THE LONG-TERM EVOLUTION OF THE EUROPEAN ENERGY SYSTEM

Simeon Hagspiel & Jean-Baptiste Paquel

1. Introduction

“Gouverner, c’est prévoir – Governing is foreseeing” says a famous French quote attributed to Adolphe Thiers, a 19th century politician. Indeed, understanding the future and the multiple consequences of any action is central to decision making. This universal truth is particularly relevant for the energy sector. Energy systems are often extremely large and complex, involving people, businesses and institutions with intertwined stakes in the successful operation and development of these systems. Scenarios not only enable powerful decision making but are also a way of communication. Their use in the energy sector has exploded since the start of the liberalization wave starting in the 1980ies, and has regained even further momentum by the complex developments induced by climate change and the corresponding efforts to fight back. Building scenarios has emerged as a standard tool to systematically map, analyze and compare possible future developments of the energy system in a comprehensive and understandable framework. Every year, an uncountable number of scenarios is being prepared by a large variety of stakeholders, with a broad range of approaches and a large variety of sectoral and temporal scope. Scenarios depicting the possible implementation of the energy transition within a Pan-European perimeter are in particular demand and will be the main focus in this Chapter.1

1 It is noteworthy that manifold scenarios can also be found on larger and smaller geographical scales, i.e., for the global level on the one hand side, and for the regional, national or local level on the other hand side. Due to the European focus of this book, however, we will mostly deal with scenarios covering the Pan-European perimeter, even though several insights can be gained with respect to the generic understanding of scenarios

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Despite the large variety of available scenarios, their overall objective is typically the same: provide guidance and inform discussions and decisions. Differ- ent categories of scenarios achieve this in different ways. The main institutional scenarios, such as the IEA policy scenarios or European Commission Reference answer to the question “how will current trends evolve if nothing else changes?”. These scenarios are designed to assess the impact of current policies and always fail, by design, to foresee disruptive changes in the system. Other scenarios, called normative, are designed to demonstrate the feasibility of a vision or of policy targets. For instance, the IPCC “Representative Concentration Pathway” or of the Greenpeace Revolution scenario belong to this category.

Almost all scenarios, except those developed specifically to prove otherwise, tend to overly assume that the future will look like the immediate past.

Although some well-understood indicators may indeed be accurately predicted in scenarios2, this is usually not the case for emerging technologies or business. The rise in solar panel deployment is perhaps the most famous example of a development that all major scenarios had failed to see, to an immense margin. Nu- merous other examples can be found where historic figures fall out of the range of recognized scenarios, even in a relatively short term.

Reportedly, all current main European institutional scenarios3 fail to deliver a trajectory consistent with the Paris Agreement emission targets. One key challenge for policy makers is therefore to reconcile the descriptive scenarios, analyzing the impact on existing or proposed policies with the normative scenarios depicting systems matching with environmental, economic or energy security targets. The “carbon budget” approach proposed by the IPCC in the Represent- ative Concentration Pathway scenarios (IPCC 2014) and the conclusions of the Special Report on Global Warming of 1.5 °C (IPCC 2018) is an effective tool to achieve this. It is currently the only reference against which the climate emissions estimated by various scenarios can be checked in a credible manner.

The limitations of scenario based decision making also comes from the building approaches. The result of any scenario heavily depends on the assumptions chosen, for instance in terms of technology efficiency, cost or penetration, economic or population growth, fuel prices, etc. Modeling tools can only provide simplified representations of real life interactions. The complexity of human systems, and the cross-implications of technology development, changing lifestyles

and their utilization, including other geographical scales. 2 For instance, the liquid oil consumption in the near future, to give one concrete example. 3 As of 2018.

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and habits of citizens, the environment, or even human health, make it indeed impossible to create global, universal models.

Nevertheless, scenarios can be effective in pointing to practicable paths towards policy targets when being used properly. Misused, they can contribute to an ill- adapted regulatory framework or stranded investments. Scenarios are important communication tools which can help demonstrating the impacts of acting, or not acting. It is also easy to select figures out of their context specifically to bias debates.

The scientific community and literature broadly comes to the same conclusions when it comes to properly using scenarios4: it is recommended to consider a wide range of scenarios with different sets of assumptions as well as different methodological approaches. If possible, it can even be beneficial to employ different organizational entities for the scenario building process.

This is often contradictory with the frequent requests of investors, policy makers or other parties that are interested in simplified scenario building approaches. Even though the request for few and easy-to-use scenarios is understandable, one of the fundamental strengths of the approach would be lost, and that is indeed the depiction of a credible range of possible developments.

2. From storylines to decision making

“Scenarios are an analytical technique for exploring uncertainty by asking and answering “if ... then” questions to support risk management decisions.” 5

This section develops a generic description of scenarios as well as the purpose they serve, and suggests how they should be used in a decision-making context.

2.1 Scenarios, serving a purpose

The top-level objective of all scenarios is to provide guidance and enable better informed discussions and decisions. To name a few examples, it may be worthwhile to conduct a scenario analysis for assessing the viability of a policy measure in different economic context, for demonstrating the techno-economic potential of an emerging technology, or for proving the feasibility of policy targets.

4 See, for instance, Paltsev (2016). 5 Hamrin et al. (2007).

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Schematically, scenarios can fulfill specific purposes as depicted in the list below. Noticeably, the list is not mutually exclusive: scenarios can cover several purposes at a time.

– Inform policy- or other decision-making, by showing which developments can materialize under which circumstances. This can be in both directions: desired development, or unwanted; feasible respectively infeasible system developments.

– Support specific views and opinions: Medium for communication and discussion, with the possibility to involve different stakeholders, views and disciplines.

– Assess the impact of different alternatives: This can range from “small” decisions such as individual asset operation, to more fundamental decisions such as asset investments or changes in the market design. Typi- cal uses of scenarios in policy making processes include impact assessment and dimensioning of policies.

The purpose thought out by scenario developers dictate the type of the scenario. McDowall and Eames (2006) proposed the following classification for six different types of scenarios.6 Each of these types answers a specific question:

Descriptive scenarios Normative scenarios Forecasts Exploratory Technical Visions Backcasts Roadmaps scenarios scenarios

How will cur- How do Are the What are the What are What are rent trends specific driv- landscapes benefits of a possible the neces- evolve ers impact described specific often pathways sary steps according to on current feasible and desirable, to reach the required to quantitative trends? what are sometimes targets? reach the extrapola- their techni- plausible targets? tions and cal implica- vision of the predictive tions? future (rather models? than what is the way to achieve it)?

Table 33.1. Scenario classification (Source: McDowall and Eames 2006).

The main European energy scenarios (discussed in section 4 of this Chapter)

6 The classification was developed for hydrogen economy scenarios but holds true in a more general context.

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such as those developed by the IEA, European Commission, System Operators, BP, Shell or Greenpeace are all either exploratory scenarios looking at the impact of a selected set of policies, or back-cast scenarios considering systems that reach decarbonisation targets.

In addition to the type of scenario and depending on the purpose of the scenario building exercise, the responsible body must determine at an early stage the required specific outcomes of the exercise. For instance, for a utility to make an investment decision into a new power plant, it will be necessary to have price estimates as an output of the scenario. To provide another example, consider the case of a governmental institution envisaging the implementation of a market design change to achieve CO2 emission reductions: scenarios for this case necessarily need to have CO2 emissions as an output to measure the effectiveness of the investigated design, plus probably an estimate of the overall system cost to measure its economic efficiency. A detailed discussion of the scenario building process will follow in the Chapter 3 below.

2.2 How to use and trust scenarios?

Scenarios only fulfil their purpose if they answer the underlying question(s) in an effective and trustworthy way. Effectiveness and trust, however, require clarity and transparency, last but not least about the (unavoidable) limitations of scenarios:

– Due to the size and complexity of the systems they shall represent, scenarios can never embrace all their technical and economic features. In other words, scenarios necessarily imply simplifications. Indeed, providing a set of suitable simplifications is one of the main tasks of scenario building. This will be depicted in the next subsection under “Definition of Scope”.

– Again, due to the size and complexity of the system, scenarios can never depict the entire range of possible realizations of future developments, but always represent a (typically very small) selection of possible futures.

– As a scenario is only one possible realization of a wide range of possible future developments, it may not be seen as a prediction of the future.7 Meanwhile, to the recipient and user of scenarios, this should not come neither as a surprise nor as a disappointment, as the above depicted pur-

7 This can be stated based on standard probability theory: Each value in a continuous probability distribution has and infinitesimally small probably of being realized, which is statistically equivalent to zero.

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poses can nevertheless be fulfilled and thus carry value. In other words, loosely reciting George Box, a famous scientist: “All scenarios are wrong, but some are useful.”

Indeed, looking back at widely used scenarios which were produced in the past, it often appears that they have been often markedly far from the reality. The charts below show how much solar capacity was foreseen for the years 2015 in the EU Reference Scenarios published from 2003 to 2013 by the European Commission, and the way total variable renewable and thermal capacity was expected to evolve by 2030. Note that the European Commission scenarios are far from being the only body to be mistaken but have the merit to provide the necessary transparency and consistency of format and scenarios since 2005 to serve as a consistent example. In fact, all scenarios issued by major institutional, commercial, or NGO entities had missed even the orders of magnitude which materialized thereafter.

Figure 32.1. Installed solar capacity in 2015 in the European Commission Refer- ence scenarios released between 2005 and 2013, and actual historical value. Source: own illustration, based on European Commission 2016.

The reason for this perceived inaccuracy is that these scenarios are not forecasts or predictions, but usually analysis of the impact of existing trends or policies. The IEA annually released World Energy Outlook – a trusted assessment of future energy developments in each country – carries a noteworthy and commend- able disclaimer to assist the reader in using the underlying scenario analysis:

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Figure 32.2. Installed wind and solar, and thermal capacities by 2030 in the Euro- pean Commission Reference scenarios released between 2005 and 2013, and actual historical value. Source: own illustration, based on European Commission 2016.

“[The New Policies Scenario8] provides a well-founded basis for expectations about the future and thereby also serves as an invitation for improvement: if the outcomes described are sub-optimal or, even, unacceptable, then policies and other conditions and factors need to change.”

The quote also explains and legitimates why any ex-post analysis of older IEA scenarios shows wide inaccuracy between their content and the actual situation. Despite the fact that media, policy makers or investors may present them this way, the World Energy Outlook, just as all descriptive scenarios, are not forecasts of the future. It merely describes the impact of a set of possible actions on the energy system evolution.

It is also a striking observation we are typically unable to predict disruptive technologies or events. Instead, we tend to extrapolate the steadiness of recent trust into even distant futures, and scenario-building models are mostly good at depicting “smooth” evolutions of an existing setup. For these reasons, our understanding of a more distant future can quickly evolve as the present unfolds.

The above observations lead to (legitimate) questions whether scenarios can and should be trusted to inform crucial policy or investment decision making. The answer is a conditional “yes”. If scenarios are well-understood and interpreted with care, there is no denying that they are use- and powerful means to make better-informed decision-making. Only by understanding the intent, context, assumptions and limitations behind, however, a scenario can serve its purpose.

8 The New Policies Scenario is the reference scenario for the IEAs World Energy Outlook. It is accompanied by other more or less ambitious scenarios. See Section 4 for further explanations.

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In this context, it should be stressed again that each scenario is supposed to be useful for answering a specific question: “What if this policy/event/development/price/target/business model/etc …”.

These are complex questions requiring sophisticated scenario building techniques. Apart from the actual decision-making, it is thus a challenge in itself to understand the differences in optimisation software, thousands of technical questions usually invisible to the scenario end-users, or underlying data frames. Moreover, because the future is uncertain, it will always be impossible to answer such questions with absolute certainty. As a result, it is impossible to consider that a single scenario, however good it is built, can be used for anything more than proving a point, or effectively communicating an ambition. Nevertheless, equipped with the proper knowledge and understanding, they can become a formidable tool to support informed decision making. This exercise should always define upfront the precise questions to be asked, and for each of these questions consider sub questions corresponding to different assumptions, constraints or modelling tools. These aspects will be looked at in the next section 3.

3. Scenario building process

3.1 The art of building scenarios

The scenario building process is initiated by the formulation of one or several high- level purposes, as depicted in the previous subsection 2.1. Starting from there, a number of steps needs to be taken to arrive at a scenario fulfilling its purpose. This process is depicted in Figure 32.3 below. It should be noticed that this process is typically not followed separately for each individual scenario, but simultaneously for a set of scenarios. Indeed, insights are often gained from the comparison of outcomes in different scenarios, rather than absolute values in individual ones.9

Figure 32.3. Scenario building process. Source: own illustration.

9 For instance, a relative price increase moving from one scenario to another.

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3.1.1 Definition of scope and granularity

Depending on the purpose of the scenario, elements that shall be included and excluded in the Scenario need to be defined especially with respect to the envisaged target figures, but also with respect to the inputs and process variables. In other words, step 1 needs to define the boundaries of the system which the scenario shall cover, along three main dimensions:

1. Sectoral scope and granularity. Broadly, three types of sectoral coverage may be distinguished for energy system scenarios:

– Partial system model (e.g., electricity or gas only).

– Sector coupling (e.g., interlinked power and gas).

– Energy system model (i.e., all primary energy carriers and energy end uses).

The granularity refers to the level of (dis-)aggregation of energy facilities within the sector(s). For instance, the scenario can depict actual individual power generation units, or aggregated technologies (e.g., “coal power”).

2. Temporal scope and granularity. The temporal scope refers to the timeframe covered by the scenario. For instance, for making investment decisions, it should cover at least the asset’s economic lifetime. In the context of energy system scenarios, timeframes can be classified as follows:

– Near-term future (~2025-30).

– Mid-term future (~2050).

– Long-term future (~2070-2100).

The temporal granularity can range from seconds to multiple years, even though a relative coarse resolution is typically chosen for energy scenarios, especially the ones looking at the mid- to long-term.

3. Geographical scope. The geographical scope can range from local to global. In line with the scope of this book, the remainder of this Chapter will mostly focus on European scenarios.

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– Local

– National

– Regional

– European

– Global

To illustrate the three scoping dimensions (sector, time, and space), they can be represented in a 3D-diagram as shown in Figure 32.4 below for the example of a European sector coupling analysis looking at the Mid-term future.

Figure 32.4. Illustration of the three scoping dimensions for energy system scenarios. Source: own illustration.

3.1.2 Definition of methodology and assumptions

Depending on the purpose and scope of the scenario, meaningful and manageable methodology and assumptions need to be defined. In this process, it is crucial to clarify which elements are input the scenario building, and which ones are an output. To give an example: the amount of renewable energy in the system in 2030 could be an exogenous input, i.e., a fixed assumption, for instance in line with target values already defined in a political process. It could, however, also be an output of the analysis, where only the costs of certain renewable technolo-

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gies are assumed, and the amount of renewable energy in the system in 2030 be determined (endogenously) by the scenario building approach.

In terms of scenario building methodology, we can distinguish different approaches as follows:

Top-down vs. Bottom-up: The top-down approach formulates high-level values, targets and developments, then breaks those down to the envisaged level of granularity. This is also known as “target scenarios”, i.e., only those developments are considered that comply with certain normative criteria by reaching a certain target value for CO2, for instance. The bottom-up approach, in contrast, defines low-level fundamental system characteristics and interactions, and then aims at calculating the resulting system development. Compared to top-down scenarios, this approach can be more open in terms of target states of the system (i.e., they can have a more exploratory nature), even though certain target values

(e.g., for CO2 reduction) can nevertheless be imposed.

Expert-based vs. Model-based: To build the scenario, i.e., to determine the envisaged characteristics and numbers describing the system in a possible future, different techniques may be deployed. An expert-based approach engages with individuals (or groups of it) to clarify and directly propose the final system state. E.g., industry experts or politicians can be asked about their expectation on future PV growth. In contrast, a model-based analysis starts from lower-level fundamental system characteristics and interactions to determine how the system develops. Model-based analysis is supported / enabled by computational tools (see info box below). Note that expert and model-based is not mutually exclusive, rather the contrary: Expert-based inputs (i.e., “solid” assumptions) are needed to feed model-based analysis, e.g., with respect to expected future developments of fuel prices, availability of technologies, etc. Logically, these assumptions typically vary (at times substantially) depending on the source, and may be (in fact, almost certainly will be) biased towards the view and interest of the scenario-building body respectively commissioning entity. Therefore, care should be taken when interpreting scenarios, critically reviewing the underlying assumptions. Furthermore, this should make clear why transparency of inputs, methodologies and outputs is so crucial and deserves better rules and best practice.

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Scenario building tools

Nowadays, almost all scenario-building activities are supported by computational tools which reflect socio-economic dispatch and investment decisions in a comprehensive and consistent analytical framework. They are also known as market modeling tools. Typically, these models take the assumption that the specific sector respectively market of interest is and will be in an equilibrium state. In this case, the problem translates into an optimization problem, i.e., a cost-minimization respectively welfare-maximization. These optimizations can be computed in a (more-or less) straightforward way by industrial solvers, such as CPLEX, Mosek or Gurobi.

A large variety of software tools is nowadays available with different sectoral scope, e.g., electricity only, power-and-gas interlinked model, or global energy system model. In terms of temporal and geographical dimension, they typically allow a flexible scaling, e.g., to cover individual or multiple countries, or individual snapshots or multiple years. While these models used to be mostly tailor-made and research-oriented, an “industrialization” and some standardization can be observed. For instance, the European Com- mission has been using the PRIMES energy system model since the 1990ies to build scenarios and to test energy policies and their impact. The tool is a property of the University of Athens and has faced criticism for its lack of transparency and non-replicability. As a reaction, the European Commis- sion has recently been developing their own in-house tool METIS which is based on the commercially Crystal Platform and which shall be published shortly.

Yet, a long way is still ahead to achieve better interoperability and compa- rability of input data and results. Nevertheless, tools like PLEXOS, BID, CRYSTAL, TIMES or MARKAL are being more and more established and widely used by many stakeholders in an increasingly transparent way.

3.1.3 Implementation

Depending on the definition of methodology and assumptions, they need to be implemented accordingly. Often, the commissioning entity contracts dedicated institutes or consultants to perform this task, due to the fact that specific assets and expertise are needed, such as software tools, etc.

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3.1.4 Analysis

The indispensable last step of scenario building is the analytical assessment of the constructed scenario. Naturally, the envisaged outputs need to be extracted. Furthermore, consistency and quality checks need to be performed. Very often, flaws or mistakes can thus be detected, which in turn requires to turn back to the previous stages to amend the scenario building process. Depending on the complexity of the process, this highlights the need for careful preparation at an early stage.

3.2 Storyline

The above steps are typically accompanied by corresponding “storylines” or “narratives”, depicting the high-level background idea for setting up the respective scenario. Very often, the cone of investigated scenarios is framed by some sort of “best” and “worst case” story (in the sense of the high-level purpose), plus possibly some intermediate situation. Others are of course possible, e.g., “what if we do nothing”, “what if this technology becomes available”, etc.

3.3 Technical limitations

Even though scenario building is a well-established and often applied means for enhanced decision-making, technical limitations still prevail, often caused by a lack of input data, methodological sophistication, and/or “creativity” in the assumptions and overall scenario building process. As a consequence, scenarios often struggle to “appropriately” reflect certain effects and dynamics while depicting possible future developments and impact of the following elements. The following elements are often finding a limited representation in scenario- building processes:

– Diversity and sheer number of European and national regulatory rules.

– Behavioral aspects, such as preference for local or green products.

– Decentralized technologies, such as blockchain.

– Disruptive events, such as electric vehicles or new types of storage devices.

– Extreme events, for instance caused by changing climate conditions.

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Further effort will be needed to enhance scenario-building processes with respect to a better representation of these (and other) elements, thus allowing (even) better decision-making.

4. Arboretum: scenarios for the European Energy Transition

Each year, cyclical or one-off productions from European and National Insti- tutions, Parliamentary Commissions, intergovernmental organisations, system operators, businesses, NGOs, think tanks, consultancies and research institutes make up a veritable forest of scenarios. Far from looking exhaustively at each of the trees or even species in the forest, this section presents the key specificities of its most remarkable elements.

As al EU member States and the European Union are all signatories of the Paris Agreement, a vast majority of these scenarios are designed to explore and prepare the energy transition, and a decrease in CO2 emissions of the European energy system.

4.1 Institutional scenarios

The International Energy Agency’s (IEA) World Energy Outlook is the undisputed most authoritative publication in the forest of scenarios. The data and analysis directly feeds policy making processes and investment decisions throughout the world. Due to their very wide usage, they are particularly prone to being misused as predictions or even policy recommendation rather than analysis of existing trends.

The IEA has been increasing the number and nature of scenarios that constitute the basis of the WEO. The “Current Policies Scenario”, depicting foreseen evolution of markets without any new policy input, was replaced as the WEO’s reference scenario in 2010 by the “New Policy Scenario”, which includes, cautiously, policies still in development. The IEA has since added to these two descriptive scenarios a normative one, the “Sustainable Development Scenario” which demonstrates pathways to achieving several sustainability targets. These scenarios are joint in each edition by other ones developed specifically to explore a specific region, policy or technology.

The IEA scenarios are built using a mix of approaches including expert opinion, for instance for fuel prices, as well as bottom-up and top-down simulations for the evolution of power markets. For European power system simulations, the

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IEA uses a model based on the Crystal-platform similarly to the new in-house METIS model developed by the European Commission (see info box above).

The International Renewable Energy Agency (IRENA), an international organisation set up in 2009, produces their own scenarios called RE-map: the Renewables Energy Roadmap. The RE-map is based on exploratory technical scenarios designed to test the potential for renewable development in each country if the right policies are put in place.

Among scenarios directly used by governments or institutions for policy making decisions, it is also important to mention the International Panel on Climate Change (IPCC) scenarios which are at the basis of the various reports guiding the work of the United Nation Framework on Climate Change.

Any report released by the IPCC must have consensus of all participating experts and governments. Agreeing on a small number of storylines or complex modelling approaches is difficult for any organisation and would be an unfeasible task at global level. The IPCC has therefore regularly updated a set of over forty scenarios corresponding to variations in demography, agricultural practices, technology penetration, etc. The IPCC uses simple models, with relatively easily rep- licable simulations, to derive from these assumptions energy consumption and other areas indicators which are then converted into greenhouse gas emissions.

This extensive yet simplified approach is extremely resource and time - inten sive. But is has made possible the release and support by all nations of detailed prospective technical reports which is a rare, if not unique achievement. The scenarios computed have served as basis to adopt and dimension the Kyoto Pro- tocol, and later the Paris Agreement. Since 2015, the IPCC scenarios have been replaced by a smaller list of four “Representative Concentration Pathways”.

All European countries, as well as the European Commission develop their own institutional energy scenarios. Governments use them to explore, test, dimension and communicate on policies. At national level, scenarios are usually built by the relevant ministries in coordination with national representatives from the industry, consumers or other groups.

The European Commission uses the EU Reference Scenario as a central tool to test the effectiveness and potential consequences of energy, transport and climate policies. The Reference Scenario follows a descriptive (forecast) rather than normative approach exploring the continuation during up to 40 years of current policy and market trends.

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4.2 Other notable European scenarios

The European Networks for Electricity and Gas Transmission System Operators (ENTSOs) release every two years a common set of European energy scenarios primarily designed to assist infrastructure investment decisions. The storylines explored are agreed with European stakeholders, and the scenarios are built using a mix of top-down, bottom-up and external references approach.

Based on these scenarios, the European Commission uses cost-benefit-analysis results10 of gas and electricity interconnection and utility scale storage projects in these scenarios to award the Project of Common Interest label.

The World Energy Council, one of the energy world’s most influential non- governmental organisation, uses their own energy scenarios as corner stones of most of their debates, studies and advocacy material.

BP and Shell outlooks are the most widely cited privately produced energy scenarios. They have been effective for decades at bringing lights to specific questions which often find their way on the public energy debate. The oil companies have been adding to their portfolio of scenarios increasingly decarbonised scenarios (such as the Shell “Sky” scenario – 2018), both to prove their commitment to accompanying the transition and analyse the impact of climate policies on their sector.

Since 2005, Greenpeace has been publishing model back energy scenarios named Energy [R]evolution, including systems with up to 100% renewable energy sources. Few organisations have the resources and technical ability to model and advertise scenarios at this scale, although many other environmental organisations produce simpler global, European or national visions or forecasts. For instance, the French NegaWatt scenarios developed by an association of energy professionals have fame in national energy circles by proposing quantified pathways towards a fully renewable power system.

Common trends of exploratory European electricity scenarios: are we on par with the Paris Agreement targets?

10 The analysis methodology is drafted by the ENTSOs and approved and published by the European Com- mission. The analysis results are released in ENTSO-E and ENTSO-G biannual Ten Years Network Devel- opment Plan.

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Exploratory scenarios, considering the long-term evolution of current trends and new policy decisions, are the closest policy makers, investors or communi- cants can get to an often-desired prediction of the future. The common trends they show can be considered as plausible futures, even though they are often disproved by unforeseen technology, economic or societal developments.

Apart from the decrease in CO2 emission, present in almost all publications, some rare common trends appear in the 2019 European forest of electricity scenarios. Electricity demand, as well as peak load are usually foreseen as stable or slightly increasing in the next decades despite often significant efficiency gains, due to the electrification of the heating and transport sectors. Modulation of the demand made possible by the digitalisation of the electricity system (smart grids) contributes to the integration of variable renewables in the system. On the generation side, wind and solar sources are the key driver that differentiates the main scenarios. Nuclear energy slightly decreases in the next 10 to 20 years in a majority of scenarios. New decarbonisation techniques, such as carbon capture and storage or power to gas technologies are absent (at significant scale) from most of scenarios before the years 2040 or 2050.

Reportedly,11 all the main institutional European scenarios produced at national or European level fall short of reaching the Paris Agreement objectives. It is well the case in descriptive scenarios which do not foresee the impacts of not yet developed policies or technology disruptions, but also within normative scenarios such as the IEA “Sustainable Development”.

Other non-institutional scenarios including some of those listed above might of course be consistent with a limitation of temperature rise to 1.5°. However, the absence of major scenarios describing an environmentally and economically acceptable energy future underlines the lack of consensus on the way to achieve at least the later stages of large scale decarbonisation.

The only existing and generally agreed reference for carbon emissions allowing to mitigate climate change seems to be provided by the IPCC in the Representa- tive Concentration Pathway and 2018 Special Report on Global Warming of 1.5 °C. The “carbon budget” approach proposed in these reports is a simplified way to measure the additional emissions that can enter the atmosphere to stay below 1.5C. This tool should be used by policy makers to test compliance of the scenarios they are using with Paris Agreement targets.

11 See, for instance, IEEFA (2018)

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5. Conclusion

We conclude by summarizing the key elements to be considered by policy and decision makers when working with scenarios:

– Scenarios help to understand the implications of certain actions or non- actions. They can provide guidance but no certainty.

– For any scenario, consider first the question it seeks to answer:

• Explanatory scenarios, such as the IEA policy trend scenario or the EC Reference scenarios provide insights how current trends will evolve according to quantitative extrapolations and predictive models.

• These scenarios are effective tools to assess the impact of current policies “if nothing else changes”.

• Yet, these scenarios are not predictions: By definition (and intent), they always fail to forecast unplanned developments or disruptive technological or societal changes.

• Normative scenarios, such as the IEA Sustainable Development Scenario, or the Greenpeace Revolution scenario depict the benefits of a specific, often desirable, and sometimes plausible vision of the future. They help understanding possible pathways to reach certain targets.

– Almost all scenarios, except those developed specifically to prove otherwise, tend to overly assume that the future will look like the immediate past.

– Decision-makers should use not one, but an array of scenarios depicting different futures in a wide spectrum of assumptions and methodologies.

– All main institutional descriptive scenarios fail to reach the Paris Agree- ment targets. Policy makers should closely observe the “carbon budget” of the scenarios they consider, and check their consistency with the Paris Agreement objectives, e.g. through the IPCC scenarios.

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– Institutional scenarios will need enhanced levels of transparency and continuity of data and methodology to retain trust and to further empower decision-makers.

6. References

– European Commission (2016). EU Reference Scenario. 2016 and earlier editions are available at https://ec.europa.eu/energy/en/data-analysis/ energy-modelling – Hamrin, J., Hummel, H., and Canapa, R. (2007). Review of the role of renewable energy in global energy scenarios. Center for Resource Solu- tions for The International Energy Agency. Available at https://resource- solutions.org/wp-content/uploads/2015/08/Review_of_the_Role_of_ Renewable_Energy_in_Global_Energy_Scenarios.pdf – IPCC (2014). Representative Concentration Pathways (RCPs). Availa- ble at http://sedac.ipcc-data.org/ddc/ar5_scenario_process/RCPs.html – IPCC (2018). Special Report Global Warming of 1.5 ºC. Available at https://www.ipcc.ch/sr15/ – McDowall, W., and Eames, M. (2006). Forecasts, scenarios, visions, backcasts and roadmaps to the hydrogen economy: A review of the hydrogen futures literature. Energy Policy 34(11), pp. 1236-1250. Available at https://renewables-grid.eu/uploads/tx_nbrgilgext/McDowall2006.pdf – Paltsev, S. (2016): Energy Scenarios: The value and limits of scenario analysis. CEEPR WP 2016-007. Available at http://ceepr.mit.edu/files/ papers/2016-007.pdf – IEEFA (2018). OFF TRACK: The IEA and Climate Change. Oil Change International and the Institute for Energy Economics and Finan- cial Analysis (IEEFA). Available at http://priceofoil.org/2018/04/04/ off-track-the-iea-and-climate-change/ – Paltsev, S. (2016). The value and limits of scenario analysis. MIT CEEPR WP 2016-007. Available at http://ceepr.mit.edu/files/papers/2016-007. pdf

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Part 6 – Chapter 33 – Seventy Years of European Energy Policy Transition

CHAPTER 33 LESSONS FROM 70 YEARS OF EUROPEAN ENERGY POLICY TRANSITION

Helmut Schmitt von Sydow

Integration is a permanent process of transition. European integration is the transition from the coexistence of multiple nations to an ever closer Union, as enshrined in the Treaty of Paris and reaffirmed in the Treaties of Rome,1 Brus- sels2 and Maastricht3. Sometimes it takes the form of a big bang when there is a major breakthrough, but more often it develops as a slow process of gradual change, sometimes even barely visible in the short run, nevertheless always very impressive if you look back some twenty years or so.

The foundations of today’s European Union were laid some 70 years ago. A first push was given by Winston Churchill in his speech at the University of Zürich in 1946 calling for the creation of a United States of Europe based on a partnership between France and Germany and starting with a Council of Europe which, indeed, was created in 1949. Soon it became clear, however, that a top down approach starting with a kind of European government was not very efficient in real life because of the unanimity rule for voting in the Ministerial Commit- tee. So the Industry Commission of the European Movement proposed, at the Westminster Conference of 25 April 1949, to overcome national vetoes by progressive cooperation on very specific points to pursue very specific objectives.4 They choose four basic industries: steel and coal, and also electricity and means

1 Par. 1 of the preamble of the Treaty establishing the European Economic Community 2 Par. 2 of the preamble of the Treaty concerning the accession of the Kingdom of Denmark, Ireland, the King-King- dom of Norway and the United Kingdom of Great Britain and Northern Ireland to the European Economic Community and to the European Atomic Energy Community 3 Par. 11 of the preamble of the Treaty on European Union 4 Pierre Gerbet, La Genèse du Plan Schuman, Des origines à la déclaration du 9 mai 1950, Revue française de science politique, 1956, p. 525 ff, 527.

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of transport, which should be supervised, yet also sanctioned if necessary, by a public authority.5

Eventually on 9 May 1950, French Foreign Minister Robert Schuman announced his plan for pooling coal and steel and invited the nations of Europe to join France in sacrificing a measure of national sovereignty to a new supranational authority. Broadcasted over French radio on the eve of an Allied meeting reconsidering the German question and a months before the outbreak of the Korean war, the announcement was bold, simple and imaginative - a public relations coup of heroic proportions.6 The Schuman Plan captured the imagination of citizen and politicians and became a force for change and a myth, similar to – 35 years later – Jacques Delors’ White Paper on completing the internal market by the “magic date” of 1992. That Paper, too, was rapid, bold and radical.7 So there is first lesson to be learnt.

1. Transition from war and fratricide to solidarity and peace keeping

The European Coal and Steel Community, eventually established in 1951, pooled the control over two major industries with almost control powers of the supranational High Authority, in order to ensure security of supply and avoid producers’ cartels, for the sake of reconstruction, wealth and prosperity of consumers, citizens and the economy in general.

But its importance goes far beyond its economic impact. After two world wars and European fratricide the ECSC focused on coal and steel because these two industries were considered to be the bases for armament and, thus, war. The objective, and indeed the result, of the ESCS was to make military hostilities politically unthinkable and economically impossible in Europe. The lesson was learnt in ex-Yugoslavia when, after fifteen years of civil war, the countries and -ter ritories of South East Europe founded a new Community, starting with gas and electricity, extending it later to oil and providing for an opening clause for other energy sectors and network industries.8

5 John Gillingham, Coal, Steel, and the Rebirth of Europe, 1945-1955: The Germans and French from Ruhr Conflict to Economic Community, Cambridge University Press 1991, p. 230. 6 Gillingham, p. 231. 7 Helmut Schmitt von Sydow, The Basic Strategies of the Commission’s White Paper, in: Bieber/Dehousse/ Pinder/Weiler, 1992: One European Market?, Baden-Baden 1988, p. 79ff, 88. 8 See Dirk Büschle infra in this book.

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2. The coal transition

For many centuries wood had been the principal source of energy, lighting and heating. However, in the 18th century they became scarce and their prices surged. England, in particular, suffered from deforestation, and imports from Scandinavia were difficult and expensive. Therefore, the English industry turned to coal. The industrial revolution started in Great Britain because the Midlands – contrary to the Netherlands who had already reached a similar level of technological development – offered enormous reserves of coal, fueling the production of textiles, steel and railways. Great Britain lead the coalescence of economic cooperation and became the most urbanized region of the world. Soon, Wal- lonia, Northern France and the German regions of Ruhr, Silesia and Saarland followed. They all disposed of big reserves of coal, and their rapid economic growth attracted people from all over Europe.

Of course, pollution by smoke was visible from the start, but the economic advantages seemed to be more important than the – albeit growing – environmental impact.

Especially the reconstruction of Germany after the second world war would not have been possible without the hard work of the miners suffering in the dark hundreds of meters below the ground. The debt of gratitude motivated German citizens and politicians to support their coal industry when imports became more competitive, despite their general reluctance against subventions and State interventions.

Aware of the sentimental – and thus politically important – feelings in Ger- many, Poland and other Member States, the European Union did not venture to fix a final date for coal production nor a percentage for the share of coal in the European energy mix.

The reason is the interdependence of environmental and industrial policy. Even if Europe would forbid all production and use of coal, there would still be other regions in the world – China, India, but also Australia and South Africa – that would rely on coal. It is in the interest of European environmental policy that those countries – if they stick to coal – revert to the modern technologies of clean coal, carbon sequestration and storage. In fact, Europe has developed a major technological leadership in clean coal, and has a an environmental as well as industrial interest to export clean plants. However, importers will not buy our techniques if we don’t use them ourselves at home or, at leas, are able to exhibit some pilot plants to demonstrate the benefits.

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The replacement of coal by less polluting sources of energy remains a permanent goal of European energy policy. But the European Union is well advised not to fix coal quotas. We may and must fix pollution goals, but we should avoid to intervene too much in the choice of energy sources and of means of energy production. European can promote carbon free energy by incentives and pollution limits, and in order to support the necessary global coordination we even may disarm unilaterally to lead by example.

3. Transition to dialogue – from Florence to Montecatini

Dialogue is the prerequisite for consensus and democratic decision making. Lack of open dialogue leads to disagreement and – even if decisions are taken – undermines the credibility and authority of decisions. Sometimes you have to lock the participants into a closed room in a remote location, with no contact to the outside world, and tell them that they may not leave until they have reached an agreement.

One traditional example is the conclave of catholic cardinals who are to elect a new pope and announce the successful outcome by white smoke. Another example are the members of a jury at a criminal court.

The reasons for the success of this method surely are seclusion and time con- straint, but also the ability to speak openly. When people reveal their profound interests and concerns without hesitation nor shame instead of hiding behind a smoke screen of delusive arguments, their partners will better understand their motivations and anxieties and better discern the path to common ground and win-win solutions.

European energy policy has seen the creation of the Florence Forum for electricity in 1998. In order to discuss the need and content for legislation and regulation, the Commission invited all stakeholders to Badia Fiesolana, a former mon- astery on the hills above Florence which hosts the European University Institute since 1976. The Florence Forum, which now meets once or twice a year, became an immediate success. Although it has no legal powers it agreed, by consensus, on rules concerning cross-border trade, congestion management, transparency and tariff principles.9 When electricity suppliers were asked to publish their tariffs for the sake of transparency of commercial transactions, they first refused, fearing speculation leading to congestion; but when they learnt that some trans-

9 Christopher W. Jones, EU Energy Law, Vol 1, The Internal Energy Market, Leuven 2004, p. 205ff..3.

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parency was needed in order to check fair access and tariffs, they agreed to dis- close their transactions to regulatory authorities.

The Florence Forum on electricity was followed, two years later, by the Madrid Forum on gas and subsequently by other fora for fossil fuels, energy consumers, refining, sustainable energy in the defence and security sector, infrastructure, nuclear and other sectors. Although not all of them have the same impact on regulation an although the privacy of undisturbed discussions has somewhat diminished with the arrival of mobile and smart telephones, the recipe for open peer-to-peer and heart-to-heart discussion is still valid.

What is true for regulators and stakeholders is also true for Ministers. In July 2003 energy and environment ministers held a trail-blazing meeting in Monte- catini, near Florence. They gathered over the weekend in a spa hotel located in a quiet park with ample space for private talks and confessions. Although there were permanent demonstrations downtown by opponents to modern summit diplomacy, their noise almost disappeared in the background and did not stop Ministers but, if ever, encouraged their cohesion and mutual understanding.

The discussions on Friday and Saturday morning were conflictual and even pas- sionate. For many years, environment and energy (as well as industry and internal market) had been considered as natural foes. Environmentalists believed that all energy production and consumptions polluted the air and that economic growth and internal market lead to more transport and even more consumption, whereas industry used to retort that without the wealth of economic growth there would be less money to finance all the gadgets to please the environment.

On Saturday afternoon, participants started to realize that despite their different points of departure, they were aiming for the same goals, albeit for different motivations. They all wanted energy efficiency leading to less consumption, the ones in order to diminish pollution, and the others in order to diminish Eu- rope’s dependence on imports.

4. The internal market transition

While coal and nuclear material were largely covered by the Treaties on the Coal and Steel Community and Euratom, all other energy sectors fell, and still fall, under the Treaties establishing initially the European Economic Community, later the European Union.

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As the latter, until Lisbon, did not contain specific provisions on energy, only the general rules applied, including the basic freedoms of the free movement of goods, persons, services and capitals as well as the competition rules.

Prior to the 1980’s, there was little Community action in the electricity, gas and even oil sector because most service industries were run by national state-owned monopolies enjoying exclusive rights to sell, import and export.10 So it seemed difficult to apply the basic Treaty freedoms without creating new distortions of competition, and harmonization was hampered the rule of unanimity.

One important, but largely unknown exception, occurred during the first petroleum crisis in 1974. Under the pressure of the embargo of the Organization of Petroleum Exporting Countries, all European States were tempted to control their oil exports even to the partners of the European Economic Communi- ty. They did not dare to impose quantitative restrictions on intra-Community trade, but they introduced a TLA (toute licence accordée) system of automatic licenses - which would enable them to block the system whenever they felt that exports increased too much. The Commission started infringement procedures against eight out of the then nine Member States, referring to a recent –widely unknown – judgment of the Court of justice that had ruled that such automatic licenses, though they were allowed under international trade rules, were incom- patible with the basic Treaty rule forbidding, in the internal market, export restrictions and all measures having equivalent effect.11 The Commission argued that the judgment also concerned State monopolies. As a result, Member States renounced to their TLA systems.

Later, in the wake of the White Paper on the completion of the internal market by 1992, the Commission took action against eight Member States again arguing that their electricity and gas monopolies were contravening the basic Treaty rules concerning free movement of goods; the Court answered with Solomonic wisdom that, while the Commission was entitled to take action to prohibit such monopoly rights, it had to meet a high burden of proof to demonstrate that the existence of monopoly rights were not essential to achieve legitimate public service obligations.12 Although these judgments are now largely of academic interest since the adoption of the internal market directives for gas and electricity, they have surely helped in the decision making process leading to that adoption.

10 Christopher Jones, p. 1ff. 11 Judgment of 15 December 1971 in joined cases 51 to 54/71- International Fruit, point 3. 12 Jones, p. 2.

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5. Three packages reflecting subsidiarity and proportionality

There have been three packages on the internal market for electricity and gas. The Commission started with a soft approach but tightened the thumbscrews when additional pressure seemed necessary to overcome of the reluctance of economic actors to play by the rules and to achieve the results of free choice for consumers and free access to the grid for suppliers.

Take the example of unbundling of vertical integrated companies. The first set of Directives – electricity in 1996 and gas in 1998 – concentrated on unbundling of accounts; there may still be one single company, but transparency will avoid cross-subventions. The second package in 2003 requested legal and organizational unbundling; there must be two separate companies and their managers and staff must be completely independent from each other. The third package of 2009 culminates in ownership unbundling – although it provides for some sub-categories and exceptions.

European energy policy is not meant to regulate as much as possible but to respect the principles of subsidiarity and proportionality. That applies to all economic sectors, to electricity and gas, to telecommunications and transport, to chemicals and food. For energy, the criteria are the effective opening of markets, the evolution of prices, the statistics on cross-border trade and on consumers switching their supplier. No criterion is exclusive; no one wants consumers to switch permanently, no one wants all trade to cross borders, and contrary to e.g. telecommunications no one wants create incentives for more energy consumption by lower prices. But all criteria, taken together, offer a realistic picture of the state of competition and market freedoms.

6. The normative force of facts

At the end of 2005, relations between Gazprom of Russia and Naftogaz of Ukraine became tense. On 31 December the supply contract from Gazprom to Naftogaz would expire, and Gazprom seized the opportunity to ask for a price increase. Indeed, the gas price from Russia to Ukraine was at a quarter of world market prices, reflecting the traditional friendship between communist countries. Now that Ukraine got emancipated from Russia and started to turn West and that Ukrainian elections were scheduled in spring, Gazprom saw no justification for the old preferential treatment. Ukraine, on the other side, felt not able to pay such a high price increase. Its economy was not all energy efficient and and had a high level of consumption, and its industry relied on cheap energy in

523 Part 6 – Chapter 33 – Seventy Years of European Energy Policy Transition

order to gain a competitive advantage for exports, including exports to Western countries.

Both parties claimed loudly that they were not able to cease, and in the last days of December it became clear that this was not the usual bargaining show, but that discussions were really stuck and that Gazprom might really cut deliveries on 1 January 2006. That could have created also problems for the deliveries from Gazprom via the Ukraine to the European Union. Action was needed.

So on Friday 30 December, the Commission services convoked a meeting of gas experts of the Member States for Wednesday 4 January. In order to ensure that the invitation, which was sent to Member States’ permanent representations in Brussels, reached the competent national ministries, reference was made to the “Gas Coordination Group foreseen by Directive 2004/67/EC”, although the Directive entered into force only next May, the Gas Group did not yet exist, and even after its creation it would only be competent to discuss internal gas trade inside the European Union, not trade with or between third countries.13

When on Sunday 1 January, the contract between Gazprom and Naftogaz had, indeed, not been renewed, public opinion began to worry about gas supplies. Interrogated by the press, the energy minister of Austria, that on the very 1 Janu- ary was taking over the rotating presidency of the Council, answered that he was aware of the problem and that the European Commission had already convoked a crisis meeting of the competent Gas Group. If necessary, he would assist that meeting. On Monday the ambassadors of Ukraine and Moldavia requested to assist that meeting, too, and the Austrian minister and the European energy commissioner confirmed their participation. On Tuesday, Naftogaz also requested access. So a low level meeting of national experts dealing with intra-Community trade had developed into a political crisis meeting with ministerial participation.

When the experts finally met on Wednesday, the problem had mostly been resolved because on Tuesday evening Naftogaz and Gazprom had reached an agreement prolonging their contract for six, if necessary twelve, months to allow further price negotiations. It seems that the agreement also stipulated, on the request of Gazprom, that both parties would abstain to go to the Brussels crisis meeting next morning. Visibly, Gazprom did not want the Commission to intervene as an arbiter.

13 Art. 7 of Council Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply

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The lesson is that the influence of Europe grows considerably as soon as the Union is perceived as pursuing a common policy with common instruments and institutions, speaking with one voice. In particular, the pressure of crisis may open policy windows.

The new momentum continued in the following months and years. Still in winter 2006 a group of European gas experts, led by the Commission, went to Ukraine in order to control the pipelines from Russia and to check, in particular, if transit to the European Union was flowing normally. And when at the beginning of 2009 another dispute between Naftogaz and Gazprom arouse, another crisis meeting and another monitoring mission were organized early January. In March 2009 Ukraine and the Commission signed a joint declaration on the modernization of Ukraine’s gas transit, whereby Ukraine promised to respect the basic elements of the Union’s gas legislation such as the independence of the transmission system operator and the transparent, objective and non-discriminatory application of transmission tariffs.

Eventually, when the Security of Gas Regulation was reformed in 2010, new provisions reinforced the Gas Coordination Group and entitled the Commis- sion to coordinate actions with regard to third countries and to create a monitoring task force,14 providing a legal base to what had already started to happen.

7. The transition from top down to bottom up

Foreign policy is a convincing example for the advantages of a technical, industry approach based on facts and needs, over a political approach based on high level, abstract considerations. While it is easy to proclaim the goal of a common foreign policy, the process may be slow before any concrete action is convened. Security of supply is one of the three pillars of the magic triangle of energy policy enshrined in the Lisbon Treaty. But while the two other pillars – internal market and environment – were rather quickly implemented, even before the entry into force of the Lisbon Treaty, foreign policy was not considered to be ripe for spectacular action before the ratification of Lisbon. The reason is that, because of the absence of an energy chapter in the Treaty and the lack of visibility of Europe in international negotiations, Member States and even scholars were accustomed to a lack of common foreign energy policy and took it as a proof of a lack of European competence. In reality, energy is an economic good

14 Art. 11 par. 7 and art 12 par 2 of Regulation (EU) 994/2010 of 20 October 2010 concerning measures to safeguard security of gas supply and repealing Council Directive 2004/67/EC.

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as any other in the European Community and, consequently, falls under the general rules governing free movement in the internal market and the exclusive competence for international trade.

But to impose that view after decades of silence would have amounted to a revolution. In addition, energy trade has three characteristics that distinguish it from other sectors: First, energy negotiations do not aim at dismantling import restrictions but to the contrary boos imports by cooperation with, and investments in, the exporting countries. Second, such trade arrangements are often concluded by private companies and not by States – although the respective Ministers may be standing behind the managers during the signature and tap them on the shoulder in order to encourage them. Nevertheless, the Treaty provisions on the common commercial policy apply only to public authorities, not to private companies. Third, most of these arrangements are not published and their precise content remains more often than not unknown. When the Com- mission some years ago read in the press that a Member State had struck an energy deal with Uzbekistan and asked for details, the Member State answered that its neighbors had signed similar deals without reporting to the Commission.

A top down approach might have led Member States to stress the geopolitical and vital importance of energy and, in order to avoid the acquis communautaire and majority voting in the Council, to revert to the political decision making culture of the nascent European security and foreign policy. NATO had already announced that they were ready to add energy to their fields of action.

So the Commission started low level by convincing the European Parliament and the Council to adopt simple rules on the transparency of intergovernmental agreements on energy in 2012.15 In 2015 the Commission carried out an evaluation of that decision and concluded that an ex-post notification was not sufficient as, whenever an Agreement is not compliant with EU law, it may be too late for renegotiations, both legally and politically. Thus the Commission proposed and Parliament and Council adopted in 2017 new rules increasing transparency;16 draft Agreements with third countries in the gas and oil sector must now be submitted to the Commission before, not after, they are signed.

15 Decision 994/2012/EU of 25 October 2012 establishing an informtion exchange mechanism with regard to intergovernmental agreements between Member States and third countries in the field of energy. 16 Decision (EU) 2017/684 of 5 April 2017 on estblishing an inforation exchange mechnism with regard to intergovernmental agrements and non-binding instruments between Member States and third countries in the field of energy, and repealing Decision 994/2012/EU.

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Another – and less known – example of a technical low level approach occurred in 2005 in the wake of Hurricane Katrina which had destroyed American facilities for production of crude oil and petroleum products, affecting also the supplies to the EU. To avoid shortages, the International Energy Agency had asked a number of European Member States to release some of their oil stocks, and even EU Member States that were not members of the IEA expressed their support for the emergency action. As a result, the level of oil stocks in some Member States were to fall below the compulsory minima laid down by Direc- tive 68/414/EEC.17 However, the Directive did not forbid Member States to decrease the levels in case of difficulties of supply; it only asked them to inform the Commission allowing for a discussion with the other Member States.18 The Commission convened the Oil Supply Group of national experts and convinced them to agree to a common, not national evaluation of the reduced oil stocks. Indeed, although some national stocks fell below the individual quantities prescribed by the Directive, the overall quantities in the whole European Union did not fall below the sum of individual minima. The Oil Group recognized that the actions taken by individual Member States did not endanger the common security of supply, but felt that the Commission should comfort Member States and legally confirm its interpretation. So the Commission published a Recommen- dation accepting that individual stocks might fall below the prescribed level,19 indirectly establishing a system of EU-wide calculation and of prior authorization.

8. The Echternach way of transition

“Moving three steps forward, two steps backwards” is the common perception of the dancing procession celebrated every Whit Tuesday in Echternach, the oldest city of Luxembourg.20 European integration seems to follow a similar pattern, and the energy reform by the draft Constitution of 2004 and the Lisbon Treaty of 2007 is a perfect illustration.

The draft of a European Constitution, as proposed by the Convention,21 contained Article III-157 on energy consisting of two paragraphs: The first one defines three objectives for the “Union policy on energy”, the second one choose

17 Directive 68/414/CEE du 20 décembre 1968 faisant obligation aux Etats membres de la C.E.E. de mainte- nir unniveau minimum de stocks de pétrole brut et/ou de produits pétroliers. 18 Art. 7 of Directive 68/414/CEE. 19 Commission Recommendation 2005/885/EC of 7 December 2005 on the release of oil stocks following the supply disruption caused by Hurricane Katrina. 20 www.willibrord.lu/rubrique4/Dancing-procession/historical-aspects 21 Doc. CONV 850/03 of 18.07.2003

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the decision making process for adopting legislation. That second paragraph is accompanied by a subparagraph on Member States’ choice between different energy sources and the general structure of their energy supply. Thus from the beginning of the negotiations, the big leap forward was restricted by two caveats. They were however innocent insofar as they seemed just to mirror common perception of national sovereignty and relatively little Community action during the first decades of European integration.

The Convention was followed in 2003 by an Intergovernmental Conference in order to transform the draft constitution into a Treaty to be ratified by all Member States. During the negotiations, the United Kingdom and the Neth- erlands requested that the Constitution should stipulate more clearly national sovereignty over energy resources.22 So the “choice” became a “right” and was extended to a Member State’s “right to determine the conditions for exploiting its energy resource”.23

The Commission opposed the amendment. Indeed, the conditions for exploiting energy resources were already subject to the Treaty provisions on the right of establishment, to Directive 94/22/EC on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons, to the ECSC acquis concerning mineral oils, and to the Directives governing the internal market for gas and electricity.

As a result the whole energy chapter was thrown out in May 2003.24 A full jump backwards.

In order to save the chapter by a compromise between the legal concerns and national desire to affirm sovereignty, the Conference later compensated the -at tack on the acquis by a reference to the “application of other provisions of the Constitution.”25 Thus the step backwards was limited.

The final text of Article 194 as introduced by the Lisbon Treaty may not add much in substance. Many of the environmental and internal market aspects have been pictured as “old wine in new bottles”.26 However, this new Treaty chapter offers many advantages, providing for an autonomous legal basis for positive

22 Doc. CIG 37/03 of 24.10.2003, p. 15, point 70. 23 Doc. CIG 73/04 PRESID 16 of 29.04.2004, Annex 34. 24 Doc. CIG 76/04 PRESID 18 of 13.05.2003, Annex 26. 25 Doc. CIG 50/03 of 25.11.2003. 26 Katja Papenkort, Jan-Kristof Wellershoff, Der Energietitel im Vertrag von Lissabon – Alter Wein in neuen Schläuchen, in: RdE 2010, p. 77ss (77).

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measures, more visibility, more legitimacy and more legal security. Energy is one of the winners of Lisbon, and foreign energy policy and security of supply are the winners of the energy chapter.

UNESCO accepted the “hopping procession of Echternach” as they call it, in its list of intangible cultural heritage because – despite the zigzag path - it provides “its participants and observers with a sense of identity and continuity.”27 The same holds true for energy policy which needs, in addition to small steps of technical and administrative progress, an occasional political and psychological boost.

27 UNESCO, Intergovernmental Committee for the Safeguarding of the Intangible Cultural Heritage, Deci- sion 5.COM 6.27 of November 2010.

529

The Authors

THE AUTHORS

‘Views expressed by employees or former employees of EU institutions, ACER, ENTSOs, IRENA are those of the authors and do not necessarily represent the official views of the institutions and organisations for which they work or worked.

Sami Andoura Sami Andoura is the leader of the sustainable development team at the Euro- pean Political Strategy Centre, the in-house think tank of the European Com- mission, reporting directly under the authority of the President. He provides strategic analysis and policy advice for the President on matters related to the policy priorities, including Energy Union and Climate Change, Transport and Mobility, Circular Economy, Sustainable Development, and other issues related to Jobs, Growth, Innovation and Industrial policies. Prior to joining the EPSC, Sami was Professor and head of the European Energy Policy Chair at the Col- lege of Europe. He served as Senior Research Fellow at the Jacques Delors Insti- tute, an EU policy think tank based in Paris. He has also been the head of the European Affairs Programme at Egmont – The Royal Institute for International Relations in Brussels.

Antonella Battaglini Founder and Chief Executive Officer of the Renewables Grid Initiative. -An tonella is currently a member of the European Commission’s expert group on electricity interconnection targets and has previously been an expert member of the World Economic Forum’s 2014-2016 Global Agenda Council on the Future of Electricity. In 2015, she was named one of Tällberg’s five Global Leaders for her commitment to a sustainable energy future and combating climate change. She has also worked as a senior scientist at the Potsdam Institute for Climate Impact Research (PIK) where she led the SuperSmart Grid (SSG) process, a concept she developed together with her team to reconcile different approaches

531 The Authors

to the system integration of renewables. By adopting a holistic approach, the SSG addresses the challenges of the transformation of the power sector considering generation, transmission and demand management. In this concept, both centralised and decentralised options play an undisputed role.

Klaus-Dieter Borchardt Prof. Dr. Klaus-Dieter Borchardt holds a law degree from the University of Ham- burg (1974-1979) and a PhD from the Free University of Berlin (1985). Since 1987 Mr Borchardt is a Civil servant at the European Commission where he served in different Directorates General (“Employment, Social Affairs and Edu- cation”, Legal Service, Agriculture and Rural Development) and as first Deputy and then Head of Cabinet of Commissioner Mariann Fischer Boel (Agriculture and Rural Development). Mr Borchardt also worked as a Member of the Cabi- net of the German Judge at the European Court of Justice in Luxemburg. Since 1 April 2013 he is working in the Commissions Directorate-General for Energy, first as Director responsible for the Internal Energy Market and since 1 January 2019 as Deputy Director General. Mr Borchardt is Teaching Professor at the Faculty of Law at the Julius-Maximilians-University in Würzburg since 2001.

Christian Buchel Christian Buchel is a Member of the Board of Enedis, the distribution system operator in charge of operating, developing and maintaining the medium- voltage and low-voltage power grids across 95% of mainland France. Since May 2018, he is Director for Customer, Markets, Territories and Europe of Enedis, in charge, among other things, of customer policy, market mechanisms, territories and distribution concessions. As the previous Chief Digital Officer of Enedis, also in charge of Europe and International Development, he drove during three years the digital and big data transformation of the company, with the goal of bringing it at the forefront of digital in the electricity distribution sector in France and Europe and to offer a better public service. He is also Chairman of EDSO for Smart grids, the Euro- pean association representing leading electricity distribution system companies that are cooperating to make the European smart grid vision a reality. Prior to this, Christian Buchel held various top-management positions within the EDF Group. He was notably a Member of the Board and COO of Ener- gie Baden-Württemberg (EnBW) in Germany as well as CEO of Electricité de Strasbourg. In the late 1990s, Christian Buchel also served as an advisor to EDF’s CEO. During his early career, he held both managerial and operational responsibilities, covering the entire value chain of the electricity industry.

532 The Authors

Christian Buchel holds an engineering degree from Ecole Supérieure d’Electricité (Supélec, Paris) and was a research fellow at CERN, Geneva, shortly after the end of his studies.

Dirk Buschle Dirk Buschle is Professor and Chairholder of the European Energy Policy Chair at the College of Europe in Bruges. He teaches the annual course “European and International Energy Policy and Governance”. Dirk Buschle is also Deputy Director of the Energy Community Secretariat since 2011 and has led its legal unit since 2007. In this position, he is in charge of ensuring implementation of European energy law in the countries of the En- ergy Community. He is also responsible for dispute resolution and negotiations and acts as mediator in high-profile investor-state conflicts in the energy sector. Prior to his current position, Dirk Buschle was Head of Cabinet of the Presi- dent of the Court of Justice of the European Free Trade Association (EFTA) in Luxembourg. Dirk Buschle graduated in law from Constance University, Germany, and earned his Ph.D. at St. Gallen University in Switzerland. He has widely published in different areas of European policy and law, has lectured at Universities of Reykjavik, Constance and St. Gallen as visiting professor.

Claire Camus Claire Camus is a Belgian national who has studied and worked in the United States, the United Kingdom and Slovenia. She graduated in Political Science with a specialization in International Relations before spending all her career in communication. Firstly, in a diplomatic representation, moving on to the Euro- pean financial services before entering for the last ten years the world of energy. Claire worked as Communication Advisor in a national regulator before joining ACER and being the first Press and Communication Officer of the newly created European Agency. She then started working for ENTSO-E since 2014 and is now heading the communication team.

Alicia Carrasco Alicia Carrasco took her MCs in Environment and Sustainable Development at UCL in London and her Master Degree in Economics and Business Admin- istration at UMA in Málaga. She is the founder and CEO of olivoENERGY, a European Energy Strategy Consultancy, who focuses on identifying business opportunities coming from energy regulations and innovation. Former director

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energy policy at EU Tesla, director regulations EMEA digital grid SIEMENS, director regulatory affairs eMeter and Standard & Poor’s energy analyst, she co- founded in 2010 the Smart Energy Demand Coalition, SmartEN being pivotal of the development of flexibility and market directives in EU, and recently in 2018, she has co-founded Entra, association of aggregation and flexibility in Spain.

Andrzej Ceglarz Andrzej Ceglarz is a researcher at the Renewables Grid Initiative in Berlin and a PhD candidate at the Bavarian School of Public Policy at the Technical Uni- versity of Munich. For his dissertation he was granted a fellowship in the framework of the Think Lab ‘Energy-Society-Change’ from the Foundation of Ger- man Business. Between 2014 and 2017 he worked at the Potsdam Institute for Climate Impact Research developing approaches supporting stakeholder participation in the development of energy infrastructure. His interests lie in multi- level decision-making processes regarding climate and energy policies (with a focus on Poland and Germany), high-voltage power line development projects, and transdisciplinarity in the field of energy.

Olivier Corradi Olivier Corradi is a Data Scientist, Software Engineer and founder of the start- up Tomorrow, where he’s working on using AI and Data Science to build scalable digital solutions to climate change. He is the creator of the electricitymap. org platform, was previously head of data science and engineering at AI start-up Snips, and worked at Google and IBM Research.

Marina Cubedo-Vicén Marina holds a Masters Degree on Security and Crisis management from Uni- versity of Leiden and a degree on International Relations from University Ne- brija, Madrid.

Jos Delbeke Jos Delbeke (1954, Belgium) is Senior Adviser at the European Political Strat- egy Centre at the European Commission, and Professor at the European Uni- versity Institute in Florence and at the KU Leuven in Belgium. He was Direc- tor-General of the European Commission’s Directorate-General for Climate Action from 2010 to 2018, having worked on all aspects of climate policy and

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diplomacy, as well as other environmental issues, such as chemicals and sustainable development more generally. He holds a PhD in Economics (Leuven) and joined the European Commission in 1986.

Jacques Delors Jacques Lucien Jean Delors is a French politician who served as the 8th Presi- dent of the European Commission from 1985 to 1995. He served as Minister of Finance of France from 1981 to 1984. He was a Member of the European Parliament from 1979 to 1981. He heads the Jacques Delors Institute promoting European integration and independent thought leadership.

Gustav Fredriksson Gustav Fredrikkson is a PhD candidate in Environmental and Energy Econom- ics at ETH Zürich in Switzerland. He previously worked for the Brussels-based think tank Bruegel, where he focused on issues related to energy and climate. He holds a MSc in Economics from the Stockholm School of Economics in Sweden

Christophe Gence-Creux Christophe Gence-Creux holds a PhD in Economics from the University of Toulouse, where he used to teach Economics and Regulation. After a post- Doctorat at the Laval University in Quebec, where he continued his research on the Economic Regulation of network infrastructure industries, he worked as a consultant for the World Bank for the promotion of public-private partnerships in the financing of network infrastructures in the North-African and Middle-Eastern countries (MEDA) region. From 2003 to 2011, he worked for the French Energy Regulatory Authority, CRE, where he was in charge of the market integration process with neighbouring countries, the well-functioning of the French balancing market and its opening-up to cross-border balancing trade and to the participation of demand-side response. In February 2011, he joined the Agency for the Cooperation of Energy Regula- tors as the Head of the Electricity Department.

Dolf Gielen Dolf Gielen is director for Innovation and Technology at the International Renewable Energy Agency since 2011. He worked previously for the United Nations Industrial Development Organization and the International Energy Agency. He has a PhD from Delft University in the Netherlands.

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Jean-Michel Glachant Jean-Michel Glachant took his PhD in economics at La Sorbonne University. He has been professor in France till 2008 when he got the Loyola de Palacio Chair in European Energy Policy at the European University Institute in Flor- ence (Italy). He is since Director of the Florence School of Regulation.

Simeon Hagspiel Simeon Hagspiel holds a Master’s degree in Engineering from ETH Zurich, and a PhD in Economics from the University of Cologne. He has a broad expertise in energy economics, engineering and policy, developed and proven in numerous research and consultancy projects for the public and private sector. A specific focus lies on the planning and regulatory design of transmission grids and renewable energy integration. He is currently the Team Lead for Economic Studies at ENTSO-E.

Tom Howes Tom Howes is an official of the energy department of the European Commis- sion. He worked on renewable energy policy and energy market integration issues for some years. Now as deputy head of the economic analysis and financial instruments unit, he manages economic modelling and data for energy policy development. Policy work includes the 2030, “clean energy” packages and the long term strategy, the energy prices & costs reports, energy subsidies and energy security studies, energy state aid policy, and the development of energy financial instruments. He is an economist and has previously worked for the Australian and British governments and the IEA.

Luis Janeiro Luis Janeiro is Programme Officer at IRENA’s Innovation and Technology Cen- tre. Before joining IRENA, Luis was senior energy and climate policy consultant at Ecofys-Navigant. Luis holds an MSc degree in Sustainable Development from the University of Utrecht (The Netherlands), a postgraduate diploma in Renewable Energies from the University of Santiago (Spain) and a BEng in In- dustrial Engineering from the University of Vigo (Spain).

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Pascal Lamy From September 2005 to August 2013, Pascal Lamy served for two consecutive terms as General Director of the World Trade Organization (WTO). A committed European and member of the French Socialist party, he was Chief of Staff for the President of the European Commission, Jacques Delors from 1985 to 1994. He then joined the Credit Lyonnais as CEO until 1999, before returning to Brussels as European Trade Commissioner until 2004. Mr. Lamy holds degrees from HEC School of Management, the Institut d’Etudes Poli- tiques (IEP) and the Ecole Nationale d’Administration (ENA). Pascal Lamy was appointed in 2016 President of the French Committee of the Pacific Economic Cooperation Council (PECC) and chair of the European group of experts in charge of evaluating the impact of EU research funding. He shares his other activities between the Jacques Delors Institute (President emeritus), the presidency of the World Committee on Tourism Ethics, as well as various mandates or missions related to international affairs. He is also Presi- dent of the Board of Directors of the Musiciens du Louvre (Orchestra of Marc Minkowski), member of the Board of Directors of the Fondation nationale des Sciences politiques, the Mo Ibrahim Foundation, the Thomson Reuters Founders Share Company, Transparency International France and the Center on Regulation in Europe (CERRE); senior advisor to the Brunswick Group, to Trade Mark East Africa (TMEA) and to the World Trade Board, member of the Advisory Boards of Transparency International, the Oxford Martin School, UNITAID and the Friedland Institute. He is affiliate Professor at HEC. He is currently also member of the Global Future Council on regional Governance at the World Economic Forum. Pascal Lamy is author of various books and reports on global governance, Eu- rope and international trade. Pascal Lamy also lectures to the benefit of Institut Jacques Delors among other engagments, on issues related to globalisation, global governance, international trade, international economics, regional integration, European and French issues.

Maria Eugenia Leoz Martin-Casallo Maria Eugenia Leoz is a policy officer in the Directorate-General for Energy of the European Commission working on internal energy market issues since 2014. Previously she practiced EU energy law and EU competition law at Latham & Watkins LLP in Brussels. She holds a JSM from Stanford University, a LLM from Amsterdam University and a Law degree from Universidad Complutense de Madrid.

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Philipp Lowe Philip Lowe, Former ~Director of Energy and of Competition, European Com- mission; Senior Advisor, Oxera Consulting.

Leonardo Meeus Leonardo Meeus completed his a PhD in engineering at KU Leuven, Belgium. In 2008, he joined the Florence School of Regulation at the European Univer- sity in Italy as a researcher. Since 2012, he is professor at Vlerick Business School in Brussels (Belgium) and at the Florence School of Regulation.

Susanne Nies Susanne Nies holds a PhD and a habilitation from Bonn University, Berlin Free University, as well as Sciences Po Paris, in Political Sciences, as well as an economics degree from London School of Economics, and a Master degree in Slavistics and Romanistics. Previously she was heading the French Institute for International Relations Brussels branch and was affiliated as a senior researcher to the energy programme of the institute; she has a long track of academic publication, affiliation to research and lecturing, as well as consulting. She is managing director and member of the executive management of ENTSO- E, in charge of strategy and policy, communication and stakeholder relationship, as well as leading the work on Research and Development and TSO-DSO interface.

Philipp Offenberg Philipp Offenberg is an Analyst at the European Political Strategy Centre (EPSC) – the in-house think tank of the European Commission, reporting directly under the authority of the President. He provides strategic analysis and policy advice on matters related to the policy priorities, including Energy Union and Climate Change, Transport and Mobility, and Innovation and Industrial policies. Before joining the EPSC, he worked as Research Fellow on EU energy policy at the Jacques Delors Institut Berlin. Since 2014 he has also been a Research Associate at the European Centre for Energy and Resource Security King’s College London. His prior work experience includes positions with Ac- centure and BASF.

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Jean-Baptiste Paquel Jean-Baptiste Paquel is Long Term Planning Manager at the ENTSO-E Secre- tariat. He joined ENTSO-E in 2013 as a Corporate Affairs Advisor working on stakeholder engagement, network codes and regional cooperation strategy. Jean-Baptiste began his career in Denmark where he worked for 2 years to prepare the presence of French stakeholders at the 2009 UN Copenhagen Climate Conference. He later worked at the French Environment and Energy Manage- ment Agency as a smart grids expert overseeing French public investments in large scale demonstration projects. He studied engineering in Paris and Beijing.

Diego Pavia Diego Pavía graduated as electrical engineer, specialising in electronics and automation from the Polytechnical University of Madrid. His first professional experience, in 1988, was as co-founder and CEO of a start-up, Knowledge En- gineering, dealing with industrial controls systems using artificial intelligence and neural networks. Three years later he joined Sema Group, and started a long career with private companies. In SchlumbergerSema, Diego headed multicultural working groups all over the world in the field of energy, with revenues of $650M. Between 2002 and 2010, Diego was the CEO of Atos Origin, a leading international IT service provider, where he was responsible for Spain and South America, about 9,000 employees, and an annual turnover of €450M. Diego has been CEO of InnoEnergy, since 2010. As a serial entrepreneur, Diego has created seven companies in his lifetime.

Thomas Pellerin-Carlin Thomas Pellerin-Carlin is head of the Jacques Delors Energy Centre and Re- search Fellow at the Jacques Delors Institute. Thomas joined the Jacques Delors Institute in 2015. He now works as the Head of the Jacques Delors Energy Cen- tre and as a Jacques Delors Institute research fellow. He works on the European Union energy policy, with a focus on innovation and climate change. Thomas also teaches at the College of Europe Energy Union Training Programme and at the Sorbonne. He is also a member of the Policy Advisory Council of the Eu- ropean University Institute’s Florence School of Regulation. Thomas previously worked in a consultancy (Europroject, Italy, 2010), the French Army, the French Administration (General Secretariat for European Affairs, 2012) in Academia for the College of Europe, (Belgium, 2013-2015) and its European Energy Pol- icy Chair. Thomas studied political science and holds a MA from the College of Europe (2012-2013, Václav Havel Promotion) and an MA from Sciences-Po Lille (2007-2012, Promotion George Orwell).

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Alberto Pototschnig Alberto Pototschnig is the first Director of the European Agency for the Coop- eration of Energy Regulators (ACER), established in 2010 pursuant to Regula- tion (EC) No 713/2009. He was appointed in May 2010 and took office on 16 September 2010. Before joining the Agency, from January 2006 he was a Partner in Mercados EMI, a Madrid-based international consultancy specialising in the energy sector, where he served as CEO and Deputy Chairman. He previously worked at the Italian Transmission System Operators (from 2003 to 2005), served as first CEO of the Italian Electricity Market Operator (from 2000 to 2003) and in the Italian Energy Regulatory Authority (AEEG, from 1997 to 2000), with his final position being Director of Electricity Regulation. Alberto started his professional career in 1989 with London Economics, an international economic consultancy, where he was eventually in charge of the industrial economic advisory practice. Between 2003 and 2005 Alberto acted as an adviser to the Italian Government on environmental policy issues. Since 2004, he is an adviser at the Florence School of Regulation, where he regularly teaches on energy regulation and market design. Alberto holds a Degree in Eco- nomics from Bocconi University in Milan and an MSc in Econometrics and Mathematical Economics from the London School of Economics, University of London.

Konrad Purchala Konrad Purchała is Head for European Integration Policy at the Polish Trans- mission System Operator, PSE S.A., serving as Deputy Director in the Interna- tional Cooperation Department. His main interest is electricity market design, focusing on the interactions between the technical aspects of power systems operation and the economics of electricity markets. His references range from capacity calculation and allocation mechanisms, market coupling, integration of balancing markets as well as system and market analysis. He also took an active role in large European research projects on distributed generation, wind energy integration and institutional support for tackling future R&D challenges of the European TSOs. Mr. Konrad Purchała received a M.Sc. degree in electrical engineering in 1999 from Warsaw University of Technology, and in Ph.D. from University of Leu- ven in Belgium in 2005 for his work on management of congestion in liberalized electricity markets. From 2005 till 2009 he worked in Belgium in Power System Consulting of Tractebel Engineering – center of excellence for the GdF-SUEZ group, where he was an expert in techno-economic studies. He joined PSE in 2009 as Adviser to the Board. Between 2012 and 2016 he lead the Energy Mar- ket Development Office, which in May 2016 became integrated into Interna-

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tional Cooperation Department. In March 2017 he was elected as Chairman of ENTSO-E Market Committee.

Pierre Serkine Pierre Serkine joined EIT InnoEnergy in 2014. Before joining the EU Business Unit of the company as Energy & Innovation Adviser in 2017, he worked as technology analyst on storage and on consumer empowerment (behavioural change, prosumers, active consumers) and digitalisation. Prior to that, he worked for the European diplomacy on energy, climate change and raw materials issues, on adaptation to Climate Change for the French Min- istry of Environment and Energy, and as an analyst in cleantech in a Private Equity funds. He graduated from a school of engineering, holds an MSc in Aer- ospace Dynamics, a M. Econ in Energy and Climate Economics, and a MA in European Studies.

Laurent Schmitt Laurent Schmitt is ENTSO-E’s Secretary General since January 2017. Before joining ENTSO-E, he was Global Smart Grid Strategy Leader at General Elec- tric Grid Solutions. Laurent worked in Europe, the United States and Asia, first on power generation then on transmission and distribution specialising in smart grids solutions. Laurent is a member of strategic committees in CIGRE, IEC, EPRI and European Smart Cities Platform. He took part in expert task forces of the IEA and the European Commission. In 2015, he was named one of the most 40 influential people in the European Smart Grid by the Metering & Smart Energy International Magazine.Laurent is a French national. He graduated in Power System Engineering from Supélec in Paris and holds an Executive MBA from INSEAD, France.

Helmut Schmitt van Sydow Helmut Schmitt von Sydow is professor for European Law at the University of Lausanne and at the European College of Parma. He has studied Econom- ics and Law at the Universities of Frankfurt, Geneva and Berlin. From 1971 to 2008 he worked for the European Commission in Brussels principally in the areas of the internal market, industry, energy and external relations; in particular, he has been Director for Capital Goods Industries, Director for Conventional Sources of Energy, and Chief Legal Adviser to the Director general for Energy and Transport. He has written several books and numerous articles on European Law with special emphasis on institutional issues and on internal market poli-

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cies. He is co-editor of the Revue du Droit de l’Union européenne and was, until 2017, editor in chief of the European Energy Journal.

Theresa Schneider Theresa Schneider is the Senior Manager for Communication of the Renewables Grid Initiative, Berlin. She holds an M.A. in European Studies from University of Hamburg and a B.A. in Political Sciences from Charles University, Prague.

Christian Schülke Christian Schülke is an advisor on government and regulatory affairs at Equi- nor. He has held various positions in Equinor (formerly Statoil) since 2010, dealing with energy policy and regulation at EU and national level, in Brussels and Berlin. He previously worked as research fellow at the French Institute of International Relations. Views expressed in this article are his own.

Jesse Scott Jesse Scott holds a degree and masters from Cambridge University. She is a co- author of the International Energy Agency’s flagship report Digitalization & Energy (2017) and Council on Foreign Relations book Digital Decarboniza- tion (2018). A recognised expert on EU climate and energy policy and political strategy, she previously worked at thinktanks E3G and DemosEuropa, and at electricity sector group Eurelectric where she headed the environment and sustainability programme and led a multi-sector coalition for strong carbon markets. She is currently tackling a key new field of energy change as Deputy Secretary General of Eurogas, working on natural, renewable and decarbonised gas. She guest lectures at Edinburgh University.

Konstantin Staschus Konstantin Staschus was ENTSO-E’s first Secretary-General, from March 2009 until Jan. 2017. He defined and built up the Brussels Secretariat of ENTSO- E, managed strong growth in ENTSO-E’s number of legal mandates, working groups, projects and staff, and ensured that legal mandates on network codes, ten-year plans, R&D etc. were met, and that the TSOs’ strategies decided in the Assembly were pursued successfully. Since 2017, he consults part-time with his own StaRGET GmbH for ENTSO-E as external Chief Innovation Officer, chairs CIGRE’s Study Committee C1 on system development and economics, and built up the European Technology & Innovation Platform ‘Smart Networks

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for Energy Transition’ for the EU’s smart grid and sector coupling R&D prioritization, as ETIP SNET’s founding Chair. He also works part-time as a Direc- tor at the Navigant Consulting (prior Ecofys) office in Berlin, where he advises utility clients on strategies to lead and shape the energy transition towards more renewables and climate protection and into an energy cloud, platform-based business environment. Prior to ENTSO-E, he held leadership and managing director positions in the German utility associations Deutsche Verbundgesell- schaft DVG, Verband der Netzbetreiber VDN, and Bundesverband der Ener- gie- und Wasserwirtschaft BDEW. After his B.S. equiv. from Technical Univer- sity Berlin, his M.S. and Ph.D. degrees in Operations Research from Virginia Tech (USA), and a one-year internship at the Mexican Institute of Electrical Re- search, his first utility work was for nine years at Pacific Gas and Electric, USA.

Frauke Thies Frauke Thies is Executive Director of smartEn, Smart Energy Europe. SmartEn is the European business association for digital and decentralised energy solutions, focussing on the interaction of demand and supply in an integrated system. Before joining smartEn (formerly known as SEDC) in September 2015, Thies held different positions at Greenpeace EU and the European Photovoltaic Industry Association SolarPower Europe. She also worked on secondments in Washington, D.C. and in New Delhi, India. She holds a Master degree in En- vironmental Sciences from Lüneburg University, Germany, and an Executive MBA from Vlerick Business School, Belgium.

Sonya Twohig Sonya Twohig is Managing Director at ENTSO-E and leads Operations in ENTSO-E including pan European implementation programs through which the European TSOs establish common rules and policies, develop operational tools such as the Common Grid Model and leads the strategy on Regional Se- curity Coordination, in co-operation with TSOs, European Commission, Eu- ropean regulator (ACER), distribution system operators and stakeholders. In her role Sonya is also responsible for leading the pan European strategies such as on Cyber Security policies which support critical infrastructure together with the 43 TSOs that are members of the ENTSO-E association. Cyber security is an important consideration in the wider context of Transmission System Resil- ience. Supporting TSOs and the wider industry in improving their approach and awareness of effective risk management and business continuity for TSOs is an area of particular interest to Sonya in her role in ENTSO-E.

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Peter Vis Peter Vis (1960, United Kingdom) is Adviser at the European Political Strategy Centre at the European Commission. He joined the Commission in 1990 as an indirect taxation specialist and for the past 20 years has worked on climate policy, in particular with respect to emissions trading, renewable energy and sustainable transport. He holds a Master of Arts degree in History (Cambridge, UK).

Kirsten Westphal Dr. Kirsten Westphal is based at the Stiftung Wissenschaft und Politik (SWP), the German Institute for International and Security Affairs in Berlin Germany. She is assigned for International Energy Relations and Global Energy Security. Previously, she has worked as Assistant Professor for International Relations at JLU Gießen and as a consultant in the energy industry. She has published widely on international energy relations and EU external energy relations with a books The Political and Economic Challenges of Energy in the Middle East and North Africa, Routledge Global Governance, Routledge, 2018 (edited with David R. Jalilvand) and on Global Energy Governance in a Multipolar World (with Dries Lesage and Thijs van de Graaf ), Aldershot/ Burlington Ashgate 2010; and recent publications on The Geopolitics of Energy Transformation, SWP- Comments 2018/C 42 (mit Andreas Goldthau und Martin Keim); Eurasian Economic Union Integrates Energy Markets – EU Stands Aside, SWP Com- ment 2018/C 05, January 2018 (with Maria Pastukhova); German-Russian Gas Relations: A Special Relationship in Troubled Waters.

Georg Zachmann Georg Zachmann is a senior fellow at Bruegel – an independent economic think tank based in Brussels. At Bruegel he has worked since 2009 on energy and climate policy. Prior to Bruegel Georg worked at the German Ministry of Finance, the German Institute for Economic Research in Berlin and the energy think tank LARSEN in Paris. Georg holds a doctoral degree in economics.

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