The EU Commission publishes the fourth State of the Energy Union report. The State of the Energy Union Report is an important tool to highlight and monitor the implementation of this key priority of the Juncker Commission. The report takes stock of the progress made towards building the Energy Union, and highlights the issues where further attention is needed. It brings together a series of Commission reports and initiatives related to the Energy Union in an integrated way. The state of the Energy Union report is accompanied by two annexes demonstrating the progress made in renewable energy and energy efficiency. In parallel, the Commission is today presenting two forward looking communications one on the strategic batteries plan for Europe and one on a new institutional framework for our energy and climate policy by 2025.
The 4th State of the Energy Union Report: What is the Energy Union?
When the Juncker Commission took office in 2014, a resilient energy union with a forward looking climate policy was identified as one of the ten priorities of the new Commission. On 25 February 2015, the Commission adopted “A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy”, also known as the Energy Union Strategy. The publication of this strategy created a new momentum to bring about the transition to a low-carbon, secure and competitive economy.
The objective of the Energy Union is to provide all European Union (EU) consumers – households and businesses – with secure, sustainable, competitive and affordable energy. The Energy Union has five dimensions: (i) security of supply, solidarity and trust (ii) a fully integrated energy market (iii) energy efficiency (iv) decarbonisation of the economy and (v) research, innovation and competitiveness.
What are the main achievements of the Energy Union?
Europe’s energy supply today is safer, more viable and more accessible to everyone than only a few years ago. The modernised energy system boosts the EU economy, attracts investments and creates local job opportunities.
The Energy Union has resulted in a comprehensive and legally binding framework for a socially fair energy transition ensuring the gradual decarbonisation of our economy in line with our international commitments under the Paris agreement while simultaneously helping to modernise the European economy so that no citizen or region will be left behind.
It has also enabled the EU to increase its level of ambition for 2030 in a number of energy related sectors, from increased targets for renewable energy and energy efficiency, to targets on emissions from cars, vans and lorries. It has also provided a solid basis for work towards a modern and prosperous climate-neutral economy by 2050.
The Energy Union today disposes of a fully up-to-date regulatory framework that provides the necessary certainty for high-quality, innovative investment to modernise our economy and to create local jobs. Through deepening the internal energy market, and by placing the consumer at the centre as an active participant within this market, the Energy Union provides all citizens with secure, sustainable, competitive and affordable energy supply.
In addition, the Juncker Commission has put in place an enabling framework of supporting measures to ensure a smooth transition for European industries and regions. A number of targeted initiatives have been created to guarantee all regions and citizens benefit from the energy transition.
On the international stage, the Energy Union has allowed the EU to speak with one strong voice, instrumental for the negotiation and the implementation of the Paris Agreement; and to continue to lead by example in global climate action through a competitive and socially-fair transition.
What does the Energy Union mean for citizens?
The Energy Union responds to one of EU citizens’ key concerns. They massively call for action against climate change and for the energy transition. According to the last Eurobarometer survey on the subject, 9 out of 10 Europeans consider climate change a serious problem and see it as the third biggest problem of our times after poverty and economy.
In parallel, the Energy Union creates jobs and growth. Today, there are more than 4 million green jobs in the European Union, and between 2000 and 2014, employment in the environmental sectors of the economy grew considerably faster (+49%) than employment in the economy as a whole (+6%). These figures will further increase, with investments in domestic renewable energy expected to replace imported fossil fuels and by harvesting Europe’s early-mover advantage in many of the “green” industries.
The Energy Union also contributes to addressing energy poverty, which still affects almost 50 million people across all member states. Measures to this effect include, inter alia, promoting investments in energy efficiency. Energy efficiency measures also help to reduce energy bills. There is still a huge untapped potential in energy efficiency and member states will specifically tackle this issue in their National Energy and Climate Plans.
The Energy Union will help consumers save money and be actively involved in the energy system by providing them a role as a producer as well as consumer of electricity. The new legislation put in place with the “Clean Energy for All Europeans” package will also reduce direct costs for consumers by for example restricting switching fees that still represent a substantial part of energy bills. More generally, the Energy Union relies on the active participation of consumers, for instance to generate electricity for their own consumption, store it, share it, consume it or sell it back to the market.
What does the Energy Union mean for cities and regions of Europe?
70 % of Europeans live in cities, where the bulk of emission reductions will take place. The Energy Union places local communities, especially cities, municipalities and urban communities, at the heart of the transition. The Commission is helping them through initiatives such as the European Covenant of Mayors for Climate and Energy, which gathers more than 8,800 EU cities representing more than 230 million Europeans, committed to fight climate change. These cities, which represent nearly a third of the EU’s 2020 commitment for emission reductions, have already cut their emissions by 23% from their baseline year inventory.
How does the Energy Union ensure a fair and just energy transition for all?
As part of an ambitious climate and energy policy, the Commission has also adopted a number of enabling measures that support the social fairness of the energy transition.
The coal and carbon-intensive regions in transition initiative, for example, supports Europe’s coal regions, ensuring that these regions can modernise their economies in line with a transition towards a more sustainable economy while focusing on social fairness, job creation, new skills and financing for the real economy. Through regular meetings and a standing platform, national and local authorities, businesses and citizen groups can exchange best practices on how to valorise the opportunities created by the transition and ensure that no citizen or region is left behind. In addition, eighteen pilot regions of eight Member States benefit from a tailored support to identify concrete ways to start and lead the transition, accompanied by existing EU funds, financing tools and programmes.
The Commission also offers region-specific support for boosting innovation under the pilot action for regions in industrial transition. Until now, 12 test regions are working in partnership with Commission experts to boost their innovation capacity, remove investment barriers, equip workers with the right skills and prepare for industrial and societal change, on the basis of their smart specialisation strategies. The pilot seeks to find new ways to help these regions harness globalisation by decarbonisation, innovation, digitisation, and developing people’s skills, in particular those regions which have experienced significant employment loss in coal, steel or other energy intensive industries.
Moreover, the Commission has kick-started the clean islands initiative “Clean Energy for All EU Islands” with the objective to accelerate the clean energy transition in Europe’s over 1 000 inhabited islands. It aims to help these islands tap into locally available renewable energy sources, energy efficiency potential and innovative storage and transport technologies and become self-sufficient in energy, thus reducing costs, environmental pollution and reliance on heavy fuel oil to generate power, while creating growth and local jobs.
What does the new governance system for the Energy Union consist of?
The European Union has put in place a new governance framework to implement and further develop the Energy Union. This new regulation requests Member States to develop integrated National Energy and Climate Plans that will include their national contributions to the collective EU targets and the necessary policies and measures to achieve these contributions for ten-year periods. Through a continuous iterative dialogue with the Commission and between themselves, this will stimulate cooperation between Member States to achieve the objectives of the Energy Union, save administrative costs by streamlining most of the current energy and climate reporting requirements and provide regulatory certainty for stakeholders and investors.
All Member States have now officially submitted a draft of their first National Energy and Climate Plans for the period 2021-2030. This major milestone, which required a significant collective effort, is built on an excellent spirit of cooperation over the past 3 years.The Commission is currently assessing these draft plans in close cooperation with member states with a view to issue potential recommendations by 30 June 2019, to support member states to improve the plans and to ensure that the EU can collectively deliver on its new 2030 targets. Member states are expected to submit their final plans by 31 December 2019.
Why do we need a strategy for batteries in Europe?
Driven by the ongoing clean energy and mobility transition, demand for batteries is expected to grow very rapidly in the coming years, making this market an increasingly strategic one at global level. According to some sources, the European market potential could be worth up to EUR 250 billion annually from 2025 onwards. This trend is further reinforced by the new and comprehensive legislative and governance framework for the Energy Union, successfully adopted under this Commission to accelerate the transition to a sustainable, secure and competitive EU economy.
However, today the European share of global cell manufacturing is just 3 per cent and is, without further supporting action, forecast to rise to between 7 and 25 per cent in 2028, while Asia has an 85 per cent share. If no action is taken to support the creation of a viable battery manufacturing sector, there is a risk that Europe falls irreversibly behind its competitors in the global batteries market, and becomes dependent on imports of battery cells and raw materials used in the supply chain.
Huge investments are needed to this end. It is estimated that 20-30 giga-factories for battery cells production alone will have to be built in Europe and their related ecosystem will need to be considerably strengthened.
Batteries have therefore been identified by the Commission as a strategic value chain, where the EU must step up investment and innovation in the context of a strengthened industrial policy strategy aimed at building a globally integrated, sustainable and competitive industrial base.
What is the Commission proposing on batteries?
Following the adoption of the Strategic Action Plan on Batteries in May 2018, the Commission is working together with many Member States and key industry stakeholders to build a competitive, sustainable and innovative battery ecosystem in Europe, covering the entire value chain, embracing raw materials extraction, sourcing and processing, battery materials, cell production, battery systems, as well as re-use and recycling.
This is the main objective behind the European Battery Alliance (EBA), an industry-led initiative, which the Commission launched back in October 2017, to support the scaling up of innovative solutions and manufacturing capacity in Europe. The EBA is helping to foster cooperation between industries and across the value chain, with support at both the EU-level and from EU Member States.
Today’s Report highlights the progress achieved over the past year on the implementation of the key actions set out in the Strategic Action Plan on Batteries. For example:
The EU budget is providing important funding opportunities to support research and innovation in batteries. The EU’s Framework Programme for Research and Innovation for 2014-2020, Horizon 2020, has granted EUR 1.34 billion to projects for energy storage on the grid and for low-carbon mobility. In 2019, Horizon 2020 added a call to fund, under the European Battery Alliance, battery projects worth EUR 114 million. This will be followed by a call in 2020 amounting to EUR 132 million, covering batteries for transport and energy. The European Regional Development Fund is also providing support for research and innovation to promote an energy-efficient and decarbonised transport sector.
The EU’s regions have shown an interest in establishing partnerships to take forward joint projects and further develop strong innovation ecosystems in the field of batteries. One such interregional partnership, focusing on advanced battery materials for electro-mobility and energy storage, was launched in October 2018 in the framework of the Smart Specialisation Platform on industrial modernisation. This partnership has already expanded to include 22 regions and several pilot areas have been established across the value chain to identify battery-related projects that could lead to successful commercial businesses.
The European Battery Alliance is acting as a catalyst for creating a battery value chain in Europe. Around 260 industrial and innovation actors have joined this network. The EU Knowledge and Innovation Community (KIC) Innoenergy (European Institute of Innovation and Technology) has steered this network and already announced consolidated private investments of up to EUR 100 billion, covering the whole value chain. This includes announcements of production of primary and secondary raw materials in the EU, and planned battery manufacturing investments from several European consortia.
The European Battery Alliance is examining the potential for cross-border breakthrough innovation projects related to the battery strategic value chain with a view to accessing public funding that could be compatible with the EU’s State Aid rules under the Important Projects of Common Interest (IPCEI) framework. Several EU Member States have already launched processes to identify potential consortia and are working together to design one or more IPCEI in this field. They aim to seek approval by the Commission in 2019.
What is the Commission proposing in its Communication towards a new legislative framework for our energy and climate policy by 2025
While the enormous progress has been made in building the Energy Union during the last years, there are areas which have the potential of further improvement to achieve all the policy objectives. An important aspect of this forward-looking agenda on future energy policies involves examining how the Union takes decisions in this area.The Communication towards a new institutional framework for our energy and climate policy by 2025 sets out possibilities for moving to the ordinary legislative procedure in matters of environmental and energy taxation and fuller involvement of the European Parliament and of national Parliaments in policy-making under the Euratom Treaty. Moving to the ordinary legislative procedure in matters of environmental and energy taxation would facilitate the alignment of the tax regime to the EU’s energy and climate policy objectives. Fuller involvement of the European Parliament and of national Parliaments in policy-making under the Euratom Treaty would enhance transparency and democratic legitimacy for decisions on nuclear energy.
As the Commission has recently stressed in its Communication “A Clean Planet for All”, the energy transition requires a comprehensive economic and societal transformation, engaging all sectors of the economy and society to achieve the transition to climate neutrality by 2050. Achieving this objective requires decisive action across policy areas and it is essential that the EU should be equipped with the tools to take the necessary decisions in a manner that is both efficient and democratic.
Why does the decision making process for energy taxation need to be changed?
The Commission in January 2019 already laid out its ideas towards a move to qualified majority voting decision-making in the area of taxation. A further Communication adopted today explores how such a move could pave the way for proposals in the field of energy taxation, and specifically for initiatives that support the broader EU energy and climate goals, since current EU decision-making procedures are not fit for purpose.
The EU institutional framework around these issues is not fit for purpose, as it requires unanimous agreement amongst 28 Member States before action can be taken. This unanimity often cannot be achieved or leads to sub-optimal policies. A case in point is the failure of Member States to agree on the 2011 Commission proposal to update the EU’s Energy Taxation Directive. This proposal would have maximised the potential of energy taxation to deliver on climate change commitments and to support sustainable growth. It would also have reversed the paradoxical situation whereby the most polluting fuels are sometimes the least taxed in Europe.
Today’s Communication suggests that proposals in the area of energy taxation could be put forward under the so-called ‘passerelle clause’ – Article 192(2) – which provides for QMV decision-making for energy taxation measures that are primarily of an environmental nature. This could be justified for environmental taxation measures aiming at reducing CO2 and other polluting emissions or improving energy efficiency, key priorities of the EU’s Energy Union strategy and of the Paris Agreement. The Commission would encourage Member States to decide quickly to move forward, to unlock benefits for future generations. All Member States would need to agree for this to become a reality.
The Commission is currently re-evaluating the Energy Taxation Directive to decide if a potential update is necessary.
Why does the decision making process under the Euratom treaty need to be changed?
While there is a clear understanding that the use of nuclear energy is a national choice to be made by each Member State, and this will continue to be the case, the Euratom Treaty provides the most advanced legal framework in the world in the areas of nuclear safety, waste management or radiation protection.
There is, however, a recognised concern that the Euratom Treaty needs to evolve in line with a more united, stronger and democratic EU.A central aspect is the democratic accountability of Euratom and in particular the involvement of the European Parliament and of the national Parliaments.
The Treaty of Lisbon extended the ordinary legislative procedure to nearly all policy areas where the European Parliament had previously only had a consultative role. While the ordinary legislative procedure also applies in general to the Euratom Treaty, the individual legal bases of the Treaty do not foresee it. It remains the case, therefore, that the European Parliament is merely consulted on legislative proposals and international agreements falling under the competence of Euratom.
The Commission considers that more needs to be done to enhance the role of the European Parliament to improve the democratic legitimacy of decision-making under Euratom. In the short-term, the European Commission will establish in the months to come a High Level Group of Experts. Its task will be to assess and report to the European Commission on the state of play of the Euratom Treaty with a view to ensuring that, on the basis of the current Treaty, its democratic accountability is improved.
Energy investment in emerging economies: Transforming Southeast Asia’s power sector
Authors: Michael Waldron and Lucila Arboleya*
The new IEA Southeast Asia Energy Outlook 2019 (SEAO) provides a comprehensive overview of energy prospects in an increasingly influential region for global energy trends. Alongside the scenario projections and analysis, the report contains three “deep dives” – on the future of cooling, on regional electricity trade and renewables integration, and on investment – that reflect priorities for cooperation agreed between Southeast Asia energy ministers and the IEA.
Bolstering investment in more efficient and cleaner energy technologies in Southeast Asia’s power sector is a particularly urgent challenge. Policy makers in many countries of the region are stepping up their efforts to support deployment of renewables across the region, but investment has lagged well behind the levels reached in China and India. Electricity demand in Southeast Asia is rising rapidly, and many parts of the power sector are showing signs of financial strain.
Whichever pathway the region follows, it will need a sizeable increase in investment flows and a reallocation of capital, particularly under a sustainable pathway (in the Sustainable Development Scenario) where renewables spending more than quadruples.
What can be done to put the region on a more sustainable pathway, from both a financial and environmental perspective? This was the question that we addressed in the new IEA report and also at a major IEA Roundtable featuring the insights of financial, legal, industry and policy experts from across Asia, which was held in Singapore on 1 November as part of the Singapore International Energy Week.
Bridging investment gaps with more private finance
To date, public actors – including state-owned enterprises and public financial institutions – have provided the bulk of funding for the power sector, particularly in thermal generation. By contrast, wind and solar PV projects have relied much more on private finance, spurred by specific policy incentives.
In addition, funding for over three-quarters of generation investment has come from within the region. This landscape reflects prevailing decision-making frameworks, which have largely revolved around state-owned utilities and the distortionary impact of energy subsidies, but also the ability and willingness of private players to navigate perceived country, regulatory and market risks that have inhibited much higher levels of investment in the power sector across Southeast Asia.
However, public sources alone cannot cover the sizeable investment needs ahead. Sustained and balanced access to international and regional sources of private finance, complemented by public sources, would better help Southeast Asia fund its energy goals. More robust private financing conditions would help governments to use public capital more effectively, especially in countries with limited fiscal capacity.
Realising this requires reforms and greater policy focus on tackling the risks facing investments, especially in renewables, flexibility assets and efficiency. With the dramatically improved economics of renewables in many parts of the world, the region now has a compelling opportunity to transform its power sector.
While recognizing that market conditions and underlying risks differ starkly by country, the SEAO points to efforts needed across four priority areas:
- enhancing the financial sustainability of the region’s utilities;
- improving procurement frameworks and contracting mechanisms, especially for renewables;
- creating a supportive financial system that brings in a range of financing sources and
- promoting integrated approaches that take the demand-side into account.
Priority 1: Enhancing the financial sustainability of the region’s utilities
The region’s utilities, mostly state-owned, function as the primary counterparty to private generators and are the main investors in electricity networks (which as highlighted in the SEAO, are also crucial for supporting regional trade and integration). Their financial sustainability depends on their ability to recover costs, which is influenced by customer connections, operational performance and regulatory frameworks. Cost-recovery varies across Southeast Asian markets, with particular challenges related to setting retail tariffs in a way that balances system needs and affordability for consumers.
For example, despite improved borrowing conditions for Vietnam Electricity (EVN), financial performance is tenuous and tied to government decisions on electricity prices, which remain low by international standards. By contrast, in Malaysia, a combination of improved operations, better financing and regulations for cost-pass-through supports a relatively high level of per capita investment for grids.
Underperformance can put pressure on government budgets, as in the case of Indonesia. Following several years of improvement, increased financial pressure on PLN, due to rising power purchase and fuel costs in the face of frozen retail tariffs, prompted a year-on-year boost in government subsidies in 2018 (equivalent to over 3% of total state spending). Looking ahead, PLN’s subsidy burden could be sizeably reduced through more cost reflective electricity tariffs. Moreover, changes to retail prices could be tempered through better utilisation of existing generation, more focus on efficiency measures to help slow Indonesia’s demand growth and less dramatic expansion of capacity with contractually onerous terms.
Priority 2: Improving procurement frameworks and contracting mechanisms, especially for renewables
Investment frameworks for power generation have evolved considerably, but further reform could help improve private financing prospects. While independent power producer (IPP) investments are playing an increased role, these have come mostly through administrative mechanisms, such as direct negotiation with utilities, which are often not transparent in terms of price formulation. Price incentives (e.g. feed-in tariffs) under licensing schemes have driven most investment in renewables, but their design is not always effective; in some cases (e.g. Indonesia) tariffs have been set too low to attract investment at current project costs.
Competitive auctions, which can provide price discovery and clear risk allocation through contracts, have helped drive down renewable purchase prices around the world. Most Southeast Asian countries have been slow to adopt them, but implementing such transparent mechanisms for orderly market entry, with a commitment to sustain their use over time, would go a long way to reassure investors.
The case of Viet Nam illustrates challenges and opportunities in terms of policy design and bankability. Attractive feed-in tariffs spurred a boom in solar PV deployment in the first half of 2019, financed mostly by regional players. Yet, perceived risks and financing costs are relatively high and international banks remain reluctant to lend to renewables projects. This stems from risks associated with the standard power purchase agreement offered to IPPs, including areas related to dispatch and payments, as well as concerns over the adequacy of local grids to accommodate a rapid increase in variable generation. Clearer regulations, better policy design, and measures to address system integration and contractual concerns could help to improve the affordability of investments. With financing terms equivalent to those found in more mature markets, generation costs for solar PV and onshore wind could be around one-third lower.
Priority 3: Creating a supportive financial system that brings in a range of financing sources
As changing financing conditions make investing in some legacy parts of the power system more difficult, more effort is needed to cultivate a supportive financing environment for newer technologies while ensuring security of supply. To illustrate, final investment decisions for coal power in the region have fallen to their lowest level in over a decade in 2019 (reflecting a mixture of increased financial scrutiny by banks and overcapacity concerns). There has been a reduction in the number of financiers involved in transactions in the past three years, while IPP projects that have gone ahead continue to rely on a high share of international public finance.
At the same time, mobilising capital in newer areas requires improving the cost and availability of finance. The average loan duration in Southeast Asia is just over six years, far less than the lifetimes of energy and infrastructure assets. The cost of capital for an indicative IPP varies widely – with estimates in Singapore, Thailand and Malaysia at 3-5% (nominal, after-tax), while those for Philippines, Viet Nam and Indonesia are much higher (7-10%). Investors cite limited availability of early stage project development equity and long-term construction debt for renewables and storage, though some dedicated funds, such as the Southeast Asia Clean Energy Facility, are emerging to fill the gap.
Priority 4: Promoting integrated approaches to investment that address the demand side
Integrated approaches to investment, which take into account the demand side, could help to address rising consumption needs more cost-effectively. This is particularly true in fast-growing areas, such as demand for cooling, which is a major driver of supply requirements during peak hours but where more efficient air conditioner units, including those manufactured locally, are available at affordable prices. Efficiency investments can face barriers due to the small transaction sizes (from the perspective of banks), high upfront capital requirements (from the perspective of consumers), challenges in evaluating creditworthiness, and lack of clear labelling to support purchase choices. Low and subsidised retail power tariffs can also distort the investment case.
Addressing information barriers, enhancing financing models and reducing subsidies would better support investment. Energy service companies are addressing the scale and upfront financing challenge of investment. They are well established in markets with long-term energy savings targets and supporting regulations, such as in Malaysia, Thailand and Singapore. Targeted use of public funds, insurance and capacity building can help reduce performance-related risks, as in Indonesia’s Energy Efficiency Project Finance Program. Progress in aggregating and securitising projects, through green bonds for example, could also help attract lower cost finance from a bigger pool of investors. Despite picking up in 2018, with over 40% targeting low-carbon buildings, Southeast Asia accounts for only 1% of global green bonds issuance to date.
Higher investments would yield multiple benefits
Overall, achieving Southeast Asia’s energy goals will call upon stronger policy ambitions across a range of energy sources and significant new capital commitments in the years ahead. As international experiences have demonstrated, where governments provide frameworks that allow for the efficient allocation and management of investment risks, the private sector responds and the cost of capital is reduced.
These efforts would also yield multiple benefits – in the Sustainable Development Scenario, average annual capital spending across the entire energy sector of more than $140 billion over 2019-40 (higher than the $110 billion under the State Policies Scenario), is offset by the nearly $200 billion that Southeast Asian economies would save annually on fossil fuel imports by 2040. Such financial savings would come in addition to improved local air quality and universal energy access, as well as a reduced contribution to global climate change.
There is now an opportunity for investors and companies in Southeast Asian countries to engage with governments in order to encourage financial decisions and policy making that are better aligned with sustainability goals. This includes not just traditional utilities, developers and banks, but also the crucial perspectives of development finance institutions and the institutional investors, whose participation will be critical to funding the region’s energy goals.
As the world’s “All-fuels and All-technologies” energy authority, the IEA will continue to assist ASEAN Member States to tackle their energy policy challenges, including through good data and analysis, training and capacity building and enhanced engagement.
*Lucila Arboleya, Energy Economics and Financial Analyst.
Understanding the World Energy Outlook scenarios
Authors: Laura Cozzi and Tim Gould
Today’s energy choices and their consequences
Today’s energy choices will shape the future of energy, but how should we assess their impact and adequacy? This is the task the World Energy Outlook takes on. It aims to inform the thinking of decision makers as they design new policies or consider new investments. It does so by exploring possible futures, the ways they come about and some of the main uncertainties – and it lays out the consequences of different choices for our energy use, energy security and environment.
One key element of this is to assess where the global energy system is heading, based on the policy plans and investment choices we see today. A second is to assess what would need to be done differently in order to reach the climate, energy access, pollution and other goals that policy makers have set themselves.
As ever, this year’s World Energy Outlook, to be released on 13 November, brings many changes from the 2018 edition. In this commentary, we wanted to highlight two in particular.
Introducing the Stated Policies Scenario
In this year’s Outlook, the New Policies Scenario is renamed as the Stated Policies Scenario (the acronym is STEPS – STated Energy Policies Scenario). As with its predecessor, this scenario is designed to reflect the impact not just of existing policy frameworks, but also of today’s stated policy plans. The name change underlines that this scenario considers only those policy initiatives that have already been announced. The aim is to hold up a mirror to the plans of today’s policy makers and illustrate their consequences, not to guess how these policy preferences may change in the future.
The planned policies analysed in this scenario cover a wide spectrum. For example, a country might state that it intends to remove fossil-fuel consumption subsidies or, alternatively, that it will walk back a previous reform. Another might say that it will tighten future fuel efficiency standards or step up support for electric vehicles. One might open up new resource developments in oil and gas while another might limit them.
Many countries today are raising their ambitions for clean energy deployment, as reflected by the rising interest in offshore wind that we explored in depth in a special focus from this year’s World Energy Outlook that was released separately in Copenhagen last week. Countries may also announce new rural electrification targets or ambitions to bring clean fuels to parts of their population that rely on firewood or other solid biomass for cooking.
All of these stated policies are assessed individually and their impacts are modelled. In our updated and expanded online explainer on the World Energy Model, the large-scale simulation model that is used to generate all our projections, we have made all the key policy assumptions available for all scenarios, along with all the underlying assumptions on population, economic growth and energy resources (which are held constant across the scenarios) and information on prices and technology costs (which vary by scenario depending on the market and policy context).
There is one type of policy announcement that deserves special attention: the growing number of long-term decarbonisation targets, including “net zero” commitments. After the UN Climate Summit in September, there were at least 65 jurisdictions, including the European Union, that had set or were actively considering long-term net-zero carbon targets. These economies together accounted for 21% of global gross domestic product and nearly 13% of energy-related CO2 emissions in 2018.
Are these “net zero” targets all incorporated into the Stated Policies Scenario? It depends. The target has to be announced or adopted officially, but the crucial variable is how visible the pathway is to reach it. As always with the World Energy Outlook, the details matter. Is there a strategy to decarbonise heat? What about heavy industry? What about trucks or aviation? To the extent that these pathways are laid out, then the overall ambition is also reflected in this scenario.
And it’s not only about national governments: other commitments are becoming increasingly important, whether from sub-national authorities, cities, companies or investors. We also keep a close eye on changing public attitudes and preferences, as these can be very significant in shaping energy use (as, for example, with the rising popularity of SUVs).
In aggregate, these commitments are enough to make a significant difference. The comparison with the Current Policies Scenario, which only looks only at policies in place but from which the effects of announced policies are excluded, makes this clear. However, there is still a large gap between the projections in the Stated Policies Scenario and an energy system that meets global sustainable energy goals.
Extending the Sustainable Development Scenario to 2050
What should policy makers do? What pathways might help meet these targets? What technologies need a boost? Where should innovation, research and investment be directed? How can we balance growing energy demand with the need to reduce air pollution and carbon emissions? How can millions of people gain access to critical energy services while also meeting climate goals?
The IEA seeks to help policy makers in government and industry shape a more secure and sustainable energy future. This is why the World Energy Outlook has been providing detailed climate mitigation scenarios for more than a decade. Two years ago, we introduced a new scenario, the Sustainable Development Scenario, which also incorporates two other crucial elements of the Sustainable Development agenda: cleaner air and universal access to energy, in addition to climate targets.
In the IEA’s view, these elements are profoundly interconnected aspects of global energy transitions. The Sustainable Development Scenario is one of the very few deep decarbonisation scenarios that considers all of them in detail and provides a pathway that achieves them simultaneously, along with detailed attention to the security and affordability of energy supply. In our view, no vision of a sustainable energy world can be considered complete if parts of the global population do not have access to modern energy.
Another new feature of this year’s WEO is that the horizon for the Sustainable Development Scenario is extended by a decade to 2050. This has little impact on achieving modern energy for all, both for electricity and clean cooking. That goal is reached by 2030 in this scenario. But it provides a clearer view on how dramatic improvements in air quality reduce pollution-related premature deaths. And it gives considerable additional clarity on how the scenario meets the Paris Agreement goal of holding the rise in global temperatures to “well below 2°C … and pursuing efforts to limit [it] to 1.5°C.”
The Sustainable Development Scenario models a rapid and deep transformation of the global energy sector. It is consistent with all the “net zero” goals contemplated today being reached on schedule and in full. The technology learning and policy momentum that they generate means that they become the leading edge of a much broader worldwide effort, bringing global energy-related CO2 emissions down sharply to less than 10 billion tonnes by 2050, on track for global net zero by 2070.
This means that the Sustainable Development Scenario is “likely” (with 66% probability) to limit the rise in the average global temperature to 1.8 °C, which is broadly equivalent to a 50% probability of 1.65 °C stabilisation. These outcomes are achieved without any recourse to net negative emissions.
How does this scenario relate to the pursuit of a 1.5 °C outcome? For one answer to this question, we turned to the IPCC Special Report on 1.5 °C. Almost all the 1.5 °C scenarios assessed by the IPCC (88 out of 90) assume some level of net negative emissions. A level of net negative emissions significantly smaller than that used in most scenarios assessed by the IPCC would provide the Sustainable Development Scenario with a 50% probability of limiting the rise in global temperatures to 1.5°C.
However, as we have pointed out in the past, there are reasons to limit reliance on early-stage technologies for which future rates of deployment are highly uncertain. That is why the Outlook has always emphasised the importance of early policy action. That is also why, in the WEO-2019, we explore what it would take to achieve stabilisation at 1.5 °C with a 50% probability without net negative emissions.
Two different types of scenario make a powerful mix
The World Energy Outlook incorporates two different approaches to scenario design. The first defines a set of starting conditions and sees where they lead; the Stated Policies Scenario and the Current Policies Scenario are of this type.
The second approach does the opposite, defining a set of ambitious future outcomes and then working out how they can be achieved: this is the principle underlying the Sustainable Development Scenario.
Each of these approaches, on its own, offers powerful insights. In combination, they provide a broad perspective not just on the energy and climate challenges that we face today, but on what can be done to address them.
*Tim Gould, Head of Division for Energy Supply Outlooks and Investment.
Understanding users is key to the evolution of the world’s energy systems
Authors: Brian Motherway and David Shipworth
The choices made by individuals are having a significant effect on the evolution of the global energy system. Thanks to distributed renewables, users are no longer only consuming energy – they are also producing it. Shifts in consumer behaviour, such as a move toward electric vehicles, are also creating stresses and opportunities for power systems. Yet in addition to distributed renewables and electrification, one of the most significant, cross-cutting and user-centred trends transforming today’s global energy system is digitalisation.
By joining together all components of the energy system via high-speed digital communications networks, digitalisation provides new opportunities to accelerate the growth of low-carbon and energy efficient energy systems. For example, as the share of variable renewable generation increases, homes and businesses with electric cars and heating and cooling systems can offer flexibility services to ensure the security of our power supply. By facilitating higher levels of automation, digitalisation also promises efficiency gains across the energy system: from individual appliances to buildings and power plants.
For consumers, digitalisation is changing expectations of service and value. People no longer need only to be passive energy consumers; digital technologies are already supporting people to more actively participate in energy markets, and will soon allow users to produce, consume, store and trade an even wider range of energy services.
The IEA is at the forefront of research on each of these trends, tracking technology change and supporting its member governments understand how to leverage the digital revolution for greater energy efficiency, and how infrastructure, markets and institutions can adapt to the evolving challenges of electricity security in the 21st century, amongst other topics.
One of the key takeaways from this research is that energy users are now more central to the energy system than ever before, with consumer purchasing decisions and behaviour determining the pace of technological change, whether digitalisation becomes a force for greater efficiency or just more energy use, and how much distributed storage and flexible load resources become available to balance variable renewables.
Yet paradoxically, a major unknown factor in future energy transitions is the human element. For example, research has consistently revealed mismatches between how technology providers, techno-economic models, and policy makers expect technologies to be adopted and used, and reality. These discrepancies play out in contrasts between the expected and actual impacts of policy measures and observed uptake of technologies – through to the ‘performance gap’ between designed and in-use efficiency of vehicles and buildings.
A failure to properly understand the role of energy users in the energy transition is worrying in a world where governments have set ambitious climate goals that depend on a rapid increase in demand-side energy efficiency, alongside an acceleration in the growth of intermittent renewable generation. If the world is to succeed in this mission, it is imperative that policy makers and technology providers properly understand how and why people adopt and use new energy technologies.
With this in mind, 16 members of the IEA family and three sponsors launched a new collaboration under the IEA’s Technology Collaboration Programme (TCP) in October 2019: User-Centred Energy Systems, or UsersTCP. This initiative brings together the world’s leading socio-technical researchers and policy makers to provide the evidence base needed to make better energy policy decisions that place energy users at the heart of the policy process.
UsersTCP was created with the recognition that people use technologies to convert energy into the services they want. To do this, technologies must be useable, and their services must satisfy user needs. This ‘socio-technical’ approach is becoming more and more central to policy making and lies at the heart of the work of the collaboration.
Announced at the All-Energy Australia Conference in Melbourne, UsersTCP has adopted a systems perspective in which people, such as technology designers, policy makers, intermediaries and end users, are as integral as hardware and software to delivering an energy system that meets our wider social, environmental and economic goals. As such, the work programme focuses on business models, peer-to-peer energy trading, hard-to-reach energy users and the social licence to automate, with new work to begin shortly on the application of behavioural insights in energy policy making , in collaboration with the IEA’s Energy Efficiency Division.
To help disseminate the outputs of the UsersTCP and connected work, the User-Centred Energy Systems Academy has begun holding monthly webinars on key topics. Building on the success of the DSM University, the first webinar looked at on the grid integration of electric vehicles.
The IEA will be working closely with this new research collaboration, and looks forward to using the results of its research to inform its modelling capacity and policy guidance.
* David Shipworth, Chair of UsersTCP.
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