POLICY BRIEFNumber 6 | April 2020

Research and innovation needs for clean energy supply

OVERVIEW

• Coordinated energy transformation roadmap, with Research

and Innovation (R&I) speeding-up the development and scale-

up of new clean energy technologies

• Adopt and address challenges of digitalization

• Promotion of transdisciplinary and systemic thinking and

corresponding approaches

The EU strategic long-term vision aims at achieving climate neutrality by 2050. This Policy Brief outlines key features of the High-Level Panel Report of the European Commission’s Decarbonisation Pathways Initiative highlighting future EU research and innovation needs to promote decarbonised sources of energy supply.

and store energy. These technologies will allow the creation of new system integration across energy supply and various types of energy demands; and to manage intermittent supply and demand of all types. Clearly, this requires unlocking new flexibility potential in the energy system using a higher digitalized connectivity of supply and demand. With the aim to reduce GHG emissions, a fundamental transformation of energy supply should also provide benefits related to other energy related externalities, such as air pollution, concerns related to resource and material consumption, as well as implications related to biodiversity and land use.

Achieving clean energy supply requires research and innovation in a number of areas, such as digitalization, systemic thinking and new technologies as defined in a transformation roadmap (Figure 2).

BACKGROUND

Electricity and heat production is the largest single sector contributing to today’s emission of greenhouse gases (GHGs) in the EU (Box 1), although substantial advancements in emissions mitigation have been made over the past 3 decades (Figure 1). Decarbonisation of electricity generation is an important enabler of the general shift towards increased electrification of other parts of the economy and society. However a low-carbon power sector “clean electrons” will not be sufficient to meet the EU’s climate mitigation targets on its own. A large number of the other energy vectors will need to be decarbonised as well, underlining the importance of the use of “emission-neutral molecules” for several applications, such as in mobility, for heating and in industry.

The challenge to produce and use clean energy concerns all EU member states and requires multilateral approaches and joint efforts for innovation and development of new technologies to convert, transport

[BOX 1] Components of the system The supply of energy is responsible for approximately 70% of EU Greenhouse gas emissions

Figure 1: Change of CO2 emissions in the EU energy system compared to 1990 levels [1].

POLICYBRIEF 6 | April 2020 | Clean Energy Supply

Rapid and continued innovation of novel clean energy technology is required across all areas of the energy system, such as the efficient use of renewable energy, and advanced low-carbon end-use applications for heating and mobility based on electricity, and biogenic and synthetic fuels. (Box 2) Nevertheless, on its own technology innovation is insufficient if not developed along with credible policies and well-functioning markets that enable new clean technologies to enter markets and that facilitate highly integrated energy systems with consumer acceptance of innovative technologies. As such, a system transformation roadmap is needed, that aligns energy innovation, market re-design and energy policy with competing policy objectives.

Technologies Emission-neutral molecules are a necessary ingredient to achieve net-zero emissions in sectors where full electrification seems unlikely, such as aviation, parts of heavy-duty transport, or certain industry subsectors. Currently, it is still unclear whether biofuels with CCS, Hydrogen, or e-fuels will be competitive technology in certain markets to supply emission-neutral molecules. Full scalability and technology maturity have to be demonstrated in a number of large-scale demonstration projects until 2030 at the latest if any of these technologies are to have a relevant contribution for achieving the 2050 targets. To accelerate the decarbonization of the power sector and maximize the emission reductions achievable through electrification, R&I into technologies and systems facilitating integration of variable renewables is required. This comprises both power system supply technologies such as all types of low and zero carbon power plants, electricity storage and grid technologies, as well as

technologies facilitating a smart electrification of end-uses such as heat pumps and electric hybrid boilers. Importantly, the quality of energy supply and reliability of the systems must remain in future which requires R&I on appropriate technologies that can ensure stable system operation also at largely different energy supply structures than today.

DigitalisationDigitalisation is accelerating to penetrate peoples’ activities, products and services, specifically related to smart homes and other smart energy-efficient solutions. Digitalisation could help to better manage energy demand, improve grid reliability, and lower energy costs, but it could potentially also have a number of negative effects. Digitalisation itself requires additional energy (data centres), and digitalisation-enabled services could lead to substantial additional energy demand – as, for example, seen with the blockchain-based crypto-currencies. Digitalisation can also create a new situation of information asymmetry for prosumers. With the increase in data availability and use, as in other sectors of the European economy, concerns over data collection, data control, data integrity, and data ownership, etc. arise. Research and innovation needs are required in data handling and privacy as well as development of IT infrastructure and market interfaces for digitalised smart energy systems.For handling of big data (from smart meter to dynamic market pricing), strategic research that improves the

[Box 2] Mega-trends in today‘s energy landscape in Europe• Greater renewable energy sources (RES) production at declining costs, and (potential of) increasing electrification; • Greater energy efficiency; • New energy technologies (such as distributed energy technologies) and governance structures; • Digitalisation as a key driver and enabler of greater integration and service orientation; • Active consumers/prosumers.

Figure 2: Technology roadmap.

NEEDS OF RESEARCH AND INNOVATION

POLICYBRIEF 6 | April 2020 | Clean Energy Supply

system security related to the energy system and IT system is required. At the same time, the digitalization should not undermine decarbonization. For example, energy use for monitoring (smart-meters and/or data storage) must not exceed potential energy savings. In this context, life cycle analysis of digitalization should be considered to avoid unforeseeable implications (e.g. rebound effects) to the energy sector. To support analytical work on the energy transformation, data on energy sector characteristics collected via big data applications should be made available for research purposes while respecting data privacy.

Transdisciplinary and systemic thinking The transformation of the energy sector is a systemic challenge where successful climate- and energy policies must consider inter-sectoral interdependencies . It is indispensable to focus on promotion of transdisciplinary and systemic thinking. Sector coupling is prerequisite for the sustainability of low carbon energy systems. If sectors are to be more integrated from a technical point of view, also policies should be discussed and agreed across different domains, such as finances, transport, economy and energy. Policies aiming to bring low carbon technologies to market must be coordinated across sectors by reflecting dynamics of the different market conditions. Effects and timing of policies and market reforms need to be better understood to allow timely implementation of reforms.

Research and innovation needs are identified in developing integrated analytical tools/framework, which consider systemic aspects for generating insights for informed-decision making. For example, development of large scale integrated energy modelling framework with capabilities for incorporating temporal and spatial dimensions, consumer behavioural aspects, technology richness, and macro-economic implications. Any such tool should also be able to assess the impact of policy instruments along multiple dimensions and to incorporate stakeholders’ decision making.

Many zero-carbon technologies exist/emerge but they are often far-off from market because of insufficient carbon prices, missing consumer acceptance and market barriers. A re-design of energy markets and policies is needed that sets the right price signals and offers long-term investment perspectives. Importantly, research into the effectiveness and implementability of policies

is needed. A special focus should be on understanding the interactions between different policies at EU level, national level and regional level in order to guide the transformation and prevent unwanted interferences. The EU ETS is a main pillar of the energy supply

decarbonisation and needs to be strengthened to promote low-carbon solutions by providing sufficient high long-term price signals. Moreover, interferences of the EU-ETS with other energy policies (e.g. on renewable energy, and energy efficiency) need to be eliminated. R&I on both policy instruments and market design as well as the interaction between the two is crucial to ensure robust policies and market regulations. (Box 3)

A good example for the research need into policies and market design is the need to develop new electricity market structures. Strongly falling costs of wind and solar power technologies together with effective support policies in the form of feed-in-tariffs or tenders have fundamentally changed the power system. This challenges the existing electricity markets that were designed to supply electricity whenever it was demanded with the help of dispatchable power plants with relevant variable cost, and are thus ill suited for the new system where variable generation and flexible demand have to be brought together. At the same time, the electricity system is moving from a structure with few, very large operators (centralized) to more widely distributed with participation from prosumers.

Some important challenges remain – particularly securing the stability of the electricity grid in the face of greater fluctuations in supply from small scale renewable sources – but on the whole the trend to more decentralization and more market actors seems to accelerate, and is backed by the Market Design regulation proposal from the European Commission. Policy-related research and innovation is needed to support new electricity market designs that work well with high levels of low marginal cost supply and incentivize dynamic consumer involvement while ensuring stable system operation. Market re-designs would need to concern not only trading energy but also appropriate energy system flexibility mechanisms across various energy sectors unlocking the potential that storage, flexible supply and demand as well as sector coupling provide.

[Box 3] Main challenges in deployment of new market designs supporting upscaling of clean technologiesMany zero-carbon technologies (or even net negative emission technologies) exist/emerge, but they are far-off from market because high prices, consumer acceptance and market barriers. Energy markets are need to set the right price and investment signals for clean technologies and their advanced smart system integration. This is a challenge because economics of new decarbonized technologies are very different to the traditional technologies. Thus, new market designs are required to cope with the energy transformation based on a robust legal framework with sufficient long-term market stability and mechanisms for secure system operation.

[Box 4] Key reflections from the stakeholder The stakeholder workshop held on 16 September 2019 in Brussels highlights the needs for • Direct support for commercialization and up-scaling of near-market solutions.• Creating a stable policy environment with reliable short-, mid- and long-term targets.• Appropriately carbon pricing to allow new zero-emission technologies to succeed.• Engagement of citizens in decentralisation and digitalisation efforts• Establishing network to exchange lessons learned and enable benchmarking and prioritization

POLICY MEASURES AND MARKET DESIGN

POLICYBRIEF 6 | April 2020 | Clean Energy Supply

Given the interdependencies within the energy sector, a coordinated energy transformation roadmap shall be developed along the various dimensions of the transformation describing technology, markets and institutional frameworks. Policies should be flexible in order to take into consideration regional and local particularities of the energy transformation. For exemplary sites, the transformation might be showcased through SuperLabs that not only provide proof of the transformation of the energy system but also the economic, societal and institutional changes connected with the energy transition. Decarbonisation strategies should consider technologies along larger energy value chains, or at the least assess up- and down-stream implications. Policies should facilitate upscaling of pilot and demonstration projects as this is an important step to test new technologies under real-world conditions and to create business cases in the long-term (Box 4).

Importantly, considerable efforts are made by private companies in the past to finance R&I. To ensure that private capital flows into low-carbon solutions, governments must create a reliable mid-term market environment for these technologies. This includes ensuring credible and sufficiently high CO2 prices, e.g. via the introduction of a floor price in the ETS; mandating minimum shares of novel fuels/technologies; or setting phase-out dates of high-carbon technologies. The most successful low-carbon innovations of the last decades – PV and e-mobility – were made possible by creating a strong demand pull (PV: Feed-in-tariffs in many EU countries; e-mobility: Zero emission vehicle standards, feebate/rebate systems, mandating EV shares in China) that led to an innovation race between private companies. Replicating these success stories for less developed technologies will require the setting of similar demand pulls. In this regard, policies should

address connecting energy supply and demand where decarbonisation of energy services is difficult to achieve (e.g. long-distance transport and industry) in order to create long-term business cases for new fuels and technologies, like it would be the case for a hydrogen or synfuel economy which not only allows to go to zero-CO2 emissions but even negative emissions if bioenergy is used.

Policy makers need to establish an appropriate institutional setup to address current (and emerging) market barriers. For example, a low-carbon energy supply system is more design-intensive and more capital intensive in nature as the system we know from the past, and it will require access to know-how and capital for utilities, other energy suppliers and the emerging group of prosumers (i.e., household and small firms). In this context, policies need to facilitate appropriate knowledge-building and financial mechanisms including harmonization of policies on the supra-national and EU level to set equal incentives across geographies and to gain knowledge spill-overs.

Authors:T Kober1, R Kannan1, R. Pietzcker2, P Deane3, F Fuso-Nerini4

1PSI; 2PIK; 3UCC 4KTH.

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