FINAL REPORT

The Advisory Group on the Energy Roadmap 2050

13 December 2011

Contents

1. Introduction

2. What is a Roadmap?

3. What is the policy context for the Roadmap?

4. Are there tradeoffs between the objectives?

5. What happens if other countries do not follow the EU lead?

6. Should there be intermediate targets?

7. Why Europe?

8. How much harmonisation?

9. What role for the carbon price?

10. What role for scenario modelling and the PRIMES model?

11. Should the Roadmap be technology-specific?

12. How should network investment and finance be facilitated?

13. What role for EU regulation?

14. What sort of policy framework should be provided?

15. Recommendations

Annexes:

a. Terms of reference

b. The membership of the Group

c. Meetings and working arrangements

1. Introduction:

The Ad Hoc Advisory Group (the Group) was set up with the aim of providing independent advice to the Commissioner for Energy in the preparation of the 2050 Energy Roadmap. The Group met on three occasions (in April, July and September 2011) and this report summarises the main contributions from the Group members, and lists a number of agreed recommendations to the Commissioner.

The terms of reference are attached in annex (a). The members of the Group are listed in annex (b). Details of the meetings and working arrangements are set out in annex (c).

By the very nature of the Group’s membership, views on major aspects of the Energy Roadmap inevitably differed, sometimes strongly. For the Group’s work this has been an advantage, helping to sharpen the modelling and scenario work the Commission has been undertaking, forcing the different views to be tested out over the period to 2050. Given the period of four decades, a host of uncertainties, new technologies and changes in the nature of the European economy and society as a whole are likely to play out in ways that it would be foolish for anyone to try to predict. The actions by other major carbon emitters – such as the US, China and India – are yet to be determined following the Copenhagen and Cancun meetings in 2009 and 2010 respectively. The Group stressed that the design of the policy framework depends upon the nature of this uncertainty, and again the diversity of views has helped to provide insights into the robustness of different policy options.

It is important to bear in mind what is beyond the scope of the Group. The Group is not responsible for the contents of the Roadmap, nor is it required to provide a detailed analysis or a critique of the modelling that the Commission has conducted or intends to conduct. The Group was not informed about and did not discuss the outcome of simulations carried out by the Commission in order to assess the impact of alternative paths to 2050 carbon targets. These are tasks for the Commission. Crucially, the Group has not produced its own Roadmap.

In providing advice, the Group has been mindful of its terms of reference which take the current European energy and climate change policies as a given starting point. The Roadmap is designed to provide a framework for future policies to achieve the three aims of European energy policy – decarbonisation, security of supply and competitiveness.

2. What is a Roadmap?

At the first meeting of the Group, there was extensive debate about the role and limits of the Roadmap. Some members of the Group considered the term “Roadmap” as overused, with various organisations giving the term very different meanings. The importance of considering a range of possible transition paths to decarbonisation has the corollary that there is no one single “Roadmap”, but rather many. This should be reflected in the various scenarios that the Commission is investigating, and in the ways in which they are presented.

The central role of deep technical change was emphasised by members, though there was disagreement about the extent that the deployable technological options over the next four decades were largely already known and determined, or whether there were likely to be major changes within the Roadmap period. Particular emphasis was placed on the implications of adequate transmission and distribution investment, smart meters, and super grids and the implications of a more active role for the demand side. For the period to 2030, much more is already known, and hence whilst the Roadmap is to 2050, in practice the transition to 2030 can be given much more definition than the subsequent decades.

Members raised the question of domain, and the extent to which the Roadmap should focus on energy in the wider sense, rather than place too much emphasis on electricity. The view was expressed that decarbonisation of electricity was more straightforward than other energy sources and uses, and that the Roadmap should explicitly recognise all these other energy dimensions, rather than focussing exclusively on electricity. The role of transport – and in particular the electrification of transport – was emphasised by the Group, with significant consequences for the design and expansion of the electricity networks and almost complete decarbonisation of electricity production. The rationale for separate Roadmaps for transport and energy was therefore questioned, as was the provision of separate finances for the two sectors in the EU’s budgetary arrangements. Recognition of the wider role of the oil and gas sectors in the Roadmap and the avoidance of too narrow an emphasis on the electricity sector was stressed.

Some members were concerned about the extent to which detailed modelling and underlying assumptions would be understood by the wider public, who would have to bear the costs of the decarbonisation transition, particularly if Europe’s leadership in climate change was not matched by similar measures from other major economies. The price implications for consumers would need to be communicated and part of the role of the Roadmap should be to engage with the public on the full costs and implications of the radical transformation that decarbonisation implies. In this regard, attention was specifically drawn to the UK DECC 2050 Pathways Calculator as an example of how citizens could engage in the debate.

Recommendation One: The Commission should set out in the Roadmap its role, limits and uncertainties, and address the diversity of possible transition paths. Flexibility in the face of possible technical and other change should be given a central place in the Roadmap.

Recommendation Two: The Commission should integrate the transport and energy Roadmaps, with explicit modelling of the consequences of the electrification of transport for the electricity and gas sectors, and of the role of the oil sector.

Recommendation Three: The Commission should set out in the Roadmap how the outcomes will be presented transparently to the wider public to ensure full public engagement and understanding of the necessary tradeoffs.

3. What is the policy context for the Roadmap?

There are three main pillars to the existing policy framework on which the Roadmap must build:

· The Internal Energy Market (IEM)

· The climate change framework

· The external framework, including the European Energy Community Treaty and the Eastern Partnership

These measures are all in the context where the choice of the energy mix and most of the policy instruments remain largely a national matter. The Lisbon Treaty, whilst incorporating a chapter on energy and considerably extending the powers of the Commission with respect to energy policy, specifically reserved the energy mix to national governments.

Taking each in turn, there have been three phases to the development of EU directives to complete the Internal Energy Market (IEM): the first round of Directives (1996 and 1998); the second round (2003); and the third package (2007). The current aim is to complete the IEM by 2014. The Group drew attention to the fact that most of the current low carbon technologies (notably wind and solar) were being supported outside the market, hence reducing the scope and role of the IEM. It was noted too that coal and nuclear received support in a number of EU member countries. The need to align the IEM and the decarbonisation and security agendas was emphasised, and the Roadmap should explain how this is to be achieved.

The climate change framework itself builds upon several phases to the development of EU climate change policy. Early measures included support for the Kyoto Protocol, and then the EUETS. Most recently the Climate Change Package set out the 2020-20-20 measures, with Directives covering the 2020 carbon target and the 20% renewables targets, and an ambition to achieve the 20% energy efficiency target by 2020. The EU has adopted a commitment to reduce the production of greenhouse gas emissions to 80-95% below the 1990 levels by 2050, and actively pursued an international agreement at Copenhagen. The Roadmap is being prepared on the assumption that other countries will play their part in addressing what is a global and not just a European problem. The Group nevertheless considered the possibility that international agreement may not be forthcoming as rapidly or completely as the Commission would like.

The overarching Low Carbon Roadmap, already published, provides a further framework within which the Energy Roadmap is set.

On the external dimension, the EU has an active neighbourhood energy policy. The main components are the European Energy Community Treaty (ECT), the Eastern Partnership and the relations with Russia. For the purposes of the Roadmap, the important element is the ECT that incorporates the acquis into treaty members’ obligations, and in particular the carbon and renewables targets. The implication is that the Roadmap will influence energy policy beyond the EU’s borders – in the Balkans, North Africa, Eastern Europe, South East Europe and the Caspian states. One member, stressing the importance of universal global access to electricity, regarded this as a core issue for the Roadmap.

4. Are there trade-offs between the objectives?

The IEM and the climate change package confront Europe with an enormous challenge, the scale of which is yet far from apparent to the general public (who will have to pay for the investments) and indeed to many governments. The almost complete decarbonisation of the energy sector in the next four decades requires the replacement of most of the existing assets. Energy intensive industries will either have to switch to low carbon energy supplies or exit the European economy. The relative price of energy between the EU and other major economies (including also compensation measures to combat carbon leakage) will be critical in determining the outcome for the energy intensive sectors. Both the completion of the IEM and the decarbonisation of the energy sector require the development of an integrated set of energy networks ― and hence further infrastructure beyond the requirements for decarbonisation.

These enormous investments must be achieved whilst ensuring security of supply and protecting and enhancing the competitiveness of the European economy – in other words, all three objectives (decarbonisation, security of supply and competitiveness) need to be met simultaneously. There was also discussion of the relation between the IEM and decarbonisation on the one hand, and technological development on the other.

It has been claimed that these three objectives do not conflict: that decarbonisation policies enhance security of supply by reducing reliance on (frequently imported) fossil fuels, and that the investment in decarbonisation will create green growth, offsetting losses to “brown” jobs and industries. The assumption of high, rising and volatile fossil fuel prices forms part of this “win-win-win” argument. The Group held differing views about the direction of fossil fuel prices, (notably in respect of gas and the impact of shale gas) and in any event it was argued that the Roadmap should not be dependent on any one fuel price projection, and the scenarios should model a wide range of possible outcomes.

Not all the Group was entirely convinced by this happy coincidence of objectives. Some members of the Group considered that intermittent renewable technologies may, if developed to a substantive or dominating share of the energy market and not complemented by appropriate measures, create issues in respect of security of supply, and for many members of the Group the problem of carbon leakage remains a substantive one, if other countries do not follow the EU’s lead.

Some members considered that the Roadmap should make clear whether the carbon objective was unconditional in respect of the action of other countries, and whether it was a “trump” objective, or could be traded off against security and competitiveness objectives. To the extent that the Roadmap was primarily identifying policy frameworks and scenarios to achieve the 2050 emissions reduction target, the Group recommended that the Roadmap should identify the consequences to the other objectives of various decarbonisation paths, and set out the measures that would need to be taken to ensure adequate security of supply and protect competitiveness with different technological mixes. In particular, various levels of renewables shares should be explicitly modelled alongside the security and competitive implications comprising the whole life cycle.

Recommendation Four: the Roadmap should explicitly address and make transparent the potential trade-offs between the three objectives under each scenario. The Roadmap should explicitly provide for flexibility in policy measures in the event that other countries do not play their part in addressing the global challenge of climate change, and if competitiveness and security problems materialise.

Recommendation Five: the Roadmap should set out the consequences and mitigating measures under each scenario for security of supply and competitiveness while taking the whole lifecycle into account. Each scenario should set out the associated measures to protect security and competitiveness.

5. What happens if other countries do not follow the EU lead?

A number of members of the Group were particularly concerned about the consequences of other major economies not following the EU’s lead. It is already apparent that the ambitions the EU had for the Copenhagen COP have not been fulfilled, and recent developments in the US do not encourage the expectation of early action on binding legal carbon caps. Whilst China has moved quickly to develop its domestic supply and its export potential in renewables technologies, members of the Group noted that China also plans to greatly expand its coal-fired electricity generation. On current plans, such an increase in China’s coal burn would negate much of the positive impacts of EU mitigation measures, and indeed the “carbon leakage” problems may be exacerbated, and continue to undermine the impact of the reduction of carbon production in Europe. Whilst carbon production might fall, carbon consumption may not – and indeed strong rises in carbon consumption in some EU countries since 1990 were noted.

The Group reiterated the importance of the Energy Roadmap focussing on global climate change, and assessing the impact of European policy not just on EU carbon production, but on global emissions. Thus some members considered that carbon production and carbon consumption within the EU should both be explicitly modelled for the Roadmap. Some members questioned both the feasibility and the relevance of the EU’s 2050 carbon production target in this context. Others pointed to a number of difficulties in measuring and modelling carbon consumption.

The problem of carbon leakage is not limited to China, India and the US. Leakage to countries on the EU’s borders was specifically mentioned, and in this context the importance of the ECT was emphasised. In the absence of appropriate policies and measures, energy intensive industries on Europe’s borders could evade the carbon reduction costs, and export their products back into the EU. Additionally, higher carbon electricity generation could be generated just outside Europe and then fed back in as and when the European-wide electricity grids develop.

The Group concluded that the issue of carbon leakage could not be ignored and that the Roadmap should explicitly address this issue. The options include setting carbon targets in consumption terms, border taxes (ensuring a level playing field between EU carbon constrained industries and imports from countries which do not price carbon) and adjustments to the EUETS to take account of the position of energy intensive industries.

Recommendation Six: Whilst recognising the practical difficulties and the possible implications for the EUETS, the Roadmap should pay explicit attention to the challenges from carbon leakage under different scenarios, including consideration of the measurement of EU carbon consumption. The Roadmap should not be exclusively focussed on carbon production.

Recommendation Seven: The Roadmap should explicitly address scenarios in which other countries take longer to develop climate change policies.

Recommendation Eight: The ECT should be further developed in respect of agreeing carbon policies with Europe’s neighbours.

6. Should there be intermediate targets?

In debating the role of the Roadmap in setting out a variety of transition paths, the Commission is taking the overarching carbon reduction target to 2050 as a given. The question therefore arises as to whether the Roadmap should indicate an intermediate carbon reduction target after the 2020 target, and before the 2050 target, and whether it should be conditional, in carbon production or consumption terms, and extend to targets for specific technologies (or groups of technologies), notably renewables and energy efficiency. Unsurprisingly members did not form an agreed position on an extended bundle of targets, and therefore debate focussed on the minimum basis of an intermediate carbon target.

Members of the Group were broadly sympathetic to the development of a 2030 intermediate carbon or greenhouse gas target consistent with the longer term targets, though there was considerable debate and disagreement about whether this should be unilateral or be conditional on other countries adopting similar targets. Members also discussed the basis of the range of possible disaggregated targets, noting the issues not only of conditionality, but also the sectors to which targets might be applied, and importance of carbon consumption.

There were very strong differences of opinion on the issue of additional intermediate targets. Some members expressed support for a rolling forward of the renewables and energy efficiency targets, highlighting impacts on investors and infrastructure implications. Others argued against such targets, highlighting the problem of “picking winners”, the need to take account of technical change, the role of gas, and the problems of lobbying and capture.

Whatever form of intermediate targets is adopted, the Group emphasised the need for annual monitoring and reporting on progress towards the 2050 target. It was argued that a process of annual reviews allows not only an assessment of how well the EU is doing, but would also help the credibility of the targets by requiring the EU to set out how it would deal with over- or underperformance as it materialised, or as conflicts between the three overarching objectives emerge, and the consequences for further policy actions.

Recommendation Nine: the Roadmap should set out intermediate 2030 greenhouse gas targets to provide further clarity to investors. The Commission should assess the arguments for and against conditional or unconditional targets as well as for and against renewable and energy efficiency and other possible complimentary low carbon targets, taking account of the role of the transport sector and buildings.

Recommendation Ten: There should be annual reviewing and reporting of progress in respect of each of the three objectives.

7. Why Europe?

The Roadmap is explicitly an EU construct, and hence at the core is the need to both respect the reserved areas for member states, and to spell out the benefits of achieving the overall objectives through common European approaches where appropriate, and where the gains from cooperation can be clearly demonstrated. Members of the Group noted in particular the consequences to neighbouring countries of Germany’s recent decisions.

In respect of a number of European dimensions, members of the Group drew particular attention to first, the extent to which infrastructure was more cost effective if developed for the internal market as a whole. Insufficient attention has been paid to modelling a European electricity and gas transmission network linked to pan-European production sites (super grids), rather than solely considering links between the member states. Such modelling and the recognition of the impacts of technical change for grids should be explicit in the Roadmap and its role in implementing the IEM should be emphasised. Second, the gains to security from interconnection, and hence the creation of considerable Europe-wide portfolio effects from new infrastructure, should be explicitly modelled in the Roadmap. Third, the key role transmission plays in facilitating the development of renewables and support, given their intermittency and their locations (frequently not coincidental with the major load centres), should be incorporated into the scenarios and their implications. Finally, the gains from pooling R&D and innovation efforts in respect of renewables, CCS, batteries and storage, and other technologies should be estimated, and their implications for the S.E.T. Plan spelt out.

Recommendation Eleven: the Commission should commission an independent study of the economic gains from European energy network integration and the economic gains from a common approach to climate change mitigation, and compare these with the costs and benefits of heterogeneous national approaches to renewables and the technology mix.

8. How much harmonisation?

Notwithstanding the gains from a Europe-wide approach noted above, many measures to achieve the three objectives are national and indeed even more localised. Measures to improve the energy efficiency of buildings are an obvious example. Particular attention was directed towards cities and urban design, and the potential gains from integrated city planning.

Some members stressed that these national competences do not however rule out the gains from common targets (for example for renewables and energy efficiency), nor the benefits from coordination and the sharing of R&D, innovation and best practice. If some countries make more rapid progress towards decarbonisation, some members considered that they would face a competitive disadvantage against slower EU members with implications for the IEM. Others thought it might be a competitive advantage.

The Group discussed the case for making the 2020 energy efficiency targets mandatory. There was no consensus on this. Issues raised included: the difficulty in defining benchmarks and baselines; and the short time now available to achieve the targets. The role of air conditioning was also raised. Some members questioned whether energy efficiency, though by definition a “good thing”, would reduce demand, and if so by the amount assumed in Commission estimates. Others considered that energy efficiency had such a central role to play in meeting the overarching objectives, that notwithstanding the practical issues raised, the EU 2020 efficiency targets should be made mandatory, and rolled forward to 2030.

In terms of the aspects of existing policies which are delegated to national competence, the Group noted the plethora of renewables support mechanisms across the EU, and the possible inefficiencies which might result. Looking ahead, specialisation in different types of renewables has obvious cost advantages. It was noted that solar energy was likely to be more successful in the south of Europe and wind power might be best placed on the north western locations.

This specialisation might extend beyond the EU’s borders, notably in respect of solar in North Africa, and in this context, opportunities within the framework of the Energy Community Treaty and the EU’s external relationships should be fully explored in the Roadmap.

9. What role for the carbon price?

The Group agreed that a carbon price was one necessary and crucial element in the transition, though there were different views as to how central it should be. Some members placed great emphasis on this market-based mechanism, and in particular its role in avoiding picking technological “winners”. Others viewed the role of the carbon price as one component in a package of technology-driven measures. It was however widely (but not unanimously) viewed as unhelpful and economically inefficient to have different carbon prices and different carbon price mechanisms across the EU, not only raising the costs of transition, but also potentially distorting the internal market, especially the IEM.

The EUETS was set up with the intention of creating a credible EU-wide carbon price which would drive emissions reductions. The EUETS was the first large scale emission trading scheme, and the assumption was that other countries would, in due course, set up their own ETS regimes (especially the US), and that gradually these would become fungible with the EUETS. This has not happened, nor, in the opinion of the majority of the Group, is such an international development likely in the near future, or even at all.

For a variety of reasons, a number of member states have deemed the carbon price in the EUETS too low, volatile and short term to be sufficient, and have introduced their own explicit or implicit carbon taxes. These national innovations in carbon pricing have included: carbon taxes for the non-EUETS sectors; carbon taxes that overlap with the EUETS; and floor prices of carbon. In addition, energy taxes have been adjusted at the national level to take greater account of the carbon content of the different fuels.

Members of the Group considered the possible flaws in the EUETS design and some members of the Group expressed a considerable degree of scepticism about the future role of the EUETS. Others regarded the EUETS as central to EU climate change policy. Some members of the Group argued that the Roadmap should make clear whether, if an intermediate target to 2030 is recommended, the EUETS cap would be formally tied to it.

Most of the Group considered that the development of lots of different carbon prices was not only inefficient in carbon terms but also distorted the IEM. It recommended that the Commission should, through the Roadmap, set out the costs and benefits of this national diversity, as part of the wider consideration of the costs of different pathways to achieve the 2050 carbon target.

Mindful of the problem of carbon leakage and the possible undermining of energy intensive industries within the EU, where other countries do not adopt commensurate carbon prices and carbon reduction measures of their own, the Group considered the case for a carbon border tax and other possible border adjustments. Many practical and political obstacles were noted, but the Group concluded that this was sufficiently likely to be an efficient way of addressing leakage to conclude that the Roadmap should at least investigate the costs and benefits of this option, and compare it with other options.

An alternative under consideration is to give special treatment under the EUETS to energy intensive industries facing international competition. Notwithstanding the appeal to some lobbyists and its broader political appeal, this approach has a number of obvious drawbacks, not only weakening the EUETS, but also implying higher reductions (and less permits) for the rest of industry.

Recommendation Twelve: the Roadmap should stress the central role of a common carbon price in the EU and clarify the relationship between the EUETS and an intermediate 2030 target.

Recommendation Thirteen: the Roadmap should take explicit account of national measures to introduce carbon taxes and carbon floor prices, and set out the rationale, benefits and costs of a common European approach to carbon pricing, and the costs and benefits of national diversity. The Roadmap should explore options to bolster and reinforce the carbon price across the EU.

Recommendation Fourteen: the Roadmap should propose a regular assessment of the measures taken to combat carbon leakage and consider the case for a carbon border tax and other compensating measures.

10. What role for scenario modelling and the PRIMES model?

The second meeting of the Group was devoted largely to consideration of the Commission’s scenarios and the supporting role of the PRIMES model. It should be stressed that it was not the job of the Group to comment on and critique in detail the PRIMES model, but rather to consider how it fed into the scenarios and the Roadmap.

The PRIMES model is one tool, and it plays a central role in the Commission’s work on the Roadmap. Members of the Group raised a host of questions, and as a result a number of key points emerged. Essentially what matters is the assumptions that feed into the modelling of the scenarios, and the Group stressed the need for the Commission to be very explicit about these assumptions, as well as testing sensitivity to changes in these exogenous variables.

Amongst the issues that emerged were: the assumption of perfect foresight by companies, but not by individuals; the use of different discount rates; the costs of different technologies; and fossil fuel prices. There was considerable debate about the role of fossil fuel price assumptions, including of the IEA’s recent contributions. Major recent developments in international gas markets, notably shale gas, were considered.

The Group was concerned about the transparency of the PRIMES work, and in particular the property rights in the algorithms and detailed internal workings of the model. Whilst assumptions were published, the model remains the private property of the National Technical University of Athens. The consequence is that independent parties cannot replicate the results. This is a commercial matter for the Commission, but members of the Group pointed out that it does have obvious consequences for the credibility of the Roadmap.

The technical nature of the modelling limits that ability of wider public engagement, and some members of the Group were concerned that the Commission should make its work more widely available to non-technical audiences.

The Commission’s seven scenarios (but not the results) were presented to the Group and in particular: the Common Reference Scenario; the Current Policy Initiatives Scenario; and the Five Decarbonisation scenarios. Particular attention by the Group members was paid to the decarbonisation scenarios: energy efficiency; diversified supply technologies; high renewables; delayed CCS; and low nuclear.

Amongst the issues discussed were: the extent to which the carbon price drives the scenarios; the absence of a “high nuclear scenario”; and the impact of delayed CCS not only on the electricity sector but also on industrial emissions. Amongst the points made were: that the delayed CCS scenario could be taken as, in effect, a high nuclear scenario; and that a scenario with CCS plus biomass was needed as one of the ways of moving towards negative carbon emissions. Indeed negative carbon emissions technologies might be required in all scenarios to meet the overarching targets.

A number of members expressed more general scepticism about the methodology, and in particular the wider tendency to structure the energy policy around these scenarios rather than a wider framework of policy.

There was also concern about the extent to which the scenarios chosen might be interpreted as the main or only ones the Commission was considering. Criticism was also made of the possible interpretations of the titles given to the scenarios, and that these might encourage the public debate to focus on particular technologies rather than the broader policy framework. By separating out scenarios, common themes may be lost.

The Group was concerned that under each scenario the implications for security of supply and competitiveness might not be fully explored.

Recommendation Fifteen: the PRIMES model should be made publically available so that its results can be replicated by interested parties and to the extent that the PRIMES model is used to support the Roadmap, the assumptions and technology costs should be made explicit.

11. Should the Roadmap be technology-specific?

There were very strong differences between members of the Group on the extent to which the Commission should be technology-specific in the Roadmap, especially in respect of renewables and energy efficiency.

One view was that, given the technological and market uncertainties, and given the uncertainty about the conduct of other major emitters, the most efficient strategy is to rely primarily on markets and market-based instruments to achieve the targets. These market-based instruments might include the carbon price, and prices for security of supply, with a border tax creating a level playing field between the EU and other countries which did not adopt similar measures. A variant might be to auction capacity in low carbon technologies, creating a market-based capacity mechanism, preferably with an EU-wide dimension.

The alternative view was that the Commission could not avoid additional elements of technological choice and some members strongly criticised existing elements. If the EU was minded to develop renewables on a larger scale, it was argued that this would require a host of ancillary investments and policy choices, notably in respect of networks and infrastructure and market design. A large-scale electricification of transport would similarly require major ancillary investments. Some members suggested that this created a “chicken-and-egg” problem, and hence the EU should commit to a preferred path, and coordinate policies to facilitate the necessary investments.

Notwithstanding these differences in views, the Group nevertheless agreed that market instruments will be needed in any event, and at this stage in developing the pathways, the Commission should at minimum in the Roadmap point out the implications for coordinated investments under each of its scenarios.

12. How should network investment and finance be facilitated?

Networks are, in large measure, monopolies, and hence there is little option but to plan their expansion and integration. Markets cannot solve network design and development problems, though they can of course provide the finance.

The Group noted the Commission’s various communications on infrastructure and the importance of developing European grids and gas networks―to complete the IEM, encourage price convergence and gain the economies of scale and portfolio benefits. These networks are doubly important in the context of the carbon reduction targets and building the scope for specialisation in different renewables and other technologies to different geographical areas within the EU and outside.

Such networks will not arise spontaneously, and the Group urged the Commission to take a strong position in the Roadmap not only on the need for Europe-wide networks, but also the associated investments, planning and finance. Pan-European networks should play a central role in the Roadmap.

The Group noted the sheer scale of the required investments to meet the decarbonisation target for 2050, both in networks and with the replacement of most of the electricity generation capacity in Europe, and the consequent urgency given the life cycle of investments.

The Group was concerned that although the Roadmap would require this investment to be forthcoming largely from the private capital markets, the EU had little by way of core policy measures to actually make this happen. Though the investments would in large measure be for the member states to deliver, there is as yet little evidence that this scale of investment will in fact be forthcoming. The role of the EIB was considered by some members to be extremely important. Some members also considered that the IEM should be redesigned to deliver the necessary investment incentives.

A key issue raised is the cost of capital. The Roadmap policy framework is designed to provide more certainty to investors for networks, buildings and generation, but to achieve this it has to be credible. It is far from obvious that such credibility has been achieved so far, and the Group emphasised the centrality of the investment finance question to the Roadmap.

Recommendation Sixteen: the Roadmap should place the development of adequate European energy networks at its core.

Recommendation Seventeen: the Roadmap should place considerable emphasis on the need to finance a major investment programme in both generation and networks, and spell out measures to minimise the cost of capital to the extent they are deemed necessary. There should be explicit reference to the role of European financial institutions, notably the EIB.

13. What role for EU regulation?

The Group discussed the regulatory context, and the implications of national regulatory approaches for the development of the fully integrated IEM and the Europe-wide grids.

Whilst the IEM is due to be completed by 2014, the plethora of different market designs and the scale of the price disparities suggest that this dimension of European energy policy has a long way to go to meet the spirit as well as the letter of the IEM.

Ensuring the European integration of generation and of networks requires significant elements of EU-wide regulation, based upon common principles and rules. The Group noted the positive developments in respect of ACER, and the Roadmap should consider how and whether the renewables and other reserved and protected markets might be brought within the wider EU regulatory framework and the IEM.

Recommendation Eighteen: the Roadmap should in each scenario set out the regulatory requirements and ways to overcome existing barriers.

14. What sort of policy framework should be provided?

The Roadmap is intended to provide a framework rather than a specification of a particular technological pathway. However, some members pointed out that for many lobbyists and special interests, there is a strong pressure to favour particular technologies and particular reserved agendas, since they benefit from the subsidies and support mechanisms that would be required for a technologically-specific pathway. This is especially relevant to the advocates of nuclear power and specific renewables, like offshore wind.

Labelling the decarbonisation scenarios by terms like “high RES” and “low nuclear” may act to encourage such lobbyists to push for the adoption of their preferred technology.

The Group agreed that there were certain common policy framework components, independent of the particular pathway pursued. Amongst those discussed (but not necessarily agreed) were: a carbon price; the development of market-based capacity mechanisms; intermediate greenhouse gases 2030 targets; trading in renewables and other low carbon technologies; a plan for EU-wide networks; and common regulatory principles.

Members variously suggested that additional measures, notably to address carbon leakage (carbon border taxes and other compensation measures), linkage between the EUETS and a 2030 target, floor prices for carbon, and an element of technological specificity should all be considered in the Roadmap and the scenarios.

Finally, the Group noted that this policy framework is a package, and the Roadmap should pay careful attention to their interactions, especially in respect of security of supply and competitiveness, rather than address each policy component in isolation.

Recommendation Nineteen: a distinction should be made between setting the policy framework and detailed intervention in specific markets. The Roadmap should focus primarily on the former, leaving the choice of detailed policy instruments largely to the member states, whilst maintaining options for harmonisation where appropriate. In particular, the carbon price should be determined, where possible and practical, at the European level. Maximising the ability to trade between member states to meet targets should encourage the harmonisation of specific instruments. Harmonisation of market design should be further encouraged through the competitive forces of the IEM and the completion of the physical infrastructure of European energy networks. 15. Recommendations

Recommendation One: The Commission should set out in the Roadmap its role, limits and uncertainties, and address the diversity of possible transition paths. Flexibility in the face of possible technical and other change should be given a central place in the Roadmap.

Recommendation Two: The Commission should integrate the transport and energy Roadmaps, with explicit modelling of the consequences of the electrification of transport for the electricity and gas sectors, and of the role of the oil sector.

Recommendation Three: The Commission should set out in the Roadmap how the outcomes will be presented transparently to the wider public to ensure full public engagement and understanding of the necessary tradeoffs.

Recommendation Four: the Roadmap should explicitly address and make transparent the potential trade-offs between the three objectives under each scenario. The Roadmap should explicitly provide for flexibility in policy measures in the event that other countries do not play their part in addressing the global challenge of climate change, and if competiveness and security problems materialise.

Recommendation Five: the Roadmap should set out the consequences and mitigating measures under each scenario for security of supply and competitiveness while taking the whole lifecycle into account. Each scenario should set out the associated measures to protect security and competitiveness.

Recommendation Six: Whilst recognising the practical difficulties and the possible implications for the EUETS, the Roadmap should pay explicit attention to the challenges from carbon leakage under different scenarios, including consideration of the measurement of EU carbon consumption. The Roadmap should not be exclusively focussed on carbon production.

Recommendation Seven: The Roadmap should explicitly address scenarios in which other countries take longer to develop climate change policies.

Recommendation Eight: The ECT should be further developed in respect of agreeing carbon policies with Europe’s neighbours.

Recommendation Nine: the Roadmap should set out intermediate 2030 greenhouse gas targets to provide further clarity to investors. The Commission should assess the arguments for and against conditional or unconditional targets as well as for and against renewable and energy efficiency and other possible complimentary low carbon targets, taking account of the role of the transport sector and buildings.

Recommendation Ten: There should be annual reviewing and reporting of progress in respect of each of the three objectives.

Recommendation Eleven: the Commission should commission an independent study of the economic gains from European energy network integration and the economic gains from a common approach to climate change mitigation, and compare these with the costs and benefits of heterogeneous national approaches to renewables and the technology mix.

Recommendation Twelve: the Roadmap should stress the central role of a common carbon price in the EU and clarify the relationship between the EUETS and an intermediate 2030 target.

Recommendation Thirteen: the Roadmap should take explicit account of national measures to introduce carbon taxes and carbon floor prices, and set out the rationale, benefits and costs of a common European approach to carbon pricing, and the costs and benefits of national diversity. The Roadmap should explore options to bolster and reinforce the carbon price across the EU.

Recommendation Fourteen: the Roadmap should propose a regular assessment of the measures taken to combat carbon leakage and consider the case for a carbon border tax and other compensating measures.

Recommendation Fifteen: the PRIMES model should be made publically available so that its results can be replicated by interested parties and to the extent that the PRIMES model is used to support the Roadmap, the assumptions and technology costs should be made explicit.

Recommendation Sixteen: the Roadmap should place the development of adequate European energy networks at its core.

Recommendation Seventeen: the Roadmap should place considerable emphasis on the need to finance a major investment programme in both generation and networks, and spell out measures to minimise the cost of capital to the extent they are deemed necessary. There should be explicit reference to the role of European financial institutions, notably the EIB.

Recommendation Eighteen: the Roadmap should in each scenario set out the regulatory requirements and ways to overcome existing barriers.

Recommendation Nineteen: a distinction should be made between setting the policy framework and detailed intervention in specific markets. The Roadmap should focus primarily on the former, leaving the choice of detailed policy instruments largely to the member states, whilst maintaining options for harmonisation where appropriate. In particular, the carbon price should be determined, where possible and practical, at the European level. Maximising the ability to trade between member states to meet targets should encourage the harmonisation of specific instruments. Harmonisation of market design should be further encouraged through the competitive forces of the IEM and the completion of the physical infrastructure of European energy networks.

Annexes

a) Terms of Reference of the Ad Hoc Advisory Group on Energy Roadmap 2050

“The Directorate General for Energy in cooperation with other Commission services is currently preparing an Energy Roadmap to 2050 to be adopted towards the end of 2011. This Energy Roadmap will follow the Low Carbon Economy Roadmap 2050 adopted by the Commission on 8 March 2011[1] and will specifically focus on decarbonisation possibilities and policy challenges in the energy sector.

The objective of the Energy Roadmap 2050 in relation to the Low-Carbon Economy Roadmap would be to assess energy-specific scenarios and the means of achieving decarbonisation, while ensuring energy security and competitiveness for the European Union. This assessment will build on the established EU energy policy and the EU 2020 Energy Strategy, embedding them in a longer term strategy.

It is essential to bring a long-term perspective to bear on today's policy and regulatory decisions in the energy sector. Firstly, the transition to an efficient, low-carbon energy system which has already started must be shown to be on track towards a substantial reduction in greenhouse gas emissions. Secondly, investors, especially those considering long lived investments, want policy and regulatory certainty well into the future.

The purpose of Roadmap is not to choose one scenario or one development path to 2050 as a preferred option but rather to examine a set of possible transitions against which a strategy for the long term and proposals for actions in the coming years can be worked out.

The role of the Ad Hoc Advisory Group is to discuss different scenarios and policy challenges and provide advice for the preparation of the Energy Roadmap. Member of the Advisory Group will bring their contributions in their areas of expertise.

Issues to be discussed could include: energy market integration, financing of infrastructures, drivers towards market compatible national renewables support schemes and use of cooperation mechanisms, incentive to investments in the transition to a secure, competitive, low-carbon energy system, international issues and energy policy approach.

The Ad Hoc Advisory Group will meet approximately three times between May and November 2011 in Brussels Commission premises. The final output of the group will be a report consolidating the results of the meetings providing advice, from the group as a whole, on the challenges to be tackled in the 2050 Energy Roadmap.”

b) The membership of the Group

Dieter Helm (chair)

Claude Mandil (deputy chair)

Jorge Vasconcelos

David MacKay

Fatih Birol

Arne Mogren

Frederic Hauge

Brigitte Bach

Coby van der Linde

Eugeniusz Toczylowski

Ignacio J. Pérez-Arriaga

Wolfgang Kröger

Giacomo Luciani

Felix Matthes

c) Meetings and working arrangements

The Group met on three occasions in Brussels.

The first meeting comprised a presentation from Philip Low on the background to the Roadmap, and proceeded to a round table discussion of the objectives of the Roadmap and the issues to be considered.

The second meeting comprised a presentation from Professor P. Capros NTUA on the PRIMES model, followed by a presentation on the Commission’s scenarios. Members of the Group discussed these presentations and set out the issues for consideration in the Group’s report.

In advance of the third meeting, the Chairman prepared an initial outline draft of the report.

The Commissioner for Energy introduced the third meeting. The Chairman presented his first outline draft report and the draft recommendations. Members of the Group discussed the recommendations.

Following the third meeting, the Chairman revised the draft report, and communicated with members of the Group on detailed drafting points.

At the end of September 2011 the Group agreed this final report.

[1]http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/272&format=HTML&aged=0&language=EN&guiLanguage=en

Results of the public consultation on the "Energy Roadmap 2050"

Executive Summary

The Commission is preparing an Energy Roadmap to 2050 to be adopted by the end of 2011. This Energy Roadmap will follow the Low Carbon Economy Roadmap 2050 adopted by the Commission on 8 March 2011[1] and focus on decarbonisation in the energy sector. The background to the need to develop a decarbonisation strategy is the EU commitment to an 80-95% reduction in greenhouse gas emissions below 1990 levels by 2050 in the context of necessary reductions by developed countries as a group. The Energy Roadmap will present policy challenges for the decarbonisation of the energy sector while preserving the competitiveness of industry and strengthening energy security.

On 20 December 2010, the Directorate General for Energy launched a public consultation on the Energy Roadmap. The public consultation[2] was based on an online questionnaire with seven questions, some requiring comments and others in the form of multiple choice.[3] The public consultation was open between 20 December 2010 and 7 March 2011. Nearly 400 contributions were received.

This report summarises the replies. Statistical information is provided in annex 1.

Question 1 How to ensure credibility: A large number of contributors said that the assumptions and data used for modelling should be as transparent as possible and a variety of modelling methodologies should be used. Many private sector organisations emphasised the need for a stable, clear and predictable legislative framework, to encourage the necessary investments in the energy sector which generally have a very long lead time.

Question 2 The EU's position in a global policy context: More than half of all respondents chose "global energy efficiency and demand developments" and "global development of renewable energy" as the most important issues.

Question 3 Societal challenges and opportunities: Overall responses were fairly evenly distributed among the different choices. Public acceptance of new infrastructures was seen as important by many.

Question 4 Policy developments at EU level: Roughly half of the respondents believe that energy efficiency is among the three most important issues needing more development at the EU level.

Question 5 Milestones in the transition: Across all industries and NGOs, intermediate targets, checkpoints and regular updates towards 2050 were recommended. However, the decarbonisation roadmap should be flexible enough to allow the route to be changed along the way.

Question 6 Key drivers for the future energy mix: About half of all respondents believe that global fossil fuel prices in relation to costs of domestic energy resources and long term security of supply will be the most likely key drivers of the future European energy mix.

Question 7 Additional thoughts and contributions: There was a considerable divergence in opinions on the best way to decarbonise the energy sector in terms of market intervention as well in the selection of a preferred technology option to be pursued.

1 Introduction

The European Commission is currently preparing an Energy Roadmap to 2050 to be adopted towards the end of 2011. This Energy Roadmap will follow the Low Carbon Economy Roadmap 2050 adopted by the Commission on 8 March 2011[4] and will specifically focus on decarbonisation in the energy sector.

The need for our decarbonisation strategy is the EU commitment to an 80-95% reduction in greenhouse gas emissions below 1990 levels by 2050, in the context of necessary reductions by developed countries as a group[5].

The Energy Roadmap will present a number of policy challenges to achieve our long term strategy of progressive decarbonisation of our energy sector while preserving the competitiveness of industry and strengthening our security of energy supply.

On 20 December 2010, as part of the process of preparation of the Energy Roadmap to 2050, the Directorate General for Energy launched a public consultation. The public consultation was based on an online questionnaire of seven questions of which some were multiple choice and others open questions.

1. How to ensure credibility of the work (open question),

2. The EU's position in a global policy context (multiple choice),

3. Societal challenges and opportunities (multiple choice),

4. Policy developments at EU level (multiple choice),

5. Milestones in the transition (open question),

6. Key drivers for the future energy mix (multiple choice),

7. Additional thoughts and contributions (open question)

The public consultation was open between 20 December 2010 and 7 March 2011. Nearly 400 contributions were received, approximately half from organisations and half from individual citizens. Approximately half dozen Member States sent a formal reply to the public consultation. This report summarises all contributions received. Additional statistical information on the replies is provided in the annex. The individual contributions have been published on the public consultation's webpage.[6]

Given the participation from a broad spectrum of organisations as well as citizens, this public consultation offers insights into a large range of stakeholder opinions.

2.1 How to ensure credibility of the work

Question 1: How can the credibility of work on the transition to a low-carbon energy system in 2050 be ensured? (For example regular updating of projections using energy system models, focus on developments in technologies, level of expertise needed in each sector,…)

A large number of contributors from different entities and sectors said that the assumptions and data used for modelling should be made as transparent as possible. They also recommended modelling a range of different scenarios using different modelling methodologies. Using diverse scenarios and considering results from different models would allow a better understanding of the risks and uncertainties in the modelling, e.g. regarding the pace of technological development, possible energy price developments, results from the implementation of policies, international developments influencing the energy sector, risk of technological lock-ins, etc. and could help identify configurations that could threaten the three core objectives of our energy policy, namely security of supply, competitiveness and sustainable development.

Scenarios used should be scientifically sound and updated on a regular basis to include latest developments and to check progress towards our objectives in the EU and Member States. The possibility to have peer reviews of the modelling exercise was also suggested.

A few organisations from diverse sectors explicitly criticised the PRIMES model regarding its transparency.

Many private sector organisations emphasised the need for a stable, clear and predictable legislative framework, to encourage the necessary investment in the energy sector which have generally very long lead time. In establishing the legislative framework preference should be given to market driven policies rather than top down political intervention.

Some industry respondents recommended that initiatives related to sustainable use of energy, and GHG (greenhouse gas) reductions should be bundled together in a holistic approach rather than a piecemeal method tackling specific sectorial issues at different times. The importance of striking a balance among decarbonisation of the energy sector while maintaining competitiveness and ensuring security of energy supply was underlined.

A few organisations expressed concerns about a loss of international competiveness because of high energy costs and argued that GHG abatement policies in the EU should only be implemented under equally strong commitments from other countries and regions in a robust international framework for cooperation on climate change.

The need for a legislation ensuring fair competition between different energy sources on a level playing field was also emphasised. However, different views were expressed on what constitutes a level playing field. Renewables organisations in particular argued that policies should take all external costs into account while other organisations argued for a "technology neutral" approach and phase out of subsidies for specific energy sectors (see also replies to question 5 in chapter 2.5).

2.2 The EU's position in a global policy context

Question 2: Looking forward, EU energy policy may be increasingly influenced by developments in global energy supply and demand, international cooperation on climate and initiatives taken outside the EU. Which developments should be considered in the Energy Roadmap 2050? On which do you think a stronger EU line is necessary? (Pick three most important ones)

The chart above represents the relative preferences expressed by organisations and citizens to question 2. A detailed percentage split of opinions of different organisations, with a breakdown among industries, NGOs and utilities is provided in annex 1.

Overall, more than half of all respondents chose "global energy efficiency and demand developments" and "global development of renewable energy" as the topics most worthwhile of consideration in the roadmap or requiring a stronger EU line. Among NGOs, those two answers received the strongest majority.

The third most chosen response for organisations was the further development of an international framework for cooperation on climate, a response which the vast majority of energy utilities judged to be among the most significant factors.

"Further development of international standards, trade and investment frameworks" was supported by almost a third of the respondents from organisations.

Approximately one third of organisations indicated specific developments not included in the multiple choice option such as: taxes and carbon markets, impacts on developing countries, competitiveness, land use change from biomass, caps on energy use and increased efficiency, renewables, as well as secure availability of fossil fuels.

Remarkably among citizens, "global nuclear renaissance" was the most popular answer after "global development of renewable energy", indicated by more than half of the respondents.

2.3 Societal challenges and opportunities

Question 3: What societal challenges and opportunities do you think are likely in Europe over the next decades as a result of changes in the EU and global energy system? On which ones do you think a stronger EU line is needed? (Pick three most important ones)

The chart above represents the relative preferences expressed by organisations and citizens to question 3. A detailed percentage split of opinion different organisations, with a breakdown among industries, NGOs and utilities is provided in annex 1.

Overall, responses were fairly evenly distributed among the top six choices. Public acceptance on new infrastructures received the highest share of votes from organisations. More than half of utilities viewed public acceptance and increased reliance on electricity as major social challenges or in need of a stronger EU line. Among NGOs "increased scope for decentralised power generation and for local, integrated solutions" and "creation of sustainable and publicly acceptable energy sources" received most support.

Among citizens, the most popular answers were on increased energy efficiency and increased reliance on electricity. Throughout the questionnaire, citizens often tended to highlight a social dimension, e.g. through advocating a role for education and media in driving behavioural change (energy saving) and increasing public understanding or acceptance of certain technologies. Some also viewed vocational training to create the necessary skills for a low-carbon economy as essential.

Some organisations underlined that due to the profound structural changes in the energy industry required for a transition to a low-carbon energy system, the roadmap should explicitly consider social and employment effects.

Under "other (please specify)", a variety of other challenges and opportunities were highlighted by respondents, mostly relating to particular technologies.

2.4 Policy developments at EU level

Question 4: The EU's approach to energy policy is founded on regulation and an internal energy market providing competition, innovation, energy efficiency and development of resources including renewables, environmental sustainability, energy security and solidarity, and effective relations with external partners. Which are the main areas which you think might need further policy development at EU level, in a 2050 perspective? Please specify what you think is needed, references to supporting analyses welcome. (Boxes, pick three; also text box)

The chart above represents the relative preferences expressed by organisations and citizens to question 4. A detailed percentage split of opinion different organisations, with a breakdown among industries, NGOs and utilities is provided in annex 1.

Roughly half of respondents consider that energy efficiency is among the three most important aspects needing more development at the EU level. This figure is goes up to 70% for NGOs and but is considered a priority by only about a quarter of the preference for utilities, after infrastructure, financing and energy security. A similar difference in emphasis between NGOs and utilities can be found for renewables.

Development of infrastructure was seen as a priority by approximately a third of respondents. Within organisations a significant majority of utilities views the development of infrastructure as a main area for further policy development.

Asked to give their own views, a variety of other possible areas for policy development were specified by respondents, mostly related to particular technologies. A few respondents also mentioned policy harmonisation in general and a level playing field.

Other aspects of EU low-carbon policy development, such as solidarity, effective relations with external partners and support for industrial and regional transition management were not viewed as high priorities by respondents.

2.5 Milestones in the transition

Question 5: Which milestones would you see as most useful to specify at this stage for the transition to a low-carbon energy system in Europe? References to supporting analyses welcome.

Across all industries and NGOs, intermediate targets, regular checkpoints and updates towards 2050 were recommended. The regular monitoring of the proper implementation of existing legislation e.g. targets for Member States was also considered important.

However, with respect to future milestones and targets to be adopted, it was indicated that a straight line to our decarbonisation target will not reflect the way in which changes will happen in our society. A decarbonisation roadmap should be flexible enough to change route along the way through periodic reviews, taking into account the latest developments in technology, international framework etc. The usefulness of specific roadmaps for different sectors was acknowledged e.g. industry, transport, agriculture etc.

A 'level playing field' is also seen as important by a broad spectrum of organisations including renewables, nuclear, gas and CCS associations as well as commerce chambers and utilities. However, 'level playing field' appears to be interpreted in a variety of ways by different stakeholders, some arguing for a free market approach and others for some form of intervention to internalise externalities or introduce support schemes for making certain technologies commercially viable (renewables, CCS, energy storage, etc.) Utilities tend to view liberalised and integrated EU energy markets and a binding global post-Kyoto agreement as essential. A few organisations indicated that EU decarbonisation efforts should be conditional on equally far-reaching measures in other economies.

Renewables and energy efficiency industries, NGOs and environmental interest groups tend to view binding targets for energy efficiency by 2020 and binding targets for renewables or GHG emissions by 2030 as essential to support a predictable investment framework for low-carbon technologies. In some sectors, such as power generation, due to the long lifetime of fossil fuel and nuclear power plants, 2050 is only one investment cycle away. Clarity on the future legislative framework is needed to avoid a lock-in into high carbon investments and the stranded cost in the associated assets.

Some recommended that milestones should not be restricted to decarbonisation objectives but should also identify to "technological proof points" for large scale deployment of innovative low carbon technologies. This could concern technologies such as CCS, smart grids, super grids, new electricity storage technologies and e-mobility. However, different choices were emphasised by different stakeholders.

Broad support was expressed for increased electrification of our energy system and in particular of the transport sector. As the power sector will be a major contributor to the decarbonisation of our economy, the roadmap should provide milestones in the decarbonisation of power generation. Some respondents advocate a full decarbonisation of power generation as a prerequisite for achieving the overall 80-95% decarbonisation of our economy including an abandonment of unabated coal power generation.

2.6 Key drivers for the future energy mix

Question 6: What are the most likely key drivers for the future energy mix in the EU? (Pick 3)

The chart above represents the relative preferences expressed by organisations and citizens to question 6. A percentage split of opinions of different organisations, with a breakdown among industries, NGOs and utilities is provided in annex 1.

About half of all organisations and citizens believe that global fossil fuel prices, compared to costs of domestic energy resources and long term security of supply will be the mostly likely key drivers of the future European energy mix.

Overall less than 20% of respondents selected "gradual integration of the internal market" as their choice. Hardly any NGOs selected "gradual integration of the internal market" as their choice. However, some 40% of the utilities did so.

Among NGOs, over 60% believed that EU climate policy is decisive. However, only 33% of overall respondents believe that climate policy is a likely key driver for our future energy mix.

Throughout all types of organisations and among citizens, public subsidies were not viewed as one of the most likely key drivers for the future energy mix, receiving less than 10% of the choices.

As to other likely key drivers, several organisations emphasised specific low-carbon technologies, including nuclear power. Financing instruments for achieving the required investments into low-carbon technologies were also mentioned as another key driver.

2.7 Additional thoughts and contributions

Question 7: Do you have additional suggestions or more specific thoughts on the Energy Roadmap 2050 ?

There was a considerable divergence in opinions on the best way to decarbonise the energy sector.

Some replies indicated that decarbonisation should be obtained with minimal intervention and driven by market-based instruments. Policy and instruments should concentrate on goals and not on prescription on what industry should do or on a selection of technology options. Utilisation of offsets in other regions of the world through the Clean Development Mechanism and Joint Implementation to complement emission trading was advocated. Overlap of different legislative initiatives aiming setting a carbon price, e.g. a CO2 tax, in addition to the emission trading system should be avoided.

Other replies supported mechanisms such as sectoral emission targets, specific technologies, additional targets for renewables and binding targets for energy efficiency, while explicitly opposing instruments for offsets in other regions. Some argued that more emphasis should be given to storage technologies, including utilisation of large hydro reservoirs in Northern Europe and particularly in Norway.

Energy efficiency should be pursued all along the full supply chain including power generation, cogeneration, district heating and actions on the demand side. The importance of energy efficiency in buildings which represent 40% of EU energy use was underlined. Energy efficiency measures in the building sector should avoid "shallow renovation" with only limited increase in efficiency as such "shallow renovation" seems attractive in the short term but prejudge future measures locking in suboptimal renovations. .

There was a broad consensus on supporting technology and innovation and on extension of the Strategic Energy Technology Plan beyond 2020.

Opinions on the potential contributions of nuclear, renewable energy sources and fossil fuels to our decarbonisation objectives are divergent. A few respondents advocated that for furthering a sustainable energy system without technical lock-ins a long-term perspective, beyond 2050 up to 2100 should be considered.

NGOs, environmental groups and renewable industries, tend to see a 100% renewable electricity supply as both feasible and desirable.

Others see nuclear power as the best form of decarbonised energy together with limited amount of renewables. Nuclear industries cite cost advantages and availability of nuclear as base load capacity as main advantages over intermittent and expensive renewables.

Fossil fuel industries emphasise CCS as a sustainable and cost effective way to reduce GHG emissions. For gas industries, gas is a cheap means of emission reductions and could play a key role in the decarbonisation of the power sector via fuel switch from coal, providing a cost efficient, sustainable, and flexible power generation to complement the increase renewable capacity in the next decades. Beside its role in power generation gas has still a major role in the residential sector and a huge potential exists for an increased penetration of natural gas vehicles in the transport sector. The need to strike a balance between reducing fossil fuel use and fostering substantial investments in new major gas infrastructures from third countries was underlined. The coal industry underlined the need to avoid lock-in into a dash for unabated gas generation.

Some viewed the development of a new "pan European" energy infrastructure as necessary for our transition to a low carbon system. A trade off among investments in new infrastructures, super grid, smargrid and new power generation capacity is needed.

Annex 1

Question 2. Looking forward, EU energy policy may be increasingly influenced by developments in global energy supply and demand, international cooperation on climate and initiatives taken outside the EU. Which developments should be considered in the Energy Roadmap 2050? On which do you think a stronger EU line is necessary? (Pick three most important ones)

|| Organisations || Citizens

|| Total || Industry || NGO || Utility ||

further development of an international framework for cooperation on climate || 44% || 42% || 42% || 81% || 35%

take-up by other countries of EU model for action on climate change || 14% || 17% || 20% || 10% || 13%

further development of international standards, trade and investment frameworks || 29% || 39% || 12% || 24% || 21%

global energy efficiency and demand developments || 58% || 51% || 73% || 33% || 50%

global nuclear renaissance || 15% || 9% || 15% || 38% || 53%

global development of renewable energy || 53% || 38% || 71% || 29% || 55%

global development of carbon capture and storage (CCS) || 10% || 17% || 5% || 15% || 12%

price developments in global fossil fuel markets || 20% || 23% || 20% || 10% || 18%

development of energy resources in neighbouring countries and infrastructures linking them with the EU market || 14% || 14% || 15% || 19% || 17%

other (please specify) || 31% || 33% || 22% || 33% || 9%

|| || || || ||

Question 3. What societal challenges and opportunities do you think are likely in Europe over the next decades as a result of changes in the EU and global energy system? On which ones do you think a stronger EU line is needed? (Pick three most important ones)

|| Organisations || Citizens

|| Total || Industry || NGO || Utility ||

economic and employment gains in some parts of the energy sector, in some parts of the EU, losses in others || 23% || 20% || 27% || 15% || 15%

increased importance of access to high-performance energy infrastructures (eg smart meters and grids) || 35% || 32% || 37% || 38% || 36%

increased reliance on electricity || 28% || 25% || 22% || 57% || 40%

creation of sustainable and publicly acceptable energy sources || 33% || 29% || 44% || 19% || 38%

public acceptance of new infrastructures needed for the EU market (eg large storage technologies, pan-European grid) || 42% || 49% || 27% || 57% || 35%

increased scope for decentralised power generation and for local, integrated solutions for meeting energy, waste management and other needs of communities || 35% || 30% || 46% || 29% || 30%

public acceptance of need for increased energy efficiency || 33% || 25% || 37% || 29% || 41%

changed patterns of disruptions in energy supplies, both fossil and electricity || 9% || 7% || 15% || 5% || 10%

increases in energy prices and energy poverty || 18% || 23% || 12% || 10% || 24%

moving of energy-intensive industry to other parts of the world || 10% || 13% || 7% || 24% || 8%

other (please specify) || 20% || 29% || 12% || 14% || 5%

|| || || || ||

Question 4. The EU's approach to energy policy is founded on regulation and an internal energy market providing competition, innovation, energy efficiency and development of resources including renewables, environmental sustainability, energy security and solidarity, and effective relations with external partners. Which are the main areas which you think might need further policy development at EU level, in a 2050 perspective? Please specify what you think is needed, references to supporting analyses welcome. (Pick three most important ones)

|| Organisations || Citizens

|| Total || Industry || NGO || Utility ||

competition || 12% || 16% || 5% || 10% || 13%

carbon pricing || 27% || 32% || 24% || 24% || 25%

internalization of other external costs || 16% || 14% || 22% || 5% || 18%

RTD, innovation || 32% || 36% || 20% || 29% || 39%

energy efficiency || 47% || 38% || 71% || 24% || 51%

transport policy || 9% || 6% || 15% || 5% || 13%

renewables || 38% || 29% || 59% || 19% || 26%

financing || 24% || 22% || 20% || 43% || 10%

energy security || 24% || 29% || 15% || 29% || 28%

solidarity || 2% || 1% || 0% || 10% || 7%

development of infrastructures || 32% || 28% || 20% || 71% || 31%

effective relations with external partners || 4% || 7% || 0% || 0% || 7%

support for management of transition to affected regions, industries || 4% || 7% || 5% || 0% || 6%

other (please specify) || 23% || 28% || 22% || 24% || 10%

|| || || || ||

Question 6. What are the most likely key drivers for the future energy mix in the EU? (Pick three most important ones)

|| Organisations || Citizens

|| Total || Industry || NGO || Utility ||

global fossil fuel prices, compared to costs of domestic energy resources || 52% || 52% || 51% || 33% || 48%

long term security of supply || 48% || 55% || 37% || 48% || 52%

public subsidy || 8% || 9% || 10% || 10% || 9%

expectations about short-term security of supply || 3% || 6% || 2% || 0% || 9%

political decisions by Member States || 37% || 43% || 29% || 38% || 36%

gradual integration of internal energy market || 15% || 10% || 7% || 38% || 17%

international framework for cooperation on climate || 21% || 14% || 24% || 24% || 24%

EU climate policy || 41% || 29% || 63% || 48% || 33%

public acceptance of new energy technologies and the related infrastructures || 41% || 39% || 42% || 48% || 42%

other (please specify) || 20% || 26% || 15% || 14% || 7%

[1] http://ec.europa.eu/clima/policies/roadmap/index_en.htm

[2] http://ec.europa.eu/energy/strategies/consultations/20110307_roadmap_2050_en.htm

[3] Questions 1, 5 and 7 were open questions and 2, 3, 4 and 6 were in form of multiple choice.

[4] http://ec.europa.eu/clima/policies/roadmap/index_en.htm

[5] Conclusions of European Council, 4 February 2011.

[6] http://ec.europa.eu/energy/strategies/consultations/20110307_roadmap_2050_en.htm

Brussels, 27 September 2011

Ener.a.1.dir(2011)1238714

Summary record of the meeting

Subject: PRIMES Peer review Meeting, Brussels, Monday 26 September 2011

The aim of the meeting was to assess the suitability of the PRIMES model for complex energy system analysis by independent reviewers having the necessary modelling knowledge and experience. The meeting was held at DG ENER premises on Monday 26/09/2011.

Following reviewers were invited:

1. Dr. Fatih BIROL, Chief Economist of the International Energy Agency and

Ms. Laura COZZI, Principal Analyst, Deputy Head, Office of the Chief Economist, International Energy Agency as alternate, (both absent, excused)

2. Mr. Patrick CRIQUI, CNRS-Université Pierre Mendès-France, Grenoble,

3. Dr. Andy KYDES, OnsiteAnalytics, retired from US DoE, Energy Information Administration (absent, excused)

4. Dr. Felix Christian Matthes, Öko-Institut, Institute for Applied Ecology,

5. Mr. Hector Pollitt, Cambridge Econometrics Limited,

6. Prof Dr. Christian von Hirschhausen, Technical University of Berlin,

Other participants

Prof. Pantelis Capros, National Technical University of Athens

European Commission, DG Energy:

7. Mr. Tudor CONSTANTINESCU, acting Director A Energy Policy

8. Ms. Mechthild WÖRSDÖRFER, Head of Unit A1

9. Mr. Manfred DECKER

10. Ms. Livia VASAKOVA

11. Mr. Michal TRATKOWSKI

12. Mr. Tom HOWES

13. Mr. Marc RINGEL

The meeting was chaired by M. WÖRSDÖRFER who gave a short introduction on the context and purpose of the meeting and introduced the agenda. Peer reviewers had the possibility to send questions per email prior to the meeting. The Commission received questions and comments from all 4 peer relievers present as well as from Prof. Kydes.

In order to structure the discussion on the basis of the questions received from peer reviewers, it was proposed to have three broad sessions followed by conclusions. This structure was accepted by all participants leading to the following sessions:

1. PRIMES modelling mechanisms

2. Modelling context

3. Modelling assumptions

Prof. Capros prepared an extensive presentation on all three points that was distributed to all peer reviewers at the meeting, and sent afterwards. The presentation is annexed to the summary record.

The three sessions were followed by concluding remarks by each of the peer reviewer who were also asked about possible suggestions for improvement in the next modelling cycle.

1. PRIMES modelling mechanisms

Following issues were covered in session 1:

(1) Are the PRIMES modelling mechanisms adequate in balancing the need for reducing complexity and providing a relevant picture of the European energy system?

1.1 Final energy demand and representation of behaviour of agents

1.2 Perception of costs within the micro-economic budgeting problems

1.3 Power and heat generation in the overall supply system

1.4 Grid representation in modelling, interconnections and intra-EU trade

1.5 Market clearing and price formation (including consumer prices)

1.6 Energy investments and modelling dynamics

1.7 Expectations, foresight and risk management by agents

1.8 ETS modelling

1.9 Bio-energy modelling module

1.10 CCS: modelling of capture, transport and storage of energy and process emissions

1.11 Calibration (sources, procedures, experience gained in a suite of exercises)

Prof. Capros presented the first part of his slides (1-27) and replied to numerous questions from peer reviewers. The questions dealt in particular with the following points:

- Formation of electricity prices in the model and recovery of costs

All cost are fully recovered through prices including RES subsidies, hence the model is implicitly providing capacity payments (without simulating explicitly such a system) on top of the wholesale prices based on marginal costs. Prices are not the same for all final energy consumers but costs are allocated according to their price elasticity with industry having the lowest price reflecting the current situation. Marginal electricity costs can become very low but are never equal to zero, even in a hypothetical 100% renewables system based on wind and solar, as there are always costs for balancing and storage. Scenarios with high penetration of nuclear and CCS have a substantial part of baseload generation allowing lower prices for industry. Scenarios with very high renewables penetration have much less low cost baseload electricity and show convergence of prices for all final energy consumers.

Electricity imports are possible and might be significant for some Member States; the importer is considered to be a "price taker" and is not determining the price on the market of a given Member State.

- Perfect foresight and expectations of investors

PRIMES generally applies perfect foresight over a limited time horizon, e.g. 10 years in demand, 20 or 30 or more years in power generation. The reason for applying the assumption of perfect foresight and thus giving investors certainty over several years for their investments is that the model simulates technologies that work; usually the scenarios quantified by the model do not simulate technology or other failures; the foresight model options can be changed to quantify scenarios of different nature.

- Infrastructure modelling

For infrastructure modelling a two-step approach is being used. In a first step, running the fully integrated version of the electricity PRIMES model, electricity trade and the need for infrastructure is being determined. Then, in the second stage, net energy imports (exports) as well as infrastructure is being introduced into the country specific PRIMES model with full resolution of all technologies and types of consumers and with interaction with the demand models. The reason for this two stage approach relates to computing time, which even with the most modern equipment is very long (8 hours for one run) when using the fully integrated model. This is particularly important as many model runs may be required when iterations are performed between demand and supply and for meeting carbon and/or other targets.

The electricity trade model of PRIMES covers all countries in the European continent except countries of the CIS and Turkey. The model performs unit commitment, endogenous use of interconnectors (with given capacities and Net Transfer Capacities (NTC)) and also optimal power generation capacity expansion planning in a perfect foresight manner until 2050. Simulations of different electricity demand levels with the model allow identification of bottlenecks and of the amount of investment in interconnectors necessary to remove such bottlenecks. A typical load profile with 11 segments is considered.

Investment in new power plants is endogenous. The rate of use of power capacities and interconnectors is endogenous. Regarding the use of interconnectors the model performs a linear Direct Current optimal power flow under oriented NTC constraints defined per each couple of countries. The model makes distinction between AC lines and DC lines, the use of the latter being controlled by operators. All interconnectors existing today or planned to be constructed in the future are represented (one by one) in the model.

- Modelling of energy efficiency

There are different possibilities how to deal with energy efficiency in the model. Policy measures such as Eco-design or energy efficiency standards influence the technology availability and possible choices of consumers. Labelling and more information campaigns are represented by lowering "perceived" costs of technologies. Introduction of energy services companies (ESCOs) lead to a reduction of discount rates. Another possibility mainly used for unidentified measures is to work with energy efficiency value that is perceived as a cost influencing the mix and energy demand without entailing direct payment, unless it is a tax or a price of permits (white certificates). The model assumes rational behaviour of agents.

2. Modelling context

Following issues were covered in session 2:

(2) Is the PRIMES energy system model embedded in an appropriate modelling context?

2.1 World modelling for international fossil fuel prices

2.2 Gas prices for Europe

2.3. Macro-economic and sectoral value added developments

2.4. Feedbacks on GDP

2.5 Modelling of transport activity including modal shift

2.6 Links to modelling non CO2 GHG including possible feedbacks

The PRIMES model does not work in isolation but relies on several other models for input (GEM-E3 for macroeconomic assumptions; PROMETHEUS for world energy prices; transport models for transport activity projections); has links to other GHG modelling (e.g. GAINS) and it is possible to provide feed-backs on GDP.

- World energy prices

PRIMES uses results from the PROMETHEUS or POLES model as inputs for fossil fuel import prices

- Macroeconomic modelling and GDP feed back effects

PRIMES can be linked to macroeconomic GEM-E3 model to provide feed-back effects of various energy and climate policies on GDP levels and growth rates. PRIMES takes macroeconomic and sectoral projections from GEM-E3 and produces energy system projections; the results (investment, prices) can be used to recalibrate parameters of the GEM-E3 model. So, GEM-E3 model produces a new projection of economic activity. PRIMES may run again with the adjusted economic activity projections. Several rounds of iterations can be introduced to "close the loop" making results progressively convergent. The linked model system was used to assess GDP impacts of 2020 targets for RES and GHG reductions with one closed loop for cost-effectiveness reasons.

3. Modelling assumptions

(3) Are the modelling assumptions used in the 2009-2011 modelling cycle plausible?

3.1 Assumptions on capital costs for present and future power generation, cost developments and learning rates

3.2 Decommissioning pathways and economics of lifetime extension

3.3 Sustainable bio-energy potential and way of sectoral allocation (linked to 1.9)

3.4. Demand side technologies for stationary uses

3.5 Transport systems and parameters used for electro-mobility (battery costs, recharging systems, etc)

3.6 Electricity storage and grids

3.7 Discount rates

3.8 CO2 storage potential including for bio-energy

3.9 Translation of policy measures into modelling parameters (e.g. information campaigns, energy service companies, energy saving obligations, eco-design standards, product labelling, promotion of CHP and micro-generation, smart meters)

The last part of Prof Capros's presentation related to the main assumptions of the current modelling exercise, with scenarios for the Energy Roadmap 2050. Besides the architecture of the model (geographical, sectors and technologies coverage and modelling mechanisms) assumptions are another element that significantly determines modelling results. Several aspects were discussed in this context:

- Discount rates

To simulate capital budgeting decisions of agents (consumers, producers) in a realistic way, the model uses sector specific discount rates. Subjective discount rates are used for decisions by households and for private cars, whereas weighted average cost of capital (WACC) rates are used for business decisions. A vast literature has provided statistical evidence about subjective discount rates, which can be substantially high for low income classes; these rates reflect risk aversion, cash flow shortages, access to bank lending, etc. If the model used social discount rates to simulate private capital budgeting decisions, the results would be unrealistic (historical developments could not be explained) and the energy saving or abatement possibilities would be overestimated. Social discount rates are used to calculate cumulative energy system overall costs by scenario.

- Assumptions on policy measures

Certain energy savings measures can be simulated by changing discount rates for parts of the sector, e.g. in areas where the representative agent employs energy service companies. PRIMES has a rather wide spectrum for capturing the various types of policy measures. While some of them can be directly introduced by changing variables, such as taxes and capital subsidies others require changes in modelling parameters (see energy efficiency point). Targets for CO2 emissions, energy efficiency, renewables and others are handled through their dual (shadow) variable.

- Capital costs for power generation technologies

Prof Capros presented a short comparison of capital costs for main power generation technologies with those of the US DOE estimates for 2010 (sent by Prof Kydes prior to the peer review meeting). While the costs are broadly similar for most technologies there are significant differences for wind and nuclear. This can be explained by a rather small database of realised projects in the last years. It was noted that if off-shore wind costs at present were to be revised upwards there might be steeper cost reductions (technology learning) afterwards; circumstances for nuclear would be different from this. There is also a need to monitor solar PV costs as recent developments show significant price reductions. Given the importance of the capital cost estimates, a sensitivity analysis using alternative trends might be a useful exercise.

- Decommissioning and lifetime extension issues

For existing plants, decommissioning schedules are based on information in the power plant inventory; however extension of lifetime and retrofitting are handled endogenously if permissible. For new plants, decommissioning is scheduled at the end of pre-determined lifetime; extension of lifetime is handled endogenously. Extension of lifetime entails investment costs (much lower than overnight capital costs); retrofitting costs add to the other extension of lifetime costs.

4. Conclusions and suggestions for improvements

All peer reviewers agreed that the PRIMES model is a suitable tool for complex analyses of the energy sector/system, especially regarding its use for appropriate scenario analysis of energy policy at the EU level. There was also a general agreement, that given the importance of the exercise transparency is a key element and main assumptions and results should be made publicly available. .

Some suggestions for improvements were brought forward by individual peer reviewers.

Prof Dr. Christian von HIRSCHHAUSEN, highlighting the integrated nature of the exercise including macro-economic and climate aspects, suggested further improving infrastructure modelling and including sensitivity analyses for main input parameters. In particular, efforts should be invested into a more detailed electricity (and perhaps natural gas) network, including perhaps constraints on transmission expansion.

Dr. Patrick CRIQUI recommended further improving macro-economic feedbacks and identified some challenges for future modelling of energy systems – system with strong penetration of renewables, storage, local management through smart grids and other infrastructure. PRIMES appears fairly well equipped to deal with making the technology process endogenous, which is however an area for research.

Dr. Felix Christian MATTHES recommended standard sensitivity analyses in order to show sensitivities of the model to some key input parameters. He highlighted the usefulness of the agent based approach in PRIMES that allows examining transfers (ETS, taxes, etc) among sectors rather than just focusing on overall costs given the expected policy debate on such issues. Recognising that infrastructure modelling is important with respect to long term bottlenecks, it is also important to consider that current load profiles might be improved in the future as costs are also strongly dependent on storage.

Mr. Hector POLLITT, highlighting uncertainty and the usefulness of sensitivities, particularly with regards to discount rates, perfect foresight and rational behaviour, and recommended to study more carefully the macroeconomic feedback issues as well as the linkages of energy policies to biomass and land use..

Professor Pantelis CAPROS addressed some of the concerns, especially regarding infrastructure, and mentioned what are the improvements of the model planned for the near future: further improvement of the representation of the building sectors and modelling of renovation policies for existing buildings and improvements of biomass modelling depending on better statistical data availability.

Mechthild Wörsdörfer

Annexes:

1. List of participants,

2. Prof. Capros's presentation,

Annex 1 - List of participants

1. Mr. Patrick CRIQUI, CNRS-Université Pierre Mendès-France, Grenoble,

2. Dr. Felix Christian Matthes, Öko-Institut, Institute for Applied Ecology,

3. Mr. Hector Pollitt, Cambridge Econometrics Limited,

4. Prof Dr. Christian von Hirschhausen, Technical University of Berlin,

5. Professor Pantelis Capros, Technical University of Athens,

DG ENER represented by:

Mr. Tudor CONSTANTINESCU

Ms. Mechthild WÖRSDÖRFER

Mr. Manfred DECKER

Ms. Livia VASAKOVA

Mr. Michal TRATKOWSKI

Mr. Tom HOWES

Mr. Marc RINGEL