According to ExxonMobil’s 2013 Outlook for Energy, global energy demand will grow 35% as the world’s population expands from about 7 billion people to nearly 9 billion by 2040. With this growth comes a greater demand for energy resources to generate electricity, which means nations have to implement long-term energy policies in order to ensure the security of supply. Energy security is a political calculus, which must also factor in the environmental and economic dimensions.
“2014 should be a decisive year in the implementation of the Belgian energy policy on security of electricity supply.”
-David Haverbeke, Partner, Field Fisher Waterhouse
Until the end of the last century, Belgium, and Western Europe in general, had excess capacity in electricity generation: the available means of production were greater than the demand for electricity, despite Belgium’s unfavorable geology for energy resources. Several factors have reversed this tendency in recent years, and Belgium’s current course is faced with a challenge in terms of guaranteeing long-term security of supply. More specifically, Belgium’s challenges are largely linked to the planned phase-out of nuclear generated power by 2025, which will affect Belgium’s dependence on imported energy, its ability to meet its CO2 emission targets, the country’s energy costs and thereby the competitiveness of its industry.
Belgium's energy dependence
Strategic security of supply is intimately related to energy import dependence. The issue at stake is the timely availability of sufficient primary energy, which includes fossil and nuclear fuels. For Belgium, nuclear energy is a delicate topic. The future of the country’s reactors has been subject to political debate since 2003, when the government approved legislation that limits the operating lives of the reactors to 40 years. Belgium has a total of seven operating nuclear units, totaling 5,943 MWe of generating capacity, and which provide around 50% of the country’s domestically produced energy.
As the nuclear phase-out has raised serious questions about Belgium’s ability to guarantee an uninterrupted supply of energy at a reasonable cost, the government decided in 2009 by a protocol agreement to allow the oldest plants to prolong their operating lives on the condition that they make an annual contribution to the Belgian budget. However, following the elections in 2010, and the 540 days without an effective government in place, these proposals were never enacted into law.
In December 2012, Belgium’s Council of Ministers confirmed that Doel 1 and 2, 433 MWe pressurized water reactors (PWR), were to stick to their date of closure in 2015, while Tihange 1, a 962 MWe PWR, was granted an extension to operate until 2025. The Council’s statement clarified that the extension was allowed to “avoid the risk that 500,000 to 1 million inhabitants would experience power cuts during winter.”
In order to bridge the energy gap that will be created from the nuclear phase-out, Belgium plans to increase its dependence on gas imports to as much as 80% of its future energy supply. This will have serious consequences for Belgium’s trade deficit, as Belgium will increasingly import primary fossil sources of energy Besides, supply and demand in global geopolitics will play a significant role. While exploitable oil and gas fields remain, it is inevitable that at some point both oil and gas will become too expensive to continue importing, in terms of the price of the primary resources themselves as well as the cost of energy conversion technologies.
The increased dependence on gas will also have an environmental impact. According to a recent report by the Boston Consulting Group (BCG), the projected net increase of approximately 7.0GW of gas-fired capacity by 2030 will increase the country’s CO2 emissions by 9.1 million tons – a 60% increase on 2013 levels – despite the fact that a large part of the capacity will generate electricity only at times when renewable sources are not producing. As Belgium has committed to reducing its greenhouse gas emissions by 15% from 2005 levels by 2020, the increased reliance on fossil fuels will most probably oblige the Belgian State to purchase allowances through the EU Emissions Trading Scheme, adding further to the costs.
Renewable alternatives, but at what cost?
The government has said that it will set up investment schemes to encourage flexible generation that can accommodate renewable energy after the closure of the nuclear reactors. In order to guarantee sustainability of supply, the government needs to continue investing in new energy technologies that improve efficiency and output of renewable resources.
Belgium aims to increase its domestic renewable energy generation capacity from 4.6GW today to more than 10GW by 2030. The renewable energy mix consists primarily of wind (both on- and off-shore), solar photovoltaic and biomass. However, some sources believe that government decisions are often made without sufficient understanding of the full economic implications and the ultimate cost which is inevitably passed on to the consumer. For instance, the government’s efforts to drive investment in solar photovoltaic energy in recent years already represent annual commitments of approximately €750 million by 2020 and an additional €380 million by 2030 according to BCG.
In parallel, the total investment in energy infrastructure, including increasing the capacity of conventional power plants, is estimated to amount to €24 billion by 2030. The BCG predicts that the incremental cost of these operational and maintenance investments will amount to roughly €250 per year for the average household.
Industry, on the other hand, could potentially see a doubling of its energy costs. A major challenge for the government is to strike an optimal balance between the impact of energy policies on industry and on households. A significant increase in electricity prices would be detrimental to the competitiveness of Belgium’s industry, which is already under significant pressure due to the country’s high cost of labor. Allocating a higher share of the cost burden to households, however, will have important social and political consequences.
The cost of energy, and its subsequent impact on industry, is of critical importance for Belgium’s overall economy. For instance, the chemical industry, one of Belgium’s most important sectors, as well as its most energy-intensive, will see substantial increases in cost if no action is taken. Employing over 90,000 people in Belgium, it could see its production costs rise by 17% by 2030 if the government remains on its current course of action.
The government needs to keep business in mind when formulating energy policies. Renewable energy policy, for example, is in a constant state of flux, which creates uncertainty for investors. Indeed, the same BCG report indicates that as many as 15 regulatory changes were made within a one-year period, which makes investors reluctant to commit to long-term energy projects in Belgium. Considering the amount of investment needed for the government to realize its renewable ambitions, it is clear that a coherent, long-term vision for Belgium’s energy future must be put in place.
The nuclear phase-out also poses another serious question for industry. If the energy gap is not bridged, insufficient domestic generating capacity can result in power cuts and blackouts in periods of peak demand. This could also result in additional costs for industry, either in terms of loss of production or in terms of equipment damage. However, newly offered demand-side management services may contribute to avoiding such scenarios.
Unlike Belgium, neighboring countries, including Germany and the UK, are actively taking steps to ensure that their environmental policies do not affect their industrial activities. The UK is even building another nuclear plant to guarantee security of supply at an affordable price. Germany, on the other hand, is implementing a rapid nuclear phase-out following the nuclear disaster in Fukushima in 2011, but is working to maintain industrial competitiveness through limiting the Renewable Energy Act (EEG) tax charged to energy-intensive manufacturing industries.
Ultimately, Belgium’s current course entails significant trade-offs due to the nuclear phase-out, which affects the country’s ability to meet its CO2 emission targets, increases the total cost of energy both for industry and households and increases energy dependence at a time when resources are becoming increasingly scarce.
As the global energy landscape becomes increasingly complex and competitive, especially due to the shale revolution in the US, Belgium must ensure it provides a sustainable, coherent plan for its future energy supply. David Haverbeke, Partner at Field Fisher Waterhouse, believes that “2014 should be a decisive year in the implementation of the Belgian energy policy on security of electricity supply.” Considering its geographical situation, the Belgian energy market evolutions can be expected to be further closely monitored by European and national regulatory authorities.
For more of our policy recommendations, please refer to our Priorities for a Prosperous Belgium.