Green Power

By RAFAEL MIRANDA | FROM TODAY'S WALL STREET JOURNAL EUROPE

Energy, its cost and the environmental implications of its sourcing and use have risen to the top of the world political agenda. With this in mind, EU leaders agreed last year on the outline of a new energy-climate policy. The member states and European Parliament are now considering specific legislation designed to increase Europe's energy efficiency by 20%, cut its greenhouse-gas emissions by 20% and boost its use of renewable energies to 20% of total energy consumption – all by the year 2020.

The European electricity industry supports EU policy makers' decision to take the leadership in fighting climate change. However, we must not lose sight of other vital objectives such as supply security, economic competitiveness and the need for an integrated European power market.

David Klein

The challenges are multifaceted, and several things need to be done in parallel. First, we need to brake the rapid increase in Europe's dependence on imported energy. For this we need balance in the overall energy mix: New renewable energy sources will have a strong role to play alongside nuclear power and the clean fossil fuel technologies, such as carbon capture and storage, that will enable us to continue using plentiful coal.

We must also be able to deliver power to our citizens and industries at competitive prices if the economic engine is to keep running smoothly. Europe must not close off viable options for producing electricity. That also means both the EU and national governments must do more to support basic research, and the development and demonstration of promising technologies so they can be successfully deployed.

Twelve years ago, the EU decided to end the national monopoly approach and bring market disciplines to the electricity and gas sectors. The European energy market is still a work in progress, though, and new legislation is now on the table to boost competition. Today we have 27 different national markets that often lack physical interconnection and regulatory coherence. We need a new impetus for market integration. This requires a number of concrete steps such as optimizing the allocation of existing interconnection capacity. This could be done, to name one example, by creating a "secondary" market where players could sell unused transmission capacity to one another.

The new legislative round also offers an opportunity to adopt a supranational, regional approach to planning and managing transmission infrastructure. It can also endow the new European Regulators' Agency with the powers to drive market integration forward. Lawmakers should adapt the current proposals to prioritize these aspects.

Policy makers must also follow through on this logic and use market approaches to energy-environment issues wherever possible. Free markets will deliver resources and drive investment in the most cost-effective manner. That is why the EU Emissions Trading Scheme (ETS), now undergoing an update, is a useful approach. Current proposals for renewable energy, on the other hand, leave a lot of room for improvement.

The ETS is a cap-and-trade system that limits overall CO2 emissions and allows companies that reduce their carbon output to sell extra emissions "permits" to other firms. The idea is to lower emissions at the least possible cost to the economy. We believe that in the longer term the emissions market, by putting a price on carbon, should drive the selection of new low-emitting energy technologies, including renewables.

This would bring greater market logic and competition to the incentivization of renewable energy. However, the current renewables proposal provides for the 27 member states to carry on with their separate national promotion schemes. A 20% renewable energy target across all sectors – from power generation to transportation – means that 35% of total electricity would have to come from renewable sources. The national approach threatens to corral more than a third of EU electricity demand into regulated, nonmarket enclosures. Doing so could undermine the aim of an integrated EU power market.

But we need the world to join in and follow Europe's lead on climate change. We need a global approach to this planetary challenge, and a global carbon price will help to drive it. That is why we want to see the ETS used to its fullest extent. It should be linked to existing international mechanisms that provide verifiable credits for projects designed to reduce CO2 output, as well as to other trading systems now being developed.

Getting these new laws right is vital. Between now and 2030, world investment needs in energy will cost an estimated $11 trillion. Of this, Europe's electricity companies will have to invest around $1.7 trillion to replace aging plants and meet rising demand. They need to have a clear picture of energy policy in order to plan these investments.

Yet the future is uncertain. The two legislative "packages" on the table are due for final agreement in early 2009; until then, it will be difficult for industry to invest with confidence.

The third plank of the 20-20-20 package, energy efficiency, is an equally vital element. Existing EU legislation promotes efficient use of energy, especially in buildings. But more needs to be done. Electricity companies are launching practical schemes to help their customers focus on energy efficiency. Eurelectric's Energy Wisdom Program boasts 250 projects that have resulted in savings of 300 million tons of CO2 emissions.

But EU policy must be consistent and imaginative. Transport is still an underexplored area when it comes to energy efficiency, and it is surely now time to create a framework for the widespread use of plug-in electric vehicles. Exploiting the synergy between a low-carbon electricity mix and intelligent electrification of the economy, including transport, can help to drive the decarbonization of the entire economy.

In short, legislators need to show some joined-up thinking across all areas of energy policy if our industry is to fulfill its basic mission of keeping the lights on and powering industry at competitive cost, while also helping to protect our environment.

Mr. Miranda is CEO of Endesa and the current president of Eurelectric, the European power-industry association.

See all of today's editorials and op-eds, plus video commentary, on Opinion Journal.

And add your comments to the Opinion Journal forum.