Is Europe giving up on renewables?

Last month the European Commission proposed that the EU should cut its domestic greenhouse gas emissions by 40 per cent by 2030, and aim for “at least” 27 per cent of its energy from renewable sources by the same date. A war of words immediately broke out.

The spin will reach a peak over the next month or so, ahead of the March vote in the European Council, although negotiations will continue through the rest of the year. Oddly, some claims made by the European environmental groups, who want higher targets, are also used by commentators to argue for less ambition. Both groups say that Europe is losing its climate mojo, and giving up on renewables.

This is untrue, but it suits both groups to say it.

The European green groups want to shame the EU into aiming higher, and the opponents of climate action want to concoct a story that renewable energy is a dying fad, in order to preserve Australia’s favourable treatment of fossil fuels. Disturbingly, this myth is gaining ground in Australia’s energy sector.

The graph below illustrates the overall point well. Last year over 25,000 megawatts (MW) of renewable energy were installed in the EU. At the same time only 9,600 MW of fossil fuels (mostly gas) were installed and over 20,000 MW of gas and coal closed.

While the EU’s package falls short on a number of fronts, there are some important elements that need to be understood when trying to make comparisons to Australia.

Firstly, the proposed renewable energy target is for all energy, not just electricity (whereas Australia’s renewable target is electricity-only). The European Commission’s analysis suggests its target would achieve 43 per cent renewables in the electricity sector. This calculation used technology cost assumptions that are higher than real-world costs for some renewable technologies today, suggesting that even higher levels of renewable energy are plausible.

Secondly, the EU emission trading scheme is Europe’s principal tool to reach carbon pollution goals. This is done through lowering the annual cap on European emissions. Currently it falls by 1.7 per cent each year, but after 2020, it proposed it would fall faster, at an annual rate of 2.2 per cent. These limits on greenhouse gases and the resulting carbon price drive enough renewable energy investment to reach the levels proposed by the Commission.

Critics are concerned that the renewables target appears to lack an enforcement mechanism at this stage. The EU’s 20 per cent by 2020 target was translated into customised nationally binding targets for each EU member, but this time around some member states are baulking at Brussels’ control of their energy mix: the UK, for example, supports an emissions reduction target of 50 per cent but wants national freedom to choose how it gets there. The European Commission expects each country to report on the progress it is making toward energy decarbonisation, but in the absence of national binding targets it is unclear how much pressure Brussels can apply.

However, given that the carbon market is expected to drive renewables investment, one can make the argument that EU enforcement of national targets is unnecessary. In any case, many member countries are likely to set their own renewable targets, to ensure they can access benefits additional to emissions reduction, such as reduced reliance on imported fuels and stability for their renewable energy industry. Germany, for example, is maintaining its commitment to 80 per cent renewable energy (100 per cent renewable electricity) by 2050.

In effect, the EU is doing what Australia should do if the current policies were to remain in place. Over time, the limits and price on carbon pollution take on more of the heavy lifting and policies like the Renewable Energy Target become less important and can be phased out. Under the Government’s “Direct Action” policy the opposite is true. With no limit or price on pollution the Renewable Energy Target becomes more important through time in meeting 2020 and post-2020 emission goals.

Suggesting that Europe is backing away from renewables – let alone that therefore Australia should too – is a wilful misreading of the situation. While the EU and its members are setting their course to meet long term goals, Australia’s approach to energy appears to be to ignore the future and focus only on current and recent issues.

The government’s Energy White Paper is a case in point. Australia’s energy sector features one of the most carbon intensive power supplies in the developed world, coal exports incompatible with avoiding more than two degrees of global warming, and multimillion dollar assets exposed to everything from sea level rise to bushfire risk. But the government’s terms of reference for the Paper don’t mention climate change at all. The government does allude briefly to Australia’s commitment to cut emissions by five per cent by 2020, although it fails to admit that much greater cuts will be necessary in decades to come. (We have agreed, for example, to provide a post-2020 emission reduction offer to the international community by April next year.)

At the same time, the Renewable Energy Target, which absent the legislated carbon price and limits becomes Australia’s single most important mechanism to reduce emissions, is under attack by the vested interests, who blame it for raising electricity prices. Not only does this wildly overstate the impact of the RET on bills (now about $1.30/week for the average household) it ignores the real price drivers (mainly the 50 per cent increase in network costs since 2009, which make up about $940 of the average household’s annual power bill). And it sets the government up for a promise it can’t keep: the savings of abolishing the RET are estimated at about $15 per household per year, an unnoticeable amount.

Australia’s energy sector is characterised by chronic short-termism, expressed through a tangle of incoherent policy initiatives and reversals. The result has been booms and busts (coal, solar PV, possibly LNG), unexpected market developments (falling electricity demand) and unnecessary costs (network investment, over-generous feed-in tariffs, higher risk premiums reflecting the uncertain policy environment). It’s fair to say that EU member states have made some of these mistakes as well. The emergence of new technologies and solutions in the energy sector has disrupted business models and challenged government policies globally, and will continue to do so for decades to come.

But Europe has already made some great strides: it is on course to over-achieve its 2020 emission reduction and renewables targets. Many of its members have driven rapid growth in renewable electricity generation: in Germany, one of the leaders, renewables contributed 19 per cent of last year’s electricity. The UK reached 11 per cent, doubling the share of renewables in just four years. Denmark, which started decarbonising earlier, reached about 40 per cent.

The lesson that we should take from the Europeans is that giving special favours to particular technologies and chopping and changing policies is costly, but unleashing market dynamics to achieve long-term goals is both cheaper and much more effective. Unfortunately, Australia looks set to once again relearn this lesson the hard way.