Fortum - What is a consistent and predictable energy policy?
Delivery reliability, responsible operations and consistent financial performance are expected from energy companies. To achieve these goals, the companies should be able to anticipate the steering effects that domestic and international regulations have on their investments, the lifetime of which spans decades.
The operations of energy companies are directed by numerous national regulations and EU legislation. Thus national and pan-European interests shape the operating environment of the companies. When aiming for internal energy markets, common game rules rather than national solutions would be more effective at ensuring a level playing field around Europe.
Real economy increases, the difficult factor
The financial crisis has weakened the economy outlook for Europe, and growth has come to a virtual stand still. The difficulties of the real economy are visible. To balance their economies, EU member states have ended up with e.g. different taxation solutions; this easily puts companies that are operating in the common markets into un-equal positions. The value of energy companies bas developed at a weaker pace than other sectors in Europe, and one key reason for this is the uncertainty related to the European regulatory environment. In fact, the heads of European electricity companies estimate that political risk is the biggest factor slowing investments.
EU or national aspects?
EU member states can independently decide on the security of energy supply and on what raw materials are used for energy production. To a large extent, member states can also independently choose how they will subsidise renewable energy. Moreover, the EU has its own regulations regarding nuclear safety, environmental issues and security of supply. The targets set by the EU to increase renewable energy, reduce emissions and promote energy efficiency also impact the operations of energy companies.
Even though the renewable energy targets are based on a shared EU target, every country has its own mechanisms for achieving them. In fact, there is a wide variety of subsidy mechanisms from one country to another. The member states also enforce EU legislation in very different ways. Additionally, the targets set by the EU are partially overlapping, which blurs steering effect and efficiency of targets and means.
Subsidy policy- Friend or Foe?
A national subsidy policy has a big impact on energy production and investments. However, national models should not conflict with EU policies. Since energy sector investments are often big. whether a one-time power plant investment or the continues maintenance of distribution networks, and the investment payback period may take decades, committing to long-term, capital-intensive investments requires a consistent and predictable energy policy.
A market-driven approach to achieve the EU' s 20-20-20 targets
The EU has set a target to create an internal energy market by 2014. A functioning internal energy market is a key factor for Europe's economic competitiveness, for a secure supply of power and heat, and for realising renewable energy targets. Europe is facing major projects, such as overhauling outdated electricity networks. and significant investments in new smart grids. The growing share of renewable energy increases electricity transmission needs because consumption isn't always located where the sun is shining or where the wind is blowing.
Cecilia Kellberg, Senior Advisor, Environment and Climate Policy for Swedenergy, a Swedish non-profit industry and special interest organisation for companies involved in the supply of electricity, is glad that the political steering is taking matters in the right direction. According to her, energy efficiency targets bring new challenges. The connection between the energy efficiency targets and the other climate and energy policy targets, i.e. increasing renewable energy sourees and decreasing carbon dioxide emissions, must be taken into consideration to avoid conflicting incentives and requirements. Currently, only the reduction of emissions is being implemented at the EU level and within the sphere of market-based emissions trading, whereas the targets related to renewable energy and energy efficiency are being realised nationally and not in a market-based manner.
"National subsidies should be phased out. Subsidies are likely to be needed for research and development also in the future, but not for operative activities. Our fear is that electricity production will become dependent on subsidies”, Keilberg notes.
A decade of investments ahead
The next decade will require significant energy sector investments- both in new low-emissions energy production and in energy transmission and the distribution network. Nevertheless, the difficult economic situation, Europe's uncertain growth prospects, and the increasing regulatory risk experienced by companies have slowed the pace of investments. In a survey of leaders of European electricity companies increased political risk was seen as the most significant factor prohibiting investments. The energy sector's increasing tax burden and changes made (even retroactively) to national subsidy schemes for renewable energy are examples of regulatory risks weakening the investment climate. Long-term investments require consistent and predictable regulation and moderate prospects for economic growth. In the coming years, an increasing share of European energy companies' investments may, in fact, be directed outside Europe.
“lt is becoming more difficult to make market-driven investments. According to our members, the biggest risk is caused by political decision-making and the regulatory framework. This is a big challenge because in the next decade the sector should make massive investments both to replace aging capacity and to transition to lower carbon production”,· says David Porter, Chairman of Eurelectric's Task Force on Investment. “In the long term, electricity demand is estimated to grow due to the increased consumption of electricity as heating and cooling needs grow”.
Porter emphasises that companies want to invest in the future. “Because huge amounts of capital are at stake, investments should be attractive to investors. That's why we need clear and consistent steering that is in harmony with a well functioning and integrated European energy market. Decision-makers should avoid shortsighted policy measures that can have unintended consequences. The industry and the decision-makers should engage in close collaboration and strengthen mutual understanding and trust.
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