July 27. 2021. 1:14

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Rugby, and the art of regulating energy in times of uncertainty


A recent decision by the Belgian energy regulator offers an unexpected analogy with the way rugby rules were rewritten to favour try scoring and greater entertainment for the fans, write Dominic Scott and Bram Claeys.

Here’s an analogy you weren’t expecting: Regulating energy is, surprisingly, much like regulating the sport of rugby. Regulators in both areas contend with challenges from a number of fronts. Rugby “regulators” have had to, over time, adapt the game to please players, fans and sponsors to keep the sport viable and entertaining. Energy regulators are also in the game of adaptation, especially with global leaders competing again for the highest climate and energy ambitions.

The International Renewable Energy Agency estimates investments in the energy sector of around €4 trillion annually are needed between now and 2050 to have a fair chance to keep global warming below 1.5°C above pre-industrial levels. However, investors need a sense of direction of where to put their money exactly.

Unlocking these investments hinges on far-sighted policy decisions and signals that investors can literally bank on. This is not, however, an easy task. Policy makers face multiple challenges. They need to use science-based, objective information to design robust policies that embody multiple important dimensions: climate protection, cost optimisation, social fairness and the like. At the same time, they are not starting from a blank page. Vested interests and inertia can impede timely and effective decision-making. And the long lives of decisions that impact infrastructure build can leave consumers or taxpayers footing the bill of bad decisions for decades.

Cleaning up energy is like updating the rules of rugby

For a moment, let’s jump back to our rugby analogy. As kicking abilities in the rugby union improved, the sport became dominated by point scoring with long-distance kicks through the upright posts. This made it a lot less entertaining. The “regulator” stepped in to enhance the prize of scoring a “try” (like an American football “touchdown”) – the far more entertaining alternative way of scoring points. Analysis suggests this led to more tries being scored.

A bit like how, in decarbonisation, decision makers introduce a tax on carbon emissions or a clean energy portfolio standard to enhance the attractiveness of clean alternatives to fossil fuels. This aligns the interests of market competitors with the objective of decarbonisation.

This is the risk in setting energy regulations and policies – that decision makers accidentally “pick a winner” and tilt the playing field in favour of a team that may not deliver decarbonisation at least cost. Regulatory decisions should clearly present the “rules of the game,” and make sure that rule changes or new decisions go no further than required to align the interests of market competitors with those of society.

We look at two examples where regulators are struggling, with the risk of losers being you, me and the battle against climate change.

Belgian authorities pick carbon capture as winner

In Belgium the government is preparing a capacity market in anticipation of the 2025 nuclear phase-out. While the capacity market is in principle technology neutral, most observers expect new natural gas power plants to compete for multi-year contracts in the opening auction this autumn. This raises concerns over the compatibility of new fossil-fuelled generation with increasing climate ambitions.

Against this backdrop, the Walloon regional government in March upheld a decision requiring the power plant to capture 30% of its CO2 emissions on one of the proposed power plants. The track record of carbon capture and storage has been far from stellar, however. There are no full scale commercial projects in operation while alternatives like renewable gases gain traction. This permitting decision thus runs the risk of not being “future-proof,” potentially leading to wasted expense.

It may be more prudent to marry the justified concern about CO2 emissions of power plants with a more generic requirement to effectively eliminate those emissions without singling out one particular technology. This is seemingly what the Belgian energy regulator CREG tried to achieve in its May publication of the capacity market rules. A new provision requires fossil gas power plants to submit a plan to go climate neutral by 2050. But this does not add much to the existing European goal to be climate neutral by that date. We expect the power sector will actually have to lead other sectors and be zero emissions in the 2035-2040 timeframe. The Spanish government is in that sense taking a more interesting direction in designing a new capacity mechanism: any new power plant will have to be zero emissions in order to receive a contract in the auction.

Hydrogen in the gas distribution network is a gamble with family heating bills

In a similar vein, it is important to keep options open when thinking through how to get fossil fuels out of building heating. Policy makers are actively being seduced into thinking that replacing dominant natural gas with green gas is the way to go. Keele University in the UK for example is blending hydrogen in the gas network to try decarbonising heating “without customers needing to change their gas appliances or behaviour.”

Obviously a very tempting proposition. But as we argued before, the available evidence indicates hydrogen in home heating has no significant future in an affordable mix of energy service choices for a decarbonised economy. And it would most certainly exacerbate energy poverty.

A much more future-proof heat decarbonisation approach is first to address the many barriers to energy efficiency. Then correct price signals by rebalancing energy taxation, combined with generic support for low income families to switch to clean heating.

Inspiring good practice

There is fortunately no shortage of examples of good practice, where decision-makers have ensured all technologies compete on a level playing field.

Recognising the risks to technology neutrality and fair competition for imports presented by the growing trend of Member States towards capacity mechanisms, the European Commission has issued a checklist of reforms to address capacity adequacy concerns as well as principles for capacity mechanism design.

And Austria recently announced a phase out of coal and oil heating by 2035, and natural gas by 2040. Without picking winners, this decision removes technologies that are inconsistent with the objective of decarbonisation. Much like how in rugby reforms attempt to protect player well-being, by sanctioning players who commit dangerous tackles, thereby lowering concussion rates.

Keeping a level head

Policy makers need to and can avoid the risk that their decisions tilt the playing field. In the implementation of capacity mechanisms, policy makers can assiduously apply the neutrality requirements of the European Commission, noting that the best option may entail steering clear of a capacity market in the first place. Across Europe, policy makers can resist making premature commitments to hydrogen networks for heat at the expense of likely cheaper and more equitable options, such as heat pumps.

For bodies making the rules and referees keeping score, applying the “future-proof” test to decisions will ensure the game is fair in the drive towards the goal of decarbonisation. And that surely means everyone is a winner.