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Comparing Externalities from Energy Sources

Posted in Europe

Nobel Prize-winning economist Amartya Sen recently decried “the failure to develop a framework for assessing the comparative costs of different sources of energy . . . inclusive of the externalities involved.”  As if on cue, the European Union (EU) issued an interim research report by an outside consultancy last month that purported to do just that.

The report by Ecofys, a Netherlands-based consultancy specializing in sustainable energy, estimates that energy use for the 28 EU Member States in 2012 failed to account for approximately €2012 200 billion ($250 billion) in external costs.  External costs are effects on third parties that are not reflected in the market price, such as pollution.  As shown in the report’s Figure 3-11 (below), half of the $250 billion in estimated costs consist of estimated damages from climate change alone.

chart 1

The report estimated the net external cost of climate change to be 43.33 €2012/tCO2e—roughly 50% higher than the United States government’s 2013 social cost of carbon estimate of €2012 28 per ton, which is itself controversial in some quarters.  The report also included controversial estimates for the value of “depletion of energy resources.”

The Ecofys report marks an ambitious attempt to use lifecycle analysis to try to calculate “all in” estimates of the external costs of producing and using energy on a comparative basis.  But estimates of external costs still remain highly uncertain endeavors.  As the EU report itself cautioned, its methods for valuing external costs come with high uncertainties because by definition there is no market value for external costs.  For example, the report explains its methods for estimating the long-term costs of disposing of nuclear waste in a lengthy annex.

These difficulties are not new.  In 2010 the National Research Council (NRC) valued the external costs of energy in the United States at $120 billion for 2005.  However, the report omitted from this figure many types of damages, including damages from climate change, which the NRC declined to include due to the then-evolving and uncertain understanding of climate change effects and damages.

Economists argue that all-in estimates of the lifecycle costs of various energy sources may be useful to policymakers in deciding which energy sources are preferable.  For example, one of the more controversial claims in the Ecofys report is that solar energy (both rooftop and utility-scale) may have larger external costs than other renewables when the coal-fired energy used to manufacture the components in China is taken into account.  See Figure 3-8 below.

chart 2

These estimates have not been officially endorsed by the EU, nor subject to peer review, and we can expect continuing debate on the subject in the years ahead.

Wholesale Electricity Market Developments in the U.S.

Posted in Electricity

Significant developments have occurred recently in wholesale electricity markets in the lower Midwest and Western regions of the U.S.

Earlier this week, the Federal Energy Regulatory Commission approved a substantial expansion of the Southwest Power Pool (SPP).  SPP is a FERC-regulated Regional Transmission Organization that administers the grid across a nine-state footprint in the south central part of the U.S and serves more than 15 million customers.  As the grid operator, SPP assures that electricity supply and demand is balanced at all times by securing resource commitments in energy “imbalance” auction markets.

Joining SPP are the Upper Great Plains Region of the U.S. Western Area Power Administration, which owns high-voltage transmission facilities and markets federally generated hydroelectric power, Basin Electric Power Cooperative and Heartland Consumers Power District.  According to FERC, the addition of these three systems “expands the geographic footprint of the regional power market to include a significant portion of the Upper Great Plains that spans the Eastern and Western Interconnections of the U.S. electric grid.”

Further to the west, the new Western Energy Imbalance Market (EIM) successfully launched on November 1.  The EIM extends the California ISO’s real-time wholesale imbalance market to other entities in the west, and is expected to enhance grid reliability and responsiveness, effectively integrate renewable power and save wholesale energy costs.  According to CAISO, the EIM reduces the amount of costly energy reserves utilities have to carry because utilities will be able to access resources across the West.  PacifiCorp, which operates across a six-state area, is the only participating non-CAISO utility now, but NV Energy in Nevada will join the EIM next year.

Finally, a wholesale imbalance market may take shape in the Pacific Northwest as well.  The Northwest Power Pool, a voluntary organization comprised of major generating utilities serving the Northwestern U.S., British Columbia and Alberta, issued an RFP for a market operator for an energy imbalance market.  According to the RFP, the selected market operator will develop and implement a market targeted to start October 1, 2017 “that will fulfill the goals of increased efficiency in the utilization of energy resources and enhanced reliability for the region.”  The RFP notes that utilities in the region need additional tools to balance the system due to the growth of variable energy resources and are managing load and resource balance without systematically sharing the diversity between their systems.  In addition, the region’s constrained transmission system needs new tools for congestion management.

The Road to Paris 2015: Contrasting Media Perspectives on the US-China Accord on Climate Change and Clean Energy

Posted in COP21 - The Road to Paris 2015

As has been widely reported, on November 12 President Obama and China’s President Xi Jinping released a joint announcement on climate change and clean energy cooperation.  Beyond the announced greenhouse gas emission targets—for the U.S., to reduce emissions 26-28% below 2005 levels by 2025; for China, (i) to peak CO2 emissions by around 2030, with the intention to try to peak earlier, and (ii) to increase the non-fossil fuel share of primary energy consumption to around 20 percent by 2030—we note the following.

Differing reporting in the U.S. and China.  The climate announcement received starkly different emphasis in U.S. and Chinese media.  In the United States, the announcement was the lead or among the lead news stories in all major outlets we surveyed, including The New York Times, The Los Angeles Times, The Washington Post, The Wall Street Journal and USA Today.  In China, People’s Daily led with Obama’s and Xi’s talks generally, with the two parties reaffirming their goal, expressed at the Sunnylands Summit in 2013, of developing a “new pattern of major power relations” between the two counties—but placed news of the emissions announcement in a separate story on page 2.  Jiefang Daily gave similar treatment to the announcement.  Cankao News, which has a conservative reputation, likewise discussed the emissions targets on the second page of the lead story.  And Beijing News, which is considered more liberal, mentioned the climate announcement in the lead’s subtitle, but only discussed its substance on the third page of coverage of the talks, on page 8 of Thursday’s edition.  (Links to Chinese editions.)

The contrasting coverage reflects different economic and political contexts in the two nations.  Beyond the substance of the agreement and fact that China is for the first time publicly stating a specific goal to peak emissions, the story’s heightened newsworthiness in the United States also likely reflects the American media’s sense of surprise, the back story of secret climate negotiations, economic tension between federal mandates and free markets, the chronically polarized politics of U.S. climate and energy policy, and the currently heightened executive vs. legislative branch posturing following last week’s elections.  By contrast in China, secrecy and surprise of policy announcements are common, national economic planning with detailed, prescriptive goals is a foundation of the economy, and divided government and partisan politics are non-existent.  To the extent that the announcement was important inside China, it seemed important for instrumental reasons—because, together with the broader dialogue of mutual cooperation, it demonstrated China’s stature in the bilateral relationship—not primarily because action on climate change is important for its own sake.

Implications for Paris 2015.   The joint announcement has been described as an important break-through leading-up to next year’s global climate talks.  With the world’s largest carbon emitters staking out goals to reduce carbon emissions, lesser emitters will find it more difficult to resist similar commitments.  More significantly, the joint announcement has served to establish China as standard-setter, together with the United States.  Its stature already established, China should be less inclined to oppose the United States in Paris for the sake of demonstrating its influence in multilateral negotiations.

Risk and Reward in the UK Continental Shelf: A Three-Part Series

Posted in Oil & Natural Gas

According to the latest Oil & Gas UK Business Sentiment Index, the UK offshore oil and gas industry currently has a pessimistic outlook for the first time since 2009. In this three part series, we consider the factors contributing to the industry’s current mood and efforts to secure maximum economic recovery from one of the most mature offshore basins in the world.

Part Three

Looking to the Future of the UK Continental Shelf (UKCS): Recent Developments in the UK Government’s Implementation of the Wood Review Recommendations

Part One of this series identified factors contributing to the current negative outlook for the UKCS oil and gas industry. Part Two of this series outlined the Wood Review recommendations to maximise recovery in the UKCS. In the final part of the series, we summarise the steps that the UK Government has taken to date in implementing the Wood Review recommendations, and look for potential indications of optimism returning to the industry in the future.

In July 2014, the Government published a response to the Wood Review in which it committed to implement all of the Wood Review recommendations. Full implementation of the Wood Review recommendations will occur in two phases:

  • Phase one: Primary legislation to establish the framework for the MER UK principles and charge a levy to fund the activities of the new Regulator. This is contained in the Infrastructure Bill, which is currently proceeding through the UK Parliament.
  • Phase two: Primary and secondary legislation to establish, among other things, wider powers for the new Regulator, an enforcement regime, and a detailed strategy for the implementation of the MER UK principles.

Notably, the Government announced that the new Regulator proposed by the Wood Review will be named the Oil and Gas Authority (OGA). The search for a high-profile CEO to lead the OGA commenced in June 2014 and appears to remain in progress. The OGA will, eventually, be structured as a government company, which will allow it greater independence than the current light-touch regulator, which operates from within the Department for Energy & Climate Change.

A further development in the Government’s implementation of the Wood Review recommendations occurred this week. On 3 November 2014, the Department for Energy and Climate Change published an impact assessment accompanying the phase one proposals to implement the Wood Review recommendations (the Impact Assessment).

The Impact Assessment estimates the potential net benefit to business associated with the implementation of all the Wood Review recommendations of between £20.7 billion and £56.3 billion (net present value), primarily as a result of greater oil extraction from the North Sea. The Impact Assessment added that the full costs and benefits associated with the Wood Review’s recommendations would be realised at the secondary stage of implementation and will be contained in a further impact assessment.

According to the Impact Assessment, consultation on phase two of the implementation of the Wood Review recommendations will begin “in autumn 2014” (i.e., immediately). The timescales published in the Impact Assessment provide for full implementation to be completed by summer 2016, subject to the legislative programme for the next Parliament.

When announcing the industry’s current negative outlook in the Q3 2014 Index, Oil & Gas UK noted that the implementation of the Wood Review recommendations would “help deliver both opportunity and certainty to the UKCS”. Even in the current pessimistic climate, Oil & Gas UK added that capital investment in the UKCS was the highest in three decades in 2013, at £14.4 billion.

On a final positive note, on 23 October 2014, GDF Suez E&P Ltd and BP announced a new discovery in the UK Central North Sea. The announcement was welcomed by Oil & Gas UK, which described the discovery as “heartening” and a demonstration that there are “still significant economic plays to be developed within the basin”.

Regulated Utilities Push into Residential Solar Market

Posted in Solar

Residential rooftop solar energy continues to expand at a rapid pace in many states. This growing market dynamic is affecting the business model of traditional electric utilities. Some utilities have sought to impose obstacles to the growth of competing solar rooftop providers, citing concern that as more homes produce their own electricity, the corresponding loss of revenue for utilities will hamper their ability to recover the fixed costs needed to maintain power grids — a claim solar providers sharply dispute. Some other utilities, including some that formerly opposed the growth of independent solar, have responded by entering the residential solar market as a direct provider of rooftop systems.

As a recent example, Arizona’s largest utility provider, Arizona Public Service (APS), proposed in July an up to $70 million plan to lease thousands of residential rooftops and build solar arrays in exchange for a utility bill rebate. Customers would receive a $30 monthly credit for making their rooftops available to APS. Tucson Electric Power, another Arizona provider, proposed a similar leasing program in which homeowners would allow the installation of rooftop solar panels on their homes in exchange for a fixed monthly power bill. These leasing programs, which have yet to be approved by the Arizona Corporation Commission, have come under fire from some solar developers as motivated by monopolistic behavior.

Similar skirmishes are occurring throughout the United States. New York regulators are considering a plan to allow utility companies to own residential rooftop systems, and a straw plan issued recently received comments from hundreds of interested parties addressing utility market power concerns. In June, South Carolina passed a law allowing utilities to offer solar leases, but the law was heavily negotiated by solar developers to prevent utilities from recovering installation costs through rate increases. And a bill in Washington that would have given utilities control of the solar leasing market failed to pass earlier this year after substantial lobbying by solar advocates.

Debate will continue in the short-term as various jurisdictions sort out the relationship between solar developers and traditional utilities.

Increasing LNG Exports: Modest Price Increases But in the National Interest

Posted in Natural Gas

The Energy Information Administration (EIA) recently released a study of the impacts of increasing the amount of Liquefied Natural Gas (LNG) exported from the lower 48 states. According to the study, increasing LNG exports by 2 billion cubic feet per day (Bcf/d) each year beginning in 2015 to levels between 12 and 20 Bcf/d would increase natural gas producer prices 4% to 11% over the 2015-2040 period. Consumer bills for natural gas would rise 1% to 8% and for electricity as much as 3%.

However, the higher gas prices would result in increased domestic investment, especially in the industries that supply inputs to the gas sector, and in higher levels of domestic consumption expenditures, resulting in GDP increases of 0.05% to 0.2%. The study finds that this higher economic output is enough to overcome the negative impact of higher domestic energy prices. According to Kyle Isakower of the American Petroleum Institute, “the updated study confirms what past research has found, which is that higher levels of exports prompt more U.S. growth and increase investment in American energy security.”

The study also found that the higher level of exports, compared to a base case level, would  increase CO2 emissions up to 0.6% as more natural gas is used to fuel added liquefaction and fuel switching occurs in the electric power sector.

The study was requested by DOE’s Office of Fossil Energy, which, under Section 3 of the Natural Gas Act, must grant a permit to export domestically-produced natural gas unless it finds that such action is not consistent with the public interest. Exports to nations with which the U.S. has a Free Trade Agreement are presumed to be in the public interest, but DOE must evaluate whether exports to non-FTA nations are consistent with the public interest. The updated study will be considered in the public interest evaluation of applications to export LNG to non-FTA nations.

EIA’s study is an update to a similar 2012 study of the impacts of LNG exports of 6-12 Bcf/d. That study concluded that the U.S. would experience net economic benefits from those levels of exports.  More than 10 Bcf/d of non-FTA exports have been approved already, according to a post on the University of Texas law school’s Energy Center blog.

The results of the study must be viewed with some perspective. The study recognizes that the pace of increase in exports in the analysis is “extremely aggressive, indeed almost impossible,” and was intended to show an “outer envelope of domestic production and consumption responses” that might follow from exports beyond 12 Bcf/d. Erica Bowman of America’s Natural Gas Alliance noted that EIA’s base case shows LNG exports of less than 10 Bcf/d by 2040, compared to the 12-20Bcf/d in the study, and that “under any but the most implausible scenarios, prices remain stable at levels below $6.00 a million British thermal units through 2030.”

Risk and Reward in the UK Continental Shelf: A Three-Part Series

Posted in Oil & Natural Gas

According to the latest Oil & Gas UK Business Sentiment Index, the UK offshore oil and gas industry currently has a pessimistic outlook for the first time since 2009. In this three-part series, we consider the factors contributing to the industry’s current mood and efforts to secure maximum economic recovery from one of the most mature offshore basins in the world.

Part Two

Addressing the Challenges Faced by the UK Continental Shelf (UKCS) Oil and Gas Industry

Part One of this series identified factors contributing to the current negative outlook for the UKCS oil and gas industry. Recognising the need for Government intervention to secure the future recovery of oil and gas from the UKCS, in June 2013, the Secretary of State for Energy & Climate Change commissioned Sir Ian Wood to conduct an independent review of offshore oil and gas recovery in the UKCS (the Wood Review). The Wood Review published its final report in February 2014 (the Final Report).

The Wood Review made four principal recommendations to address the challenges faced by the UKCS oil and gas industry:

  1. Government and Industry should develop and commit to a new strategy for Maximising Economic Recovery from the UKCS (MER UK).
  2. A new arm’s length regulatory body should be created and charged with effective stewardship and regulation of UKCS hydrocarbon recovery, as well as maximising collaboration in exploration, development and production across the industry.
  3. The new Regulator should take additional powers to facilitate implementation of MER UK.
  4. Develop and implement important sector strategies.

The Wood Review estimated that the full and rapid implementation of the above recommendations could deliver 3-4 billion barrels of oil equivalent more than would otherwise be recovered over the next 20 years (2016-2035), estimated to be worth around £200 billion in additional revenues to the UK’s economy at today’s prices (gross, undiscounted).

Reducing the Legal and Commercial Burden of Working in the UKCS

According to evidence gathered by the Wood Review, the UKCS is perceived as “one of the most adversarial legal and commercial basins in the world, disproportionately driven by risk aversion to the detriment of value creation”. The Wood Review found a significant number of disputes and disagreements arising in the UKCS, mainly on access to processing and transport infrastructure and new field cluster developments, both of which have a significant impact on maximising economic recovery.

In order to alleviate the legal and commercial burden of working in the UKCS, the Wood Review recommended:

  • The industry should, at least in the interim, commit to using standardised agreements, processes and procedures, such as the Joint Operating Agreement, Confidentiality Agreement, Proximity Agreement, Pipeline Crossing Agreement and Decommissioning Security Agreement.
  • The new Regulator should work with the industry to develop protocols and processes, based on past learning, for dispute resolution (including the use of expert assessors where appropriate).
  • Power should be given to the new Regulator to provide recommendations on disputes and disagreements within an agreed timeline and structure, ending with a recommendation to the parties concerned. Although the recommendation would be non-binding, a failure to accept the outcome could, in certain circumstances, result in sanctions. This process would not impact upon the any party’s rights to commence dispute resolution proceedings.
  • The new Regulator should have the right to attend Joint Venture meetings, particularly where areas relating to delivering MER UK or disputes are to be discussed, in order for the Regulator to fully understand the challenges faced by the industry.

The Wood Review’s recommendations received substantial industry support and positive engagement from DECC, HM Treasury and senior Government Ministers. However, those recommendations are unlikely to have any meaningful impact on the future of the UKCS unless they are implemented by the UK Government. In the final part of this blog series, we will outline the efforts made by the UK Government to date in this regard.

Risk and Reward in the UK Continental Shelf: A Three-Part Series

Posted in Oil & Natural Gas

According to the latest Oil & Gas UK Business Sentiment Index, the UK offshore oil and gas industry currently has a pessimistic outlook for the first time since 2009. In this three-part series, we consider the factors contributing to the industry’s current mood and efforts to secure maximum economic recovery from one of the most mature offshore basins in the world.

Part One

The Results Are In: The UK Offshore Oil and Gas Industry is Pessimistic

On 30 October 2014, Oil & Gas UK published the Q3 2014 Oil & Gas UK Business Sentiment Index (the Q3 2014 Index). The quarterly index gauges economic indicators including business confidence, activity levels, business revenue, investment and employment to provide a rating (on a -50 to +50 scale) of the industry’s mood and outlook.

The results of the Q3 2014 Index show that there has been a downward trend in optimism in the UK offshore oil and gas industry for the last six consecutive quarters, with the index moving into negative territory in Q3 2014 for the first time since Q3 2009:


Figure 1: Business Sentiment Trend from the Oil & Gas UK Q3 2014 Index

The Q3 2014 Index states that “the majority of respondents cite rising costs, reduction in drilling activity and the recent drop in oil price among factors in curbing optimism within the sector”. A recent Inside Energy & Environment blog post discusses the consequences of the fall in oil prices.

The UK Continental Shelf (“UKCS”) oil and gas industry faces clear challenges as a result of the basin’s maturity and is now at a turning point in its development strategy. The UKCS has evolved over the past five decades from a series of large fields dominated by large operators to a mature basin with over 300 fields, smaller new discoveries, many marginal fields and greater inter-dependence in exploration, development and production.

There has been a significant decline in exploration and production from the UKCS in recent years. Less than 150 million barrels of oil equivalent (boe) have been discovered in the past two years, with only 15 new wells reported by the end of 2013. Production of oil and gas from the UKCS has fallen by 38% between 2010 and 2013, mainly due to a rapid fall in production efficiency, which is now averaging at 60% across the UKCS.[1]

The production of oil and gas from the UKCS is pivotal to the UK’s security of energy supply, both at present and in the future. In 2012, the UKCS produced 67% of the UK’s oil demand and 53% of gas demand. According to projections by the Department for Energy & Climate Change, it is estimated that the UKCS should provide 70% of the UK’s primary energy requirements in 2030. The UK Government has deemed it of central importance to the UK that it manages its indigenous energy resources in an appropriate manner. Part two of this series will summarise the recent work of the Wood Review in seeking to address the challenges faced in the UKCS, with the objective of maximising future production.

[1] Final Report of the Wood Review, 24 February 2014, citing the Department for Energy & Climate Change and Oil & Gas UK as the underlying sources for the data.

EU Sanctions Against Russia and Their Impact on the Energy Sector

Posted in Europe

Last week, the EU decided to maintain in force its sanctions against Russia, including the sanctions targeting Russia’s energy sector.

The sanctions were adopted on July 31, 2014—by Council Regulation 833/2014 (the Regulation)—and extended on September 12, 2014.  As described in more detail in our recent client alert, the Regulation imposes a licensing requirement for the sale, supply, transfer, or export of “technologies” listed on Annex II to the Regulation to any party in Russia or for use in Russia.  Annex II contains a broad range of pipes, casings, tubings, and other tools and equipment used in oil and gas exploration and production activities.  The licensing requirement applies regardless of the end-use of those items.

In parallel, the Regulation requires licenses for the provision of technical assistance, brokering services, financing or financial assistance relating to the items listed in Annex II to Russian parties or for use in Russia.  Importantly, Member States authorities may not grant licenses if there are reasonable grounds to determine that the sale, supply, transfer or export of the technologies is for use in connection with a project pertaining to deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia, unless a given transaction is required under a contractual obligation that was concluded prior to August 1, 2014.

In addition to the above-mentioned restrictions, the Regulation prohibits the direct or indirect provision of services necessary for deep-water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia, including (i) drilling, (ii) well testing, (iii) logging and completion services, and (iv) supply of specialised floating vessels.  The prohibition is without prejudice to the execution of an obligation arising from a contract or a framework agreement concluded before September 12, 2014, or ancillary contracts necessary for the execution of such contracts.

The Regulation has not been phrased in the clearest of terms and the industry has been struggling with the interpretation of the various restrictions.  As an example, while the export restrictions in the Regulation refer to “technologies,” Annex II lists only hardware.  Further, the Regulation does not define the terms “Arctic,” “deepwater” or “shale.”  Likewise, the Regulation does not explain the scope of the drilling, well testing, logging or completion services or how to interpret the terms “specialised floating vessels.”  There has also been a lot of confusion relating to the licensing process, in particular regarding the scope of the licenses, the competent authorities within each Member State, the forms that companies have to complete, and the supporting documentation that they have to provide to the authorities.  While some Member States have issued guidance on those points, the guidance has been significantly delayed and does not address all questions posed by the industry.  The European Commission’s guidance on the interpretation of the Regulation—expected in November—will hopefully provide more answers.

The EU sanctions have been imposed in close cooperation with the United States and since their imposition have been followed by a number of additional countries, including Norway.  The sanctions are reported to have a significant effect on the energy industry.  Most EU-based companies with operations in Russia had to reassess their Russian operations, with some companies significantly limiting their operations or even exiting the Russian market.  EU-based exporters decreased sales to Russia, with German exporters reportedly decreasing their Russian sales by over 26%.  Russian companies, including Rosneft, have sought financial support from the Russian state to cover losses caused by the international sanctions and the falling price of oil.  And energy executives have said that the sanctions would eventually lead to less investment in Russian oil production, which would likely damage long-term supplies of oil, despite the U.S. shale boom.

While the EU sanctions are under a constant review, the European Council recently decided to maintain them in place.  As a result, the EU sanctions will continue to impact the energy industry for the coming months.

The Road to Paris 2015: European Council Deal on Future Climate Change and Energy Policy

Posted in COP21 - The Road to Paris 2015

Last Thursday, the 28 Heads of State of the European Union meeting at the European Council reached a political agreement on the EU’s climate and energy framework for 2030.  The compromise is intended to send a signal in anticipation of the next United Nations Framework Convention on Climate Change (“UNFCCC”) Conference of Parties scheduled for December 2015 in Paris (“COP 21”) and sets the scene of the legislative negotiations that should take place in Brussels in 2015-2017.  The European Council agreed on the following targets for 2030:

  • 40% Reduction of Greenhouse Gas Emissions: The compromise sets a binding target of 40% reduction of GHG emissions compared to 1990.  It further tightens the target of 20% reduction by 2020 and is intended to keep the EU on track to achieve a minimum 80% reduction by 2050.  In a clear signal to the rest of the world, the agreed text calls “on all countries to come forward [to the UNFCCC COP 21] with ambitious targets and policies” and commits to a review of the EU target after COP 21.
  • 27% of Power Consumption from Renewable Energies: The compromise sets a binding target of at least 27% for the share of renewable energies of all energy consumed in the EU.  The agreed target is in line with the target proposed by the Commission, but lower than called for by the European Parliament.  However, the agreed text also emphasizes that the EU 27% target should not prevent Member States from setting their own more ambitious national targets and supporting them provided that this is “in line with state aid guidelines, as well as taking into account their degree of integration in the internal market.”  Importantly, the agreed text also calls for a “fully functioning and connected internal energy market” and calls on the Commission and Member States to take urgent measures in order to ensure a minimum target of 10% of existing electricity interconnections not later than 2020, at least for the Baltic States, Portugal and Spain, and to aim for a 15% interconnection target by 2030.
  • 27% Improvement in Energy Efficiency: As opposed to the Commission’s proposal for a 30% target and the Parliament’s request for a binding 40% target, the European Council only agreed to an indicative target of “at least” 27% of energy efficiency improvement compared to projections for future energy consumption based on the current criteria.  The compromise also calls for the review of this target by 2020 “having in mind an EU level of 30%.”  While the agreed target is less ambitious than what Parliament hoped for, it may have a significant impact on the environmental design requirements of specific product categories as the agreed text also calls the Commission to “propose priority sectors in which significant energy efficiency gains can be reaped and ways to address them.”

The Greenhouse Gas Emission Reduction Target in More Detail

The 40% GHG emission reduction target is based on a complex patch of measures that reflect a compromise between the aim to achieve ambitious climate target for the EU as a whole and the demand for flexibility from poorer and carbon energy dependent Member States.

In order to achieve the 40% reduction target, the European Council agreed that the industrial sectors covered by the EU Emissions Trading System Directive (“ETS Directive”) should reduce their emissions by 43% by 2030 compared to 2005, while sectors not covered by the ETS, such as buildings, agriculture and transport, (i.e., sectors covered by the Effort Sharing Decision) should reduce their emissions by 30%.

EU ETS Directive

To achieve the 43% GHG emission reduction by 2030, the European Council signaled that the ETS Directive should be amended to achieve the following as of 2021

  • The annual factor to reduce the cap of emission allowances should be increased from 1.74% to 2.2%.
  • The free allocation of allowances to avoid carbon leakage should continue “as long as no comparable efforts are undertaken in other major economies.”
  • Member States with a GDP per capita below 60% of the EU average (mainly Central and Eastern European countries) should continue to be able to give free allowances to their energy sector until 2030.
  • 2% of all EU ETS allowances should be set aside to finance additional investment in Member States with a GDP per capita below 60% of the EU average.  The proceeds obtained from the allowances must be used in projects to improve energy efficiency and modernize energy systems in recipient Member States.
  • 10% of all EU ETS allowances to be auctioned should be distributed among those Member States with a GDP per capita not higher than 90% of the EU average.

Effort Sharing Decision

The European Council agreed that allocation of emission reduction targets for the national sectors not covered by the EU ETS should continue on the basis of national GDP, as is currently the case under the EU Effort Sharing Decision.  However, the compromise also calls for an allocation of targets that ensures compensatory measures for Member States with large emission reduction commitments or that are wealthier, and for the enhancement of the availability and use of flexibility mechanisms.

  • Concerning the transport sector, the compromise invites the Commission to consider measures for “a comprehensive and technology neutral approach,” to promote emission reductions and energy efficiency, electric transportation, and renewable sources after 2020.
  • Importantly, the text also calls for the inclusion of Land Use, Land Use Change and Forestry (“LULUCF”) into the 2030 greenhouse mitigation framework before 2020.  This paves the way for the inclusion of forest carbon offsets as a means of facilitating Member States’ compliance with the 30% target (in comparison to the 2005 level)  for sectors that are not subject to the EU ETS.

The Upcoming Climate Change Legislative Package and Procedure

While the European Council’s compromise is not legally binding, politically it will certainly define the legislative proposals to amend the EU’s climate and energy legislation that the new European Commission is expected to present by the end of 2015.  This legislative package is likely to affect the EU ETS Directive, the Effort Sharing Decision, the Renewable Energies Directive and the Energy Efficiency Directive.

Once the Commission presents its legislative proposals, the European Parliament and Council will have to consider them for adoption in a legislative process — the ordinary legislative procedure — that is likely to take at least 18 months.