Oil & Gas Q3 2023 Insights
In September 2013 the Dutch government, together with dozens of organisations and interest groups, signed the Dutch Energy Agreement (in Dutch: Energieakkoord) which holds the energy ambitions and targets up until 2023. Since then discussions around the Energy Agreement pop up almost daily.
The debate around how we should organise our energy sources, productions and consumptions seems livelier than ever. The attention for the newly shaped policies and targets is not only increased because of the geopolitical developments, ‘The Breakthrough Energy Coalition,’ the COP 21 (climate conference in Paris) and the challenges around gas production in the North of the country. Besides that, the Netherlands is lagging behind in the European benchmark to reach its goals (see figure 1). Where does the Netherlands stand today with the intended targets and ambitions? Which topics are still debated and why?
The Energy Agreement 2013 is a plan that reflects the ambitions and strategy for the energy transition from 2013 until 2023 in the Netherlands and includes clear targets and a high level roadmap. The fundamental objective is to strengthen the economic structure hand-in-hand with cleaner energy sources (and lower CO2 emissions) through heavy investments in renewable energy such as wind and solar. The main goal of the plan is to increase the share of renewable energy as part of the total energy mix to 14% in 2020 and 16% in 2023. This goal was also aligned with the European Commission.
In order to evaluate the quality and effectiveness of the agreement, it would be advisable to understand the general reasons for not achieving the goals of previous energy plans.
Considering the points above, the Energy Agreement appears to have the ingredients to gain more success and change than previous years. The remaining question is, how successful is the execution so far?
An important component of the agreement is the so-called SDE+ (In Dutch: ‘Stimulering Duurzame Energieproductie’) subsidy arrangement. The SDE+ arrangement stimulates renewable energy generation and is the agreement’s associated financial instrument to stimulate renewable energy initiatives by taking away financial barriers. The primary target groups for SDE+ are companies, farmers, local governments and energy companies. Table 1 reflects on the type of projects that have been started because of the SDE+ fund in 2014 and 2015.
After two years of SDE+, one can draw the following conclusion: the SDE+ arrangement is not expected to contribute to renewable energy production as anticipated according to a study by the Dutch Court of Audit (in Dutch: ‘Algemene Rekenkamer’) and several other studies. The expectation is that the a renewable energy share will be achieved of 12,4% (instead of 14%) in 2020 and 15,1% (instead of 16%) in 2023. Besides projects being cancelled or delayed, another reason for not reaching the target is that the renewable energy output is in practice on average 26% lower than estimated.
According to the responsible Minister (of Economic Affairs) the emphasis for next year will be on the dialogue with all stakeholders to evaluate the Energy Agreement and come to the necessary adjustments of the Energy Agreement due for implementation in 2017. For 2016 the budget will almost be doubled to €8 billion. The total amount of subsidies accepted since the start in 2011 adds up to more or less €13.2 billion.
Every year will be evaluated what the new budget will be, based on the expected costs of the proposed projects. A study from ECN (the Dutch Energy Research Centre) shows that under the current conditions, goals and agreements, a total subsidy amount of €58,9 billion will be needed.
There is a good chance the strategy will be adjusted in order to reach the targets. Up until now, no new scenarios have been communicated, except for adjustments to the SDE+. The subsidy will be coupled to the energy prices and the SDE+ allowances will be cancelled as soon as the Day Ahead prices will be negative for six consecutive hours.
Possible options sketched by the Dutch Court of Audit are as follows.
1. Support projects abroad that (are expected to) generate more renewable energy output
2. Financial incentives for alternative energy solutions and demotivation of fossil fuels
3. Do nothing and fill the gap by buying the surplus of renewable energy from other EU countries
4. An additional capital injection of €12.8 billion in wind parks
Looking at the reactions from the Minister so far, it seems likely that the last point above will be
addressed given the fact that wind energy is a key focus area of the Energy Agreement. Therefore, the Minister is not willing to radically change the strategy with respect to the aim for continuity.
While solar energy was subject of discussion in 2014, this year the discussion is about wind power. Besides the fact that most of the SDE+ budget over 2011-2015 was spent on wind power projects, the government also invests in wind parks as a separate project. Extra capacity is required as the total wind power generation established through SDE+ by 2020 is not expected to bring enough megawatts of renewable energy to reach the 2020 goal, according to the government. The extra wind parks should contribute for 2,5% of the total share of renewable energy and are expected to cost €5 billion. A total of six offshore wind farms will be tendered.
Although the wind is a clean, renewable energy, the ‘wind mill chapter’ from the energy agreement has many opponents. Besides the fact that no one likes to look at a windmill in their backyard, the main reasons for their disagreement on the heavy investments in wind mills are summarized below.
Opponents say that the government is blindly focusing on the goals, no matter the price, and question if the government follows a transition towards sustainable energy production taking into account security of supply and a reasonable price for consumers and companies. The latter is likely to be negatively influenced by another decision from the energy agreement which has fuelled the debates about national energy recently: the closure of our old coal power plants, and in the future potentially also the newer plants.
Although coal has been a cheap and stable energy source for decades, it does not fit in a clean-energy economy according to many opponents who recently stood up against coal power plants in the Netherlands.
As part of the energy agreement, the closure of the five least efficient coal power plants has been set in motion, since coal-fired electricity generation is associated by high CO2 emissions. In 2016 three coal power plants and in 2017 two others will be shut down. Initially the Dutch Authority for Consumers and Markets (ACM) did not approve this decision. According to the ACM the Energy Agreement is a cartel agreement. ACM motivated that the disadvantages (a loss of 10% of the energy production capacity) would not offset the environmental benefits.
As a result the Minister introduced minimum efficiency standards, which remain in line with the goals in the Energy Agreement, and at the same time requires heavy investments from the owners of affected generations units to meet those requirements. This was the motivating trigger for the power plants to close in 2016 and 2017.
The Minister insists to keep the remaining coal power plants open. First of all because the new plants meet the new requirements. Secondly, closing the new coal plants would be a destruction of capital invested (around €5,6 billion). On top of that, it leads to a risk that the Netherlands will have to depend on other European countries. Additional energy needs to be bought elsewhere and the countries with a surplus may offer even ‘dirtier’ energy from old coal plants. Furthermore, the coal power plants also serve a renewable purpose: burning biomass.
The SDE+ subsidy has been made available to accelerate the output of renewable energy sources. Wind, solar and biomass are the biggest components of the renewable energy share of which the output will probably not be enough to reach the 2020 and 2023 goals. Focusing on the years ahead, the Minister expressed in a letter to the Senate in December 2015 that in his view the share of current renewables will decrease because of an increase in the diversity of technologies thanks to SDE+.
This view is not in line with the budget for innovation projects to stimulate competition in technologies and cost reductions. Investments in innovations (e.g. energy storage and generation) and start-ups are kept relatively low. In 2015 the budget was 17 million.
It is announced that until March 2016, 50 million euros will be made available for innovation projects in 2016 under the so called ISDE arrangement. ISDE will also be made available to further drive renewable energy production from small installations such as sun boilers and heating pumps for consumers and businesses. A budget of 70 million will become available in 2016 including extra budgets for the years 2017 till 2021. Other alternatives to stimulate innovations such as setting up partnerships with companies and universities (abroad) or providing attractive financial arrangements for SMEs are not part of the plan. The Dutch Council for Environment (RLI) invigorates the above by recommending that long term innovation programs and a budget of 200-300 million are necessary. The key recommendation of their report is to introduce a Climate Change Act.
The U.K. was the first country with a legal climate act in 2008 and since then Finland and Denmark followed. As the content and implementation of the Climate Act of the countries differ it is too early to assess the results of the Climate Change Act. Nevertheless, the most important argument in favour of the Act remains. Besides the symbolization of commitment to the climate, the Act can help to overcome the tendency of political and electoral systems to favour short-term approaches by putting a long-term framework into legislation. This relates to one of the classic problems of ensuring consistent policy and rules as addressed in the introduction.
A Climate Act Concept has recently been published by the PvdA and Groenlinks (two political parties in the Netherlands). However, the party in government is not convinced. The goals stated in the concept are too ambitious and subverts a consistent roll out of the current Energy Agreement. The question may be the time span for the governmental party to hold back from an Energy Agreement coupled to a Climate Act.
The momentum is there to take drastic measures in order to not further drift away from the targets. Previous plans have shown the pitfalls, but most importantly the awareness from consumers and world leaders is there.
The Dutch government will do everything in its power to meet the goals for 2020 and 2023. In the first place because agreements have been made on national and European level. Secondly, the climate agreement that has been signed recently will bring more emphasis on the national energy plans. The collective, key target agreed on the COP 21 is to limit the increase in average world temperature to 1,5 degree Celsius by 2050.
Critics argue that the Dutch energy agreement is not well-considered to shift towards a sustainable environment in a responsible way. According to them the Dutch inhabitants will soon pay the price since subsidy is largely spent, for example on wind mills while their energy output remains low and their costs are relatively high. Nevertheless, from 2016 onwards a side-path to the current roadmap will be opened-up, which will likely contain the following topics to be further elaborated.