Tuesday, May 28, 2013

The EU and the Energy from the Desert


Pascal Schaefer is a graduate student at the Interdisciplinary Center Herzliya. His current research interests are decision-making and legislative responses to organ transplantation. He co-founded a renewable energy firm in the heart of Europe. At Washington University in St. Louis, Mr. Schaefer conducted research in the neuroscience and biophysics departments while earning his undergraduate degree. He has a genuine interest in game theoretical applications and strategic analysis.

Despite a clear roadmap and tremendous commitments to the build up of renewable infrastructure on shore 4 of the 5 largest economies of the EU-27 are currently negotiating an offshore solution in North Africa. While at first sight this initiative appears to go against the EUs political interest a deeper analysis reveals the opposite is true. Three key rationales drive the poliheuristic decision-making process.
 
The EUs current interest in renewable energies has two rationales. The first is reducing the carbon emissions. The second one is to create an energy infrastructure that allows long-term competitiveness for its industry. In addition to this the policy needs to be non-compensatory. Hence, the EU passed two directives to implement plans for a greener energy infrastructure. This article sheds some light on the factors that drove the decision making process of how to implement these plans. In particular it addresses the question why four governments (Germany, Italy, France, and Spain) are currently negotiating a contract over a 600 million Euro solar plant in the North African desert when one aim is cost competitive energy infrastructure for the industry (FAZ.net, 2012).

The road to a green infrastructure

In 1992 the UN held a conference in Rio that aimed at outlining a better future for the world. From it followed an action plan known as Agenda 21 featuring defined goals to be achieved for all aspects of life, including the conservation of fragile environments (Agenda 21, 1992).
In 1997 the Kyoto protocol was added to the United Nations Framework Convention on Climate Change and stated for the first time that the international society needs to take active steps against global climate change, by cutting carbon emissions. All member countries of the EU-27 signed this document  (Kyoto protocol, 1998). The European Commission identified implementation of renewable energy sources into the energy mix of each nation as the way to reduce carbon emissions.
In 2001 the European Union passed the Directive on Electricity Production from Renewable Energy Sources, which set target goals for each member country to increase their share of electricity produced from renewable energies. The goal declared in their white paper was to increase the percentage of renewable energy to 12% of all consumed energy by 2010 (European Commission, 2001.
As elaborated the EU member states are ideologically locked into carbon cutting, which answers the why. The second key rational in repealing the directive was of economic consideration. This consideration drives how to achieve the goal. In order to be attractive to any industry on European soil energy costs need to be less volatile to market shocks and more affordable than in other regions. In the light of ever-growing conventional energy prices competitiveness of European companies could see a major blow by 2030, certainly by 2050 (OECD, 2006). In order to prevent this, EU members have long-term plans, starting with repealing the Directive on Electricity Production from Renewable Energy Sources with the Renewables Directive in 2009. The new directive increased the renewable energy requirement up to 20% by 2020 (European Commission, 2007).
The EU gave member states the option to choose their own means of implementing the necessary steps to achieve these goals. As each country has different conditions to implement renewable energies each country has its own target goal. Scandinavian countries are able to use hydroelectricity and geothermal energy to get their energy, while southern countries have the opportunity to deploy solar techniques that harvest the sunlight and turn it into energy, which ultimately leads to very different ability to realize the infrastructure build up. Some countries like England have not managed to reach their target goals set for 2010. 

 Is the desert a good policy?

When analyzing the move into the desert one needs to elaborate on the limitations of the current options in the mix. Bioenergy, geothermal, wind, solar, and wave power are too unpredictable. This holds especially true in long winters like this one where Berlin sees snow until April, but barely any sunshine. This is minimizing the already poor yield even further. Some may attribute this to climate change and future winters may be equally as long in which case the widely deployed solar PV technology has little use. The big problem every country faces is storage for use at nighttime, when most countries need to rely on conventional energies. An inefficient yet expensive infrastructure does hardly align with any economic desires of long term cost competitiveness. A viable solution for this problem is the deployment of Concentrated Solar Power plants (CSP). There are currently four technologies on the market. Three of them, Linear Fresnel, solar tower, and the parabolic trough may be coupled with molten salt storage in the near future, which then is the solution. Molten salt storage is a technique that allows for the storage of heat in a salt tank. This heat can then be used to power spin the turbine at a later time, contrary to current designs that spin it immediately. The solar tower may have the greatest potential for future cost reduction and its deployment creates many local jobs (IRENA, 2012). They may be established in the arid regions rich in sunlight that are ideal for its deployment and they can be funded collectively by the entire EU so that each country gets its respective share.
The political dimension of CSP is key, as recommendations will only be implemented when political survival of the decision maker is ensured and all the objectives of the Union are fulfilled (Mintz, 2004). It is important to point out that the EU relies on the member states to drive this process and they in turn rely on their stakeholders, i.e. the citizens and companies to invest in climate change. The citizens, therefore, do a cost benefit analysis for themselves and if they find favor in the options to invest into renewable energies they will do so. The industry’s main concerns are higher energy prices, so a price hike on the domestic market may be enough reason to produce offshore at a lower cost.
Investments in renewable energy bring many benefits. If properly incentivized, investments bring additional income, as the German investor knows. They also reduce the citizen’s independence of the ever-rising prices of the energy producers, which in turn rely on the energy prices on the world market and any disruptive event of the regular procedure, be it the threat of a war in an oil producing country or an accident in a mine, can increase the price significantly over night.
With recently passed policies in place, Europeans grew accustomed to the idea of local, decentralized energy production, on shore, while cheap and stable energy prices are a must to convince companies to stay onshore. Decision makers take the stakeholders rationale into consideration, as they hold the power to vote them out of their office – a compensatory event. In this case the politicians ratifying any policies are concerned with keeping their position first and then with the objectives of the EU, as in renewable energies they do not want to be viewed as going against EU policy, which might end their political career. Additionally, the decision makers in these four countries face a very economic reality. Together they equate for more than 50% of the EU’s GDP (IMF, 2012). Therefore, they are especially concerned about keeping their economies attractive in the long run.
The desert provides ideal conditions and plenty of space southern Europe does not necessarily provide. While water is necessary for proper cleaning, desalination plants may be established. Deployment of CSP in the desert is a long-term investment with a huge start up cost, though some of these costs i.e. desalination plants may be covered under foreign aid that is sent anyway as it directly benefits a wider audience (Witney, 2012). The electricity must be imported through a special grid, which costs about 1 cent/kWh. Currently Europe imports conventional resources through the Suez Canal with a fee costing the same per kWh (Key Technologies for Desertec). As the EU-27 will rely on foreign imports of resources CSP in the desert is not directly competing with those currently investing into decentralized energy infrastructure. Instead, Germany, Italy, France, and Spain have the option to create a potential new investment opportunity. If followed through this will likely be backed with guarantees of access to the European grid allowing European investors to benefit from the energy need instead of foreign companies selling their resources.

Discussion

Decision makers of the four countries have opted to pursue an energy mix consisting of expensive local and desert energy now compared to relatively inexpensive conventional energy now. Nevertheless, they chose a non-compensatory policy that offered benefits to their nations interest at a high, yet competitive investment in the long run. It can stabilize a neighboring region in turmoil through job creation (World Bank, 2011). It achieves carbon cuts. Solar towers with storage capacity can overcome the EUs storage problem for nighttime use. Through the learning curve the price/kWh can fall to grid parity. The companies concerns are met by stable energy prices while conventional prices will continue to grow, making them less desirable after grid parity has been reached. To be truly non-compensatory 2 mistakes shall not be repeated. The decentralized system was introduced to reduce the dependency on large corporations. The benefactors of Desertec are large corporations, which will ultimately create fears that the newly won opportunity of independence will disappear (RWE). The second problem is that the deals the governments of the past have offered in the past to potential investors were very generous, ranging from guarantees over loopholes in the legislation, both to the disadvantage of the end user, also known as the voter (Handelsblatt.com, 2012). To prevent a backlash, the negotiating governments may be very careful in the guarantees and tax breaks extended to the involved parties. To ensure the voter understands that the current dogma of decentralization is not abandoned it is essential to create opportunities to invest into this project. If the voter concludes that large corporations are the main benefactors of the project, the governing parties may soon find themselves in the opposition.


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