Building a modern energy system that can tackle the policy goals of providing  secure, affordable and  environmentally sustainable energy comes with an enormous price tag. 

The International Energy Agency, an international think-tank on energy issues based in Paris, estimated in its 2012 World Energy Outlook that the European energy sector will need €1 trillion of investment by 2020 and €3 trillion up to 2030. That figure covers both infrastructure needs and the costs of ensuring sufficient generating capacity for the decade ahead.

The European Commission said in its report on an energy roadmap for 2050, which was published in December 2011, that grid investment costs alone could be in the range of €1.5 trillion-€2.2 trillion for 2011-50.

While European energy prices are currently high (and much higher than in the US), the electricity sector is warning that the investment environment for the energy sector is harmed by uncertainty. A report produced in December 2012 by Eurelectric, the trade body that represents the European electricity sector, warned of severe problems facing investment in the industry. “Powering Investments: Challenges for the Liberalised Electricity Sector” quoted 44 out of 45 energy leaders surveyed saying that they did not believe that the necessary investment would take place. The more negative perspective of those surveyed said that as little as 20% of the investment needed would be forthcoming, with the most optimistic putting the figure at 80%.

Eurelectric’s report cited deterrents to investment decisions including higher borrowing costs because of the eurozone’s sovereign-debt crisis.

Policy uncertainty

The biggest problems identified by the report were policy uncertainty and a lack of co-ordination between EU and national energy policies. In addition, Eurelectric says that there is a tension between the three aims of EU energy policy – security of supply, ensuring affordable prices, and cutting greenhouse-gas emissions.

Rather than trusting the market to find the most cost-effective solutions, policymakers succumb to the temptation to intervene, engineering such outcomes as shielding consumers from price rises. “Both European and national policymakers tend to intervene in a somewhat stop-and-go fashion, completely disregarding the long-term need for clear, effective, consistent and supportive frameworks that are conducive to investments,” the report says.

Eurelectric calls on policymakers to provide policy and regulatory stability and to reduce discretionary measures that national governments take to influence energy markets.

In particular, the electricity sector wants the EU to set a single target for the energy sector for greenhouse-gas emissions for the post-2020 period and remove a separate target for the share of renewables in the overall energy mix. This would allow the sector to find the most cost-effective means of achieving the target for reducing greenhouse-gas emissions.

Eurelectric says that creating a predictable policy framework would help utilities to finance their investment plans, and would attract funds from pension funds and insurance companies, which should be interested in long-term projects with predictable revenue streams.

As the EU steps up work on the energy and climate policy that will apply after 2020, a major concern will be finding the best way to ensure that the massive investment needs of a modern and well-functioning low-carbon energy sector can be met.