Europe Will Struggle to Raise Decarbonization Cash, IEA Says

The European Union will struggle to finance the decarbonization of its economy and keep power and gas prices low enough to retain energy-intensive industries, according to the International Energy Agency.

The bloc needs to boost prices in its emissions market, the world’s biggest, and introduce policies to attract “critical” investment in low-carbon technologies, the IEA said today in its review of regional energy strategy. The EU faces the challenge of coordinating nations’ own emission-reduction policies and subsidies that counter lower energy prices, the review showed.

“We should not overpromise on short-term carbon markets,” Maria van der Hoeven, the Paris-based agency’s executive director, said at a press conference in Brussels. “The EU emissions-trading system alone is not sufficient. Sector-specific policies to remove non-economic barriers are needed to boost investment in low-carbon technologies -- that is, nuclear, carbon capture and storage, and renewable energies.”

High energy prices are threatening the bloc’s role as the world’s largest exporter of manufactured goods and services, while emerging nations and the U.S. are projected to boost their export market share, the IEA said. Europe needs to track all energy subsidies and reduce “distortive impacts” of public intervention and cut power costs to less than the 40 percent above U.S. levels as of last year, it said.

40% Goal

The EU set a goal in October of cutting greenhouse-gas emissions by 40 percent for 2030 versus 1990 levels.

The region needs 120 gigawatts of new baseload generation in the next decade, 1.6 times the U.K.’s total existing power capacity, according to IEA estimates. About 150 gigawatts of capacity will be retired in the period and lawmakers need to find ways to attract the $2 trillion of power-plant investments needed in Europe through 2050, the agency said last month in its annual World Energy Outlook report.

“The variety of EU-wide and national instruments employed to meet climate and energy objectives has brought about challenges and unintended results,” such as higher greenhouse gas output from coal burning, the agency said. “The challenge remains of co-ordinating and raising significant EU funding.”

Fossil Fuels

EON SE, Germany’s largest utility, said today it will break itself up, spinning off fossil-fuel power plants into a separate company to focus on renewable energy. The decision “could set a blue print for other utilities” including German rival RWE AG, analysts at Sanford C. Bernstein & Co. led by Deepa Venkateswaran said in a note today.

The EU’s experience using revenue from carbon allowances to fund “a small number” of capital-intensive projects “has illustrated the need to leverage large-scale funding at EU level, to increase risk guarantees and to design appropriate policy instruments to remove technology barriers and risks,” the IEA said today.

There’s a need for “new financial instruments, and other tools for encouraging private and public co-financing,” as well as systems to monitor contribution of research and deployment efforts to competitiveness, innovation and energy and climate goals, according to the agency.

New financial incentives are “even more important” in light of plans by EU leaders to create new funding methods for the bloc from auctioned allowances, the IEA said. Carbon permits need to trade at about 40 euros ($50) a metric ton to encourage spending on clean energy, it said. The contracts were at 7.08 euros on ICE Futures Europe in London at 2:59 p.m. today.

“The trade-offs between public intervention and competitive markets should be reconciled by ensuring that public intervention is cost-effective and least distortive,” the IEA’s van der Hoeven said.

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