Climate Policy and Industrial Competitiveness: Electrification and the Energy Mix | Andreas Tirez, FEM Energy / Febeliec

So, we are a federation of industry and also with some data centers like Google are member of our federation but I will mostly talk about the heavy industry or the energy intensive industry and before I come to my message I would like to show some some quotes from Pierre Wunsch he's the head of the Belgian national bank and I took his quotes from his presentation that he gave last week at our annual energy forum and what he's trying to do with those quotes is that he wants to reset or reframe the narrative around climate policy the energy transition where he says that it was too long too optimistic it was in and around the European Commission you hear a lot the energy transition will be a great opportunity for us and if we are very ambitious then we will be a great opportunity for us and if we are very ambitious then we will be a great opportunity for us. very ambitious, then we will lead by example and the other continents in the world will follow us. And it's not, so it's not only a great opportunity, but we are also saving the world by being so ambitious. That the other continents are not following us, I think that's already clear. Just this week, there was the news that in India, they're going to build 100 gigawatts of additional coal-fired power plants on top of their 230 or 40 they already have. And about costs, these are some quotes. So it's like an oil shock, it's not an opportunity, but it's a shock, and it's spread about over 25 years that we have to absorb that. These are just citations, quotes from his presentation. Another one is it will cost about 3% of GDP in Belgium. And it will, the impact is not that big on economic growth. It will not increase economic growth, it will decrease, but only by 0.1 percentage points. So, okay, that's no free lunch, but it's also certainly something we can manage as a society. About the energy intensive industry, he was a bit less optimistic. He says, with the current climate policy, the industry will just close down in Europe. So, if we want to save this, it will be costly. And then, in diplomatic words, there are trade-offs to be made if you want to protect your sectors with tradable goods. And last one, I also like this, waiting is not always bad. If it's not ready yet, then you don't touch it. Then you wait for it to be ready. So, then to my message, it's... I have to see what I want to say. Yeah, so, it's... For the industry, it's not about low or high prices. It's more about competitive prices. If your competitors are paying high prices, then it's okay. Then you can also pay high energy costs. And also, if a technology is ready, technically, it doesn't mean it's ready from a competitive point of view. And competition can be within Europe, but it can also be with other continents. That's an important one. So, we have some policy recommendations on demand. So, demand of energy. If you want to go for this energy transition, you should focus first on the low-hanging fruit. It's mostly ETS2. Not all. You have also some low-temperature heat in the industry. But, of course, buildings, heating your buildings with electricity and not with gas should be something that you do first before you do the other stuff. And if you want to support the hard-to-bate industry, that's mostly ETS1. It will cost you a lot, but probably less than you have in mind right now. And I will show some rough estimates what it can mean for Europe. And then, this is demand. I will also show some slides about what we think should happen or how you should address the energy transition about supply, supply of electricity. What do you have to do when you plan for a good or an optimal electricity mix? Two graphs. I think most of you know this. It was very clear in the Draghi report already two years ago. Electricity prices in Europe are much higher than they are in the US and in Asia, for example, China. This is until 2025. If you look further to 2026, the gap is even wider. For gas, it's a bit more mixed. Then it's clear that the gap with the US is very big. Here it's 3.5 times. Now we are at 6 or 7 times that we have higher gas prices as in the US. With China, it's more or less the same. They also have to import a lot of LNG gas. But there they burn a lot of coal for their heat demand. So China uses more than half of the global coal use. So there, a lot of heat is being delivered with cheaper coal. Okay. I think we know this. It's about electrification. So the energy transition, we are going to switch from fossil fuels to mostly electrification. I like these calculations done by, or this slide done by Amber. So a lot of energy use, fossil energy use can be electrified. We know that. Big thing in the building sector, of course, with heat pumps, low temperature heat, 60, 70 degrees, 50 degrees. In transport, cars, trucks, buses can all be electrified. It's relatively easy to do. But also in the industry, you have low temperature heat, which you can electrify if it could be done competitively. And according to Amber, it's possible to do that. Then you have the high temperature heat. Technically, we can already do this, but it's not economical to do so. The industry will not do that in Europe. It's too difficult. And then you have some other sectors where it's, at this moment, not possible to electrify. So I will talk about those two in the next slides. But it's clear that in buildings and transport, ETS2, that should be your main priority for the energy transition. If you look at those hard-to-abate sectors, about how much energy use are we talking? How much gas are they using right now in the EU? And this is a rough estimate, but it's for the pure hard-to-abate sector that is under competitive pressure. It will be probably a bit less than 50 BCM. But you also have then the gas use for feedstock. So 500 terawatt hours, 50 BCM a year is a good estimate. And then we talk about 100 million tons of CO2 per year that you are emitting in the atmosphere. It's about 2% of the emissions we had in 1990. If you compare that with the 100 gigawatts of coal-fired power plants in India, that's about 500 million tons per year that those additional coal-fired power plants will emit the coming decades, each year. A big argument that is being used towards the hard-to -abate industry is you should get rid of your fossil fuels, your gas, because prices are too volatile and security of supply is not guaranteed. It's LNG. We've seen it with Russia. It was pipe gas also there. It was apparently not guaranteed. And also big price volatility. If we could scale down, if we could really decrease the gas use in the building sector and for the low-temperatory heat in the industry and decarbonize our electricity generation, then Norway will be more than enough to supply the hard-to-abate industry. So Norway is about 100 BCM, 1,000 terawatt towers, a little more than that. They can still explore more gas fields. So there is still more gas that is still not operational. So that would mean that you just have pipe gas from Norway. We can consider them at least our friends. They are not in the EU, but at least they seem nice people and they don't have nuclear weapons. So it's a different story with Russia and, for example, with the US. So your price volatility probably will go down. Your security of supply will go up. So this can really be a big element to lower prices if you can decarbonize your low-hanging fruit. If you talk about low-temperature heat in the industry, so these are the first three bars on the left are from Jan Rosanoff. He's a big advocate for electrification. And according to him, there are some use cases, some cases where you can already electrify and then it's cheaper, your heat will be cheaper than when you do it, when you use a gas boiler under certain conditions. And within the EU, that clearly can be the case already, even if you don't take into account the CO2 costs. But if you compare with the US, it's clearly not. So also that has to be taken into account. Some sectors that are not in competition with the US, yes, there you can do it. When you are in competition with the US, it will be very difficult to convince the industry to decarbonize and to install or to invest in an expensive heat pump. And this is the rough calculation of the support and what it would cost. So if you would support 500 terawatt hours of gas use or 500 terawatt hours of electricity use, it's also a bit the same for the hard-to-abate sector, then you arrive at an annual budget of 15 billion euros. That seems a lot, and it is a lot, it's costly, but it's only 0 or less than 0.1% of EU GDP. So that seems also manageable. So this was about demand. Now something about the electricity supply mix. So also last week we presented our position paper on how do you do that? How do you decide what do we want in the electricity mix? And we looked at two scalable technologies. It's far offshore wind because Belgium has not a big sea. So if we want to have additional offshore wind, it will be far offshore. It will be in the waters of the Netherlands or England. And new nuclear. Why not onshore wind? Also in Belgium we have big problems with permitting. And solar, you don't have it in winter. So two main messages is that if you do this system planning, you have to look at total system costs. That's the first. Just not generation costs, but total system costs. And second is the discount rate. It's something that is being missed sometimes. And I will show it has a big impact or it can have a big impact. If you change another discount rate, your results can be totally different. So first, what must be compared? So of course, the wind park itself, the nuclear reactor itself has a cost. You have to take that into account. But that's of course not the only one. Wind parts far in the sea, you have to connect them. HVDC technology is expensive. So you have to take that into account. It can cost up to billions. You also have that with nuclear or maybe not. If you can put small modular reactors close to industrial demand, the grid cost will be small. Grid cost can even be negative in the sense that if you put generation close to consumption, it can release capacity elsewhere in the grid so that other users can have more grid capacity and then you have a kind of negative cost. Backup mostly for dunkel flautters, also a bit for nuclear, but mostly for dunkel flautters, you need backup for those periods of days, weeks, that there is low wind and low solar. And then the fourth is not about a cost, it's about a benefit that can be less. So if you compare your wind park, or if your wind park is producing a lot, because there is a lot of wind, also the other wind parks are producing a lot, so it means that there is a lot of supply of electricity, prices are on general, on average, are then lower. So you have this effect of price cannibalization that you have with intermittent energy sources like wind and solar. You don't have that with a nuclear power plant. It produces baseload, even maintenance is mostly done in summer, and prices can be a bit lower. So we take this into account because we compare those two technologies with each other. So these four things, cost elements, should be taken into account. And then it's important that you use a discount rate and we take the 3% real social discount rate. And that's important. If you do it at 7%, what we would say is the private investment rate or discount rate, you see that nuclear is more expensive than offshore wind with certain assumptions and a calculation method. If you keep these assumptions and calculation methods exactly the same, but the only parameter that you change is the discount rate from 7% to 3%, you get the result on the right of the graph and you see that new nuclear becomes cheaper than offshore wind. I had a lot of questions about this, so I will take a little last week when I presented this. So I will take some time. This seems like fake. 3% nobody will invest in a nuclear power plant. At 3% that seems a bit low. And we all know that the private investors, they want 7% or even more. But it's not private investors or financial markets that decide about climate policy. It's society that decides about climate policy. And why do we as a society decide about climate policy? Because we care about future generations. That's the whole story, the sustainability. We want a better future or at least as good as we have for our children and grandchildren. So what matters to society is not only what happens today and in 20 years, but also in 2050, 2080, 2100 are things that we say this is important. So the costs and the benefits that happen far in the future are still something that matters to us. And if it still matters to us, it means that you cannot discount it too much. And 3% is already quite a discount if you are talking about 2080 or 2100. So this is the reasoning. It's society that decides about climate change, not electricity consumers or private investors. And for example, if an offshore wind park, we want to auction it and we do a zero-bit auction because we think it will happen, it will work, and then we see that the zero-bit auctions are failing and the state changes and they go for a CFD. Why? Because society has decided we want these offshore wind parks, we need them, we have to decarbonize. So the 3% is something that society decides about and when the market cannot deliver, as an economist, we say there is a market failure and the state has to intervene. And it's just also the recommendation that the European Commission sets. I don't know if some people have remembered the Stern review, Nikola Stern in 2007. It was about the big discussion with Stern was about the discount rate. Here he used a 1.4 discount rate because he said, as a society, we care so much about future generations so we have to put it lower, we have to put it at 1.4. Eventually, a big debate about it. It took some years to settle it but most of the ranges are now between 2% and 4%. Okay, if we then do these calculations at the 3% discount rate with some assumptions, we have published it, so it's on our website, we come to overall 124 euros per megabond hour and then the question that we had was, okay, what can be your capex, your overnight capex for new nuclear and still be cheaper than far offshore wind. This will be my last slide with our conclusion of that paper. You can have an overnight capex of up to 13,000 and even up to 16,000 euros per kilowatt, which is higher than we expected. It was also a bit to our surprise that this can be this high. So the first-of-a-kind project that we saw with Hinkley Point and Flamanville probably are at a higher bound or even above that. But there are other projects like the Darlington project in Canada. So this is an SMR that is being built right now in Canada for small modular reactors, each 315 megawatts. We are tractable on our session and tractable, the Belgian engineering company, is working also on the Darlington project. It was a recent publication about costs and there the overnight capex for this project should sit around 8,000 euros per kilowatt. So this seems very promising and that was also then our message to our government. There should come a concrete path to build new nuclear in Belgium without disregarding offshore wind. We don't exclude it. It can still be, if you can lower your costs for HVDC or wind parks, then it might be still a good solution. But first, we think you should build new nuclear in Belgium. Thank you. Thank you. Thank you very much indeed, Andreas. I think it's very, if we were to summarize that, we would say, you know, industry is calling for SMRs. You want SMRs to be built in the Benelux region or certainly Belgium and the Netherlands. Would that be a fair summary? Yeah, there should be a clear path to build new, if it can be cheap, we hope it could be as cheap as in Canada, then we think this should be done, yes. Cheap and nuclear often don't go together, but potentially... Cheaper. Cheaper, exactly, yes. Just a quick question before, I know we're running a bit late and I'm sure there'll be many questions for you in the break, but we have to kind of finish here. You didn't mention CBAM, the Carbon Border Adjustment Mechanism, which is their design to protect industry from these uncompetitive elements such as, you know, all the pressures from the ETS and et cetera. What's your view there? That can certainly help, but for example, it won't help exporting companies. CBAM is only to protect against imports, but a lot of industry or factories, they live from economies of scale, they are also exporting and if you lose that, because then there is no protection with CBAM, it's just helping part of it and not all sectors.