The Impact of Europe 2020 on Power and Energy Markets

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Europe 2020 is the European Union’s (EU) 10-year growth strategy for the current decade, proposed and adopted in 2010 with the aim of making the EU a smarter, more sustainable, and more inclusive economy.

The strategy sets out concrete EU-wide targets on employment, innovation, climate action, education, and poverty that must be achieved by 2020. During our free public webinar last week, we focused specifically on the EU’s three climate change and energy sustainability targets:

  • Derive 20% of energy from renewable sources
  • Reduce greenhouse gas emissions by 20% lower than 1990 emission levels
  • Increase energy efficiency by 20%

(Note that “final energy consumption” refers to all energy consumed, including heat, electricity, and energy consumed in transportation.)

What impact have these targets had on the European power and energy markets? And what can we expect going forward? My blog today will provide an overview of some of our findings.

Growth of Renewable Energy Generation in Europe

The EU has been a relatively strong force behind building up renewable energy generation capacity since the late 20th century. In 2001, the EU set a goal of raising the share of renewable energy sources (RES) in the electricity supply to 21% by 2010, and, as shown in the figure below, they surpassed that goal in 2009. From 1990 to 2011, the share of RES in European electricity generation has increased by almost 311.089 TWh.

Source: ZE

Figure 1. Data from Eurostat.

The German Paradigm for Renewable Energy Growth

Growth has been especially strong in wind energy, with Germany at the top of the ranks in terms of most wind power capacity in the EU. Thanks to a combination of feed-in tariffs and loan programs for renewable energy development, Germany has seen an increase of 39,531 GWh in wind energy capacity between 2000 and 2011.

This has meant higher costs for end-users, however, and the graph below shows how power prices for industrial consumers have increased by nearly 0.07 €/KWh alongside a 100-TWh increase in renewable energy generation from 2000 to 2011.

DE RES generation vs power price
Source: ZE

Figure 2. Data from Eurostat.

Base Load: Natural Gas or Coal?

Greater reliance on renewable energy has also meant that system operators have needed to find alternative fuel sources to maintain a reliable electricity supply, due to the intermittence of many renewables and a lack of feasible large-scale storage options.

The primary contender for base load would be natural gas, because 1) burning natural gas emits less greenhouse gases than burning coal, and 2) the EU has two of the largest natural gas exporters in the world—Russia and Norway—right next door.

However, in the UK and Germany, we see very divergent cases that highlight the impact that Europe 2020 and the changing global energy landscape have had on the European power market.

Impact of Global Events and the Changing Energy Landscape

The aftermath of Fukushima precipitated a nuclear moratorium in Germany, and with 8.5 GW worth of nuclear power taken offline in March 2011, the country has luckily had enough renewable energy generation to rely on for their daytime energy needs. For their base load requirements, however, they’ve had to find alternative fuel sources. While Germany’s commitment to energy sustainability targets would lead most to expect that they would use natural gas for their base load, this has not actually been the case.

With European gas indexed to oil and almost double the price of American gas, Germany has been turning to U.S. coal and closing many of its gas-fired power plants. And because the price of an EU Emission Allowance is at an all-time low, and most of their energy generation is low on emissions, they can afford to do so.

EU Gas v Coal Price
Source: ZE

Figure 3. The price of coal and American gas in comparison to UK gas. Data from EEX and ICE.

EU v US Gas Price
Source: ZE

Figure 4. The cost of burning coal is still cheaper than gas after adding on the price of emissions. Data from EEX.

In contrast, the gradual closures of the UK’s inefficient coal-fired power plants to meet their 2020 emissions targets and their lack of renewable generation capacity have forced them to rely more heavily on natural gas from Norway and Qatar.

Progress towards Emissions Target

Overall, it is still too early to say whether the EU is on track to meet their 2020 targets. While they seem to be on their way towards meeting the renewable energy target, their emissions have gradually increased as the European economy is slowly pulling itself out of the economic recession. As we demonstrated in the webinar, they are also still far from reaching their energy efficiency target.

EU emissions vs consumption
Source: ZE

Figure 5. EU’s energy consumption in contrast to emission levels from 1990-2010. Data from Eurostat.

In next month’s edition of DataWatch, we will provide a more in-depth analysis of the European power and energy markets in the context of the Europe 2020 growth strategy. You can also access the full recording of our webinar here.



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