Ivo Hlaváč is the public affairs director of ČEZ, one of the leading power producers in Central and Eastern Europe. ČEZ recently joined an initiative to group together the largest energy corporations in Europe, called the Magritte Group, which aims to bring about changes in European energy sector regulation. He spoke to EurActiv Czech Republic’s Adéla Denková.
ČEZ has recently joined a group of the largest European energy firms that strives to convince European leaders to make necessary changes in the European energy policy. Today, the group consists of twelve such corporations, which inevitably means that there must be conflicts of interest among them – after all, they are competitors. Yet what are the common standpoints they can agree on?
The twelve energy firms have met at one table for one reason, which is on the one hand quite simple, yet on the other hand extremely complex. And the reason is the current situation in the EU energy market. What we have in common is a conviction that the European regulation in the energy sector does not work, which is evidenced by the fact that no single energy market will be created by 2014 – a goal that the EU set years ago.
The system is set up in a manner that leads to its self-cannibalization and it fails to fulfil the political goals that the European Union itself has defined. What is worse, it partially destroys the energy market as such, leading to a situation when it does not pay off to invest in new energy sources and, for this reason, major market players have significantly cut down their capital project plans.
At this point, the planned liberalization has got into a dramatic conflict with the actual behaviour of national governments and the interests of national energy market players. That is a moment when it is at least worth it to wait before adopting more regulating measures and, instead, do a “big clean-up” in the entire system. And it is such a clean-up the dozen energy corporations call for at a time when the European Commission is about to present its proposal of binding goals for 2030.
What specific issues does this initiative focus on? What needs to be changed in the European Union according to the energy giants?
At this moment, we have in common two matters of principle. The energy businesses wish to resuscitate the carbon market and bring it to a full-fledged operation. The EU ETS (Emission Trading System) has been fairly successful at reaching its first goal, i.e., to reduce CO2 emissions, but rather due to the economic crisis and not that much due to investments in clean technologies. In contrast to the planned price of fifteen to twenty euro, the price of an emission allowance nowadays fluctuates between mere four to five euro. This has happened due to a surplus of emission allowance supply in the market, due to the economic crisis and also due to an exceptionally poor management within the carbon market. In this situation, energy firms have no motivation to decarbonize their production portfolio. Moreover, the practice has shown that the Commission has virtually no tool to secure flexibility in allowance allocation. Another priority of this initiative is to create a true single energy market where we will see the Union’s liberalization packages duly implemented and applied, with no regulated prices, no export fees and other measures that significantly distort the markets.
What then do the energy firms propose in respect of the carbon market?
All twelve firms unanimously agree that Europe needs one binding and perhaps even very ambitious goal in reducing CO2 emissions within the EU by 2030. For the time being, the plans are to reduce the emissions by some 40% by 2030. That is a very intelligible figure for us that would mean a major boost for the ETS.
So you disagree with those arguments that say the EU should continue to have three climate and energy goals, as the commitment for renewable energy resources (RES) and the energy efficiency targets are complementary to the emissions goal?
That is another thing that the twelve European energy firms have in common. Our attitude is not aimed against renewable sources. We believe that we do not need a binding goal for them. And we would not need it at all if direct subsidies were supposed to still remain in the market. The guaranteed buy-out price paid for by consumers has caused the electricity price to stop expressing real production costs; instead, it now rather expresses political objectives. Just to illustrate – since this year, German households pay 53 EUR/MWh just as a fee for the RES. Next year, this fee will rise to €62. At the same time, the price of pure electricity ranges between €36 and €37. So the households actually pay more in subsidies than for the electricity itself as traded in the exchange. As for the energy efficiency, if the emission trading system works right, we will all be motivated to reduce our consumption of electricity automatically, and there will be no goal needed.
So, in your opinion, investments in renewable sources should end?
The dozen energy firms do not say that investments in renewable sources should end but that the approach should be changed considerably. This means no binding goals and not counting the RES prices including the costs of the integration in the grid. And, thirdly, subsidies should not be granted to sources that can find their place in the market by themselves. We should only support renewable sources in the research and development phase. It is worth supporting prospective sources that are so expensive today that you cannot compete with them in the market; however, at the same time, it makes a great sense to invest in them. They need to be tested and gradually brought closer to the market since in the following years they price may dramatically drop.
You have mentioned two major points on which the twelve firms agree. Yet there is another issue, namely the potential introduction of capacity mechanisms…
This is the third major issue the twelve firms have been discussing. But I would rather call it a temporary solution or “bridge over the troubled water”. ČEZ has so far been monitoring the debate about “capacity payments” with a great distrust. We consider them something that we can hardly prevent. But it is worth trying to make them as little obstacle as possible to the liberalized market. Until the energy markets starts functioning as a true single market, we need to patch it with capacity payments so that we do not need to eliminate tens of gigawatt hours in gas power stations. With the electricity prices at today’s levels, it does not pay off to launch this kind of power plants at all.
And with these agenda items you want to succeed in the EU debate still before the spring session of the European Council?
The twelve energy corporations are no initiative with an ambition to become an institution or play any other role than today. Their objective is to talk to representatives of the European Union and national politicians in the member states. We have already debated with Commissioner for Energy, Mr. Oettinger, and we have another round of talks scheduled for the eve of the discussions on documents pertaining to the 2030 goals. We also plan to talk to Commissioner for Competition, Mr. Almunia. That is very important since the debate concerning capacity payments or RES integration falls much more in his area of competence. We have also been presenting our initiative in the member states. In terms of time, we are aiming at the spring session of the European Council. If this initiative succeeds at stimulating a debate on the major issues and a solution to the current stalemate in the energy market begins to crystallize, then this initiative should end with the Council’s conclusions. Ideally, in our opinion the European statesmen and the Commission should define action items there for themselves that will lead to a systemic change of the EU ETS, an ambitious goal for CO2 and a reasonable handling of the RES.
I expect that, from your viewpoint, a structural change is more important than the temporary withdrawal of 900 million allowances that were approved last week, based on what we hear from various sides.
A temporary withdrawal of emission allowances from auctions is today basically a vain effort. It is a debate about something that should have taken place earlier, yet it has been passed with great pomp only recently. In the past, the market sensitively responded to specific political decisions but, today, we barely see any reactions to any news. This was evident, for example, during the Parliament’s final vote that approved backloading. Backloading is surely good news. Nevertheless, it came at least one year later than it should have, and it does not resolve the problem. It does not remove allowances from the market but just shifts trading from the present to later years.
In the end, the stakeholders will have to resort to making a systemic change anyway. Various options have been discussed. A major portion of the allowances can be removed from the market permanently, and we can consider a certain form of carbon taxation or introduce a minimum price of carbon, as the UK has done. These are all open options. Of course, each of the twelve energy firms will have different interests depending on what kind of energy sources they use. ČEZ will have one point of view while RWE a different one and Fortum yet another one.
ČEZ has come with its own proposal what the emission trading system might look like in the future. The proposal focuses primarily on greater flexibility. How should the proposal of ČEZ work in practice?
We have not tried to debate on the general political level only but have also come up our own version. Therefore, we propose moving toward a flexible system of emission allowance trading. It would be an improvement of the existing mechanism. We believe that the Commission is rather a conservative institution that will be interested in continuing a system that has been in operation for two periods, has its auction platform and the relevant legislation. We do not think that a new ETS will be built from scratch on a green field.
As already mentioned, we think the system dramatically lacks flexibility. For this reason, we have come up with a fairly simple mechanism that we would like to discuss. On the one hand, we propose monitoring fluctuations in power generation and industrial production. On the other hand, the emission intensity of power generation and industrial production would be monitored too. Thus, the supply of emission allowances in the market would change based on the European economy’s volume of production over a given period of time. The system could thus better respond to economic fluctuations. All the data can be acquired from public databases with just one-month delay. The only thing such a system needs is a certain buffer, which the French in the present debate refer to as a “carbon bank”. This concept could be used in a situation of growing GDP. And if the economy slumps, the flexible mechanism will make it possible to withdraw allowances from the market.
If a certain maximum level of emission intensity is defined, it means that there will be a political number at the beginning. It will be necessary to determine emission intensity somehow. Will it not lead to more problems in the future when the reality shows again that a system created by politicians does not reflect the actual market situation?
Every decision on the future ETS model is preceded by a political decision concerning the actual ambition up to 2030. And from that the emission intensity will be derived, which we will annually have to reduce in both the energy sector and the industry. Apart from other aspects, that decision will be very difficult also due to one thing we have not mentioned yet. Today, we can hardly claim there is agreement between the energy sector and the industry concerning carbon trading. And for this very reason, the twelve energy firms call for a broader debate with European industrialists. We need to explain each other what consequences carbon trading brings for both sides. Moreover, it is also necessary that the Commission come with a solution that will protect the industry.
In reality, it is only the European Union that is presently active in honouring international commitments to reduce CO2 emissions. In the period between the recent Warsaw climate conference and the expected Paris conference in 2015, we would hardly find anyone believing that a global consensus can be found in the following months or years. And then you get the CO2 emissions reduced just on a peninsula that generates only 12% of the global emissions.
This is a frequent argument of the opponents of the EU’s climate and energy policy…
In contrast to some politicians, we do not think that, for this reason, we should abandon the European climate and energy policy completely. Besides reducing emissions, it namely brings with it many interesting side effects – a reduced dependency on fossil fuels, higher energy efficiency of energy sources, lower dependency on fuel imports. At the same time, we sense that some measures will have to be offered to the industry to boost its position in the global competition. We pay serious attention to voices from some sectors, be it chemistry, cement production or metallurgy. And we believe that the debate on CO2 emissions also needs to include discussions concerning the rules that the EU will define and enforce in this respect toward the third world.