Fortum views on EU post-2020 target setting and decarbonisation

The European Commission has presented in the Energy 2050 Roadmap (December 2011) various scenarios outlining the consequences of a carbon-free energy system and the policy framework needed to reach the established long-term target of reducing CO2 emissions by 80% - 95% below the 1990 levels by 2050. Fortum welcomes the Commission's aim to launch a discussion on longer term targets and policies already now. Especially the policy framework for 2030 should be established as soon as possible, but the pathways for 2040 and 2050 should also be discussed. Due to the long investment cycles of the energy sector, it is important to get clarity also on the longer term milestones. Policy uncertainty is a key risk for investors.

Although the discussion is now moving towards outlining the future EU energy and climate policy framework, it is important to keep the focus on the implementation of existing commitments. Policies can only deliver when they are implemented properly.

Fortum is of the opinion that:

• Year 2020 (up to which the EU has binding targets) is very close, especially taking into account the amount of new investments and changes in the energy production capacity that will be needed. Therefore the focus should now be put on the longer term perspective (2030 and 2050). The EU should agree, as soon as possible, on a sufficiently ambitious intermediate target for CO2 emissions reduction, i.e. for 2030, on the way to the agreed 80 - 95% emissions reduction target by 2050.

• An ambitious climate target for 2030 would make other related targets (renewables, energy efficiency) unnecessary. If other targets were still considered necessary, they must be seen in the context of the CO2 reduction target and set only after a CO2 target has been agreed upon; measures should primarily concentrate on eliminating possible obstacles to renewable energy and energy efficiency. Compatibility of the targets must be ensured so that they are not overlapping or conflicting and so that they are not watering down the effectiveness of each other, as we have witnessed with the current policy framework.

• A successful and cost-efficient transition towards a low-carbon economy is not possible without a well-functioning internal market. Compatibility of climate and energy policy targets and measures with the internal EU energy market must be ensured.

• The Emissions Trading Scheme (ETS) has been operating, from a technical point of view, as planned. However, historically low CO2 prices have not been able to incentivise low-carbon investments. The CO2 price level is not due to the ETS mechanism as such, but to an economic downturn and overlapping steering mechanisms, including the proposed energy-efficiency directive and schemes supporting renewable energy sources (RES). The most efficient way to bring certainty to the carbon market would be to establish a demanding CO2 target for 2030 as soon as possible.

• Regarding the topical ETS set-aside debate, Fortum does not support interventions in the CO2 market solely to eliminate the impact of an economic downturn on the CO2 price. However, if there is clear evidence that other legislative acts (e.g. energy efficiency, RES support schemes) would have an impact on the EU ETS, a set-aside to eliminate that impact could be done. We therefore welcome Commissioner Hedegaard's announcement in the context of the Informal Environmental Council on 18 - 19 April 2012 that her service will bring forward the first annual ETS report already by autumn 2012, and, based on the report, the Commission could make a proposal before the end of 2012.

• With the financial crisis shaking Europe, more attention should be paid to the costs of decarbonisation. Hundreds of billions of euros are needed for investments both in low-emission energy generation and transmission infrastructure. Much more emphasis should be put on the EU-level mechanisms instead of national ones in order to bring in efficiency and cost-savings.

• An energy-only market design can guarantee investments and efficiency in the best way. However, there is a growing debate among the energy industry and academic world about the capability of the current market model to guarantee sufficient flexible capacity to balance an increasing amount of intermittent renewable energy in the market. A clear trend towards capacity payments in some countries can be noted. The Commission should follow the development very closely and promote European-wide approaches instead of national mechanisms, in line with the internal market principles.