Paris deal pushes power sector towards decarbonisation

31 December 2015

Implications for the power industry of the Paris climate change summit in December.

The European power industry has welcomed the outcome of the international climate change negotiations in Paris, which has pledged significant changes and challenges for the power generations sector.

The agreement on December 12 of the 21st session of the Conference of the Parties (COP) to the UN Framework Convention on Climate Change ('COP21'), calls on all nations to hold the increase in the global average temperature to well below 2°C above pre-industrial levels, and commits the 195 signatories to pursue efforts to limit the temperature increase to 1.5°C. Other measures include pledges to peak greenhouse gas emissions as soon as possible and achieve a balance between sources and sinks of greenhouse gases in the second half of this century; to review progress every five years, along with a robust transparency and accountability system to track progress towards long-term goals; and release USD100 billion a year in climate finance for developing countries by 2020, with a commitment to further finance in the future.

“We were pretty pleased with the way things turned out ... but the proof will be in how this is implemented," said James Watson CEO of industry association SolarPower Europe. "The agreement made clear commitments to use solar to power much of the landmass between thetwotropics,skippingtheneedformanyof them to develop [large] power stations."

Eurelectric also welcomed the deal: "We expect the Paris agreement to lead to a robust global climate change regime which considers national commitments in a dynamic way," said secretary general Hans ten Berge.

The end of coal?

This could well mean more pressure to abandon coal as a power source. According to the International Energy Agency, the world energy system accounts for two thirds of human greenhouse gas emissions. And coal, which is twice as polluting as natural gas, supplies 41% of the world's electricity and 30% of its overall energy needs, according to analysts Enerdata.

And the implications of the Paris deal for the power generation sector are undoubtedly considerable, with funding expected to be released for research into renewables. Article 2 of the Paris accord calls for funding for new technology in developing countries through 'finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development'. The IEA has forecast that the energy sector will need to invest USD13.5 trillion in energy efficiency and low-carbon technologies between now and 2030, at an annual average of USD840 billion. This, it says, is the cost of implementing the collective national pledges for cutting carbon submitted by all parties to the Paris accord.

And while this is a lot of money, at least the Agreement indicates how much needs to be spent, said Koen Noyens, manager for generation, climate and environment at Eurelectric, who welcomed the deal's "robust and transparent regime that includes commitments from parties". He explained: "This is of crucial importance for investors, who have been calling to have a stable, transparent and predictable framework in place. A lot of new investment will be needed, not only in Europe but around the world. The framework provides a clear signal to investors to invest in low-carbon technology and they will be more likely to do so in line with the long-term objectives."

But governments need to implement these commitments to build the necessary confidence, said Watson. "Governments have said this is something that private finance needs to take up, and we do need the finances to come in" - but regulators have to play their part. "The only danger is regulation, every technology in the energy generation sector depends on regulation. It requires good legal governance and willpower. There are some difficult times ahead, there needs to be a just transition."

Developing countries

A chief concern for energy generators in developed countries has been the extent to which developing nations had to make commensurate commitments. Richard Baron, adviser at the Organisation for Economic Co-operation & Development round table on sustainable development, said that complaints of an unfair playing field now had less validity. Article 4 of the Agreement says that all parties will aim to reach global peaking of GHG emissions as soon as possible, but recognises that peaking will take longer for developing countries. Article 4 also calls on all parties 'to pursue domestic mitigation measures'. "It's a line that's going to be harder to defend," he said. "China wants to have its own emissions trading system running by 2017, but is now going to think twice before it builds more plants. Much of its production model is built on coal, and that is very intensive."

Noyens agrees that the Paris accord addresses many of the concerns about a level playing field for Europe with regard to other parts of the world. "We wanted a clear recognition and a clear role for carbon pricing mechanisms at the global level which we see as very positive outcome. Now there is a recognition for using carbon pricing mechanisms across different geographical entities - linking them could unlock significant opportunities by driving further emission reductions, reducing compliance costs and competitiveness concerns. But that must be underpinned by a robust accounting process."

The Paris agreement includes several provisions that will allow parties to co-operate in meeting their mitigation commitments as well as provisions for the establishment of a mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development. The accord endorsed an enhanced emissions trading system (ETS) in the European Union, and a restructuring of the UN's Clean Development Mechanism (to be called the Sustainable Development Mechanism), which may allow the power generation companies to offset emissions by funding compensatory schemes in developing countries. Article 5 of the accord calls for 'policy approaches and positive incentives for activities relating to reducing emissions from deforestation and forest degradation, and the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries.'

“The industry has to be part of the agreement," said Baron. "By the end of the 21st century we need a zero balance of carbon. Whatever emissions remain they are going to be equalled by sinks in the system, maybe forestry or other mechanisms, to remove CO2 from the atmosphere."

Carbon price

Putting a price on carbon was essential for success in the international response to climate change, according to senior economists. Pricing carbon was "not the only thing, but a necessary thing," said Rachel Kyte, special envoy for Climate Change at the World Bank Group. "We have to take carbon pollution out of our growth model. That entails energy policy reform, energy subsidy reform and putting a price on carbon."

Environmental campaigners believe there is less 'wriggle room' in the final Paris agreement and that issues such as 'double counting' - where eg a tropical forested country reports to the UN that emissions from deforestation have been reduced through an investment, while a developed country does likewise in relation to the same project. They point to article 6 which calls for 'environmental integrity, transparency, including in governance, and [parties] shall apply robust accounting to ensure the avoidance of double counting.'

Supporting events

Meanwhile, the transition away from fossil fuel generation was reinforced during the Paris conference by separate developments, including the launch of a Global Geothermal Alliance, which has formed an action plan by 36 countries and 23 member institutions to increase the installed capacity of geothermal power generation by 2030. Meanwhile, a Global Solar Council was launched to bring together regional and national solar associations to share best practices. A Terrawatt Initiative was also announced, calling for 1 TW of additional solar power capacity by 2030, which would represent an additional USD1 trillion of investment in solar power infrastructures.

However, Noyens acknowledged that just how a for-profit market based almost exclusively on renewable energy would function will take some time to work out. "We are evolving towards a power sector that is increasingly based on fixed costs along the whole value chain," he said. "The challenge ahead of us is to create a holistic market design that delivers the diverse set of technologies needed for a balanced low carbon energy mix and that adapts to the evolving economics of power systems.

"Only the combination of an effectively reformed EU ETS and an improved EU electricity market design can lead to proper price signals from the relevant markets - carbon, energy, flexibility and, where applicable, capacity - to drive investments
in low carbon technologies."

Baron believes the power generation sector will still find the challenge easier to meet than other sectors, such as steel. "The power generation sector has got the means to completely decarbonise ... they can move to a zero-fossil fuel power generation in a matter of decades. They may not like it, but they can do it, it's straightforward."


Author: Mark Rowe


(Originally published in MPS January 2016)

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