Decarbonizing Europe's power sector by 2050 — Analyzing the economic implications of alternative decarbonization pathways

Highlights

• We evaluate the economic implications of alternative energy policies for Europe's power sector.

• Total decarbonization costs vary between 139 and 633 billion €₂₀₁₀ up to 2050.

• Decarbonization at minimal costs is ensured by competition between all low carbon technologies.

• Excess costs of supplementary renewable energy targets depend on nuclear power and CCS policies.

Abstract

The European Union aims to reduce greenhouse gas emissions by 80–95% in 2050 compared to 1990 levels. The transition towards a low-carbon economy implies the almost complete decarbonization of Europe's power sector, which could be achieved along various pathways. In this paper, we evaluate the economic implications of alternative energy policies for Europe's power sector by applying a linear dynamic electricity system optimization model in over 36 scenarios. We find that the costs of decarbonizing Europe's power sector by 2050 vary between 139 and 633 bn €₂₀₁₀, which corresponds to an increase of between 11% and 44% compared to the total system costs when no CO₂ reduction targets are implemented. In line with economic theory, the decarbonization of Europe's power sector is achieved at minimal costs under a stand-alone CO₂ reduction target, which ensures competition between all low-carbon technologies. If, however, renewable energies are exempted from competition via supplementary renewable energy (RES-E) targets or if investments in new nuclear and CCS power plants are politically restricted, the costs of decarbonization significantly rise. Moreover, we find that the excess costs of supplementary RES-E targets depend on the acceptance of alternative low carbon technologies. For example, given a complete nuclear phase-out in Europe by 2050 and politically implemented restrictions on the application of CCS to conventional power plants, supplementary RES-E targets are redundant. While in such a scenario the overall costs of decarbonization are comparatively high, the excess costs of supplementary RES-E targets are close to zero.

Introduction

In October 2009, the European Council endorsed the objective of the European Union (EU) to reduce greenhouse gas (GHG) emissions by 80–95% in 2050 compared to 1990 levels (EU Council, 2009). Given the power sector's dominant share of CO₂ emissions in Europe and its comparatively high technological potential for abating CO₂ emissions, the transition towards a low-carbon economy implies an almost complete decarbonization of Europe's power sector.¹ The decarbonization could be achieved through various technology mixes that all allow for massive CO₂ savings in comparison to today's electricity systems, as shown by a number of recent studies (e.g., EC, 2011, ECF, 2010, Eurelectric, 2010, EWI/Energynautics, 2011, Greenpeace, 2010, Greenpeace, 2012).

Aside from the European Emissions Trading System (EU ETS) – which acts as the cornerstone of EU climate policy for electricity generation and energy-intensive industries (EU, 2009b) – the EU has implemented mandatory renewable energy targets. In 2020, renewable energy technologies are supposed to supply 20% of the EU's energy consumption (EU, 2009a) and at least 34% of the EU's electricity consumption (EC, 2010b).²

If supplementary renewable energy targets are implemented to reduce GHG emissions, the issue of counterproductive overlapping regulation arises. First-best economic principles – based on the seminal work of Crocker (1966), Dales (1968) and Montgomery (1972) – suggest that GHG reduction targets could be achieved at least-cost by the implementation of a stand-alone cap-and-trade system covering all sources of GHG emissions. A market for tradable emission certificates is cost-efficient as it establishes a uniform GHG emission price, which serves as a common benchmark for the marginal costs of each potential GHG abatement option. Boeters and Koornneef (2011) argue that supplementary instruments, such as mandatory renewable energy targets, interfere with this least-cost principle by exempting renewables as a particular GHG abatement option from the common benchmark price. Thus, given the assumption of perfect markets, supplementary renewable energy targets are either redundant or associated with excess costs. This argumentation is in line with Tinbergen (1952), who showed that a number of policy targets are best addressed by an equal number of policy instruments.³

In this paper, we analyze the costs of decarbonization and the excess costs of supplementary renewable energy (RES-E) targets for Europe's power sector in over 36 scenarios up to 2050. Our analysis contributes to the literature in several ways. First, we explicitly account for the fact that the costs of decarbonization and the excess costs of supplementary RES-E targets depend on two key conditions: the acceptance of alternative low-carbon technologies (such as new nuclear power plants and CCS technologies) and the development of the economic conditions (mostly defined by the EU's electricity demand, renewable energy investment costs and fossil fuel prices). Second, we apply a dynamic linear electricity system optimization model for Europe, which is characterized by a comparatively high technological and regional resolution, to analyze the implications of alternative decarbonization pathways for Europe's power sector. Hence, we are able to accurately capture the technological and economic consequences of political interference up to 2050.⁴

Our work complements a number of recent articles published in peer-reviewed journals (Capros et al., 2012a, Capros et al., 2012b, Fürsch et al., 2013, Haller et al., 2012) and studies (Dii, 2012, Dii, 2013, EC, 2011, Eurelectric, 2010, Realisegrid, 2010, RES2020, 2009) analyzing the decarbonization of Europe's power sector. All of these articles and studies show that the achievement of ambitious emission reduction targets for Europe's power (energy) sector in 2050 is technically feasible. However, none of these articles or studies quantifies the costs of decarbonizing Europe's power sector together with the excess costs of supplementary RES-E targets up to 2050, accounting for the availability of alternative low-carbon technologies such as nuclear power and CCS.⁵

In the base-case economic scenarios, we find that the decarbonization of Europe's power sector in 2050 could be achieved at minimal costs of 171 bn €₂₀₁₀ if competition between all low-carbon technologies is ensured and no restrictions on the use of nuclear power and CCS are implemented. However, if renewables are exempted from competition with alternative low-carbon technologies by prescribing supplementary RES-E targets the costs of decarbonization significantly rise to at least 408 bn €₂₀₁₀ — corresponding to an increase of 140% compared to the minimal costs of decarbonization. The excess costs of supplementary RES-E targets, on the other hand, can be as high as 237 bn €₂₀₁₀ or as little as 15 bn €₂₀₁₀ — depending on the acceptance of new nuclear power plants and CCS technologies. For example, given a complete nuclear phase-out in Europe by 2050 and politically implemented restrictions on the application of CCS to conventional power plants, supplementary RES-E targets are redundant. While in such a scenario the overall costs of decarbonization are comparatively high, the excess costs of supplementary RES-E targets are close to zero (in comparison to a stand-alone CO₂ reduction target).

The structure of the paper is as follows: Section 2 relates the paper to existing literature. Section 3 provides a short description of the dynamic linear electricity system optimization model for Europe's power sector used in the analysis. Section 4 defines the scenarios and Section 5 presents the results of our analysis. Conclusions are drawn in Section 6.