Navigant Research Blog

Europe’s Energy Transition Megatrends and Tipping Points, Part II: Rising Number of Carbon Emissions Reduction Policies and Regulations

— August 10, 2016

AnalyticsJan Vrins coauthored this post.

In our initial blog in this series, we discussed seven megatrends that are fundamentally changing how we produce and use power. In this blog, we will discuss the rising number of carbon emissions reduction policies and regulations, and how this is fundamentally changing the European utilities industry.

Europe has always been a leader in climate change and carbon reduction initiatives. Policies and regulations to reduce greenhouse gas (GHG) emissions continue to evolve at the European level, as well across the unique markets at the individual country and local levels (provinces and cities). Europe has established a long-term goal of reducing emissions to 80%-95% below 1990 levels by 2050. This overarching goal is supported by a range of polices, regulations, and binding targets (currently set for 2020 and 2030) targeting GHG reductions for specific sectors, energy efficiency, building performance, and renewables.

Although there is no question that there have been threats to its ability to achieve these targets—including various austerity and financial measures, Brexit, and, more recently, Clexit—the European Union (EU) remains committed and has recently put into place new regulations to provide the needed incentives for individual member states to dig even deeper. Several countries are leading the way, and when combined with initiatives at the local level (often in partnership with the private sector and local energy companies), we are seeing the sustainability objectives of governments, policymakers, utilities, businesses, and local communities more closely aligned than ever before.

The long-term impact of the Paris Climate Agreement will be significant. This agreement will focus on limiting global warming to well below 2°C (3.6°F) by the year 2100. Each nation sets its own target for reducing emissions each year. While a record number of countries (174 and the EU) signed the agreement in April 2016, the agreement will only go into effect when at least 55 countries representing at least 55% of global emissions formally become parties to it. To date, 24 countries have formally joined the agreement. If the countries that have publicly committed to join this year (including China, United States, Mexico, Canada, and Australia) formally enter into the agreement, the world would still be 1.05% short of the 55% threshold. More work to be done, but the EU and many European countries and local governments are not waiting.

EU Carbon Regulation

The EU has long had some of the most aggressive carbon policies and regulations in place, along with complementary policies establishing binding targets for energy efficiency, building performance, and renewables. Its most recent strategy is set out in the Energy Roadmap 2050. Policies and measures have also been put in place to achieve interim goals and targets for 2020 and 2030. While it is expected that the EU will achieve its 2020 targets for GHG, emissions, energy efficiency, and renewables, current predictions indicate that it will fall short of the 2030 targets by a considerable amount. Based on that, a proposal for new regulation was announced on 20 July 2016. Referred to as Effort Sharing Regulation, this regulation establishes binding national targets ranging from 35%-40% for some EU member states with higher than average GDP per capita and significant cost-effective GHG reduction potential (e.g., Luxembourg, Germany, and the UK). It also sets targets of 0%-10% for member states on the other end of the spectrum (e.g., Bulgaria, Romania, and Latvia).

Europe’s Energy Roadmap 2050 explores pathways for the transition to a new energy system that meets these GHG emissions goals while simultaneously promoting competitiveness and security of supply. In its analysis, the EU concludes that decarbonisation is technically and economically feasible. A European approach is expected to result in lower energy costs and more secure energy supplies compared to individual national schemes. Further, the EU’s move to establish a fully integrated internal energy market aims to remove technical and regulatory barriers to improved competition and expanded consumer choice, while at the same time create interconnections needed to improve energy security, reduce imports, and prepare networks for carbon-free energy resources.

With or without the UK, Europe is moving forward on its path to achieve its ambitious carbon emissions reductions targets, which will continue to be facilitated by its long-established and well-supported climate and energy policies. Many of Europe’s leading countries have already begun to realise the “triple bottom line benefits” (sustainability, affordability, and security) from these policies. Other countries will follow along, and over time, Europe—as a major international trading partner—could advance its position as global leader in establishing climate and energy compliance standards worldwide.

What Are Individual Countries Doing?

Many European countries have made significant contributions toward the EU’s climate and energy targets; a few examples are offered below.

Despite Brexit, the UK stands out as the first country to establish legally binding carbon policies and regulations. The UK’s Climate Change Act of 2008 establishes the framework for its transition to a low-carbon economy and requires that UK GHG emissions in 2050 are reduced to at least 80% below 1990 levels. In fact, the UK’s most recent Fifth Carbon Budget, which legislates the UK’s GHG emissions reductions targets, limits GHG emissions during 2028-2032 to 57% below 1990 levels. In addition, the UK government has announced plans to close all coal-fired power plants by 2025 and restrict their use by 2023.

Germany has led the market for solar renewable energy development, with other countries like the UK, France, Italy, and Spain having made substantial investments over time, and some countries continuing to accelerate investments, especially for distributed solar PV. Despite some short-term challenges in certain countries, Europe as a whole is highly committed to advancing its renewable energy agenda. For example, distributed solar PV will be a major contributor to the EU’s renewable targets; over 150 GW of solar capacity representing €250 billion ($279 billion) in revenue is forecast for 2016-2024, of which three quarters will be distributed solar PV.

Germany also appears to be leading in the area of energy efficiency, having recently announced a €17 billion ($19.4 billion) campaign titled Effizienzoffensive, the ultimate goal of which is to cut the country’s energy consumption in half by 2050. The German government has launched the scheme because expansion in renewable energy sources alone will not be enough to meet the country’s carbon emissions reduction targets. The campaign will include a competitive tender to acquire cost-effective energy savings, a pilot smart metering programme, a waste heat recovery initiative, and other activities promoting cross-cutting technologies.

In the transport sector, Norway is leading the charge toward decarbonisation with its support for electric vehicles (EVs). Today, nearly one-quarter of all new cars sold in Norway are EVs, which is a key outcome of the government’s efforts to raise awareness and support EV market development for the past 30 years. Norway’s (dis)incentive programmes (taxes, fees, tolls, access lanes, etc.) have also contributed to this outcome, as has its investment in EV charging infrastructure. Today, Norway has more than 1,000 public charging stations covering 55,000 miles of roadway, as compared to the 13,000 stations covering 4 million miles of roadway in the United States.

Norway and other European countries (e.g., Sweden, Germany, France, and The Netherlands) have also recently announced plans to phase out fuel-powered transportation. While there is considerable opposition to these plans from a diverse set of political and commercial perspectives, it is expected that if multiple EU member states succeed in establishing these types of bans, the EU will attempt to enforce similar rules throughout its territory.

Local Initiatives

While policy and regulation at the EU and country level will continue to evolve, we also see significant movement at the local level. Numerous cities have committed to clean energy, with some establishing 100% clean energy targets, including Copenhagen, Denmark; Munich, Germany; and the Isle of Wight, England. Cities and businesses have been showing tremendous leadership in reducing the emissions responsible for climate change and building resilience to climate impacts. That’s why the Center for Climate and Energy Solutions (C2ES) and the U.S. Conference of Mayors are teaming up to create the new Alliance for a Sustainable Future. This alliance will help mayors and business leaders develop concrete approaches to reduce carbon emissions, speed deployment of new technology, and implement sustainable development strategies. We see public-private partnerships between local governments, utility incumbents, new entrants, and large corporations taking shape and driving the sustainability agenda forward.

Key Roles for Stakeholders

Meanwhile, many utilities are decommissioning or converting their existing coal plants and investing in utility-scale renewables, as well as distributed energy resources (DER). We have seen Centrica, Engie, and others make significant investments in new energy businesses focused on new distributed, greener, and smarter energy products and services. The biggest challenge in this energy transition will be balancing ongoing investments in the grid while the total volume (and with that, total revenue) that flows through core centralized components decreases overtime. This includes mitigating the risk of stranded assets that may become obsolete or financially unsustainable, as well as their cost to their business, their customers, and society.

Governments and regulators at all levels have a key role to play, as well. They will have to balance a wider set of imperatives supporting a safe, reliable, and affordable power grid while at the same time incorporating clean, distributed, and more intelligent energy. In doing so, they must ensure that this shifting landscape accommodates innovation while also adapting rules and procedures to keep up with the pace of change underway.

What Does This All Mean?

The sustainability objectives of government, policymakers, utilities, and their customers are more closely aligned than ever before. Countries and local governments will continue to discuss how sustainable targets can be met without affecting jobs and the access to safe, reliable, and affordable power. And utilities will continue to evolve to support cleaner, more distributed, and more intelligent energy generation, distribution, and consumption.

Recommended action items for countries, local governments, and utilities include:

  • Understand the possibilities, costs, and full impacts of low-carbon generation and DER (energy efficiency, demand response, and others).
  • Implement a workable framework and develop an integrated plan to move toward lower emissions goals, since it’s certain that decreased emissions requirements will be in place in the near future.
  • Leverage neighbouring country and local government designs and efforts (as described above) at the European level to develop joint plans, policies, and goals.
  • Implement (pilot) initiatives that include renewable energy and other low-carbon generation into a reduced emissions framework while also incorporating energy efficiency and distributed generation as resources into the decreased emissions planning process.

This blog is the second in a series discussing how industry megatrends will play out across Europe as well as at the regional and country level. Stay tuned for our next blog in this series.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

Europe’s Energy Transition Megatrends and Tipping Points, Part I: Take Control of Your Future

— August 3, 2016

Energy CloudThe pace and impact of change in the utilities industry globally is unrelenting. Europe is no exception, and you could argue that the pace of the energy transition in Europe is faster than anywhere else in the world. The European Union (EU) as a market is the largest energy importer in the world, importing 53% of its energy at an annual cost of around €400 billion (~$447 billion). This drives many aspects of energy policies, including placing the EU at the vanguard of grid reform over the past decade. In this blog series, we will share our view on the energy transition in Europe by describing the megatrends and tipping points. Each of the following megatrends is changing the way we produce and use power in Europe. Together, these megatrends are revolutionising the energy industry.

1. Rising number of carbon emissions reduction policies and regulations: The long-term impact of the Paris Climate Agreement will be significant. The agreement will focus on limiting global warming to well below 2 °C (3.6 °F) by the year 2100. A record number of countries (175) signed the agreement, which they must now each ratify and approve, which could take some time. But European countries, provinces, cities, and utilities are not waiting. They are taking actions now toward the outlined objectives and targets of the agreement. In fact, sustainability objectives between government, policymakers, utilities, and their customers are more closely aligned than ever before. Globally, numerous cities have committed to 100% clean energy, including European cities like Copenhagen, Denmark; Malmo, Sweden; and Munich, Germany. The EU has shown no signs of slowing down in its ambition to standardise reform across unique markets through regulatory and policy momentum. A single energy market for EU member states is an enabler—if not a necessary condition—in a policy of an “ever greater union,” with or without the UK. Meanwhile, the UK has enacted legislation to deliver emissions reductions consistent with the 2 °C target through the Climate Change Act of 2013 and the commitment to remove 100% of coal-fired generation from the UK system by 2025. As the EU moves with ever greater momentum, Navigant believes other European countries in the hinterland around the EU will also be swept along. This is in part because these counties will seek to gain from the triple bottom-line benefits (climate sustainability, increased efficiency and productivity, and greater energy security), and in part because the EU as a trading partner will require compliance with these standards, policies, and regulations.

2. Shifting power-generating sources: According to the U.S. Energy Information Administration (EIA), net European generation capacity will increase by 7 GW in 2016. Much of Europe’s new capacity now comes from renewables, with close to 75% of new capacity coming from wind (44%) and solar (29%). While some new coal (16%) and gas (6%) capacity was added, far more coal and gas assets were decommissioned. As a result, net new capacity in Europe is virtually 100% renewables. While recent solar subsidy cuts have tempered its growth, wind is marching inexorably onwards. There is still no effective utility-scale solution to the inherent intermittency in renewable generation, with storage solutions and grid interconnection/active management still lacking penetration at scale. Natural gas is therefore the obvious bridging fuel during the shift to renewables. Given the abundance of natural gas availability globally, lower long-term prices, and increasing import capacity in Europe, we expect more natural gas generation capacity to come online in the future, at least for the mid-term. More traditional generation assets, particularly coal and nuclear, face an uncertain future. For coal, every scenario looks dark—at best bad and at worst grim. Older coal plants are being phased out; others are being converted to burn biofuels. Nuclear power accounts for 25% of all European electricity consumed, and any change in nuclear’s role in the generation mix will take time to implement. However, nuclear power highlights the significant differences in national energy policies across the EU and the wider European context. Nuclear was effectively killed in Germany, yet still may enjoy a renaissance in the UK if the British government decides to move forward, and new plants are under construction in France, Finland, and Slovakia. Germany has undergone the most significant generation source transition in Europe: it leads the market in renewables capacity, while its nuclear decommissioning programme has been accelerated. As a result, its two largest utilities are separating their businesses to focus on the one hand on renewables, grid modernisation, and distributed energy resources (DER), and on the other hand traditional generation and trading. Germany has become a net exporter of power and the knock-on effects of this shift in power generation sources means neighbouring countries have had to significantly change their networks to manage the impact of intermittency on their own systems and more investment in their own grid.

3. Delivering shareholder value through mergers and acquisitions (M&A), restructuring, and divestment: New industry ventures, M&A, and divestitures are happening at a rapid pace. In the search for shareholder value through scale, increased synergies, and reducing exposure to less performing businesses, this is a path that utilities will continue to explore. European renewables leader DONG Energy became the largest IPO in 2016 with a valuation of approximately €13.5 billion (~$15 billion), and RWE Innogy is slated for its own IPO by year-end. Engie and Centrica are investing billions in creating new DER and energy services businesses with numerous acquisitions. EDF, Enel, and others continue to acquire assets outside Europe in a search for global expansion and shareholder value. All this has been occurring while much of the 2016 M&A activity so far has been the divestment of non-core assets, with 1 GW of utility-owned wind assets sold to investors in 2016.

4. Globalisation of energy resources: The EU actively seeks to deliver Europe’s 2030 climate and energy targets while ensuring security of supply and affordable prices. The EU also seeks to be a world leader in renewable energy. Achieving these goals requires a transformation of Europe’s electricity system, including the reconfiguration of individual member state electricity markets into a single energy market. The EU must also achieve a balance with meeting consumers’ expectations, delivering benefits from new technology, and facilitating investments in renewables and low carbon generation while also recognising the interdependence of member states. A critical part of this initiative is connecting isolated national and regional electricity systems to secure supply and helping to achieve a truly integrated EU-wide energy market—a key enabler for the continent. While the UK’s vote to leave the EU raises a number of questions about future policy, it is too early to call what impact Brexit will have on the UK’s participation in the EU’s future single energy market. What is clear is that a focus on greater levels of interconnection (both offshore and onshore) and energy efficiency will continue to be necessary aspects of EU energy policy and will continue to receive much scrutiny.

5. New entrants and converging industries: With €1.3 trillion (~$1.5 trillion) in new industry value up for grabs globally, new entrants see value in European power markets, which is disrupting the traditional utility industry and taking market share away from utilities. These new entrants include manufacturers; technology companies (from startups to global powerhouses like Apple, Amazon, and Google); telecommunications and other data, content, and network providers; and even some oil & gas companies (like Total). For utilities, it will become more expensive to address a smaller market with the resulting impact on margins. Europe is no exception, and with significant opportunities for growth across the value chain and new energy and digital technologies available, we see new entrants investing in renewables, DER (distributed generation, energy efficiency, demand response, energy efficiency, etc.), energy management, smart cities and infrastructure, and transportation. Navigant sees many cross-industry movements between utilities and oil & gas. Shell getting back into renewables and Total announcing the creation of a Gas, Renewables and Power division—which the company has said will help drive its ambition to become a top renewables and electricity trading player within 20 years—are examples of this new competition’s encroachment on traditional utility markets.

6. The power of customer choice and changing demands: Whether residential, commercial, or industrial, customers want to control their electricity usage and spend, as well as when and what type of power they buy. But beyond having supplier options (in competitive markets), customers now want the ability to self-generate and sell that power back to the grid. Many residential customers in Europe have and will continue to install rooftop solar, and despite the reduction of subsidies in some countries, overall residential distributed generation will continue to grow. On the commercial and industrial side, large corporations like Amazon, Apple, Cisco, Google, HP, Mars, and many other large energy buyers in Europe have increased their focus on sustainable energy solutions. For example, Swedish furniture retailer IKEA plans to completely shift to renewable energy by 2020 and will invest up to €1.5 billion (~$1.7 billion) in wind and solar energy as part of new safeguard nature strategy. The company does not rule out becoming a net energy exporter, potentially selling the surplus of energy to suppliers or customers. The key question is who will capture the value of more local (distributed), broader (energy management), and individualised energy—the incumbents or the disruptors?

7. The emerging Energy Cloud: Old infrastructure is being replaced, and the trend toward a cleaner, distributed (flexible), and smarter energy infrastructure, known as the Energy Cloud, will accelerate. The Energy Cloud is an emerging platform of two-way power flows and intelligent grid architecture expected to ultimately deliver higher quality, greener, and more affordable power. While this shift poses significant risks to incumbent power utilities, it also offers major opportunities in a market that is becoming more open, competitive, and innovative. Fuelled by steady increases in DER, this shift will affect policy and regulation, business models, and the way the grid is operated in Europe. The work by EU member states in decarbonising and digitalising the grid has made the region a global leader in energy transition and puts Europe at the forefront of testing Energy Cloud reform through policies that mitigate carbon emissions, expand the role of distributed generation, and promote smart grid initiatives.

These megatrends cannot be underestimated. They are accelerating transformation in the European energy industry, enabling the entry of new players, putting pressure on incumbent players, and altering traditional strategies and business models. Organisations will need to adapt, and there will be winners and losers as this transformation takes shape. Our advice to senior leadership of energy companies is to take an integrated, holistic view of the opportunities and challenges that are flowing from these megatrends. Only then will you be able understand the full impacts and path forward—and that is the only way you can really take control of your future.

This post is the first in a series in which we will discuss each of the megatrends and the impacts (“so what?”) in more detail. We will attempt to discuss how these megatrends play out at the European level as a whole, as well as within the diverse set of regions and countries. Stay tuned for our next blog in this series.

Learn more about our clients, projects, solution offerings, and team at Navigant Energy Practice Overview.

 

The Automotive Industry and Brexit

— July 1, 2016

Electric VehicleThe referendum on the United Kingdom’s membership in the European Union (EU) had been a long time coming. In 1975, the country voted to join what was then the Common Market. Despite multiple treaty changes and political promises, no referendum was offered until June 23, 2016, when the majority (52%) of voters chose to leave the EU.

The EU was established as a customs union to set tariffs on goods coming from outside the EU, with member states not allowed to negotiate their own trade deals. Every deal made by the EU is binding on all members. The EU is a tariff-free trading area among the member states.

Because of the need to wait for a new prime minister and extensive treaty negotiations, the Brexit process is expected to take 2 years or more. The biggest unknown facing business is the nature of trade after the exit. Will there still be free trade between EU countries and the United Kingdom, or will tariffs be introduced? If tariffs, at what rate? If no new deal is made, the World Trade Organization (WTO) rules mean the United Kingdom and EU would be obliged to apply to each other the tariffs and other trade restrictions they apply to the rest of the world. Other possibilities include membership of the European Free Trade Association and/or the European Economic Area, or even a unilateral free trade policy (e.g., Hong Kong). All of the options must be considered by the U.K. Government, so a quick decision is unlikely.

The Automotive Impact

A free trade deal for goods between the EU and the United Kingdom would allow OEMs and suppliers to continue business pretty much as usual. European manufacturers are likely to lobby hard for such an arrangement, both to continue selling U.K.-built vehicles in the EU and to retain access to the lucrative U.K. market for vehicles assembled on the continent. Car buyers in the United Kingdom may benefit from lowering or eliminating tariffs from countries outside the EU, putting downward pressure on pricing.

In a scenario where WTO tariffs are imposed between the United Kingdom and the EU, new free trade deals could cause changes in business processes across Europe. The United Kingdom has the potential to become a European hub for international trade, building cars mainly for local sales and export to non-EU countries. If that happens, in the longer term there will be a need for suppliers to invest in parts manufacture in the United Kingdom. No longer restrained by EU state aid rules, the U.K. government would be able to offer additional support to companies that wish to open new facilities. Factories within the EU could then focus on producing vehicles for the internal market.

An Industry in Flux

It is, however, important to recognize that this new European trading issue comes at a time when the industry is facing major changes due to other factors such as stricter emissions regulations, greater powertrain electrification, autonomous driving, wireless connectivity, and the growth of carsharing and ride hailing. The Navigant Research white paper Transportation Outlook: 2025-2050 offers more insight on these changes. The United Kingdom could become a test bed for new technology before it is rolled out globally.

While industry waits for the U.K. Government’s detailed trade negotiations with the EU, automotive companies can take advantage of the short-term business-as-usual to analyze their engineering and business processes and value chains so that they are prepared for any outcome. There is potential for increased efficiency and profitability in the long term for those companies that adapt best to embrace the future of clean mobility on demand. Brexit may turn out to be a catalyst for positive change.

 

What Does Brexit Mean for the United Kingdom’s Energy Policy?

— June 27, 2016

Energy CloudOn Thursday of last week, Britain voted to leave the European Union (EU) in a referendum known as Brexit. The vote to leave won 52% to 48%, with 17.4 million voters in favor of leaving the EU and 16.1 million voting to remain. In the wake of the vote, the world has expressed mixed feelings on the outcome, including rage, frustration, excitement, anger, pride, and sadness. While the vote may not mean a huge shift for in the energy field, it is a historically significant event, not only in Britain, but for the rest of the world as well. One of the largest initial changes to occur as an outcome of the vote is that Prime Minister David Cameron, a leader of stay campaign, will resign. The pound plummeted to its lowest level since 1985, and further economic impacts are yet to be determined. Britain is the first nation to leave the EU, and one thing is clear: the vote means significant global change and uncertainty.

The EU’s Energy Directives

The EU has been a leader in energy efficiency regulations and requires its member states to create and update their own National Energy Efficiency Action Plans every 3 years. The requirements set forth by the EU have pushed member states to proactively create and enforce their own policies surrounding increased energy efficiency, greenhouse gas (GHG) emissions reduction targets, and increasing renewable energy.

Navigant Research’s Global Energy Efficiency Policy Analysis report discusses the role of the EU in driving global energy efficiency policy. The United Kingdom’s GHG emissions target is to reach 80% reductions below 1990 levels by 2050, in compliance with the EU’s minimum regulations of 20% below 1990 levels by 2020. The EU’s Renewable Energy Directive aims to minimally fulfill 20% of its total energy needs from renewables by 2020, which is set to be achieved through the accomplishment of individual member targets. Even within the EU’s already notable energy efficiency requirements, the United Kingdom is a leader in many policies, having surpassed many base requirements.

Brexit and the EU’s Energy Policies

The EU’s targets for GHG emissions and renewables are based on all member states achieving their individual goals. The exit of Britain from the EU does not mean the EU will no longer be able to achieve its targets, but increased targets will need to be met in the remaining member states to make up for Britain’s portion. In 2010, only 7% of the United Kingdom’s electricity came from renewables, but this increased to 18%-19% by 2014 and is on target to reach 30% by 2020.

While Brexit would mean the United Kingdom can relax on some efficiency policies, overall, it would not drastically affect the country. The Climate Change Act requires tougher GHG emissions targets than the base EU requirements. In order to hit the 30% renewable goal, many projects, such as new wind farms, have been given subsidy contracts and granted planning authorization. The vote won’t affect the project to build the Hinkley Point nuclear power station, as EDF CEO Jean-Bernard Lévy stated that, “We think that this vote has no impact on our strategy.

Leaving the EU will make it easier in the future for Britain to relax its energy policies and emissions targets, as these changes would only require domestic legislative approval. Even if Britain does not change its policies after its exit from the EU, it will lose other valuable assets, such as negotiating support with Russia, which supplies the country with 16% of its energy imports.

With the all the uncertainty surrounding Brexit, there is no way to predict the impact this vote will have on energy policies in the United Kingdom and the EU, but they could become a dominant subject in the years to come.

 

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