Europe's Love Affair with Fossil Fuels

One of the few positive outcomes of the Covid-19 lock-down has been the clear skies, rise in air quality, and drop in carbon levels. With the lock-downs easing in much of Europe and governments keen to get their economies back on track, there is at least an acknowledgment that a return to the old 'normal' will only lead us further along the path to the next looming catastrophe--that of climate change.

This year, 2020 was supposed to be the year the EU would launch its ambitious plan to tackle the climate crisis. "Today's the start of a journey. This is Europe's man on the moon moment," said European Commission President Ursula Von der Leyen describing the European Green Deal back in 2019.

But the European Green Deal--the European Commission's policy initiatives aimed at making the EU climate neutral by 2050--is already facing criticism for not going far enough and lacking any real substance. Worse still, European governments provide subsidies to fossil fuel industries under many guises: tax breaks, capacity markets, the Emissions Trading System. Investigate Europe (IE) set out to discover the extent of these subsidies and to understand how the EU--along with the UK, Switzerland, and Norway--is sabotaging its own targets.

Through our research, we found out that the 30 countries of the European Economic Zone and the United Kingdom provide subsidies for fossil fuels such as coal, lignite, gas, and oil to the tune of at least EUR137bn a year. In comparison, the total annual EU budget is EUR155bn. According to IE's findings, in absolute figures, Germany tops the list at EUR37bn per year, followed by the UK at EUR19bn, Italy at EUR18bn and France at EUR17.5bn.

Unachievable target

The goal is for the EU to be climate neutral by 2050. By 2030--just ten years away--EU governments have committed to reducing the emission of greenhouse gases by 40% of their 1990 level. To achieve the promised decarbonization of the economy, the European Commission demands that this reduction be increased to at least 55%. However, not even the 40% target is feasible while these subsidies continue to exist. According to European Commissioner Frans Timmermans, who is responsible for the Green Deal, these subsidies "will be phased out."

But actual commitment from the governments does not match the rhetoric. By the end of 2019, all Member States were expected to have submitted their National Energy and Climate Plan (NECP) to the EU Commission. Of those that have submitted a plan, 16 countries have provided an incomplete list of fossil fuel subsidies. And none of the 26 plans can clearly demonstrate how these subsidies will be phased out.

The reason these plans are so incomplete is because of a loophole of the Commission's own making. Instead of stating explicitly what constitutes a fossil fuel subsidy, the regulation states: "When reporting, Member States may choose to base themselves on existing definitions for fossil fuel subsidies used internationally." But there are so many different definitions that each government can choose from, and most are opting for the one that best fits their political aims. The UK and the Netherlands (numbers two and seven on our list, respectively) deny even providing any fossil fuel subsidies and they are able to do so, thanks to the definition they use.

That fossil fuels are deeply embedded in European economies should come as no surprise as the majority of EU Member States are producers of oil and gas, while in Poland coal is still king.

European contradictions

"Fifty-two days without coal-based electricity," boasted Portugal in early May. "Sixty-seven days," replied the UK in early June, not to be outdone. Poland cast down its eyes and shuffled its feet.

The Belchatow Lignite Mine and Power Plant in central Poland burn opencast coal day and night. It is the largest polluter in Europe, and as the world's largest lignite power plant, it emits as much as 37 million tonnes of carbon dioxide every year. The hole in the ground created by the opencast can be seen from the moon. Over the last two years, the emissions of heavy metals--arsenic, zinc, lead, nickel, copper, and chromium--have increased by more than 50%. Mercury has also seen a year-on-year increase.

Ironically, the state power plant, which poisons people while destroying the climate, boasts of the low cost of the energy it produces. "Coal is our black gold," Prime Minister Mateusz Morawiecki tells miners. But low costs are the result of open (and some hidden) government subsidies. In 2019 alone, the power plant received as much as half a billion zlotys in subsidies; that is as much as 10% of its total revenues. In 2013-2019, it received over 2.5bn zlotys in the form of subsidies and was also able to count on preferential loans and European funds.

The Polish state maintains a drip of subsidies to keep mines and coal-based power generation alive. A dozen or so subsidy mechanisms consume over 7bn zlotys a year from the state budget and citizens' pockets. They are used mainly by coal-fired power plants. These are the same plants that Poland is officially supposed to get rid of as soon as possible in order to protect the climate.

A subsidy by any other name

"The UK does not give subsidies to fossil fuels," was the response from the British government to an online petition calling for fossil fuel subsidies to be converted to those for renewable energy. "Fossil fuels are not subsidized in the Netherlands, not even through fiscal measures," Henk Kamp, then Minister of Economic Affairs told the House of Representatives five years ago. These claims, by the UK and the Netherlands, are where the tricky matter of definitions come in.

The UK (second in IE's data set) does not, for example, consider a reduction on the rate of VAT from 20% to 5% on domestic gas and electricity as a subsidy. Nor does it take into account the Capacity Market -- the subject of a recent legal challenge over state aid rules. Or financing by UK Export Finance (UKEF), a public finance institution, which supported fossil fuel-based power generation projects with a yearly average of EUR16.7m between 2014 and 2016.

The Netherlands (seventh in IE's data set) asks you to overlook tax exemptions such as that for the use of coal in electricity production (abolished in 2012 but reintroduced in 2016) and the co-firing of biomass in coal-fired power plants subsidized by EUR450m per year. And, as with the UK, the funding of projects abroad through export credit insurance would need to be ended multilaterally to "level the playing field", as State Secretary Hans Vijlbrief explained to the House.

Capacity markets: keeping fossil fuel fires burning

Capacity markets are one way of ensuring the lights stay on. As power plants come to the end of their lifespan, plans must be made to replace them to ensure security of supply. This is what a capacity market is set up to do.

The UK has the most mature capacity market, established in 2014, but other countries (Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Spain and Sweden) either have, or plan to implement one. Portugal was also an early implementer but has since dismantled their capacity market. Portugal's electric sector regulator (ERSE) and the grid manager (REN) stated very clearly that there is no reason to subsidise the 'availability' of power, since there was an "excess of energy produced in the Iberian Peninsula". Availability of power is not an issue either for much of the rest of Europe, since by the Commission's own admission, "the EU as a whole is currently in a situation of over-capacity". However, the UK was not connected to this over-capacity so needed to address very real concerns over security of supply.

The capacity market wasn't initially the UK government's preferred option. They considered at first a Strategic Reserve (that takes capacity outside the market and gives a lump sum to stay in reserve in case of problems). And from the beginning the capacity market has come under criticism. In a 2016 report, the Progressive Policy Think Tank found it: "Providing poor value for money for bill-payers... working against the government's decarbonisation objectives, and is too focused on large power stations at the expense of more efficient, demand-side solutions."

Greenpeace's Sebastian Mang told IE that the type of capacity market adopted by the UK: "is really problematic because it's providing an incentive to fossil fuels over other forms of electricity." He explained that when Greenpeace compared how much money was going to renewables in the EU compared to fossil fuels through capacity mechanisms they found that almost EUR58 billion--98% of these subsidies--is being added to energy bills to prop up coal, gas and nuclear plants.

In 2014 Tempus Energy, a DSR company challenged the state aid (an advantage conferred on a selective basis to undertakings by national public authorities) approval of the UK Capacity Market. In 2018, the General Court of the Court of Justice of the European Union found in favor of Tempus Energy. The judgment had the effect of annulling the European Commission's State aid approval for the capacity market scheme, which was suspended. However, in 2019 the European Commission confirmed its original decision to grant state aid approval and the scheme was reinstated.

Sophie Yule-Bennett, former General Counsel, of Tempus Energy told Investigate Europe that the reinstatement of the scheme wasn't as clear cut as has been presented: "[The] General Court judgment has been appealed by the EU Commission and that appeal is awaiting judgment in the European Court of Justice. In the meantime, the UK government has mostly ignored the November 2018 judgment and carried on with the capacity market, regardless."

The EU litigation concerns the circumstances under which the EU commission has to hold a phase 2 investigation and look at the detail of scheme's state aid compatibility--something that has relevance for all European capacity markets (Tempus also have a legal challenge in Poland). She stressed that it is the pending European Court of Justice judgment that is significant for the future of Capacity Markets across the EU.

She explained that "Tempus had brought legal action in the UK to force the government to comply with the General Court judgment, but the Commission's formal investigation conclusion rendered that challenge unwinnable (because the UK High Court is bound by the Commission's conclusions)." The final judgment from the ECJ is expected in the autumn.

Sara Bell, former CEO of Tempus told IE: "Our company was a real company trying to incentivize customers, electricity customers big and small to be flexible with their use of electricity because we know that renewables plus flexible customers equals rapid decarbonization."

"Obviously the flip side of that is the death of fossil fuel, and quite understandably, those companies don't want to die and they're doing absolutely everything they can. They still have extensive resources in order to be effective at lobbying and they are very effective," she said.

The influence of the fossil fuel lobby in the creation of the capacity market is examined in a report from Exeter University. The report found that although there was support for DSR, the incumbent generators "lobbied heavily against measures that would have given the development of DSR greater support"

But it is not lobbying alone that that led to policies favoring fossil fuels, the report goes on to say that "political incentives on the government produced an approach that erred strongly on the side of caution in the capacity decisions, in ways that aligned with the interests of incumbents with older assets."

Speaking to the Independent, Jonathon Porritt a former chair of the Green Party describes a situation where there are "a whole generation of civil servants in the Department for Energy and Climate Change (DECC) who can hardly move without consulting with the Big Six first."

One former civil servant told us of a situation where experienced civil servants were taking early retirement to be replaced by staff on secondments or consultants from the big six oil and gas companies. This served the government agenda as the salaries came out of a different budget so they were able to show they'd made cuts to a 'bloated public sector'. But public savings in one area were paid for elsewhere as many of the energy policies adopted were designed to maximize profits for the big energy companies.

Technology neutral?

When Investigate Europe put these points to the UK government Department for Business, Energy and Industrial Strategy, a spokesperson told us:

The Capacity Market is technology neutral which maximises competition and helps keep costs to consumers to a minimum. It is open to all technologies and types of capacity (except for those receiving support from other policies) that are capable of contributing to security of supply, including renewables. Other policies, such as the Emissions Performance Standard, Contracts for Difference and the Carbon Price Floor work alongside the Capacity Market to ensure our future energy supply is low-carbon. As coal comes offline and old nuclear plants are decommissioned, the Capacity Market provides a cost-effective mechanism for bringing forward new capacity as and when needed. Capacity Market auctions have supported a wide range of new-build resources, including gas-fired plant, battery storage, and interconnectors. The scheme has brought forward over 10GW of new build capacity to date.

In November 2018, the Capacity Market's State aid approval was annulled by the General Court of the Court of Justice of the European Union. Following a new notification by the UK and investigation by the European Commission, the Commission re-approved the CM in October 2019. The State aid approval recorded commitments by the UK Government to make six changes to the Capacity Market which align with those identified through the statutory five-year review of the Capacity Market published in July 2019.

To many, the design of the capacity market was far from impartial, and although it will reassure politicians that the lights will stay on, it was never the only means of doing this. The long-term contracts that tie in the government to fossil fuels at the expense of demand side response will make it much harder to meet targets for reducing carbon emissions, while the contracts mean the public will pay for energy whether they need it or not. The lights will stay on but the fossil fuels will be burning for some time yet.