jfernandez

Interview to Jorge Fernández

To make progress in a successful transformation process of the energy system, a stable regulatory framework must be guaranteed”

We go on with the 2020 editorial line: climate challenges. This time we have talked to Jorge Fernández, coordinator of the Energy Area at Orkestra, about a regulatory challenge: how to carry out the energy transition without losing competitiveness of the productive sector. 

People usually think that clean energy is more expensive, what truth is there in this statement?

Until not so long ago, renewable energies were more expensive than other types of electric energy. That is the reason why, in a lot of countries, also in Spain, the investment in technologies such as wind power or PV was promoted with bonus over the market price, feed-in tariffs or fiscal incentives to investment.

However, for a while, this kind of energies are considered to be market competitive without additional incentives −what is called grid parity−, that is the reason why this kind of incentives have disappeared in countries such as Germany or Spain.

Lately, promoters of new large wind and PV projects are selling energy to the forward market at a lower price than the balancing marginal price in electricity wholesale markets. We have to take into account that the electricity we consume right now comes from a technology mix and the market price usually reflects the marginal cost of the technology that generates the last electric unit served: marginal cost of natural gas combined cycle power plants, generally.

So, most of the new wind an PV projects now in operation sold their energy in auctions at 30-40€/MWh −see Figure 1−. According to the International Energy Agency, projects that will be commissioned in 2022 will sell their energy at 34.66$/MWh and 19.84$/MWh, respectively, −global average−.

Summing up, clean electricity prices are significantly lowering due to economy of scale and the improvements in technologies and materials in the production processes. The impact of renewable energy penetration in the electricity markets will tend to lower the average price of electrical energy and increase its volatility, as the availability of renewable energy changes in the short term.

Final consumers, specially households, will tend to consume energy at the average market price, even though some sectors, such as industries, are signing renewable PPAs at prices that reflect the lowering tendency of wind a PV energy.

 

Figure 1. Announced wind and solar PV average auction prices by commissioning date, 2012-2020. Source: International Energy Agency, extracted on 18/02/20

How should the energy transition be planned so companies do not lose competitiveness due to the increase of energy costs?

Firstly, insofar the energy transition requires of investment, there will be costs to recoup, regardless whether the balancing price in the electricity wholesale market continues to fall as the percentage of renewable energies in the generation mix increases. For example, the update of the Spanish Energy & Climate Comprehensive Plan (PNIEC 2021-2030) shows that the average marginal cost of the electrical generation may fall 30% by 2030 in the reference scenario. It will probably give rise to a lowering of the average electricity price in the wholesale market. PNIEC foresees investments beyond 240,000M€ between 2021 and 2030, of which almost 200,000M€ −around 20,000M€ a year− are additional investments in comparison to a scenario with no additional regulations as the ones foreseen by PNIEC. These investments will cover the whole electrical energy chain value, from generation to the electrical grids and consumption, and new uses of electricity such as electrical vehicles, as well.

The so-called energy transition entails, ultimately, the decarbonization of the economy. It is a long-term and profound process that will take several decades. It must be carried out always considering that targets must be achieved with the available resources. So, social well-being must be taken into account and design cost-efficient regulations, strategies and lines of action in the short, medium and long term.

To make progress in a successful transformation process of the energy system, a stable regulatory framework must be guaranteed. It must generate incentives to R&D investments, with regulatory schemes allowing the distribution of risks between companies and consumers. A reform of the energy and environmental tax system should also be carried out −by the principle you contaminate, you pay− without risking the competitiveness of companies and the economy.

On the other hand, consumption alternatives must be promoted to reduce the impact on companies and final consumers of the foreseeable increase of pollutant fuels and stablish mechanisms to support and compensate those who are most affected by these changes. This kind of measures form part of the strategy for a fair transition and can include from protectionist measures of the European industry −for example: import taxes depending on the environmental regulations of the country of origin− to schemes to prevent and mitigate energy poverty. This kind of measures will facilitate the agreement of politicians, economic actors and citizens in general on the need and advisability to implement, the sooner the better, a deep programme to transform the economy.

There will be several key factors to minimize the impact of all these changes in the competitiveness of companies and of the economy in general, so they will be able to take advantage of the opportunities that the transformation of the energy system will generate and develop sustainable competitive advantages in value chains and other sectors. On one hand, basic and applied R&D activities should continue to be promoted and, above all, boost the transfer of knowledge to companies to industrialize and market the new technologies and solutions.

Companies should innovate their production chain, technologically and not technologically speaking. To do that, they must set up and promote a culture based in the adoption of new digital technologies. Concepts such as eco-design, life-cycle analysis, process efficiency, the digitalization of the manufacture processes, logistic and general operations and the use of new analysis and data management tools to monitor and control processes will increase both the companies’ technical and financial efficiency. Innovation should not only adhere to materials, products or production processes, but also it could give rise to new business models based on concepts such as servitization that, through the transformation of revenue and costs structure of companies, could create competitive advantages and even new markets.

Moreover, other factors that will contribute to protect the competitiveness of companies and the economy could be the reinforcement and consolidation of an internal demand for products and services related to the energy transition −renewable generation, energy efficiency, power electronics, sustainable mobility−, also the creation of human capital specialized in key areas for the energy transition and find synergies between training-research-company.

Finally, it would be basic to start efficient financing mechanisms, so companies can carry out the necessary investments without losing their capacity to compete in the markets where they are present. Some of the ways to make the transformation of productive processes easier for companies could be to innovate in private-public financing schemes, to develop new tax and green financing tools for small and medium companies or to create tax mechanisms to support start-ups.

Do the present energy and climate strategies consider specific economy aspects?

For the last fifteen years, European Union energy and climate strategies have been defined considering quantitative targets related to the reduction of greenhouse gas emissions, energy efficiency and the degree of penetration of renewable energies in the production and consumption of energy. Since the establishment of targets for 2020 (20-20-20 strategy) and, now, for 2030 and 2050, different sectorial and multi-sectorial strategies have been developed, with no clear connection among them.

Recently, the European Commision has published the European Green Deal −COM2019 640, 11th December 2019−, a roadmap for helping the energy sector and the economy to reach the energy and climate targets in the next decades.

The European Green Deal is a package of measures created to achieve a fair and equitable transition towards a sustainable energy and financial system. It presents a roadmap to develop different policies, legislative measures and actions plans. All together they constitute a new growth strategy for the European Union. They strongly focus on circular economy, with the target to become a climate neutral continent by 2050. The measures and plans for the period 2020-2021 include a new European Climate Law, an industrial strategy, a circular economy action plan, a new directive on the energy tax system, an investment plan for a sustainable Europe, a sustainable food plan −From Farm to Fork−, a biodiversity strategy, an ecological financing strategy, a Mechanism for a Fair Transition, a Climate Pact, a mechanism to mitigate carbon escape, a smart sectorial integration of renewable energies and energy efficiency, a sustainable & smart mobility plan or a zero-pollution plan.

The scope of this plan is very ambitious. The European Green Deal covers all the economic sectors, mainly transportation, energy, agriculture, construction and industries such as iron & steel industry, cement factories, IT, textile and chemical product companies. Specifically, measures announced cover the following fields: (1) development of clean energy sources, (2) transition to a sustainable industry, (3) efficient building and renovating, (4) sustainable mobility, (5) protection of ecosystems and biodiversity, (6) development of a sustainable food chain and (7) eliminating pollution −from air, rivers, seas, lakes…−.

The application and implementation of all measures included in the European Green Deal will have a very significant impact on the competitiveness of the economy of all EU members and European regions and wants to help European companies to capitalize the numerous opportunities that the energy transition will generate.

What macro and microeconomic opportunities can the energy transition offer to Spain?

The macro and microeconomic opportunities derived from the energy transition will be related to the possibility and capability to develop long-lasting competitive advantages in fields such as the economy, value chains and activities where the capabilities and gathered know-how of the energy and industrial sector can be put into practise.

The main strengths of the Spanish economy to face the transformation of the energy system are the energy infrastructures, innovative control centres −CECOEL, CECREs−, large renewable energy resources −onshore & offshore wind and solar energy−, business leadership in all segments of the energy sector, a specially strong position in international markets in specific value chains such as renewable energies or power electronics, a powerful automotive components & vehicle assembly industry and an IT sector with knowledge on the development of innovative applications and solutions for the energy sector.

So, areas of special interest to develop competitive business niches could be smart grids and distributed energy resources −self-consumption, storage, EVs integration, etc.−, the consolidation in international markets of value chains associated to renewable energy generation −wind, PV and thermosolar−, the development of energy storage solutions −stationary and for mobility applications in industrial sectors−, a greater specialization in energy efficiency, both in households −smart buildings, zero-energy buildings− and industrial sector −new processes and fuels, etc.−. Another example is the sector of the new sustainable mobility where the automotive components and vehicle assembly industry must find its place in niches related to electrical vehicles, recharge points and development of V2G and V2B solutions , as well as, in the field of new fuels such as natural gas, LNG or hydrogen −in the long-term−, fields where the industry can be competitive and contribute to reduce GHG emissions of the transportation sector.

Other interesting areas are related to new technologies and data management, for example, the new services for energy consumers and mobility −from the management of energy equipment, prosumers that participate in the market or the servitization of mobility and other sectors−, the development of digital services and solutions for consumers −sensors, communication, data analysis, cybersecurity, management and control tools, blockchain, etc.− in sector such as circular economy, industry 4.0, the service sector, etc.

From a macroeconomic point of view, there will be a significant impact. The 240,000M€ investments foreseen by PNIEC for the next 10 years in fields such as energy efficiency and saving, renewable energy, grids and electrification and other measures taken in the mobility sector may have a great impact. For example, regarding the baseline scenario,  it is foreseen an increase of the GDP in 16,500-25,700M€ a year −up to 1.8% of the GDP by 2030−, a net increase of 250,000-300,000 jobs −up to 1.7% of the employment by 2030− or 70,000M€ of accumulated savings in the costs of fossil fuel imports between 2021 and 2030.

Jorge Fernández

jreneses

Jorge holds a PhD in Economics by Georgetown University −Washington DC−, he has broad experience in the energy sector. Now, he is senior researcher and coordinator of the Energy Area at Orkestra where he works in subjects such as energy transition, sustainable mobility and several issues related to energy and environmental regulation, markets and technology and the relationship of energy and territorial competitiveness.