Critical Policy Options to Protect Industry Competitiveness

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Samantha French
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1 Critical Policy Options to Protect Industry Competitiveness Graham Weale Chief Economist, RWE AG IEA Energy Business Council Meeting, Paris 4 th June 2013

2 RWE Group a leading European energy utility > RWE ranks among Europe's leading energy utilities with strong market positions in the UK, Germany, Netherlands, Czech Republic and Poland, with increasing presence in Central and Southeastern Europe > Annual revenues over 50 billion and about 25 million electricity and gas customers > More than 50 GW of installed capacity with bundling of conventional generation under RWE Generation SE became effective in 2013 > About 4 GW of renewable capacity including biomass co-generation 2

over 50 billion and about 25 million electricity and gas customers > More than 50 GW of installed capacity with bundling of

3 Fossil fuel and electricity subsidies appear not so important for power prices to industry $cts/ kwh Electricity to industry Source IEA (2012Q3) and VIK 100% 75% 50% 25% 0% Power Fuel Mix By Region Source: IEA Other Hydro Solar Wind Nuclear Gas Oil Coal 10,0 8,0 $cts/ 6,0 kwh 4,0 2,0 0,0 Taxes on Industrial Electricity Source IEA (2012) $cts/ kwh 8,0 6,0 4,0 2,0 0,0 Electricity Power Subsidies Source: IEA Various M. East countries Russia India China Production TWh 3

Gas Oil Coal 10,0 8,0 $cts/ 6,0 kwh 4,0 2,0 0,0 Taxes on Industrial Electricity Source IEA (2012) $cts/ kwh 8,0 6,0 4,0 2,0

Three other factors drive prices: resources, environmental policies and market organisation National resources Fossil fuels, rivers, coastline, sun Environmental

4 Three other factors drive prices: resources, environmental policies and market organisation National resources Fossil fuels, rivers, coastline, sun Environmental policy (1) Intensity (2) Cost-approach Relative power prices Market organisation (1) Public / private (2) Regulated / market (3) Distortions: subsidies, earning caps, etc. 4

policy (1) Intensity (2) Cost-approach Relative power prices Market organisation

5 The potential impact of EU CO 2 policies on competitiveness and investment decisions What are existing carbon policies in Europe? The ETS, which guarantees a specified reduction by 2020 and beyond EU renewables (RES) policy and national support schemes; in some countries nuclear policies EU Energy Efficiency Directive and national policies How are these policies affecting national and industrial competitiveness? Current policies (and recession) reduce wholesale price advantage before RES surcharges But carbon-reduction through RES is highly inefficient in some countries Competitiveness is suffering through costs and reduced power supply reliability What are the problems within the power sector? Multiple instruments and incompatible interacting goals at EU and some national levels Major distortions in the wholesale market caused by RES subsidies and limited scarcity pricing Consequently EU power companies are poorly placed to invest in the future ETS price at present is too low to offer low-carbon investment incentives Apart from current RES subsidies, it is unclear on what price signals the sector should rely 5

national policies How are these policies affecting national and industrial competitiveness?

6 Concrete options of governments to increase power-price competitiveness Key decisions: does the government want the power sector be in the public or private sector? If in the public sector, to what extent will it be supported by taxes and subsidies? If in the private sector, will the government set a stable framework and allow the industry to apply competitively-driven prices and earn a fair rate of return? Governments have two alternative choices to control prices 1. Short-circuit the market with a command and control approach for wider political purposes 2. Allow the market to work. Ensure efficient market design methods: minimise the number of constraints and use market solutions to meet decarbonisation, security and RES targets Four current recommendations for European power market 1. Simplify the framework and apply the rule: one goal one instrument 2. Decarbonisation: Continue with the EU ETS to support climate-friendly technologies with a reliable perspective; establish an ambitious but realistic and stable post-2020 emissions target 3. Supply security: Introduce a uniform EU capacity market to reward equally all contribution to capacity so as to minimise the cost to consumers 4. Affordability: Introduce a more sustainable approach to the promotion of renewables so as to reduce costs for citizens and favour greater convergence between Member States 6

If in the private sector, will the government set a stable framework and allow the industry to apply competitively-driven prices and earn a fair rate of return?

7 Recommendations for IEA analysis to improve understanding of the issues Proposal for a major IEA project and thereafter regular monitoring 1. Analyse the relative contribution of the three factors (national resources, policies and market organisation) to power prices in selected global markets vs. a benchmark of weighted average global fuel mix and traded prices in a market-based system with private sector ownership 2. Address the importance and political challenge of a stable long-term investment framework Devise one or more metrics to measure investment stability over typical asset lives 3. Compare the types of ownership and regulatory approaches which exist around the world and compare their relative merits to consumers, the investors, and the economy overall How are end-customer prices set and what are the key elements of the price structure? What impact do subsidies and taxes have? In the case of countries with a strong market-based approach and privately-sector companies what distortions exist and what are their impacts for consumers and investors? To what extent may particular ownership structures and regulatory frameworks be appropriate for particular energy policies and/or fuel mixes? 4. Based on the above develop guidelines against which countries can be bench-marked to determine the extent to which their national power sector is economically efficient 7

a benchmark of weighted average global fuel mix and traded prices in a market-based system with private sector ownership 2.

8 THANK YOU VERY MUCH FOR YOUR ATTENTION

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