 Abertyniad hi maen nhw'n fu再见 those? Pen yw y moddり aio o'r Un Boxford Instiwt ar ôl sp unfoldau ysg apartyng. If you don't know it, essentially it's very simple, it does what it says and the energy studies, we do it though from a social, political, economic perspective rather than the technical one. So a lot of what we do, is to look at policies and my subject today as the chairman has said is a little bit provocative. Europe's energy and climate policies coming apart at the seams but I think it does reflect Ieithio cyfnod o'r llesaf. Mae'r llesaf ffondiol yw'r llesaf, ac mae'r llesaf eich bod yn gweithio. Mae'r llesaf eich bod yn gweithio'r llesaf i gyd yma'r eich ddaeth. First of, yma yma eich eu cyfnodau i wych yn ei hunain sy'n meddwl i'ch meddwl. Gweithio'r llesaf? Gweithio'r llesaf eich meddwl i'ch meddwl i gyd, gallwch gwaith oherwydd i gyd yn gweithio. Dw i'r Unreal yn cael chael amddir ein allan iawn yw'r ysgrifiad yma ymddir iawn y newid ymddir iawn. Ymddir iawn, y byddio y gwestiynau sydd o byn a Efraeg, y byddio'r syniad gen i allan iawn o'r energ séf. But the second is to do with a slightly different area with that issue is that the second half of the topic is that, about how do you reconcile climate policy and liberalised market scud? I think there are some fundamental difficulties there which is quite difficult to grapple with with and my main thesis is that the commission understandably is trying to cope with the first sort of of problems, how do you get sensible policy within the EU? most o'r rwyseid ymarfer o'r cyfle o'r llwylo fathogreig o'r newid. A'n dda fi'n rhoi'r rhaid i'r lleion llymaeth a'r mar�� cyllidau i'r llythbrion cyffredin... i'r lleion cyffredin. Rwy'n hollwn i'r mahdedig gyda gael y blaeniekht hynny, ac yn deumelol, mae'n dda i'n hollu dda, yn gweithio i'r hollwch, rwy'n credu i fy nghymru fathogreigau cy insufficienta cael eu eu rtat휴 gweld i'w ddechrau... y dyfodd y mae'r eu ddweud o gael eu cyfnodau, cyngor yng Nghymru, ac mae'n gweithio'r cyfrifio'r ysgolion i'r ddwylo yng Nghymru yw oedd o'r cyfrifio'r cyfrifio'r ysgolion, ac ydy'r cyfrifio'r ddweud o'r cyfrifio'r ddweud o'r cyfrifio'r ddweud. Fy fyddwch yn gweld ei wneud, y cynhyrchu cyfrifio'r Eurwyr mewn ddechrau'r cyfrifio. It's not so much the overall policy objectives that the EU's got in energy. They're essentially the same as every government's. They're called—it depends which country you are in—often called the three e's. It's to do with the economy, with the environment, and energy security, reconciling these. Now the EU objectives are essentially the same. But it does face a number of complications. First, for the EU, the economy part of it is represented, essentially, by the single market. But that's difficult. Energy, as you probably know, has been a late starter in EU terms. The energy market is still not really a single market. It may or may not get there next year. But there is another fundamental problem there that the treaty basis is such that member states still control their own energy mix. Now, whether you can have a single market along with member states in charge of their energy makes it to me an open question. But that is a very difficult set of problems to reconcile. And as I say, one can understand why the commission has been spending so much time trying to get to grips with that set of problems. Climate change, which is probably the most important environmental problem, there is a more of an EU structure there in the sense that there are overall goals across the European Union. But underlying those are different carbon and renewable targets for every member state. So again, you've got more diversity, I would say, than unity on this. Energy security, the third of the objectives. Again, everyone agrees on the overall objective, but the fact remains that, as far as the network industries in particular are concerned, regulation is still at national level. There is in the EU nothing equivalent to the US Federal Energy Regulatory Commission, a body which has real power across state borders. It's more a matter of either the commission or the regulators amongst themselves. So there are a big governance problems across the EU. So if I think the commission hasn't solved all these problems, I'm not really blaming it for a failure. I'm just pointing attention to the difficulty of the challenge. Just to give some simple pictures of some of the diversity that comes out of this, here is an indication of the level of support in different countries for different renewables. You can see both that the total level of support, well maybe you can't see because it's a difficult chart to see, but I don't need to go into the detail. The picture is that some countries like Finland offer hardly any support for renewables because they don't really need to. Some countries like Germany say or France offer very significant levels of support, but the balance of support for different sorts of renewables, the level of support is very different. They involve in some cases quite significant proportions of the market. So in Germany about 15% of electricity already gets support. In Spain nearly a quarter of electricity is supported by renewables schemes of one sort or another. It varies between countries, but of course for all countries under the EU's 2020-2020 target, this proportion that is supported outside the market is going to increase. So that's one of the difficult starting points that the Commission's got. But there's a second set of problems. I'll start by going into them at a slightly theoretical level. The problem with reconciling markets and environmental policy arises in the fact that they tend to be framed in different ways. Markets are not about outcomes. They're about setting frameworks within which the market will produce whatever outcome market forces determine. And in the small print, which you may not be able to read there, there was the original statement from Nigel Lawson in the UK as to why liberalisation was taking place in the UK. It's because he said he didn't see the government's role as being to determine the future shape or to plan the future shape of energy production and consumption. What it should be doing is setting a framework and letting all that be determined by the market. But environmental policy, at least to date, has always been framed in terms of outcomes. It's always been framed in terms of targets, targets for renewables, targets for carbon emissions, targets for just about everything. I won't be going into the theory of it. At some level of theory you can reconcile this via economic instruments. But all I would say is at the moment that in practice that's not the way environmental policy works. It works in terms of targets. I doubt in theory whether it could work that way, which we could discuss later if you want, but that is not what happens in practice at present. But the second set of problems which I think not all concerned have grasped properly is that if you're serious about climate change, it takes priority as far as energy is concerned. Again in small print, there's a little quote there from a report in the UK which says that where energy policy decisions involve trade-offs, then environmental objectives will tend to take preference over these other objectives. The problem is most policy makers don't like that situation. They all stand up and say it's all about a balance. We've got to balance the energy and the environment and the economy. But if you're serious about the environment, that doesn't apply. The environment has to take priority. The reason is simple that energy is where the carbon is. If you want to reduce carbon emissions, you have to do something within the energy sector. That's not the case for these other objectives. If for instance, just to take an example, if you have a high carbon tax and you're worried about the social outcomes, you can probably deal with those in some other way by direct subsidies to consumers affected or whatever. If you're worried about the economic outcomes in terms of competitiveness, then you can reduce taxation elsewhere and so on. You can do things outside the energy sector to deal with the other problems, but the only way of achieving the environmental objectives is within the energy sector, so they have to take priority. That's something that politicians find very difficult to come to grips with, which is very important as far as the subject we're on today is concerned. Now, I've put a little chart here which is just dealing with the UK, and there's no special reason for that except that I know more about the UK than about other member states. My argument here essentially is, in grappling with the problems I've mentioned, the European Union is about 10 years behind the curve in actually dealing with some of these fundamental problems. It was slow in a way compared with some other countries into liberalisation. I've got there 1986, then the first major liberalisation measure in the United Kingdom, 1996, the first liberalisation package in the EU. In 1998, you had full energy market liberalisation in the UK about the same time as a third energy package in the EU. But the other thing that happened, of course, in 1998, was the Kyoto Protocol was agreed. Since then, an awful lot of thought in member states like the UK and Germany and there are others have been aimed at saying, how do you resolve this market that you've now set up? How do you reconcile that with these climate objectives we've set up? The UK has been through a very considerable process of, I won't go through all the details, but, for instance, coming up with 2050 scenarios, how much can you actually reduce emissions by 2050, which underlies the present policy, which is about equivalent to the EU's 2050 energy roadmap, which came out in 2011. An outcome of those scenarios in the UK was, firstly, a climate change act, which requires by law that these targets be met, which is actually quite important. And secondly, the setting up of a department of energy and climate change, and I think for the reasons I've given, if you're going to take climate change seriously, that's what you have to do. You have to see energy and climate change together in a single organisational unit. Now, I haven't put all the steps on the EU side here, I haven't sort of put the 2020 agreement in, but I've focused on the right-hand side on the rather minimal moves they've made on that front towards reconciling energy in the environment. There's a 2012 meeting of EU energy environment ministers, they hardly ever meet together, and there was no meeting of mine, as I'll show on that occasion. And then, this year, the European Council discussed energy, but it didn't discuss the environment, it just discussed competitiveness. It said, well, we'll look at the environment some other time, but I think that doesn't work if you're serious about climate change. You have to look at energy and the environment together. This, I won't read it all out, but I find it slightly amusing. This was described as good background reading by the then presidency for the 2012 energy and environment ministers meeting, and it's quite amusing in a way. It draws attention to essentially the same two problems I've drawn attention to. There was a problem in Europe of targets without governance. It comes up with all these targets, but it's got no way of delivering them. And there are two underlying problems. One is, it says there that the consensus that energy policy should determine energy policy is eroding. I'm not sure there was ever a consensus on that in Europe, but as I've said, you have to start off in that way if you're going to be serious about climate change policy. And secondly, at the bottom, that Member States haven't accepted that there will need to be a major curtailment of their national sovereignty over energy policy. So you have two big problems here. I'm not really trying to blame the Commission for the lack of overall progress. These are some of the fundamental underlying problems it's facing. This was the outcome, which I find very peculiar of the 2012 energy and environment ministers meeting. First of the energy ministers agreed in three options, no regrets options, energy efficiency, renewables and energy infrastructure. You didn't really meet the environment ministers. The environment ministers however had a lunch when they talked about this and they said it was very good because the EES was the cornerstone of their policy. So there you've got the energy and environment ministers not really meeting, coming up with two different sets of policies, and actually if you look at them, none of them are remotely up to the scale of the problem. So it's not a very encouraging start. The Commission sort of half accepted that in the green paper on the 2030 framework for energy and climate policy. They admit failings in four areas. One is the management challenges of renewables, another is the incentives to invest in infrastructure, another is the ETS simply not working, and finally energy efficiency targets not being met. If you look back at the previous list of four measures which were discussed at the 2012 ministers meeting, it's in exactly those four areas that the Commission admits that things aren't really working very well. So it's slightly strange that they didn't do a more fundamental rethink at that stage but went on to essentially say we need more of the same. Now a good change as I say for the second part of my talk to looking at electricity market design and the challenges posed by decarbonisation. And the first set of challenges which I think have been fairly widely recognised is a security challenge that they pose. It's because most of the low carbon plant being supported are intermittent renewables. They get priority and dispatch, they reduce the load factor for a dispatchable generation. They create market volatility. The numbers there were numbers from a UK study which preceded electricity market reform in the UK because the government asked some consultants with a high wind power system could the market as it's currently constructed still work and they said, well yes in theory but in order to get the right amount of investment you would have to have prices in this range from minus 50 pounds per megawatt hour to 8,500 pounds which is a fantastic range. The negative prices by the way are because the renewable plant gets support in those days it was from the renewables obligations scheme even with a negative price they would still continue to operate and much nuclear plant would still operate even with a negative price because it's expensive to turn it off and on. So there would be quite considerable periods of negative prices on their modelling about a third of the time. The only way in which fossil plant could actually coverage costs would be if there were also periods of very very high prices and that 8,500 is very very high and the price in the UK just now is about plus 50 pounds 8,500 is extraordinarily high. It's not just high, it's got two problems one is it's quite difficult to rely on it depends on the precise way the system is operating but it's also very difficult to guarantee that the government won't intervene because if your short run marginal cost of production is going to be about 50 pounds but you're selling at 8,500 pounds the chances are that the regulator or someone else is going to intervene and say that's not right and there is a fundamental problem here which again we could talk about later if you want but it's almost impossible within electricity to tell the difference between what one might call scarcity costs and exerting market power because almost by definition in electricity as you get to the top of the load curve there are very few plants in operation so there isn't really a market and it's always going to be possible up the load curve for someone to exercise market power and I don't think regulators have any clear way and we've seen this across the EU whether there have been any number of examinations of competition in electricity markets and in the UK where Ofgem keeps looking at electricity markets saying why were prices so high then so fossil generators really have no way of being secure about investment yet we need that plant, that flexible plant that provides security and that's why the UK is currently talking about introducing a capacity payment Ireland has had a capacity payment for some time I think a number of other countries you can see from this map are looking at capacity payments so the trend is towards capacity payments across Europe they're all facing the same sort of problem they're all facing the problem of remunerating fossil plant, the flexible plant they'll need to provide security and they're all thinking about capacity payments but there's a second problem and I think people have not really paid so much attention to but which is very important in the longer run that renewables in this situation can't themselves be remunerated by the market either because when all the wind plants are operating together you get low prices so or zero prices in Spain for instance in March there were 165 hours of zero prices there was a weekend in May I can't remember which weekend now but when all the main European markets had negative prices and some of them were down to minus 200 euros on that weekend these negative prices or zero prices you can't have negative prices in Spain because of the way the rules work but many other markets allow negative prices these long periods of zero or negative prices are by definition the times when you're getting most renewables output the theory on which apparently the commission is operating is if you introduce high carbon taxes then eventually the renewables plant will be competitive in the sense that on a levelised cost basis that is the cost per unit of output the cost will be about the same as that of lower than that of the fossil plant with the carbon but of course that won't be true of the market price because the carbon price again by definition will only apply at the times when there's high demand but low supply from renewables the whole purpose of the high carbon price is to ensure that high carbon intensive generation is used as little as possible and therefore only at the time when there are no renewables so the renewables plant will never benefit from that high carbon price so there's a fundamental problem in the market structure at the moment because they're mainly remunerated by feeding tariffs renewables don't have either their investment or their operation signalled by market prices it's difficult to see any way out of that as long as you have the same existing market structure what you've got is what is technically called pecuniary externalities it's been described by the OECD as an increasing wedge between the cost of producing electricity and the prices on electricity markets prices and costs are coming out of sync and there's no exit strategy from that and it's due to the current market structure and that's a problem with which Europe is struggling not very successfully to cope with because as I say the commission is focusing almost exclusively on its single market issues and this is what was said at the time of the European Council that Barozo wrote a letter to the council members saying that the completion of a fully functioning market is central to Europe's competitors and must not be fragmented and fragmented as a bit of Euro jargon essentially saying we don't want capacity payments despite the reasons I've given earlier why Member States are doing that they're focusing on their needs which are security which is understandable commission is focusing on its need which is a single market which is also understandable but there's no meeting of minds there they're saying this is what we want they're saying capacity markets are likely to perpetuate the fragmentation of the European market and this general negativity is continuing they're resisting the development of capacity markets they've made clear they think they are negative they've suggested a huge long list of criteria for introducing capacity mechanisms of the sort that would inevitably delay any capacity mechanisms being introduced or at the very least add uncertainty as to whether they were going to be acceptable they're proceeding with their target market and I won't go into details about what it is but it's basically a market which relies on energy only the commission's aim is to get a price a single price per kilowatt hour ultimately across the whole of Europe in the same way that you have essentially for other markets the oil market you get so many dollars per barrel they would like to have something similar with electricity and so they're going ahead with that with that design pushing it as far as they can without really taking account of these other things which they see as problems in fact basically they're working on a set of guidelines now to deal with the support for renewables to deal with the general market issues and mentally the commission it is clear thinks capacity payments are subsidies it thinks they're anti-market not just because they make the internal market more difficult to develop but because they are a sort of subsidy that the only way in the same way that say you gave a fixed amount of money to an oil producer and they still got the market price that would be a subsidy they see capacity payments as a sort of subsidy for security they see it as a market mechanism they see it as an extra market mechanism purely designed to produce security their mindset is very different from that of member states who see it as part of the basic market and is paying for a service which is essentially a reliability service which is a service that consumers value and something that they want so there is a failure of meeting of minds of this and I think what's driving it within Europe is very much the competition directorate and their view of what makes a market and their view of how markets should be constructed and it's slightly odd in a way because if you look at other markets which I think most people accept are competitive like say broadband or telephony with most of those markets you've got much more complicated pricing structures you don't price just in terms of gigabytes or minutes of phone calls you have more complicated structures with fixed payments and access payments and that's fully accepted and no one says that's a subsidy in some way I think the problem with electricity arises because it's inevitable that the government has to be involved in some way with setting markets because of the monopoly aspects the network aspects the fact that you're selling all into a single market with a single operator and that means that the commission has to take it out of the mindset of seeing these as effectively subsidies so you've got in the commission's latest sets of guidelines it's working on a slightly strange approach on the one hand it's trying to challenge a basic pricing and value element which does make sense it's treating that as a subsidy and saying that's the one we should attack on the other hand it's not doing anything about what is a market distortion the cunary externalities I've mentioned I mean there is a real problem in the markets but it's not the one they're addressing they're addressing the wrong problem and not the problem that actually matters because as I say they're concerned it's just about developing a single market they are trying to do something about the exit strategy but it's in a strange way it's by trying to get stronger market signals for renewables for instance having feed-in premier rather than feed-in tariffs but that doesn't address the basic problem if the basic market prices are not giving you accurate signals about costs are not giving you accurate signals either to drive investment or to drive operation what is the point of trying to link renewables prices closer to market prices it still won't offer an exit strategy in the long run now the commission is in its latest thinking just assuming that will happen somehow automatically when the carbon price is high enough automatically all this will work they're not really addressing the problem that if they leave the market as they are when they get very high carbon prices the market will be saying all that renewables is excess what you're doing essentially is dumping electricity on the market from those renewables which have been subsidised how you would get out of that situation I don't know so just to draw it to conclusion I think the EU does face major challenges and reconciling its energy and climate change objectives I don't really say blame them for not having succeeded in doing so so far the problem is I don't think they're really making much progress towards doing it because they're not taking account of the changes in market structures which are underway at present because of the also EU objectives in terms of decarbonisation 2050 and so on what they need to do is set clear priorities so it's clear what is driving this and how these different objectives can be reconciled they have to find some way of matching targets and governance and I don't know how that can be done it may be something has to be done at member state level as well as something has to be done at EU level but meanwhile there's no real point in setting targets for which you have no governance which you have no way of delivering and I think they need to do more to provide both clarity as to the direction of policy and robustness for the longer term otherwise I'm not sure if I was being too much over the top in saying that I think it's coming apart at the seams at the moment there are very definite strains and no clear indication that anyone is trying to knit the two parts together thank you