A unique Climate and Energy Policy Key problems and possible solutions

1. A uniqueClimate and Energy PolicyKeyproblems and possiblesolutions Goran Granić, PhD General Manager of Energy Institut Hrvoje Požar 25th Forum: A UNIQUE ENERGY AND CLIMATE POLICY IN OPEN ENERGY MARKET: a year after COP 21 Energy day in Croatia, Zagreb, 18th November 2016

2. Former Climate and Energy Policy For the implementation of climate policy and the achievement of the objectives in the energy sector, the focus was on several groups of activities: • Solutions for the fossil fuels in order to prolong their usage with minimum or no emissions, • RES, • Energy Efficiency, • New fuels, • New technologies in production, consumption and in demand management. In conclusion, the current climate and energy policies were not integrated, but have evolved independently. Especially, the financial integration was lacking.

3. Basicquestions of climate and energypolicy • All directions of activities required a new technological solutions, because technology solutions at the time of setting climate objectives have not enabled the realization of the goals. • Technological progress is a key to the success of establishing a new platform of energy management to achieve the objectives of climate policy in the entire technological chain. If technological development is not accompanied by other implementation measures, the chances of success are significantly reduced, if not excluded.

4. 21. Conference of the Parties (COP21) of the Convention on Climatechange (UNFCCC) in Paris First comprehensive global climate agreement in Paris rests on three pillars: • (1) long-term goal expressed in the form of global average temperature rise to a maximum of 2⁰C and attempts to limit it to 1.5⁰C; • (2) increase the capacity of all countries to adapt to climate change and low-emission development; • (3) facilitating financial flows in order to achieve a low-carbon (emission) development.

5. Key elements for implementation of the Agreement from paris • Implementation of climate policy demands additional financial means, meanwhile the conditions of actualization are not equal, especially when it comes to physical and financial possibilities. Envisioned are designated funds in proportion with the objectives; • Apart from the developed countries, transitional countries are also committing to reduce CO2 and GHG emissions, while the role of non governmental organisations is becoming stronger (companies, civic society, financial institutions, cities, regions); • The agreement advocates new transition context that will enable climate and energy policy goals. Energy transition – an opportunity for economic growth, raising public awareness about the possibilities of growth generated by reduction of the costs of low-emission technologies and innovations; • Energy efficiency and RES are to be included in the energy market, and a unique climate and energy policy based on market rules should be created.

6. The concept of the PARIS Agreement implementation Implementation of the Agreement should contribute to the achievement of several important positive factors: • each country is obliged to reduce emissions of CO2 and other GHG and to make their planspublic, • every countries’ commitment is to regulate transition plans and encourage NGO initiatives through civic society action plan • the Agreement is global and will have different mechanisms of application from continent to continent. Paris Agreement is a huge achievement, but global emissions level shows that prompt ACTION with a real global effect is necessary.

7. Previousexperience and goals • Previous experience of administrative management of processes without building unique climate and energy policy based on market mechanisms gave incomplete results and produced a number of significant problems, particularly in the functioning of the electricity market. • It is necessary to make a new model for implementation of climate and energy policy that will be market based, with balanced risks and unambiguous goals and financial mechanisms.

8. Obligations to reduce CO2 emissions The CO2 emission level in the EU is descending and presents a necessary and obligatory condition for energy sector development, which implicates constant sector transition. CO2 emissions are increasing globally, so activities on other continents are necessary to accomplish previously mentioned goals. 2050 is a year of new platform for generation, transmission, distribution and consumption of energy, without fossil fuels or with CCS technologies.

9. A UNIQUE CLIMATE AND ENERGY POLICY- development parameters- The parameters of social, economic and personal life are primarily growing processes, with the exception of population number in Croatia, but on global level it is a growing process. • GDP, growth expectation, and what will the consequences be on the energy consumption growth depends on a number of influential factors and is not constant but a process; • Population, growing globally and decreasing in Croatia, affects energy consumption depending on whether it is increasing or decreasing; • Industrial production, growth expectation, can consequentially influence energy consumption growth, but not in proportion with the growth rate; • Public and personal standard, expected growth, instigates growth in energy consumption; • New products, growth expectation, can consequentially increase energy consumption; • New technologies, growth expectation, increase energy efficiency and can increase the number of used applicances; • Energy efficiency, growth expectation, influences the decrease of energy consumption in the entire technology chain, from generation, transmission/transport, distribution and consumption in all sectors; • Smart management of the systems, grids and appliances, growth expectation, increases efficiency of energy consumption.

10. A UNIQUE CLIMATE AND ENERGY POLICY- implementation mechanisms- • A unique climate and energy policy demands adjustments in all stages of creating strategies, government policies and implementation mechanisms: • Legislation and subordinate acts, • Standards and norms, • Unique financial mechanisms, in granting both penalisations and bonuses, • Protection of basic values of energy markets and reduction, or elimination of administrative decisions, •Construction of developmental, scientific and industrial policies.

11. BASIC ELEMENTS OF A UNIQUE CLIMATE AND ENERGY POLICY • Optimal solution would be to connect emissions level and the costs that they cause, or the cost of their reduction. • The simplest solution is to replace the current system, which is based partly on compensation and partly on emission market, with a simple, complete model with compensations or emission taxes. Advantages of such model are multiple: • simplicity, unambiguity and fairness of the model, as well as a high implementation potential, • inclusion of all fuel users that produce emissions while using it, • changing technologies of generation and use of energy will change obligations of energy buyers, • financial system is controllable and enables planning.

12. BASIC ELEMENTS OF A UNIQUE CLIMATE AND ENERGY POLICY • Current source for renewable sources incentives, based on a compensation that all buyers of electricity have to pay, should be replaced with a compensation that all legal and natural persons that produce emissions as fossil fuel users, would pay. • Such measure would cause bigger costs for all fossil fuel users and would cause a price growth on the electricity market in the beginning, but it wouldn’t cause a price growth for the buyers. • Compensations or emission taxes would increase cost of electricity sold on the wholesale market and affect the market potential of generation from gas (and fuel oil), and especially from coal and old power plants that have low efficiency. • It is necessary to reduce the rights of privileged power plants or plants that operate because of administrative decisions, which means every power plant that is connected to the grid should earn its place through market competition, in order to preserve open electricity market. • Compensation or tax amount should be equal on a unique market space such as the EU, so speculation effects that would bring different rates in member countries, would be avoided.

13. FORMER CLIMATE AND ENERGY POLICY • For RES are found effective mechanism, based on the guaranteed feed-in tariff (FIT), which allowed issue of construction of renewablesto be viewed in isolation from the energy markets and to be closed as a stand-alone project. • Problems in the implementation of this model appeared when the share of so-called eligible producers rose above 10% in the structure of electricity production, and the same are manifested through additional challenges in the management of energy from RES and in the costs of incetives.

14. CHANGES IN FINANCING RES • The main change with the RES is change of its status; from privileged isolated part of the electric power system, stimulated, privileged and free of any obligations to the power system, in to the part of the power system, which is building its position in competition with other parts of the system. • On the question whether renewables are able to withstand market competition and in conditions when the price of electricity produced from fossil fuels is increased by fees or taxes on CO2 emissions, can not be given an unambiguous answer. • The answer depends on technology and changes dynamically as a function of technological development, increased efficiency and reduced specific cost of installation. In the technological development can be counted problems handling the production and storage of electricity.

15. CHANGES IN FINANCING RES - RISKS • The volatility and unpredictability of electricity produced from RES significantly complicates system and increases the price of the electricity. By increasing the share of renewable energy this problem is increasingly gaining in importance, especially considering the fact that most countries have practically completely ignored this problem. • Integration of RES includes three types of costs, not only one: • Subsidizing production (in Croatia in 2015, over 1 bill.HRK) • System balancing (in Croatia in 2015, over 100 mil.HRK) • Network upgrade (in Croatia are expected significant investments in the construction of the network, therefore necessary is the reinforcement of the public network in addition to the construction of the connections). • These problems can endanger the dynamics of the construction of renewable energy sources, so it is necessary to open the possibility of encouraging the construction of renewable energy sources on the investment side, dynamically aligned with changes of key influential factors.

16. ENERGY EFFICIENCY • The priority is concentrated on measures that affect the devices and technologies or processes, which could be directed by legislation or standards. • The second part of measures relates to the development of quality of market of devices and equipment, where the desirable processes are affected only with market elements. • The rest of the measures are related to the financial intervention with the basic aim to increase the scope and accelerate the implementation of specific process or usageof device. Known examples of interventions in the field of devices and appliances are in the household, car industry and lighting. • Special categories are residential and commercial buildings, where financial interventions in the existing housing and business fund is necessary. For new buildings it is possible by laws and standards to govern EE goals.

17. TRAFFIC – uniqueclimate and energypolicy • Vehicle manufacturers will have to respond to regulatory pressures and change its product portfolio in order to avoid additional costs caused by the penalties. • To encourage the development of the market the realization of active cooperation between the provider of electricity supply and final customers and vehicle manufacturers is needed;leading to the economically acceptable solutions for the customers. • Regulators should work with the industry and continuously review the possibility of the fulfillment of the proposed objectives through the established system of financial and operational incentives. • End users of vehicles should definitely evaluate the economic and environmental characteristics when buying new vehicles, and the channel of communication between the vehicle owners, regulators and manufacturers should be opened.

18. CONCLUSIONS/RECOMMENDATIONS • Common elements of the unique climate and energy policies are financial through fees and taxes on CO2 and incentive through measures that do not undermine the open energy market. • Technology development is a precondition for successful implementation of the objectives and key aspect of the decarbonisation of the energy sector. • New energy platform, which stems from the unique climate and energy policy in the long-term horizon will significantly altere the structure and relations in the energy sector, which is an important signal to companies in the energy sector, whose business is based on fossil fuels. • Support measures and the implementation of policies to reduce CO2 emissions are to be realized on the investment side, without compromising relations in the energy market.

19. CONCLUSIONS/RECOMMENDATIONS • Administrative management and interventionism in economic and energy relations in the energy sector produces negative effects and should be minimized or completely shut down. • The most challenging is a measure to include RES in the open market, and to continue the process of intensive construction and realization of the objectives of the unique climate and energy policy. • In the area of energy efficiency, buildings, especially existing, are the biggest challenge, but also a key milestone of achieving unique climate and energy policy. • In the transport sector it is necessary to encourage technological development and wisely manage the process of reducing the consumption and emissions through increased energy efficiency, the replacement of old cars, and the introduction of new technologies and fuels.

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