Carbon neutrality in EU by 2050 is achievable, but will cost

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Carbon neutrality in EU by 2050 is achievable, but will cost - Acer

Date: June 21^st 2021

Author: Alenka L. Klopčič, Tanja Srnovršnik

Category: En.vision

Topic: Electricity , Coal , Energy policy , Economy , En.vision

Carbon neutrality is achievable, despite the fact that there are some areas that are more difficult to decarbonise and the fact that this won’t be free, agreed the director of Acer in an Energetika.NET video debate.

This was just one of the messages from the recent video debate conducted by Energetika.NET with the State Secretary at Slovenia’s Ministry of Infrastructure, Blaz Kosorok, and the director of the European Union Agency for the Cooperation of Energy Regulators (Acer), Christian Zinglersen. This debate closes the trio of energy debates with the two officials held prior to, and in light of, Slovenia’s presidency of the EU.

Carbon neutrality is achievable, but it won’t be free

“I think carbon neutrality in the EU is achievable by mid-century,” said Zinglersen, noting that a global report was recently issued by the International Energy Agency (where he used to work previously; author’s note), and its main conclusion was that this is an achievable window – although a narrow one – even for the whole world. “But I think the same applies, perhaps even more positively, to Europe,” he said.

Despite being achievable, this target will also be difficult. “Further market integration is a prerequisite for getting there and is something we are working on at Acer”. To note there are some political prerequisites in addition to all the rules and technical complexity surrounding this, namely ensuring that everyone is comfortable with moving increasingly towards such a shared resource or interdependence model. There are also difficult areas in terms of the sectors that need to decarbonise.

Clearly, continued Zinglersen, we need to increase the participation of the demand or consumer side. “So, there's a lot to do, but I think it's achievable.” Costs are the tricky part, he admitted. “There will be very significant investment needs in all kinds of assets and capital stock, which isn’t the same as costs. These are investments, and they will need to be very significant. It won't be free.”

“Obviously, there is a cost. And I think there may also be broader societal costs for the transition. If you look at, for example, the coal exit strategies in some member states, it's safe to say that there has been a societal cost. There's a societal bargain or understanding there, you could say. And I wouldn’t be surprised if there is more of that coming up across Europe. So, there is a cost and there must be significant investment, but I think it's achievable.”

Going beyond energy challenges…

In Slovenia, the socio-economic costs will be the highest in the Saleska valley, where the coal exit is needed. Energetika.NET organised some discussions on this topic, which have demonstrated that there is something of a game of ‘ping-pong’ going on between the ministry and the locals in terms of who should do what and what is needed. The ministry has said, among others, that first it is necessary to determine the year of the coal exit, whereas the locals, including the companies of Holding Slovenske elektrarne (HSE), say that it is crucial to take preparatory steps prior to confirming the year of the exit. Nevertheless, the exit should now happen by 2033. However, the director of the directorate for energy hinted during one of Energetika.NET’s events that this could happen even sooner due to developments in the carbon market.

When commenting on this, Kosorok responsed by saying: “There are many ways to look at it. One is the social aspect; you should know that there are many, many people employed in this region. We only have one remaining power plant – a thermal power plant – and more than 2,500, or even up to 4,000, people are employed there directly or indirectly. It is a question of a kind of a ‘social bomb’ in terms of whether anything is, will be, or should be closed, immediately, i.e. by the year 2033. That isn’t so far in the future, especially for the energy sector, meaning that all the procedures required should be carried out to close the power plant.”

Kosorok continued by saying that replacing so many megawatts is something entirely different. That could happen in 2033, or even sooner, depending on the carbon and power prices. “So, that is one side, while the other is more or less the political side, in terms of what to close down and when, and what the impact or the consequences will be. And, of course, the locals are a bit worried about what the consequences will be, especially for the people there. In addition, the state will also implement two major laws – one relating to the closure of the coalmine, and another relating to the reconstruction or rebuilding of the entire Saleska valley – which is not only the responsibility of our ministry,” he said.

Among others, the state secretary expects that a huge political debate over the Saleska valley will take place as early as in July, while Acer’s director recognises this phenomenon as a general one, not only across Europe but also in many other jurisdictions, bearing in mind wider energy systems, stability, flexibility, solutions and markets. That is important and fascinating, but also complicated, he said, adding that there is also another component of the societal understanding “which actually goes way beyond energy or climate”.

Inefficient prices lead to wrong investments

Acer is developing a way to assess efficient wholesale power price formation, looking at barriers such as illiquid markets, constrained cross-zonal capacity and bidding zone configurations. So, how important is efficient wholesale power price formation for achieving net zero by 2050?

When answering this question, a smiling Zinglersen said: “Efficient price formation may for some sound like a PhD dissertation, but it can also be put simply: if you are worried about the costs of the European energy transition, and it would seem quite a few are, you should be worried about making right or wrong investments. What is the most crucial signal from which to assess this? It's whether or not you have efficient price formation. If you do not, the chances are that investments are either made at random or are done wrongly.”

So, according to Zinglersen, the key is to have efficient prices informing investment decisions. He continued by referring to some of the findings from last year’s Market Monitor Report, one of which was the high number of so-called negative price periods in the day-ahead market. Negative prices can be fine in a well-functioning market and, indeed, in a pandemic-induced economic downturn one would expect more negative price periods. Nevertheless, if such periods persist, and there are many of them, this can indicate an imbalance, something inefficient, for instance in relation to the lack of efficient flexibility solutions. To this end, Acer’s director sees a need to focus on the frameworks and potential barriers for demand-side flexibility solutions whether storage or otherwise.

“And, of course, there is the issue of another key component of a further integrated power market across Europe crucial for efficient price formation, namely making available the capacity of interconnectors to the market.”

Sustainability as the focus of the Slovenian presidency

In the previous Energetika.NET video debate, when talking about Slovenia’s priorities in the area of energy for its EU presidency, both interviewees stressed the meaning of the ‘Fit for 55’ package under the European Green Deal and tackled e-mobility, since this is close linked to the electricity system, but now the Slovenian presidential programme is even more defined and will focus on sustainability.

“Climate neutrality, the energy transition and the circular economy are going to be the main topics, and, of course, we will look at the recovery after the pandemic and how to implement all the ‘good stuff’ from the interface and how to function in the internal market. Thus, we are awaiting 14 July to see what the ‘Fit for 55’ package will bring,” said the state secretary in response to the question about Slovenia’s presidential programme. In this period, and with all the aforementioned topics in mind, he expects ‘a difficult examination’.

However, all EU member states will face similar, yet difficult, choices, hinted Zinglersen, illustrating that countries will need to work on electrification strategies as a likely cost-efficient pathway towards greater decarbonisation. One element of this, in addition to a more domestic focus on, for example, the electrification of transport, buildings heating or cooling, is the ever more intensified role for interconnected electricity markets across Europe. “And that requires a number of things as previously mentioned – not only rules, but also the political prerequisites for being comfortable that countries can indeed rely more on each other than in the past, confident that mechanisms are in place to warrant such trust and mutual reliance. Otherwise, it is unlikely that countries will be comfortable going in that direction,” he warned.

In response to Energetika.NET’s final question about the next concrete steps for those EU member states undergoing the energy transition and stepping into carbon neutrality, especially considering that international financial institutions have also closed their funding pipelines for fossil fuel projects, Slovenia’s state secretary tackled, among other areas, the need to efficiently replace coal – a necessity that is also very current for Slovenia.