By Geert De Clercq
PARIS (Reuters) - Europe's attempt to combine an ambitious climate policy with the liberalization of electricity markets has largely failed and the continent needs to rethink its subsidy schemes for renewable energy such as solar and wind, a French government study argues.
The study, led by the prime minister's long-term planning service CGSP, proposes a series of fixes - including cutting wind subsidies when power prices are negative - and says Europe must decide on the trade-offs between the affordability, sustainability and security of its energy policies.
In December 2008, EU leaders voted in the climate change package with three targets for 2020: cut greenhouse gas emissions by 20 percent, produce 20 percent of EU energy from renewable resources and improve energy efficiency by 20 percent.
The climate package conflicted with the EU policy, in place since the mid-nineties, of trying to lower electricity prices by liberalizing the power markets.
Even though the economic crisis had just started, EU leaders believed green policies would not interfere with liberalization, and introduced major subsidy schemes for renewable energy.
Five years later, renewables have seen spectacular growth. At the end of 2012, the share of renewable energy in gross final EU energy consumption was on average 14.4 percent, and when the sun shines and the wind blows, Germany's 65 gigawatts of renewables capacity can provide 100 percent of its power needs.
But retail power prices are higher than ever, the utilities industry is in crisis and security of supply is threatened by the lack of investment in traditional thermal generation. Even the climate plan has failed, as polluting coal-fired generation has grown in lockstep with renewables.
The study said the economic crisis which Europe has been undergoing since 2008 has swept away climate ambitions and placed the focus on growth and competitiveness.
"The multiple objectives of the European climate and energy policies lead to complexity and major economic distortions," the study said.
The study proposes a series of fixes to EU energy policy:
- introduce intraday power markets that can cope better with the intermittent nature of wind and solar than today's day-ahead markets;
- boost interconnections between countries to better balance demand and supply over a wider geographic area;
- intervene in the EU carbon emissions trading market, as a carbon value of at least 40 to 50 euros per ton is needed to incite switching from coal to less-polluting gas;
- a carbon central bank to manage the trade in permits;
- suspend subsidies for renewables when wholesale power prices turn negative due to oversupply.
Suspending feed-in tariffs would be a major policy change, but several EU countries led by Spain and Germany are already reviewing subsidy schemes.
The study said a first step should be to stop feed-in payments for new contracts when power prices turn negative.
"During these periods, the renewable producer would have 'free' energy in excess which can be stored for further use and is encouraged to invest in storage capacities," the study said.
The report - based on the studies of leading European energy economists - admits there is no consensus on whether those modifications will be sufficient to restore conditions for energy investment and to ensure security of supply.
Some economists believe an even more liberalized EU power market is the answer, while others plead for a return of government intervention, notably via the setting up of capacity mechanisms to reward utilities for keeping capacity on standby.
Marc Oliver Bettzuge, economics professor at Cologne University, said that if power markets no longer function properly, actions by market participants need to be centrally coordinated, notably by state-owned or state-regulated monopolies, as was the case in many EU states before 1998.
"There is a fundamental choice of approach to be made: coordination by competitive prices versus coordination by a central authority, e.g., by a monopolist," Bettzuge said.
He added that while the EU has opted for liberalization, policymakers at the same time distorted price formation by regulating retail prices and subsidizing renewables.
He added that initially the effects of these distortions remain limited, but that as their impact increases, they require more market intervention.
"Such a spiral of state intervention into the workings of the price process will ultimately pave the way to central planning," Bettzuge said.
(Editing by Dale Hudson)