Former European Central Bank President Mario Draghi was asked by the European Commission to prepare a report of his personal vision on the future of European competitiveness. His report, titled The future of European competitiveness – A competitiveness strategy for Europe was published recently, and it has implications for nuclear.
The Draghi report looks across the board at the EU and its industries, but its in-depth analysis is based around 10 sectoral challenges, of which the energy sector is the first, underlying as it does the economy as a whole.
Draghi says that in the energy sector two objectives should be pursued in parallel. Users must see the cost of energy fall and decarbonisation must be accelerated. To achieve this, “all available technologies and solutions (renewables, nuclear, hydrogen, batteries, demand response, infrastructure roll-out and energy efficiency and carbon capture and storage) must be leveraged by adopting a technology-neutral approach and by developing an overall cost-efficient system,” the report says.
At the moment, energy prices across the EU (and elsewhere in Europe) are closely linked to the gas price because the market pays a ‘marginal price’. This means that instead of receiving cost-based remuneration, all generation receives the price paid to the last generator to be called on (ie the most expensive in the ‘stack’ at that time). Gas turbines are usually the marginal plant, so this structure meant huge energy bills as gas prices spiked higher.
In his report, Draghi says remuneration for renewables and nuclear generation should be decoupled from fossil-fuel generation. Instead, he says, they should be rewarded under long-term contracts in the form of power purchase agreements (PPAs) or contracts for difference (CfDs).
These mechanisms are favoured under the bloc’s new Electricity Market Design, which is in the process of being finalised. Draghi says an enabling framework should be developed to progressively extend PPAs and CFDs to all renewables and nuclear assets “in a harmonised way”. He leaves the door open for other contract forms, but says “In any case long-term mechanisms that are competitive where possible should be used to contract generation resources in a way that is closer to their costs”. (For example, CfDs have been awarded via auctions in the UK.)
In this framework the use of a ‘marginal price’ will be used only in the so-called balancing market.
Further, Draghi says the EU should support PPAs for industrial users, and although his focus is variable renewables his argument also holds for nuclear. He wants the European Investment Bank (EIB) and other national banks to provide guarantees and specific financial products for industrial users, to help them access PPAs. He says smaller customers should be able to benefit from guarantees for financial counterparty risk. He adds that “Where diversified sets of providers and contractual conditions help to minimise the risk of breach or default, guarantees could further benefit offtakers by lowering credit risks.”
In seeking to include competition and offset the lack of transparency in PPA markets, Draghi also proposes national market platforms to contract resources and pool demand between generators and offtakers. Developing such a market could allow for supporting upfront investments from PPA buyers in generation projects, which could limit generators’ resorting to loans, significantly reducing the cost of the project, especially in a context of high interest rates. Industrial consumers could combine in corporate PPAs, under the supervision of a public body acting as a single buyer and seller for participating companies.
He also calls for more standardisation of PPA contracts, because customising them limits the ability to buy and sell them. He says the EU could help build a European PPA market by standardising contracts among Member States and lifting barriers to cross-border flows.
Another recommendation is unlikely to benefit ‘traditional’ large sites but may offer a model for small modular reactors. He says the EU should encourage self-generation and consumption by energy-intensive users. Each Member State should promote this option and removing barriers to it (as foreseen in other regulations related to the Renewable Energy Directive and Electricity Market Design). That would mean an enabling framework that would allow for network tariffs for self-generation that would reflect its overall system cost more accurately.
Draghi wants to see electrification in sectors such as transport as well as industry and other sectors. That could mean the way legislators treat energy charges. Draghi says, “a fundamental component of lowering energy costs for end users is reducing energy taxation”. He suggests EU Member States adopt a common maximum level of surcharges across the EU (including taxes, levies and network charges).
However Draghi’s comments on taxes do not touch on a current debate in the UK (now outside the EU and its Internal Energy Market) over taxes and levies. The UK has seen pressure growing for government to re-allocate taxes and levies from electricity bills to gas bills. Campaigners argue that the effect of adding the cost to electricity bills means users are more likely to employ gas for heating and other uses, because gas without levies is cheaper than electricity. But this runs counter to the government’s intention to promote the use of electricity, which carries a much lower – and still falling – burden of carbon emissions.
The pace of permitting
Draghi says a technology-neutral approach should include renewables, nuclear, hydrogen, bioenergy and carbon capture, utilisation and storage, and be backed by “massive mobilisation” of public and private finance. But he admits that “will not yield the desired results without increasing the pace of permitting for installation”. The slow process of obtaining permits – for both new generation and network extensions – have been a major factor in installing low-carbon generation and making full use of it.
Even “Systematically implementing existing legislation can make a major difference”, Draghi says, but he proposes an array of changes (such as digitalisation) to make the permitting process faster.
On expanding the network, he says, “Delivering a step-change in grid deployment will require a new approach to planning at the EU and Member State levels, including the ability to effectively reach decisions and accelerate permitting, to mobilise adequate public and private financing and to innovate grid assets and processes.”
A European nuclear supply chain
These recommendations support the nuclear industry partly as a consequence of supporting the low-carbon electricity industry as a whole. However, Draghi also recommended that the EU maintain its nuclear supply and accelerate the development of new nuclear (including the domestic supply chain). He made specific proposals about supporting the region’s nuclear industry and expanding its reactor fleet.
In the short term, the energy industry should adopt an approach to life extension for nuclear assets that is based around cost-efficiency. He said, “The vast majority of nuclear assets have already been built and amortised. Therefore, it can make sense to extend their lifetime to benefit from lower generation costs in the power mix. In other cases, the extension of assets would require a significant investment effort. This effort should be commensurate with the expected benefits for the economy, for instance its potential to enhance the security of supply and reduce energy prices”.
In the medium to long term, he recommends that the bloc develop industrial value chains for the cost-efficient deployment of established nuclear technologies and ‘new nuclear’ (SMRs and AMRs), for Member States.
He highlighted the European Industrial Alliance on Small Modular Reactors. The body was launched by the European Commission this year to facilitate and coordinate stakeholder cooperation for the development, demonstration and deployment of SMRs as a viable and competitive technological solution to decarbonise the European energy system. Given that the timeline is likely to mean the first SMR projects will be delivered in the 2030s, Draghi suggested that institutions like the EIB should allocate more financial support to research and industrialisation in new nuclear technologies like SMRs. The Commission should facilitate and coordinate future research and innovation needs, particularly for AMRs, under the Euratom Research and Training Programme. A nuclear skills academy should also be established.
He called for more support for national nuclear safety regulators. That should include both a framework for standardisation and the option to use so-called ‘regulatory sandboxes’, which reduce the administrative burden by allowing for testing that is real-world but limited in risk. He suggested this would ensure a smooth and robust licensing process, and help to reduce costs and risks for investors.
Finally, he said the EU should develop an overarching innovation strategy for nuclear fusion and support the creation of a public-private partnership to promote its rapid, economically viable commercialisation. The partnership should aim to create a stable and predictable ecosystem for industrial innovation, leveraging the ITER.
