Do Regulators Overestimate the Costs of Regulation?

http://yosemite.epa.gov/ee/epa/eed.nsf/WPNumber/2011-07

Abstract: It has occasionally been asserted that regulators typically overestimate the costs of the regulations they impose. A number of arguments have been proposed for why this might be the case, with the most widely credited one being that regulators fail sufficiently to appreciate the effects of innovation in reducing regulatory compliance costs. Most existing studies have found that regulators are more likely to over- than to underestimate costs. Moreover, the ratio of ex ante estimates of compliance costs to ex post estimates of the same costs is generally greater than one. In this paper I argue that neither piece of evidence necessarily demonstrates that ex ante estimates are biased. There are several reasons to suppose that the distribution of compliance costs would be skewed, so that the median of the distribution would lie below the mean. It is not surprising, then, that most estimates would prove to be too high. Moreover, we would expect from a simple application of Jensen’s inequality that the expected ratio of ex ante to ex post compliance costs would be greater than one. In this paper I propose a regression-based test of the bias of ex ante compliance cost estimates, and cannot reject the hypothesis that estimates are unbiased. Despite the existence of a number of papers reporting ex ante and ex post compliance cost estimates, it is surprisingly difficult to get a large sample of such comparisons. My most salient finding does not concern the bias of ex ante cost estimates so much as their inaccuracy and the continuing paucity of careful studies.

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A very thorough comparison of ex ante to ex post estimates of costs was conducted in 2000 by Winston Harrington, Richard Morgenstern, and Peter Nelson. The researchers considered 28 regulations written by EPA, OSHA, and a handful of other regional and international regulators. A number of different industries were covered. Ex ante cost estimates were considered “accurate” if they were within ± 25% of ex post values, and either too high or too low if they fell outside this range. By this standard total costs of regulation were overestimated in 15 instances, underestimated in only three, and deemed reasonably accurate in the remaining 11.

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The next major retrospective study of the costs of regulation was completed in 2005 by the Office of Management and Budget (OMB 2005). OMB reviewed 47 regulations initiated between 1976 and 1995. EPA issued 18 of the regulations in the OMB sample, the most of any of the five federal agencies included in the study (the others were the National Occupational Safety and Health Administration (13 regulations included), the National Highway Traffic Safety Administration (8), the Department of Energy (6) and the Nuclear Regulatory Commission (2)). As is generally the case with estimates of regulatory costs, the sample was determined by the availability of data, not by any attempt to generate a random cross-section of regulatory activity. The results of the OMB study are less striking than those of some other researchers. Of 40 regulations for which comparable ex ante and ex post data are available, 16 ex ante projections overestimated cost, 12 underestimated them, and 12 were approximately accurate. The OMB study was not completely independent of earlier work, however: for instance, nine of the studies in its sample were adopted from Harrington, et al. 2000.

At least three studies have been conducted of the accuracy of ex ante cost measures in other countries (in addition, Harrington et al. 2000 includes three examples drawn from Singapore, Norway, and Canada among their 28 case studies). While such inquiries obviously consider costs generated under different legal and regulatory structures than prevail in the U. S., they may still be useful in interpreting general approaches to regulatory cost estimation. It might also be noted in passing that international standards for the analysis of regulatory impacts have become more similar over time, with the United Kingdom (MacLeod, et al., 2006) and the European Union adopting such requirements.5 A study conducted by the Stockholm Environmental Institute considered the cost estimates presented by industry in regulatory negotiations, and found them to be consistently higher than ex post realizations of actual costs (Bailey, et al., 2002).

A Regulatory System for the Twenty-First Century Cass Sunstein, Administrator, Office of Information and Regulatory Affairs

http://www.whitehouse.gov/sites/default/files/omb/inforeg/speeches/a-regulatory-system-for-the-twenty-first_century-11-30-2011.pdf
As you may have noticed, the national debate over regulation has become unusually politicized and polarized.
In recent months, some people have stressed the crucial importance of regulatory safeguards – including rules that reduce deaths on the highways, prevent fraud and abuse, keep our air and water clean, and ensure that the food supply is safe.

Other people have objected to expensive regulations and burdensome mandates that impair growth, competitiveness, and innovation -- and that cost jobs.

In some contexts, both sides make exceedingly important points. The first sentence of the President’s January Executive Order explicitly recognizes those points, emphasizing the need to protect public health and welfare while also promoting growth and job creation.

But in some ways, the polar positions remain stuck in outmoded and decreasingly helpful debates from decades ago – from the 1970s and before.

In recent years, we have learned a lot about regulation. We know a lot more than we did during the New Deal period and the Great Society; we also know far more than we did in the 1980s and 1990s.

Here are eight of the most important things that we have learned:

• Cataloguing consequences. We have developed state-of-the-art techniques for anticipating, cataloguing, and monetizing the consequences of regulation, including both benefits and costs.
• Systemic effects. We know that risks are part of systems. We know that efforts to reduce a certain risk may increase other risks, perhaps even deadly ones, thus producing ancillary harms. At the same time, we know that efforts to reduce a certain risk may reduce other risks, perhaps even deadly ones, thus producing ancillary benefits.
• Flexibility. We know that flexible, choice-preserving approaches, respecting heterogeneity and the fact that one size may not fit all, are often desirable, both because they preserve liberty and because they cost less – sometimes a lot less.
• Small steps, large benefits. We are aware that large benefits can come from seemingly modest and small steps – including simplification of regulatory requirements, provision of information, and sensible default rules, such as automatic enrollment for retirement savings.
• Public participation. We know, more clearly than ever before, that it is important to allow public participation in the design of rules, because members of the public will have valuable and dispersed information about likely effects, existing problems, creative solutions, and possible unintended consequences.
• Disclosure. We know that if carefully designed, disclosure policies can promote informed choices and save both money and lives. Consider, for example, the recently redesigned fuel economy label, drawing attention to the concrete economic consequences of differences in miles per gallon, and the substitution of the clear Food Plate for the confusing Food Pyramid.
• Evidence, not anecdotes or intuitions. We know that intuitions and anecdotes, however compelling they may seem, and however suggestive that regulation is helpful or harmful, are both unreliable, and that advance testing of the effects of rules, as through pilot programs or randomized controlled experiments, can be highly illuminating.
• Continuing scrutiny. We know that it is important to explore the effects of regulation in the real-world, to learn whether they are having beneficial consequences or producing unintended harm. In short, we need careful assessments before rules are issued, and we need continuing scrutiny afterwards.

Of course it is true that people’s values differ, and in some cases, the relevant values will lead in a certain direction even if the evidence is clear. What I want to emphasize here is the opposite possibility, and the neglected one – that when the evidence is clear, it will often lead in a certain direction even when there are differences with respect to underlying values.

If, for example, a regulation would save a lot of lives and cost very little, people are likely to support it regardless of their party identification; and if a regulation would produce little benefit but impose big costs on real people, citizens are unlikely to favor it, regardless of whether they like elephants or donkeys. At least this is so if we engage on the facts.

To evaluate regulation, and its actual benefits and costs, we have to do that. Consider three facts:

1. In the first two years, the net benefits of rules issued in the Obama Administration have been over $35 billion – over three times the corresponding number in the first two years of the Clinton Administration, and over ten times the corresponding number in the first two years of the Bush Administration.
2. There has been no increase in rulemaking in this Administration. On the contrary, the number of significant rules reviewed by OIRA and issued in the first two years of the Obama administration is lower than the number issued in the last two years of the Bush administration – and indeed, the Obama Administration average is, through its first two years, lower than the Bush Administration average through its eight.
3. In the past decade, the costs of economically significant rules reviewed by the White House Office of Information and Regulatory Affairs (OIRA) were highest in 2007 and 2008, not 2009 and 2010. In its last two years, the administration of George W. Bush imposed far higher regulatory costs than did the Obama administration in its first two years.

On January 18th of this year, President Obama set out a fresh approach to federal regulation – an approach that reflects a lot of the new thinking about regulation. The very first paragraph of his executive order, a kind of mini-constitution for the twenty-first century regulatory state, emphasizes the importance of “economic growth, innovation, competitiveness, and job creation.” It states that our regulatory system “must promote predictability and reduce uncertainty.” It adds that our regulatory system “must measure, and seek to improve, the actual results of regulatory requirements.”

The new approach promises, at once, to maximize net benefits and to eliminate unnecessary regulatory burdens and costs on individuals, businesses both large and small, and state and local governments.

Among other things, the President called for an unprecedentedly public, and an unprecedentedly ambitious, government-wide “lookback” at federal regulation. The lookback requires all agencies to reexamine their significant rules, and to streamline, reduce, improve, or eliminate them on the basis of that examination.

Over two dozen departments and agencies have released final plans to remove what the President has called unjustified rules and “absurd and unnecessary paperwork requirements that waste time and money.” The plans span over 800 pages and offer more than 500 proposals.

In the coming years, billions of dollars in savings are anticipated from just a few initiatives from the Department of Transportation, the Department of Labor, HHS, and EPA. And all in all, the plan’s initiatives will save tens of millions of hours in annual paperwork burdens on individuals, businesses, and state and local governments.

Some of the plans list well over fifty reforms. Many of the proposals focus on small business. Indeed, a number of the initiatives are specifically designed to reduce burdens on small business and to enable them to do what they do best, which is to create jobs.

Many of the reforms will have a significant economic impact. Here are just a few examples:

• The Department of Health and Human Services recently announced proposed and final rules that are expected to eliminate over $1 billion in annual regulatory costs.
• The Occupational Safety and Health Administration has announced a final rule that will remove over 1.9 million annual hours of redundant reporting burdens on employers and save more than $40 million in annual costs.
• OSHA plans to finalize a proposed rule projected to result in an annualized $585 million in estimated savings for employers. This rule would harmonize U.S. hazard classifications and labels with those of a number of other nations by requiring the adoption of standardized terms.
• Since the 1970s, milk has been defined as an “oil” and subject to costly rules designed to prevent oil spills. In response to feedback from the agriculture community and the President’s directive, EPA recently concluded that the rules placed unjustifiable burdens on dairy farmers -- and exempted them. The exemption gives whole new meaning to the phrase “don’t cry over spilled milk.” And over the next decade, the exemption will save the milk and dairy industries, including small business in particular, as much as $1.4 billion.
• The Departments of Commerce and State are undertaking a series of steps to eliminate unnecessary barriers to exports, including duplicative and unnecessary regulatory requirements, thus reducing the cumulative burden and uncertainty faced by American companies and their trading partners. These steps will make it a lot easier for American companies to reach new markets, increasing our exports while creating jobs here at home.
• In line with proposals from the Jobs Council, the Department of State has indicated that it will revisit current visa requirements and consider how best to promote tourism, thus promoting growth and creating jobs.

Of course, we don’t only need to look back; we also need to look ahead about how we regulate in the future.
The January Executive Order provides a series of new directives to govern future rulemaking. Emphasizing the importance of predictability and certainty, those directives are consistent with, and informed by, what we have learned about regulation in recent years. And those directives have been explicitly informing our efforts since January. You may have noticed that several rules, including some in the area of labor, have been withdrawn or are being rethought with reference to the principles in the new Executive Order.

Let me emphasize five key points.

1. Public participation. The President made an unprecedented commitment to promoting public participation in the rulemaking process – with a central goal of ensuring that rules will be informed, and improved, by the dispersed knowledge of the public. Agencies are not merely required to provide the public with an opportunity to comment on their rules; they must also provide timely online access to relevant scientific and technical findings, thus allowing them to be scrutinized.
2. Advance consultation. The Order directs agencies to act, even in advance of rulemaking, to seek the views of those who are likely to be affected. This group explicitly includes “those who are likely to benefit from and those who are potentially subject to such rulemaking.” Among other things, this emphasis on early involvement is an effort to acquire relevant information and to avoid unintended harmful consequences.
3. Simplification and harmonization. The Order specifically directs agencies to take steps to harmonize, simplify, and coordinate rules. It emphasizes that some sectors and industries face redundant, inconsistent, or overlapping requirements. In order to reduce costs and to promote simplicity, it requires greater coordination. The order also explicitly connects the goal of harmonization with the interest in innovation, directing agencies to achieve regulatory goals in ways that promote that interest.
4. Quantification. The Order firmly stresses the importance of quantification. It directs agencies “to use the best available techniques to quantify anticipated present and future benefits as accurately as possible” – and to proceed only on the basis of a reasoned determination that the benefits justify the costs.
5. Flexibility. The Order directs agencies to identify and to consider flexible approaches that reduce burdens and maintain freedom of choice for the public. Such approaches may include, for example, public warnings, appropriate default rules, or provision of information “in a form that is clear and intelligible.” We know that simplification of existing requirements can often promote compliance and participation and that complexity can have serious unintended consequences. We also know that flexible performance objectives are often better than rigid design standards, because performance objectives allow the private sector to use its own creativity to identify the best means of achieving social goals. To promote flexibility, we have recently issued a call to all agencies to reduce reporting burdens on small business and to eliminate unjustified complexity. We have received dozens of important initiatives in response; they were made public in September.

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Cass Sunstein
http://www.whitehouse.gov/sites/default/files/omb/inforeg/speeches/a-regulatory-system-for-the-twenty-first_century-11-30-2011.pdf
November 30, 2011

Installed Cost of Solar Photovoltaic Systems in the U.S. Declined Significantly in 2010 and 2011 - Berkeley Lab releases “Tracking the Sun IV,” a report on PV systems from 1998 to 2010

http://newscenter.lbl.gov/news-releases/2011/09/15/tracking-the-sun-iv/
The installed cost of solar photovoltaic (PV) power systems in the United States fell substantially in 2010 and into the first half of 2011, according to the latest edition of an annual PV cost tracking report released by the Department of Energy’s Lawrence Berkeley National Laboratory (Berkeley Lab).

The average installed cost of residential and commercial PV systems completed in 2010 fell by roughly 17 percent from the year before, and by an additional 11 percent within the first six months of 2011. These recent installed cost reductions are attributable, in part, to dramatic reductions in the price of PV modules. Galen Barbose of Berkeley Lab’s Environmental Energy Technologies Division and co-author of the report explains: “Wholesale PV module prices have fallen precipitously since about 2008, and those upstream cost reductions have made their way through to consumers.”

The report indicates that non-module costs—such as installation labor, marketing, overhead, inverters, and the balance of systems—also fell for residential and commercial PV systems in 2010. “The drop in non-module costs is especially important,” notes report co-author and Berkeley Lab scientist Ryan Wiser, “as those are the costs that can be most readily influenced by solar policies aimed at accelerating deployment and removing market barriers, as opposed to research and development programs that are also aimed at reducing module costs.” According to the report, average non-module costs for residential and commercial systems declined by roughly 18 percent from 2009 to 2010.

Turning to utility-sector PV, costs varied over a wide range for systems installed in 2010, with the cost of systems greater than 5,000 kilowatts (kW) ranging from $2.90 per Watt (W) to $6.20/W, reflecting differences in project size and system configuration, as well as the unique characteristics of certain individual projects. Consistent with continued cost reductions, current benchmarks for the installed cost of prototypical, large utility-scale PV projects generally range from $3.80/W to $4.40/W.

The market for solar PV systems in the United States has grown rapidly over the past decade, as national, state and local governments offered various incentives to expand the solar market and accelerate cost reductions. The study—the fourth in Berkeley Lab’s “Tracking the Sun” report series—describes trends in the installed cost of PV in the United States, and examined more than 115,000 residential, commercial and utility-sector PV systems installed between 1998 and 2010 across 42 states, representing roughly 78 percent of all grid-connected PV capacity installed in the United States. Naïm Darghouth, also with Berkeley Lab, explains that “the study is intended to provide policy makers and industry observers with a reliable and detailed set of historical benchmarks for tracking and understanding past trends in the installed cost of PV.” 

Costs Differ by Region and by Size and Type of System
The study also highlights differences in installed costs by region and by system size and installation type. Comparing across U.S. states, for example, the average cost of PV systems installed in 2010 and less than 10 kilowatts (kW) in size ranged from $6.30/W to $8.40/W depending on the state. The report also found that residential PV systems installed on new homes had significantly lower average installed costs than those installed as retrofits to existing homes.

Based on these data and on installed cost data from the sizable German and Japanese PV markets, the authors suggest that PV costs may be driven lower through large-scale deployment programs, but that other factors are also important in achieving cost reductions.

The report also shows that PV installed costs exhibit significant economies of scale. Among systems installed in 2010, those smaller than 2 kW averaged $9.80/W, while large commercial systems >1,000 kW averaged $5.20/W; partial-year data for 2011 suggests that average costs declined even further in 2011. Large utility-sector systems installed in 2010 registered even lower costs, with a number of systems in the $3.00/W to $4.00/W range. 

Cost Declines for PV System Owners in 2010 Were Partially Offset by Falling Incentives
The average size of direct cash incentives provided through state and utility PV incentive programs has declined steadily since their peak in 2002. The dollar-per-Watt benefit of the federal investment tax credit (ITC) and Treasury grant in lieu of the ITC, which are based on a percentage of installed cost, also fell in 2010 as a result of the drop in average installed costs.

The reduced value of federal, state, and utility incentives in 2010 partially offset the decline in installed costs. Therefore, while pre-incentive installed costs fell by $1.00/W and $1.50/W for residential and commercial PV in 2010, respectively, the decline in “net” (or post-incentive) installed costs fell by $0.40/W for residential PV and by $0.80/W for commercial PV.

The report “Tracking the Sun IV: An Historical Summary of the Installed Cost of Photovoltaics in the United States from 1998 to 2010,” by Galen Barbose, Naïm Darghouth, and Ryan Wiser, may be downloaded from http://eetd.lbl.gov/ea/emp/reports/lbnl-5047e.pdf.

The research was supported by funding from the U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy and by the Clean Energy States Alliance, a national nonprofit coalition of leading state clean energy programs that work together to advance renewable energy project deployment in their states and across the country.

Lawrence Berkeley National Laboratory www.lbl.gov addresses the world’s most urgent scientific challenges by advancing sustainable energy, protecting human health, creating new materials, and revealing the origin and fate of the universe. Founded in 1931, Berkeley Lab’s scientific expertise has been recognized with 12 Nobel prizes. The University of California manages Berkeley Lab for the U.S. Department of Energy’s Office of Science.
Press Release dated September 5, 2011

European Commission - Energy Roadmap 2050: a secure, competitive and low-carbon energy sector is possible

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1543&type=HTML
To achieve the goal of cutting emissions by over 80% by 2050, Europe's energy production will have to be almost carbon-free. How to achieve this without disrupting energy supplies and competitiveness is the question answered by the Energy Roadmap 2050 the Commission is presenting today. Based on the analysis of a set of scenarios, the document describes the consequences of a carbon free energy system and the policy framework needed. This should allow member states to make the required energy choices and create a stable business climate for private investment, especially until 2030.

Energy Commissioner Günther Oettinger stated: "Only a new energy model will make our system secure, competitive and sustainable in the long-run. We now have a European framework for the necessary policy measures to be taken in order to secure the right investments."

The analysis is based on illustrative scenarios, created by combining in different ways the four main decarbonisation routes (energy efficiency, renewables, nuclear and CCS). None is likely to materialise but all scenarios clearly show a set of "no regrets" options for the coming years.

The Energy Roadmap 2050 identifies a number of elements which have positive impacts in all circumstances, and thus define some key outcomes such as:

• Decarbonisation of the energy system is technically and economically feasible. All decarbonisation scenarios allow achieving the emission reduction target and can be less costly than current policies in the long-run.
• Energy Efficiency and renewable energy are critical. Irrespective of the particular energy mix chosen, higher energy efficiency and important rising shares of renewables are necessary to meet the CO2 targets in 2050. The scenarios also show that electricity will play a greater role than now. Gas, oil, coal and nuclear also figure in all scenarios in different proportions, allowing Member States to keep flexible options in their energy mix provided a well connected internal market is achieved quickly.
• Early Investments cost less. Investment decisions for the necessary infrastructure up to 2030 must be taken now, as infrastructure built 30-40 years ago needs to be replaced. Acting immediately can avoid more costly changes in twenty years. The EU's energy evolution requires anyway modernisation and much more flexible infrastructure such as cross border interconnections, "intelligent" electricity grids and modern low-carbon technologies to produce, transmit and store energy.
• Contain the increase of prices. The investments made now will pave the way for the best prices in the future. Electricity prices are bound to raise until 2030, but can fall thereafter thanks to lower cost of supply, saving policies and improved technologies. The costs will be outweighed by the high level of sustainable investment brought into the European economy, the related local jobs, and the decreased import dependency. All scenarios get to decarbonisation with no major differences in terms of overall costs or security of supply implications.
• Economies of scale are needed. A European approach will result in lower costs and secure supply compared to national parallel schemes. This includes a common energy market which should be completed by 2014.

Background:

The aim of the roadmap is to achieve the low-carbon 2050 objectives while improving Europe's competitiveness and security of supply. Member States are already planning national energy policies for the future, but it is necessary to join forces in coordinating their efforts within a broader framework. The Roadmap will be followed by further policy initiatives on specific energy policy areas in the coming years, starting with proposals on the internal market, renewable energy and nuclear safety next year.

The EC published in March 2011 the overall decarbonisation roadmap covering the whole economy. All sectors – power generation, transport, residential, industry and agriculture –were analysed. The Commission has also been preparing sectoral roadmaps, among which the Energy Roadmap 2050 is the last one, focusing on the whole energy sector....

 

The Commission, after extensive discussions with stakeholders, has identified four main decarbonisation routes for the energy sector – energy efficiency impacting mostly on the demand side and on the supply side renewable, nuclear and CCS. The scenarios proposed explore different combinations of this four decarbonisation paths interacting:

• two current trend scenarios: the reference scenario and an updated version including current policy initiatives. This latter scenario serves as the basis of all decarbonisation scenarios;
• a high energy efficiency, where there is a commitment to very high energy savings, leading to a 41% decrease in energy demand by 2050 compared to the 2005-2006 peaks;
• diversified supply technologies, in which all energy sources compete on a market basis with no specific support measures;
• high renewable energy sources (RES), with strong support measures for RES resulting in a RES share amounting to 75% in gross final energy consumption, and to 97% in electricity consumption;
• a delayed Carbon Capture and Storage (CCS) with the share of nuclear energy in primary energy consumption amounting to 18%;
• and a low nuclear with higher shares of CCS, around 32% in power generation.

The share of renewable energy (RES) rises substantially in all decarbonisation scenarios, achieving at least 55% in gross final energy consumption in 2050 up 45 percentage points from today's level at around 10%. The share of Renewables in electricity consumption reaches 64,8 % in a High Energy Efficiency scenario and even 97% in a High Renewables Scenario.

The Energy Roadmap 2050 is also ambitious when it comes to energy efficiency: It shows that we need to reduce energy consumption by 2050 by a minimum of 32 percent to maximum of 41 percent compared to the peak in 2005/2006, according to the different scenarios.

Investments cost a lot of money. Is it not cheaper if we forget about decarbonisation? The analysis shows that costs will rise anyway and will be roughly at the same level as if we were not to do anything. If we continue current policies, the total energy system cost - including fuel, electricity and capital costs, investment in equipment, energy efficient products - could represent 14.6% percent of European GDP in 2050 (compared to 10.5% in 2005). 

If we continue with current policies, we may not have to invest as heavily in infrastructure as in the decarbonisation scenarios (high efficiency, high renewable, delayed CCS, low nuclear and diversified supply technologies), but we the face higher fossil fuel costs as gas and petrol prices are estimated to rise due to an increase in world wide demand. By contrast, in the case of the decarbonisation scenarios higher upfront investment is needed but less fossil fuel.

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Access to flexible supplies of all types (e.g. demand management, storage and flexible back-up power plants) can be best delivered in a well-connected and well-functioning internal energy market. It helps to use resources efficiently across Europe. For example, with sufficient interconnection capacity and a smarter grid, managing the variations of wind and solar power in some local areas can be provided also from other sources (e.g. renewables, storage or back-up power plants) elsewhere in Europe.Energy policy developments need to take full account of how each national electricity system is affected by decisions in neighbouring countries. Now more than ever, coordination is required. Working together will keep cost down and ensure security of supply.

If investments are postponed, they will cost more and create greater disruption in the longer term. For every US Dollar of investment not made in the power sector before 2020, an additional US 4,3 would need to be spent after 2020 to compensate for increased emission, the IAE says in is 2011 World Energy Outlook. 

 

For Europe, the Commission already analysed in its "Roadmap to a competitive low-carbon economy" (March 8, 2011) investment expenditure increases of around Euro 100 bn per annum for the 20 year period from 2030 – 2050, without comparably decreasing the investment before 2030.... Some stakeholders show ... that the cost-efficient deployment of renewables across Europe can reduce cumulative costs by more than a fifth by 2030 compared to a Member State by Member State approach. 

 

Electricity prices will rise in the next decades in any case, regardless if we continue with our actual energy policy or go for decarbonisation. We will face higher electricity prices due to increases in fossil fuel prices (gas, coal and oil)... because world wide demand is increasing, especially in Asian countries such as China. If we opt instead for any decarbonisation scenarios (high efficiency, high renewable, delayed CCS, low nuclear and diversified supply technologies), electricity prices rise because we have to invest heavily in new infrastructure and technologies. 

 

... They rise until 2030 because capital, grid and fuel costs rise and auctioning payments will increase. Until that year, the increase of electricity prices is roughly the same in all scenarios, regardless whether we stick to our current energy mix or go for decarbonisation, e.g. high renewable share.  After 2030, electricity prices stabilize or decrease under the decarbonisation scenarios. This is because less operational costs are needed for electricity production which in turn has a positive impact of prices. These operational costs include ETS allowances and fossil fuels.  In the case of renewables, the modelled investment needs beyond 2030 are higher than in the case of the others scenarios. This is due to this scenario being a somewhat extreme "near 100% renewable power" scenario which comprises assumptions about very increased storage needs, extension of the grid and back up facilities such as gas power stations. Most of these investments will come after 2030 due to the sharp increase of renewables in the same period of time. This means also higher electricity prices for this particular scenario, but substantial RES penetration in itself does not necessarily mean high electricity prices. Some of these costs are attributable to conventional power plants built prior to 2030 which are assumed to need to recover their investment costs fully despite not running at close to full capacity due to the subsequent renewables growth. 

 

As regards environmental impacts, all policy options significantly reduce energy consumption with the largest reduction coming in the High Energy Efficiency scenario. The composition of energy mix would also differ significantly in a decarbonised system with strong increase in RES in all scenarios. Nuclear developments depend on policy assumptions taken and ranges from 2 to 18% share in primary energy consumption. The share of gas is the highest in Low nuclear scenario with significant CCS penetration. Oil and solids decline.
Electricity share in final energy consumption doubles from current levels and electricity become the most important final energy source. All decarbonisation scenarios achieve 80% GHG reduction and 85% energy related CO2 reductions in 2050 compared to 1990 as well as equal cumulative emissions over the projection period. In 2030, energy-related CO2 emissions are between 38-41% lower, and total GHG emissions reductions are lower by 40-41%.

Various analyses of carbon and energy policies on GDP suggest that impact is rather limited. Depending on  the decarbonisation scenario, there are no average annual additional energy system costs due to the pursuit of this major decarbonisation as a part of a global effort compared with the Reference and CPI scenarios, or they are small. As regards electricity prices, some policy options show a small decrease in electricity prices as compared to Reference and CPI scenarios (Energy Efficiency and Diversified supply technologies) while some others show increases (High RES and to a lower extent Low nuclear). ETS carbon prices are significantly higher than in the Reference and CPI scenarios, while fuel prices are lower. All policy options require more and more sophisticated energy infrastructures electricity lines, smart grids and storage) with High RES scenario having the highest requirements.

Social dimension of decarbonisation roadmaps is crucial as transition to low carbon economy will require an in depth change in several sectors affecting companies, employment and working conditions. Education and training need to be addressed at an early stage in order to avoid unemployment in some sectors and labour shortages in others. The impact of decarbonisation policies on employment are not substantial by 2020 as shown by several studies but investments in new technologies might trigger demand for higher skilled jobs.

Security of energy supply measured as import dependency improves in all policy options by 2050, the biggest improvements being in the High RES scenario. As regards affordability of energy costs by households, all policy options show significant fuel savings but also higher capital and energy efficiency investment costs. Total energy expenditures by households are higher in all policy options, the highest increase being in options showing strong energy efficiency policies and RES penetration.

Options were compared based on their effectiveness; efficiency and coherence. As regards effectiveness, the 3 objectives of energy policy – sustainability, security of supply and competitiveness - were taken. All policy options were designed to reach 85% reductions of energy related CO2 emissions in 2050, so all are effective. It should be noted that some options are highly dependent on success of new commercially yet not proven technologies. As regards security of supply, all policy options reduce import dependency. However, in more electrified world, stability of the grid might be of much higher concern. As regards, competitiveness, some  policy options show a small decrease in electricity prices as compared to Reference and CPI scenarios while some others show increases. ETS prices are significantly higher than in the Reference and CPI scenarios,  while fuel prices are lower. The model triggers adequate investment which are driven by specific policies or  carbon prices and investment decisions are based on perfect foresight assumption.

In terms of efficiency, the analysis demonstrates that the costs of decarbonisation of the energy system are similar in all scenarios and that most decarbonisation scenarios even show cost savings compared to the Reference scenario. The least costly scenarios are Delayed CCS and Diversified Supply Technologies scenarios with significant penetration of nuclear.

All policy scenarios are coherent with other EU long term objectives (on climate, transport, etc). There is no clear winner among policy options scoring the best in all criteria and several trade-offs will need to be taken into account.

Further information - http://ec.europa.eu/energy/energy2020/roadmap/index_en.htm and
MEMO/11/914.

The European Commission http://europa.eu Press Release dated 15 December 2011