Phase-2 National Allocation Plans: Will they bolster Sustainable Energy Technologies?
By Thomas Bouquet, Cogen Europe
January 2007

Sustainable Energy Technologies (SETs) cover a range of different technologies: renewables-based electricity and heat generation technologies such as small-scale hydro, photovoltaics, biomass-based boilers, but also energy efficient technologies such as cogeneration (i.e. combined heat/cooling and power). These technologies have all received the support of the European Union and most Member States through a variety of supportive legislative and regulatory initiatives.

The European Commission has been very open about the fact that it wishes to use the European Emissions Trading Scheme (ETS) in order to help improve the penetration of low emitting technologies and processes. Its string of (tough) decisions on Member States’ phase-2 National Allocation Plans (NAPs) has reinforced the perception that current practices will have to change.

The ETS only covers the larger industrial and power producing sites in Europe , and most notably those with a rated thermal input in excess of 20 MW. The managers of the 12,000 installations in the ETS scheme are now faced with an additional challenge: that of reassessing their processes in order to best adapt to the costs incurred by participation in the ETS.

Phase-1 did not give incentives

While ETS installations under phase-1 were not strongly incentivised to implement innovative technological solutions to diminish their carbon emissions, the situation is likely to be different under the phase-2 of the ETS (2008-2012).

Several factors have made investments in sustainable energy technologies a marginal option for companies so far:

• In most case installations under phase-1 got more allowances than were needed to cover emissions (resulting in a 2005 over-allocation calculated at circa 78 million allowances);
• Phase-1 was only a 3-year period, and did not give the long term visibility needed for SET investments;
• Prices of European Emission Allowances (EUAs, corresponding to a tonne of CO 2) have been very volatile (ranging from near 30 EUR to under 4 EUR) so far and have not sustained levels that would drive investments in SETs;
• SETs are relatively high in the merit order of industrial process improvements, with a potential for energy efficiency improvements with better payback periods yet to be fully tapped into.

Phase-2 can make a change

Phase-2 (2008-2012) opens a new, longer period, more adapted to the scale of investments necessary for SETs to make a significant contribution.

In addition, the Commission’s decision to put an end to over-allocations at the national level will result in a scramble for emission abatement opportunities, whether on-site or through Kyoto protocol project activities (especially Clean Development mechanism Projects, which already generate 112 million Certified Emission Reductions on an annual basis). A side-effect of this new situation is that the price of emission allowances ought to be sustained throughout the period, especially since aviation, a sector with a net short position, will be included as of 2011. EUAs for phase-2 currently trade in the 16-18 EUR range, and have been relatively stable over time.

All these factors combine to paint a picture in which SETs stand to make an important contribution, whether in Europe at ETS host sites, or in developing countries through the Kyoto-based project activities.

Cogeneration and small-scale renewables

Given that European ETS host-sites are generally large industrial sites with high demand for high-grade heat, the SET options are often limited to cogeneration (including biomass-fired cogeneration). This mature technology already makes a significant contribution to lowering Europe's CO₂ emissions and the Commission wishes to harness the ETS in order to promote the technology further.

Other SETs, such as small-scale renewables, also have a role to play. They can help meet part of the buildings’ electricity and/or heat loads and have potential well beyond the confines of ETS installations. They are also an integral part of a company’s corporate social responsibility strategy.

Renewable-based SETs already play a very important role in CDM and JI project activities and hence the ETS can be seen as indirectly driving demand for these technologies.

However, if the ETS is to become “the main market based mechanism by which necessary incentive for investment in mature low carbon technologies is provided” [High Level Group on Competitiveness, Energy and the Environment, 2nd report, October 2006], European Member States will have to be creative in the redrafting of their phase-2 National Allocation Plans.

With lots of pressure on national administrations both coming from the Commission and from national industries, it is important that those companies investing in SETs be rewarded. For a combustion-based technology such as cogeneration, this means ensuring that the cogeneration installation receives enough allowances to cover its needs: anything short of this would indicate that the ETS still suffers from serious design flaws.