Also by EU-China Energy Cooperation
Platform Project
2020
EU China Energy Magazine Spring Double Issue
EU-China Energy Magazine Summer Issue
中欧能源杂志夏季刊
EU-China Energy Magazine Autumn Issue
中欧能源杂志秋季刊
EU-China Energy Magazine 2020 Christmas Double Issue
中欧能源杂志2020圣诞节双期刊
2021
EU-China Energy Magazine 2021 Spring Double Issue
中欧能源杂志2021春季双期刊
EU-China Energy Magazine 2021 Summer Issue
中欧能源杂志2021夏季刊
EU China Energy Magazine 2021 Autumn Issue
中欧能源杂志2021秋季刊
EU China Energy Magazine 2021 Christmas Double Issue
中欧能源杂志2021圣诞节双刊
2022
EU China Energy Magazine 2022 February Issue
中欧能源杂志2022年2月刊
EU China Energy Magazine 2022 March Issue
中欧能源杂志2022年3月刊
EU China Energy Magazine 2022 April Issue
中欧能源杂志2022年4月刊
EU China Energy Magazine 2022 May Issue
中欧能源杂志2022年5月刊
EU China Energy Magazine 2022 June Issue
中欧能源杂志2022年6月刊
EU China Energy Magazine 2022 Summer Double Issue
中欧能源杂志2022年夏季雙刊
EU China Energy Magazine 2022 September Issue
中欧能源杂志2022年9月刊
EU China Energy Magazine 2022 October Issue
中欧能源杂志2022年10月刊
Digest of the Handbook on Electricity Markets - China Edition
Digest of the Handbook on Electricity Markets - International Edition
电力市场手册 （精华版）- 中国发行
电力市场手册 （精华版）- 国际发行
EU China Energy Magazine 2022 November Issue
中欧能源杂志2022年11月刊
EU China Energy Magazine 2022 Christmas Double Issue
中欧能源杂志2022年12月刊
2023
EU China Energy Magazine 2023 February Issue
中欧能源杂志2023年2月刊
EU China Energy Magazine 2023 March Issue
Joint Statement Report Series
Electricity Markets and Systems in the EU and China: Towards Better
Integration of Clean Energy Sources
中欧能源系统整合间歇性可再生能源 - 政策考量
Supporting the Construction of Renewable Generation in EU and China:
Policy Considerations
中欧电力市场和电力系统 - 更好地整合清洁能源资源
支持中欧可再生能源发电建设: 政策考量
ENTSO-E Grid Planning Modelling Showcase for China
ENTSO-E 电网规划模型中国演示
Accelerating the Incubation and Commercialisation of Innovative Energy
Solutions in the EU and China
加速中欧创新能源解决方案的孵化及商业化
Table of Contents
Also By EU-China Energy Cooperation Platform Project
Letter from the Team Leader
1. Electricity market design: What future for long-term contracts?
2. Renewables or coal? 11 lessons on Germany’s changing energy mix
3. REHeatEU: A once-in-a-lifetime opportunity for energy security and
climate protection
4. How the energy crisis is boosting heat pumps in Europe
5. Policy support needed to boost sustainable aviation fuels in China
6. News in Brief
7. Featured Publication
Sign up for EU-China Energy Cooperation Platform Project's Mailing List
Also By EU-China Energy Cooperation Platform Project
Letter from the Team Leader
Dear All,
Welcome to March 2023 issue of the EU China Energy Magazine!
As the spring flowers come into bloom, it is a relief to see that the EU has
managed to survive the winter in this energy crisis so well. Gas storage
levels are above those of 2020, and the EU can breathe a sigh of relief for a
short time. However, the turbulence on the energy market will be with us
for some years to come. And it remains the case that, in addition to energy
security and affordability, the aspect of sustainability is a key factor. This is
reflected in the articles in this issue.
First, we delve into the future of long-term contracts in electricity market
design, exploring how contractual arrangements are evolving to encourage
investment and innovation in renewable energy. We then turn our attention
to Germany, examining the country's shift away from coal and towards
renewables, and sharing 11 key lessons from this ongoing transition.
Next, we explore how the combined influence of evolving consumer
preferences, private sector investment readiness, and a supportive policy
framework can create a tipping point to expedite building decarbonisation.
This is followed by an in-depth analysis of the growing popularity of heat
pumps in Europe, as consumers seek low-carbon alternatives to traditional
heating systems in response to the continent's energy crisis.
Finally, we look at sustainable aviation fuels in China, exploring the policy
support needed to drive their adoption for the decarbonisation of the
transport sector.
We hope you find this issue both informative and thought-provoking, and
we invite you to join the conversation on these crucial topics.
Once again, I would like to say a big thank you to our editors Daisy Chi and
Helen Farrell for their hard work in delivering this issue of the magazine
under extreme pressure.
Flora Kan
ECECP Team Leader
1. Electricity market design: What future
for long-term contracts?
The European Commission recently closed its public consultation on the
reform of the EU’s electricity market design and is expected to table a
proposal on March 16. In the version of the proposal that leaked this week,
the Commission is taking measures to improve the PPA (Power Purchasing
Agreement) and forward markets. Member States can make use of ‘hybrid’
market design to support new RES investments, but the Commission puts
some requirement in place to protect the functioning of the spot market and
preventing crowding-out of PPA markets: Support contracts need to be
equivalent to two-way CfDs, which are more financial and keep short-term
incentives intact, and governments should prioritise allocating CfDs to
investors that have PPA contracts in place. The proposal leaves many
design details unanswered and might not go far enough for some
stakeholders who favour managed CfDs for all generation assets.
The fact that the European Commission did not originally consult on a well-
defined set of measures for long-term contracts but instead considered a
wide range of options, reflects the fact that there are major differences of
opinion between member states. This is no surprise, as there already exists
large national differences in the implementation of short-term markets, the
role of capacity markets, the support schemes of RES, and regulation of the
retail tariffs. Some fundamentals must be kept in mind when considering
such schemes and as the final version of the Commision’s proposal will
soon be published and discussed at the Council and the European
Parliament.
Improving the market for long-term contracts
We expect the use of long-term contracts by private parties will increase in
the long run net zero scenario. Price volatility is expected to increase,
government price guarantees for RES such as feed-in tariffs, will phase out,
and the prudential regulation of the retailers will become stricter.
We also expect innovation in energy contracts. Long-term contracts will
need to go beyond standard forward contracts on the day-ahead market.
Specific contracts, such as Power Purchasing Agreements (PPAs) are
needed to target actors with different risk profiles (retailers, intermittent
RES producers, storage operators, aggregators, conventional generators).
Balancing contracting positions might require multilateral contracting
(CERRE[1], 2022, p.96). For instance, a wind farm, a retailer, and a storage
operator together might have a lower risk exposure than any two players
together.
The market for corporate PPA is likely to mature further, but integrated
companies with portfolio investments will remain important as well. Those
could be in the form of classical utilities, but also in special purpose
vehicles such as energy communities or integrated offshore energy hubs.
Those structures can prevent hold-up in closely intertwined investments.
Government intervention in long-term markets
There are good arguments for government intervention in the contracting
market such as: regulating the risk of retailers, standardising contracts to
simplify netting of positions, improving transparency, contracting on behalf
of consumers to prevent future intervention by the government, and
providing natural counterparties for some contracts. The lastcategory should
cover activities that are heavily affected by regulation, such as the
availability of transmission capacity and long-term carbon policies with
long-term transmission rights and options on the CO2 ETS price. However,
a key role remains with private parties.
The existing market has worked well in providing consumers with the
option to lock-in prices three to sometimes five years in the future, but
consumer demand for those contracts was often limited. While producers
might like longer-term contracts to reduce their capital costs, economists
disagree on whether and how we should regulate hedging beyond this
period, especially given the lack of consumer demand for longer term
hedging. Some economists argue for more government intervention in the
long-term contracting market and structural market design changes, in what
is called a hybrid market design (See CERRE, 2022, p.101)
We believe that the subsidiarity principle should apply with respect to the
implementation of organised long-term markets for two reasons: There is no
consensus among economists or industry participants on whether we need a
large market reform based on long-term contracts. Member states also have
different social contracts regarding the role of governments in steering
markets, and their consumers have different risk-appetites across.
There are benefits from using organised long-term markets as they will
lower capital costs for investors and hedge consumers against large price
changes.
Government intervention for long-term contracts may make more sense for
base-load producers (e.g., nuclear, and renewable energy suppliers) as they
have large investment costs, and are less likely to be price setters, and
therefore have higher risk exposure if private contracts do not provide
sufficient hedging. For gas-fired power plants, the electricity price follows
their input cost as they are often marginal, and their price risk is therefore
lower.
Flexible energy sources such as storage and demand side management
might find it hard to find long-term hedging contracts in organised futures
market, but it is not obvious that targeted government-mandated contracts
will be useful here. Governments might find it hard to quantify the portfolio
benefits of different flexibility technologies and bilateral private contracts
are likely to be more innovative than standardised government contracts.
Moreover, portfolio investors might build a mix of renewable energy and
storage facilities and internalise risk offsets within a company (ibid., p.97).
Many countries in Europe already have a form of hybrid markets as they are
using distinctive styles of support schemes for renewable energy and
capacity markets, next to a more harmonised wholesale market.
Harmonisation at EU-level might help improving the efficiency of those
schemes for renewable energy, capacity markets and potentially long-term
contracts and allow for international trade. So, there is no need for a
revolutionary new design to improve the role of long-term contracts.
Drawbacks of government-backed contracts
However, there are also drawbacks of government-backed long-term
contracts, which might have implications for the internal market, and for
which the European Commission might impose some minimal requirements
at the central level:
● The contracted capacity might not fully take part in the short-term
markets: day-ahead, balancing, and ancillary service market. This could
reduce production efficiency and reduce spot market liquidity.
● There might be too little competition for long-term contracts, with
insufficient cross-border participation as long-term transmission contracts
do not exist and contracts are not sufficiently standardised between Member
States。
● Format might suit one technology more than another. So, we might
obtain an inefficient combination of production technologies. This might be
in particularly valid for demand response, storage, and other forms of
flexibility.
● Government-regulated contracts might crowd-out private PPAs and
portfolio investments because the government could offer better contracting
conditions and does not price the risk of different assets correctly.
● Energy prices might be too low, if a government exercises its monopsony
power as a single buyer and extracts resource scarcity rents by signing long-
term contracts at below the expected market rates and passes the lower
contract price on to consumers. This could be a form of state-aid (ibid.,
p.98)
Empirical evidence on long-term contracts highlights some of those pitfalls.
Chattopadhyay & Suski, (2022[2]) indicate that legacy long-term PPA
contracts slow down innovation, reduce spot market liquidity and are often
less competitive with higher prices. In CAISO and MISO, regulated
planning processes, utility programs, and state-directed procurements for
preferred resource types several years in advance have crowded out short-
term capacity markets. Capacity markets were therefore not successful in
attracting merchant investments and large quantities of low-cost capacity
supply (Pfeifenberger et al. 2017[3]). In the Ontario market, the operational
decisions of some assets (renewable, hydroelectric, and nuclear) do not
respond to market prices, because they are subject to fixed price contracts
independent on production levels (Pfeifenberger et al. 2017). The
Colombian contract model did not provide enough incentives for
intermittent RES (Olaya et al., 2016[4]). However, there are also many
examples where government-mandated targeted long-term contracts have
accelerated investments. For instance, in the UK, the Low Carbon Contracts
Company has contract about 30 GW of new capacity under Contract for
Differences (CfDs).
How to minimise these drawbacks?
The European Union might try tolimit the downsides of those effects by
providing some guidelines on contract design, but those often increase the
risk for investors as well. Examples of such measures are as follows:
● Make the contracts technology neutral and standardised to increase the
number of bidders. Contracts could focus on hedging long-term price
exposure of consumers, and less on the hedging needs of producers.
● Use an auction to determine the contract price, as this will create more
competitive pressure.
● Allow portfolios of technologies to participate in the market for
government contracts. For instance, a RES producer combined with a
storage operator can sell a forward contract and manage risk internally. This
reduces the need for the auctioneer to rely on availability and portfolio risk
factors in the auctioning process or will allow at least some arbitrage
between technology choices. This will require, however, more financial
monitoring on the risk exposure of portfolio bidders.
● Allow contracts to be traded on secondary markets, so firms can
reallocate contracts. This will allow inefficient generation capacity to exit
the market, and retailers can adjust their contracting positions if they gain or
lose customers. Secondary markets are important for firms to mothball
technology in a timely fashion. To enable secondary markets, contracts
should not be strictly bound to a particular asset. For instance, if an
inefficient asset is under a long-term contract with historical favourable
contracting conditions, it might not be in the firm’s best interest to mothball
the asset, unless the contractual obligations can be transferred to other
assets.
● Turn physical contracts into financial contracts, such a Contract for
Differences, where contract deviations are settled financially. This keeps
incentives for availability and participation in the spot market. It requires
liquid short-term markets to function well.
● Fix the contracted quantity ex-ante. Contracts should be based on
deemed capacity and not available capacity. Take-or-pay clauses that are
sometimes used for thermal generators eliminate their incentive to
participate in spot markets and reduce liquidity. This is also the case for
renewable energy production. Hence, the risk for unavailability must be
with the seller of the contract.
● If resource scarcity rents are extracted, this should happen in a
transparent way, and state aid concerns need to be addressed, when rents are
reallocated.
● Allow cross-border participation in the auctions for long-term contracts,
as this will increase competition. This will require long-term contracts for
transmission capacity (CERRE, 2022, p.99-100).
Conclusion
The energy crisis has stirred up a discussion on whether (long-run) risks and
incentives are correctly allocated between investors, consumers, utilities,
and the government; especially considering a future net zero energy system.
The lack of long-term contracts has exposed consumers to price spikes and
created windfall profits for inframarginal production. Do Member States
need more tools to promote long-term contracts in a so-called hybrid
system?
Many Member States already supplement the short-term market with
additional mechanisms, for instance to support renewable energy and
nuclear, and capacity renumeration schemes. State-aid rules have explicit
provisions for those contracts. Hence, Europe already has hybrid markets.
The current discussion allows the Commission to ascertain whether those
hybrid markets need to become more harmonised to improve competition
and prevent a fragmentation of the European energy market, and whether
state-aid rules should be adapted to allow governments to intervene more
explicitly in risk allocation and to prevent distortions of short-term markets.
The precise design principles of the CfDs support program will determine
whether they are beneficial for the energy market.
The crisis also shows that we need to step up the regulation and monitoring
of risk in the energy sector. This takes many forms: energy procurement by
individual retailers, margin requirements for financial contracts, the use of
physical and financial collaterals, netting of contracts, the allocation of
congestion risks, monitoring the liquidity and pricing of futures markets,
and assessing systemic risks.
Since its inception, the European internal power market has been evolving
continuously, and it will continue to do so. We have established a well-
functioning set of short-term markets, cherished by most stakeholders. This
has resulted in a European-wide well-integrated internal market, which
benefited security of supply and competitiveness. We do not need a
revolutionary new European-wide market design, but an improved
regulatory framework for hybrid markets which Member States can apply
based on national preferences, and better monitoring and regulation of risk.
By Bert Willems
Republished with permission from CERRE
This article is an edited and commented excerpt from CERRE’s report
‘Recommendations for a Future-Proof Electricity Market Design’. For
more, check out the report here.
2. Renewables or coal? 11 lessons on
Germany’s changing energy mix
Last year marked a turning point for the EU’s energy policies. The
dependency on Russian fossil fuels - gas in particular - had severe
consequences for its member states and resulted in an energy supply crisis
across the entire EU. In response, the EU put forward measures focusing on
the promotion of renewable energy and energy efficiency as well as the
diversification of gas supply. Germany adopted the most comprehensive
policy programme to promote the expansion of renewables and energy
efficiency.
However, Germany has chosen coal as a short-term emergency alternative
to replace gas and secure sufficient energy supply during the energy crisis.
Its plans to phase out coal, however, remain unchanged. Overall, the gas
crisis is likely to lead to an accelerated energy transition both in Germany
and in the rest of the EU. adelphi analysed Germany’s changing energy mix
along with Germanwatch and present the 11 identified lessons in this policy
brief.
Europe’s structural response to the gas crisis has
been to focus on renewable energy, energy
efficiency, and diversification of gas supply.
The year 2022 marked a turning point for European energy policies as the
negative impacts of the EU’s dependency on Russian fossil fuels –
especially gas – were heavily felt. Before, Russia supplied the EU with
about 40 per cent of its fossil gas, imported predominantly via Nord Stream
I as the main network of gas pipelines running to Germany under the Baltic
Sea. That pipeline network is no longer functional, the Russian government
has reduced the flow of gas to Europe, and the EU has set itself the
objective to stop importing Russian gas. Since the beginning of the conflict,
the EU has successfully cut around 10 per cent of fossil gas demand in
response to the invasion and in order to reduce dependency on Russian
fossil fuels, with an overall reduction of 15 per cent being planned by
March 2023.
As a response to the energy crisis the European Commission proposed the
RePowerEU Plan in May 2022 with its three main objectives of saving
energy, accelerating the production of clean energy, and diversifying energy
supplies.
● To save energy, the plan proposes an updated target for energy efficiency,
raised from 9 per cent to 13 per cent by 2030, compared to the projections
of the 2020 Reference Scenario. Moreover, the Commission proposed a
target to reduce overall electricity demand by 10 per cent, as well as an
obligation for Member States to reduce demand during peak price hours by
and additional 5 percent.
● The plan foresees a rapid rollout for renewables, proposing to increase
the 2030 target for renewables from 40 per cent to 45 per cent (from 1 067
GW to 1 236 GW), supported by a faster permitting process for renewable
installations and the introduction of the EU Solar Energy Strategy, which
intends to double installed solar capacity by 2025 from current levels. The
strategy aims to bring more than 320 GW of solar PV online, newly
installed by 2025, and almost 600 GW by 2030.
● Moreover, the EU has taken measures to diversify its gas supply and
entered international cooperation with several countries to this end. Next to
increasing supply, the EU has also introduced measures to reduce gas
demand by adopting the European Gas Demand Reduction plan, including
the switch from gas to alternative fuels, incentives for reducing gas
consumption, and reducing heating and cooling, to support Member States
in reducing their gas demand by 15 per cent.
Germany has supported EU measures on gas reduction and aims to cut its
gas consumption by 20 per cent between 1 August 2022 and 31 March
2023. In Germany, the reaction to the energy crisis has also translated into
an enhanced focus on diversifying gas supplies, with plans to build a
number of fixed onshore LNG terminals and five floating storage and
regasification units, as well as pursuing contracts with additional suppliers.
Some parts of the federal German government want support for the
exploration of new gas fields abroad, but a number of ministries are trying
to prevent this step. The situation has also led to postponing the deadline for
nuclear phase-out by three-and-a-half months, and a temporary uptick in
coal consumption.
Germany has passed the largest package of
measures to accelerate the energy transition to
renewable energy, and is developing further laws
to speed up this process.
In spring of 2022, Germany announced its ‘Easter Package’, which
included the most amendments to energy policies that Germany has seen in
decades. The five laws that were amended in July 2022 all target the rapid
expansion of renewable energies, ranging from an increase in renewable
capacity expansion, faster permitting processes and grid expansion for an
improved integration of renewable energies. The update of the country’s
Renewable Energy Act (EEG), for example, included new targets for
renewable energies. The share of wind, solar, and hydropower in electricity
consumption is set to increase to at least 80 per cent by 2030. Due to the
new level of priority allocated to renewable energies, the planning and
permitting processes of installation projects will be accelerated. This is
especially important to speed up the expansion of onshore wind energy,
which had been negatively affected by bureaucratic delays in the past. Wind
power provided the largest contribution to electricity generation in 2021
(2021: 114.6 bn kWh; 2020: 132.1 bn kWh), yet its installed capacity has
been growing only slowly (2021: +1.632 MW; 2020: +1.227 MW). In
comparison to the slow expansion of installed wind power capacity,
installed solar power capacity was expanded continuously: From 2016 to
2021, total installed capacity grew by 46 per cent from 40.700 MW to
59.400 MW. 2022 saw yet another increase in the rolling out of solar power,
as net solar PV additions are estimated to have risen by 26 per cent,
increasing the cumulative installed capacity to over 65 GW.
In addition, targets for offshore wind have also increased significantly with
the Offshore Wind Act and the Offshore Realisation Agreement: Offshore
wind capacity will be expanded from the current 8 GW to 40 GW by 2035
and 70 GW by 2045 (previous target: 20 GW by 2030; 40 GW by 2040).
In 2022, the share of renewables in German power consumption reached a
new high, as renewables accounted for almost 46.9 per cent, an increase of
4.9 percentage points from 2021.
While renewables are widely considered to have the highest priority in the
debate about energy security, energy savings and efficiency have been
somewhat less prominent but no less crucial. A study by E3G found that
investments in building efficiency alone could help Germany to save more
gas than would be imported via any of the planned LNG terminals, saving
EUR 200bn of gas imports. Germany introduced clear measures tackling
energy efficiency and savings on the demand-side by approving two energy
conservation ordinances in August 2022. The ordinances include enhancing
the energy efficiency in public, private, and corporate buildings, e.g. by
optimising of heating systems, as well as energy savings in companies, for
which companies with an annual energy consumption of 10 GWh or more
are required to implement energy efficiency measures. Moreover, Germany
is working on two ambitious energy efficiency laws. So far, concrete legal
targets include a reduction of final energy consumption by 500 TWh by
2030. Starting in 2024, the federal government is required to reach final
energy savings of 45 TWh per year, while the German states must save 5
TWh annually.
At the end of January, due to the described measures and relatively mild
temperatures, gas storage facilities are still full, prices have come down,
and the problem of a gas crunch seems unlikely for the current winter
season. However, next winter may still be a challenge, as – contrary to the
first part of 2022 – no gas from Russia will be imported, China might
export less gas due to stronger domestic demand, and mild temperatures are
not guaranteed.
In the power sector, additional unforeseen events –
especially a nuclear power crisis in France - have
exacerbated an extraordinary supply crisis.
Along with the high energy prices as a result of Russia’s invasion of
Ukraine, several other factors aggravated the energy crisis. France
experienced a power crisis due to the weak nuclear output during much of
2022. By November, a record number of 26 out of 56 reactors was shut
down. Moreover, the effects of the exceptional summer drought throughout
the EU, which hampered hydropower generation in the South, put
additional stress on the EU’s electricity systems.
In this emergency, coal will play a role as a short-
term alternative to gas in the power sector.
A particularly effective measure to reduce the total amount of gas
consumed lies in curbing its use in electricity generation. However, while
investment in renewable energies has been ramped up in Germany and
across all of the EU, renewable energy capacities are not yet sufficient to
cover for the current supply shortages in gas. It is now widely seen as a
mistake that previous governments slowed down the expansion of
renewable energy. While Germany used to be a pioneer in solar and wind
power, changes to the Renewable Energy Sources Act, which resulted in
reduced feed-in tariffs and fewer financial incentives for the industry, as
well as additional regulations led to a slowdown in the expansion of
installed solar power. More recent obstacles were a lack of skilled
technicians and backlogs in the supply chain. In the case of onshore wind,
long permitting procedures, minimum distances, local protests, and
ideological blockages in some German states like Bavaria have hampered
the expansion of wind infrastructure. Another problem is the transmission
infrastructure that has not been developed fast enough in the past because of
opposition from local municipalities in expanding an electricity line
connecting the northern and southern grids. A majority of wind energy
generation takes place in northern Germany while southern Germany is
responsible for an outsize share of the country’s total electricity demand.
Furthermore, Germany has had to export large amount of electricity to
France in 2022, where a large number of nuclear power stations were
unable to run consistently.
Because of these shortcomings, coal-fired power plants have been chosen to
substitute for fossil gas in the short term and serve as an emergency
alternative to gas in the power sector.
Short-term plans for coal include the extension of
the lifetime of existing plants for a few months or
years coupled with higher operating hours.
Not only Germany, but several other EU Member States, such as Austria,
France, and the Netherlands, have decided to extend the operation time of
their coal-fired power plants, reopened them, or raised caps on operating
hours. In Germany, the parliament passed the Substitute Power Plant
Standby Act (EKBG) in July, which intends to secure energy supply and
flexibility for the energy market during the energy crisis. In line with the
EKBG, coal-fired power plants will be upgraded in order for them to re-
enter production for the energy market at any time but only as a back-up
option. The same goes for power plants that initially were supposed to be
shut down in either 2022 or 2023, as well as for plants that have - until now
- only served as grid reserves, or security reserves, the latter of which are
supposed to restart only in extreme emergencies. For hard coal-fired power
plants, the temporary comeback will apply until the end of March 2024 at
the latest. For lignite, it will end even earlier on 30 June 2023.
The uptick in coal consumption has led to higher
emissions in 2022, but the structural challenges
for Germany to meet its climate targets lie
elsewhere, in the buildings and transport sector.
Calculations by Agora Energiewende show that the reduction in CO2
emissions required for achieving the German climate targets did not
materialise in 2022 as Germany's GHG emissions stagnated at around 761
million tons of CO2, missing the target of 756 million tons of CO2. Emission
reductions in 2022 compared to the reference year 1990 were only 39 per
cent and, thereby, for the second time, lagging behind the 2020 climate
target of 40 per cent. Although energy consumption fell to the lowest level
measured since the country’s reunification in 1990, the increased use of
coal and oil nullified the emission reductions that were achieved through
energy savings and lowered gas consumption. However, the use of coal in
the power generation process was not the problem behind the failure to
meet the climate targets, as the emission targets of the power sector were
met. Rather, the transport and building sectors failed to meet their targets as
the necessary structural changes for deep emissions reductions in those
sectors have been delayed for years.
At the EU level, a study by Ember found that the short-term uptick in coal
use will not have negative impacts on EU climate ambitions in the long
term. Even if all the coal-fired power plants that are now on reserve across
the EU were to operate at 65 per cent of their capacity, emissions in 2023
would increase by 30 MtCO2, equalling 1.3 per cent of the EU’s total CO2
emissions in 2021 and 4 per cent of its annual emissions in the power
sector.
The German government remains committed to
its goal to end the use of coal ideally by 2030.
According to the German government, the increased coal use is only seen as
a last resort and short-term back up to secure energy supply. Germany will
not add any new coal capacity, and the government remains committed to
phasing out coal ideally by 2030 and by 2038 at the latest, as mandated by
German law.
The legal date for the end of lignite-based power production in Western
Germany was recently moved forward to 2030 from 2038. While it is
unclear to what extent this will lead to reduced emissions overall, it
provides additional certainty that the age of coal is ending.
That Germany remains set on its plans to end coal use and accelerate its
energy transition can be seen in the case of Western Germany, where the
legal date for the coal exit has been accelerated. In the federal state of North
Rhine-Westphalia (NRW), the end date for lignite in the Rhenish mining
area has been moved forward by eight years to 2030. Two power plants that
were meant to be shut down by the end of 2022 will remain connected to
the grid until 31 March 2024, and all other lignite-fired power plants of
RWE32 will retire by 2030. The implementation of this understanding
between the BMWK, the Ministry of Economic Affairs, Industry, Climate
Action and Energy of the State of NRW and RWE was anchored in law by
adapting the Coal-fired Power Generation Termination Act. The
government estimates that 280 million tons of coal are to remain in the
ground as a result, saving up to 280 million tons of CO2 that could have
been emitted with a later phase-out in 2038. However, in a scenario
modelled by Aurora Energy Research, which is based on the assumption
that generating electricity from lignite would be unprofitable after 2030 -
mainly due to the gradual normalisation of gas prices and rising prices in
European emissions trading - the early phase-out of coal in the Rhenish
mining area in 2030 would not have any meaningful emission-reducing
effect. While it remains thus unclear to what extent this arrangement will
reduce overall emissions, it highlights that the age of coal is ending in
Germany.
Coal use in response to the crisis: Lützerath
Part of the compromise to re-activate two lignite power plants but move the
date for coal phase-out forward by RWE has been the decision to destroy
the German hamlet Lützerath. In some circles, its fate has taken on a
symbolic significance, purportedly indicating whether Germany will act in
keeping with the Paris agreement and the 1.5° goal. The hamlet consists of
only a few houses and many of its previous residents have long sold their
property and moved elsewhere. The ground now belongs to the energy
company RWE, and clearing and demolition work started in 2020. Climate
activists did occupy the site for about two years until January 2022 to
prevent Lützerath’s destruction but without success.
An anticipated exit from hard coal and from
lignite in Eastern Germany s still under
discussion.
Discussions about aiming for an earlier lignite exit in Eastern Germany are
ongoing, but are more
complicated due to stronger objections from local politicians. In January
2023, Germany’s Federal Minister for Economic Affairs and Climate
Action, Robert Habeck, called on states in the east of the country to follow
the agreement between NRW and RWE and move their respective coal exit
to 2030 as well, warning that after 2030 coal-fired power generation in
Germany will no longer be economically viable.
While a timely exit from lignite is the bigger challenge, Germany also has
remaining hard coal-fired power plants that fully run on imported coal.
They will be phased out through a combination of two approaches: Until
June 2023, power plant operators can participate in several rounds of
auctions to receive a payment from the state to close down their plants by
2026 at the latest. For the remaining plants, a phase out schedule will be set
by the regulator, following a pathway defined by law. The end date of that
pathway is also 2038 at the latest and would have to be brought forward for
a complete coal exit by 2030.
The recent changes to the European Emissions
Trading Scheme and the rapid growth of
renewables are likely to make coal uneconomical
by 2030 in Germany.
Overall, the German government has emphasised that emissions will only
increase in the short term. In the long term, overall emissions will not
surpass any planned targets because the cap on emissions from the power
sector under the European Emissions Trading System (ETS) remains
unchanged. With the recent deal on the European ETS from December 2022
that increases emission reduction targets to 62 per cent (from the current 43
per cent), the European coal phase-out could even be accelerated and take
place before 2030, as coal usage becomes more and more unprofitable.
Overall, the gas crisis is likely to lead to an
accelerated energy transition, translating into
higher climate ambition. It will be crucial to
reduce fossil lock-in in order to avoid stranded
asset risks.
There are no relevant political voices that demand a lowering of German -
or European - climate targets.If anything, ambitions seem to target an even
faster transition towards clean energy, now that the problems of a fossil
fuel-based energy system dependent on imports have manifested themselves
as clearly as they have since the beginning of the war. The German coal exit
is unquestioned and likely to be accelerated. The largest risk in the current
changes to the German energy mix lies in the potential lock-in of new fossil
fuel infrastructure related to LNG imports. Oversized LNG project could
quickly turn into stranded assets as renewables expand rapidly, the carbon
3. REHeatEU: A once-in-a-lifetime
opportunity for energy security and
climate protection
The war in Ukraine has increased the focus on the way we heat our
buildings. Overnight, the EU’s dependency on Russian energy threatened
the economy at an unprecedented scale. It became urgent to decouple the
EU economy from Russian energy supply. Of the Russian gas imported into
the EU in 2021, 30 to 40 per cent was used to heat buildings. Equally
worrying, 30 per cent of greenhouse gas emissions come from buildings.
Today, this makes the replacement of fossil fuels in buildings by renewable
solutions a top priority for energy security as well as for climate goals.
Could the current crisis unleash a green swan that will exponentially
transform the building sector in this decade? A green swan is an
unpredicted event that positively transforms the economy. ‘This
extraordinary bird symbolises the potential for change and, in particular, for
transformation.’[5]
The opportunity
Renewable solutions: The sales ratio of oil and gas boilers to hydronic heat
pumps was 5:1 in 2021, but there has been a significant increase in the sales
of heat pumps since then.[6] New heat pumps working with natural
refrigerants can provide a higher output temperature which makes them
suitable for the existing building stock—gone are the days when heat
pumps were only suitable for new buildings. In fact, the green swan may
very well be a heat pump. One goal at the EU level is to reach a share of 49
per cent renewables in buildings by 2030 compared to 24 per cent in 2020,
including by installing 10 million new hydronic heat pumps by 2027 and
300 GW of photovoltaics (PV) on rooftops by 2030. The achievement of
EU 2030 targets would lead to total annual heat pump sales of 7 million
units (both hydronic and air-to-air solutions) and a savings of 21 bcm of gas
by 2030—which is ‘equivalent to almost 15 per cent of EU pipeline imports
from Russia in 2021’.[7]
A strong European manufacturing base: With less than 10 per cent
imports of heating appliances from third countries, the EU manufacturing
base is strong. However, past years showed a worrying sign: the trade
balance in heating deteriorated from 2015 to 2021. The EU–China trade
balance went from a surplus of EUR 249 million to a deficit of EUR 390
million within five years.[8] Current disruptions of global supply chains and
policies like the American Inflation Reduction Act are now putting
additional pressure on EU manufacturers. This is where a strengthened
industrial policy could really make a difference. It could alleviate the
temporary threats and even strengthen the European manufacturing base.
Social acceptance and affordability: Already before the war in Ukraine,
35 million Europeans lived in energy poverty.[9] While the rising energy
prices hurt people and the economy, they are a clear additional reason to
speed up the energy renovation of buildings. Recent data show a tangible
shift of consumer preferences towards renewable solutions, especially heat
pumps, PV, and self-consumption models. The speed and scale of the shift
depend on two issues: the upfront cost of heating systems, which is still
three to four times higher for a hydronic heat pump than for a gas boiler,
and their operating costs. A ratio of gas to electricity price between 1:2.5
and 1:3 per kilowatt-hour would ensure that the electricity bill remains
acceptable compared to a conventional gas solution (see current price ratios
on energypriceindex.com).
Speed and scale: The speed and scale of the market transformation on the
supply side correlates with (1) manufacturing capacity and the availability
of (2) supplies (material and components) and (3) installers. The
achievement of EU targets requires a threefold increase of the existing heat
pump manufacturing capacity and a parallel decrease of conventional
combustion solutions. This is possible with a massive pan-European
upskilling programme and job creation: Half of the 1.5 million installers
need training and 750,000 more should be recruited.[10]
A heterogenous building stock with high peak demand in winter:
Buildings are heterogeneous, meaning that a diversified mix of heating
solutions is necessary to meet all heat profiles, including district energy.
The European heating demand is on average three times higher during the
winter than in the summer. The gas infrastructure is built in such a way as
to meet this higher winter demand, but the electricity infrastructure is not
yet equipped to meet it, as shown in the figure below. Gas properties make
it a convenient energy carrier for storage over longer periods of time.
Hybrid gas–heat pump solutions, including the hybridization of existing,
already installed, gas boilers with heat pumps, can utilise this potential and
address seasonality at lower system costs.
The green swan
Changing consumer preferences, the investment readiness of the private
sector, and the policy framework could constitute a critical mass for
exponential change: the green swan of buildings decarbonization.
Consumers: Energy security concerns triggered by the war in Ukraine and
the increasing salience of climate change is leading to a true awareness
shock among consumers. Climate change is not a theoretical threat made by
distant scientists anymore; its effects are tangible, salient, and immediate. In
2022 alone, over 15,000 people died in heat waves in Europe.[11]
Movements such as Fridays for Future have been another eye opener for
many. This awareness shock combined with rising energy prices is already
translating into what could be the premise of the biggest market shift in
decades. According to preliminary figures from the Association of the
European Heating Industry (EHI), the sales of gas condensing boilers
decreased overall by 8 per cent in 2022 vs 2021, and the sales of air-to-
water heat pumps increased by 40 per cent, with big differences across
member states.[12]
Private sector: This awareness shock is equally tangible in the private
sector. Heat pump targets at EU and national levels and possible bans of oil
and gas boilers have given a strong market signal for investors. This has led
to investment pledges amounting to EUR 4 billion in the heat pump ramp-
up in Europe.[13]
Policies: It is likely that this shift will be maintained and accelerated by the
implementation of the new EU energy and climate framework: REPowerEU
and the Fit for 55 package— ‘fit’ for a 55 per cent greenhouse gas reduction
by 2030 compared to 1990 levels. The table below provides an overview of
the potential transformative effect of the upcoming policy framework.
Source: Author’s own compilation of existing legislations and ongoing revisions. Note: most policies
listed in this table are still under discussion, either at the drafting or the negotiation stage, so
changes are still very likely.
This table clearly shows the magnitude of the transformation that could be driven by policies. We
should pay close attention to the EU, the UK, and those member states that are at the forefront of
these policies (such as Germany, Netherlands, France, and Denmark), as they could become
mainstream in the foreseeable future.
The speed and scale of the transformation is difficult to anticipate as the market has been relatively
stable over the past decades. Change theory indicates, however, that technological change usually
starts slowly then accelerates exponentially.[14]
Industrial policy
A green swan that keeps value creation, jobs, and sustainable growth in Europe will need a strong
industrial policy. We are witnessing a paradigm shift in the design of industrial policy at EU and
national levels, with proposals on the table that were unthinkable even two years ago, such as a
European Sovereignty Fund or extra subsidies for clean technologies ‘made in Europe’. Here is a list
of six success factors for an effective industrial policy in heating.
● Ramp-up of EU manufacturing capacity via public support in R&D, capex (direct funding and
accelerated depreciation), skills, and guarantees. It is possible to leverage existing instruments such
as the EU Innovation Fund and the Temporary Crisis Framework for State Aid.
● Speed. Support measures, especially financial instruments, must kick in immediately, with faster
lead-times. The approval duration of Important Projects of Common European Interests, for example,
is inappropriate for the heat pump opportunity. Forced import of renewable solutions can be avoided
by giving sufficient lead time to the European industry for the ramp-up of manufacturing capacities.
● Skills. Leverage the European Social Fund and other instruments such as the EU Pact for Skills to
attract and train installers (see above).
● Regulatory certainty. The Fit for 55 package combined with national initiatives will be a strong
driver for investments. A priority is to steer those investments and leapfrog into environmentally
friendly, circular, and resource-efficient solutions. Most European heating manufacturers consider
that there is no conflict between increasing production capacities to reach the 10 million heat pump
target by 2027, and higher environmental goals, for example via the F-gas and REACH regulation.
[15]
● Subsidies targeting end-users. A priority is to secure demand for low-carbon solutions until
economies of scale and innovation further reduce their production costs. Behavioural economics
shows that upfront costs have a greater impact on final consumer decisions than total cost of
ownership; this has to be factored into the design of national subsidy schemes. Extra subsidies for
products ‘made in EU’ would also be a strong pull for European-based manufacturing.
● Supply chains. Evaluate and support the European production and diversification of the supply of
key components such as compressors, semiconductors, and power electronics—for example, with an
extension of the framework set out in the European Chip Act to other critical clean technologies.
The long-term perspective
A green swan in buildings would unleash an exponential ramp-up of heat pumps by 2030, a giant
renovation wave, and millions of prosumers (actors both consuming and producing energy)
benefiting from self-consumption and selling flexibility to the grid. A question that remains open is
the role of green gases in buildings.
A study was commissioned by EHI to compare a full-electric scenario (Pathway A) with a balanced-
mix scenario (Pathway B) where the heating stock is fully carbon neutral by 2050. Its findings
projected that, in the latter scenario, gas demand goes down to 460 TWh in 2050 vs 1280 TWh in
2020. Meanwhile, the peak load demand from heat pumps is 50 per cent lower, leading to EUR 345
billion of accumulated savings until 2050.
The availability of green gases for other hard-to-abate sectors is critical. Yet, the amount of green
gases that will be available in 2050 and their costs are uncertain. Some evaluations send a positive
signal, for example:
● Biomethane production potential in the EU has been estimated at 1,350 TWh.[16]
● Hydrogen production potential in the EU has been estimated at 1,710 TWh.[17]
Assuming that half of the 460 TWh gas demand for buildings is met by hydrogen, and the other half
by biomethane, that would mean, in this estimation, that only 13 per cent of the available hydrogen
supply would go to buildings.
Heating appliances are ready for green gases. Additional evaluations of the cost-efficiency of security
of energy supply and resource adequacy are still needed to meet the seasonality of heating demand at
the lowest costs possible.
Conclusion
The decarbonization of the building stock is a unique opportunity to enhance both energy security
and climate protection. Policies, evolving consumer preferences, and the private sector’s willingness
to invest indicate that we could see a green swan in buildings in this decade. That green swan could
very well take the shape of a heat pump. In the words of Professor Martin Viessmann, ‘This is a once
in a lifetime opportunity to write climate history’ for each and every one of us.[18] Maybe the EU
energy security strategy adopted in the wake of the war in Ukraine should have been called
REHeatEU instead of REPowerEU.
By Alix Chambris
4. How the energy crisis is boosting heat
pumps in Europe
Heat pumps are widely seen as the most important technology when it
comes to decarbonising heating. Organisations including the International
Energy Agency and McKinsey see heat pumps providing most of our
heating needs in the future, on the path to net-zero emissions.
Until recently, heat pump sales had been struggling to take off, but this is
changing rapidly. In a previous Carbon Brief guest post we reported double-
digit growth in 2021.
Since then, Russia’s invasion of Ukraine, the resulting energy crisis and
related policy interventions have boosted installations in Europe even
further, to unprecedented new highs.
For the first time in 2022, heat pump sales in Europe reached 3m, up 0.8m
(38%) from a year earlier and doubling since 2019. Sales doubled in a
single year in Poland, Czech Republic and Belgium.
One main driver is cost: gas and oil prices skyrocketed in 2022 and even
though electricity prices also increased sharply in many countries, running
costs tipped in favour of heat pumps.
With further policy changes likely to continue supporting the rollout of heat
pumps, we look at their current and potential future adoption across Europe.
Expanding markets
Initial figures for Europe show that 3m heat pumps were installed in 2022,
up 38% year-on-year. This builds on a 34% increase in 2021, which was, in
turn, much higher than the previous norm of around 10% per year. This
acceleration is shown in the figure below.
Annual heat pump sales in Europe, 2012-2022. Source: EHPA. Chart by Carbon Brief using
Datawrapper.
Within the total for Europe, national heat pump markets can be grouped into three categories: mature
heat pump markets, emerging heat pump markets and dormant heat pump markets.
Mature markets in Europe, where heat pumps have been installed in large numbers for a long time
and annual growth tends to be lower, include the Nordic countries, Switzerland and France.
Countries with emerging markets, showing more recent and rapid growth in large numbers, include
Germany, Poland and the Netherlands. Dormant heat pump markets include Ireland (where no data is
available for 2022), Portugal and the UK.
Most notable about 2022 is the rapid growth in both mature and emerging market segments, and the
signs of awakening in dormant markets, such as the UK.
This is shown in the figure below, where heat pump sales in 2021 (light blue circles) and 2022 (dark
blue) are shown for a selection of European countries. The percentage growth in sales between the
two years is indicated at the end of each bar.
Growth in European heat pump markets in 2022, by country, in terms of the number of units sold and
the percentage increase. Source: EHPA for all countries except those with the following national
sources, SULPU, UNICLIMA, BWP, Duurzaam Verwarmd, NOVAP, PORT PC, SKVP, FWS. Chart
by Carbon Brief using Datawrapper.
Even the very mature market in Finland experienced extraordinary growth in 2022, with heat pump
sales up 50%. The Finnish government gives grants of up to EUR 4,000 to replace oil-fired heating.
Similarly, Norway already has the highest heat pump penetration in the world. Around two-thirds of
households now use the technology, which accounts for almost all new heating systems. Yet Norway
still saw 25% growth in heat pump sales in 2022.
Despite having installed heat pumps for a long time and having a very mature market, Switzerland
also saw 23% growth in 2022. Two-thirds of all heating systems sold in the country in 2022 were
heat pumps. To level the playing field for clean heating technologies, Switzerland implemented a
carbon tax on heating fuels in 2008, which is currently set at around EUR 120 per tonne of carbon
dioxide (CO2). This is coupled with a federal grant programme administered by the cantons.
For a mature heat pump market, Sweden also recorded impressive growth of 61% in 2022. Sweden’s
carbon tax, which has been in place since the 1990s and reached EUR 115/tCO2 in 2021, has been a
primary driving force behind its heat pump market.
Doubling sales
While mature, established European markets recorded surprisingly strong sales growth in 2022, the
most rapid increases were found in emerging heat pump markets.
In three European countries – Belgium, Czech Republic and Poland – the heat pump market roughly
doubled in a single year.
Poland has long been seen as a laggard when it comes to climate policy. Yet its heating market is
changing fast and nearly a third of all new systems are now served by heat pumps.
Moreover, Polish heat pump sales more than doubled in 2022, with growth of 120% year-on-year,
possibly the fastest growth ever seen for the technology.
To put this in context, Poland also saw the second-greatest increase in 2022 when measured in terms
of the numbers of heat pumps sold, behind only Italy, and beating out larger economies with more
established markets for heat pumps such as France, Germany and Sweden.
A reform of Poland’s Clean Air Programme in 2018 provided increased support for heat pumps. At
the same time, their running costs have become much more economically attractive, thanks to rising
fossil fuel prices driving up the cost of alternatives.
Another major mover in 2022, Belgium, has been a heat pump laggard, with some of the lowest
installation rates in Europe. Yet in 2022 the market doubled, with around 13,000 additional units
sold. Similarly, the Czech heat pump market grew to reach 60,000 units sold, up from 30,000 in
2021.
Elsewhere, Slovakia experienced record growth of 88% in 2022. According to Vladimir Orovnický,
the president of the Slovak Association for Cooling, Air-conditioning and Heat Pumps, this was
mainly driven by energy security concerns rather than government policy, although the nation’s
Green Houses Program continues to offer grants of up to EUR 3,400 for heat pumps.
German Chancellor Olaf Scholz makes a statement at an assembly wall on which various heating
burners are installed for training purposes during his visit to the Chamber of Crafts’ training center
on October 22, 2022.
Credit: Peter Kneffel / dpa / Alamy Stock Photo
In Germany, one of Europe’s largest markets for heating systems, heat pump sales grew by a record
53% in 2022. One important driver was the announcement that all newly installed heating systems
will need to run on at least 65% renewable energy by 1 January 2024 – two years earlier than initially
planned. Rising gas and oil prices probably also contributed to the increase.
In 2021, Germany had implemented a carbon price on gas and oil used for heating, which will rise
from EUR 30/tCO2 today to EUR 45/tCO2 in 2025. This is likely to support further growth for heat
pumps.
Finally, France, historically one of Europe’s largest markets, set a new record for sales of air/water
heat pumps in 2022. Sales of these devices grew by 30% to reach around 346,000 units, up from
267,000 in 2021.
Correspondingly, 2022 marked a sharp decline in the French fossil fuel boiler market, with sales of
gas and oil condensing boilers falling 30%. France provides generous grants to install heat pumps,
with larger sums available to lower-income households.
Cold climates
In addition to the growth rates in 2022, it is also interesting to look at the geographical distribution of
sales. Indeed, the shift to heat pumps is not just happening in warmer countries. On the contrary, the
highest penetration of heat pumps can be found in the coldest climates
In Europe, the four countries with the highest number of installations of heat pumps per 1,000
households in 2022 are Finland, Norway, Sweden and Estonia. These four countries also face the
coldest winters in Europe, as shown in the figure below (y-axis and darker blue shading).
Number of heat pumps sold per 1,000 households in 2022 versus average January temperatures.
Source: EHPA. Chart by Carbon Brief using Datawrapper.
Evidence disproves the oft-heard allegation that heat pumps are unable to work in cold climates.
Although heat pumps are less efficient when it is coldest, performance does not suffer drastically.
Data from field tests in Germany show that air-to-water heat pumps still produced more than two
units of heat for each unit of electricity when the outside temperature was -3.6C. (In technical terms,
their average ‘coefficient of performance’, or COP, was 2.3.) Even at temperatures below -10C, the
heat pumps were operating with a COP of 1.6. Similarly, in Finland, tests of air-to-air heat pump
systems from various manufacturers resulted in COPs of 3 at -10C and 2 at -20C.
Outlook for heat pumps
High fossil fuel prices have changed the economics of heat pumps, often making them cheaper to run
than gas- or oil-fired heating. While prices for oil and gas have fallen from last year’s record highs, it
is unlikely that the coming years will see a return to previously low levels.
Meanwhile, the EU’s Emission Trading System (EUETS) is due to start putting a price on carbon
from heating fuels from 2027, which will further advance the economics of heat pumps.
Several countries have announced phaseout dates for fossil fuel heating, although it remains to be
seen how exactly this will be implemented. The European Commission has also mentioned a possible
phaseout date for the sale of fossil fuel heating systems by 2029 and, if adopted, this could trigger an
even bigger shift to heat pumps in EU member states.
Novel policy instruments such as clean heat standards, that may require a specific quantity of clean
heating systems to be installed, are currently being discussed in the US and the UK. In addition to the
existing policies and regulations, such clean heat standards could play an important role in scaling up
Europe’s heat pump market in the coming years.
Finally, reforms to the EU renewable energy directive (RED) might also provide countries with the
incentive to deploy heat pumps. The RED sets targets for growing the use of renewable heating and
cooling, yet the current version encourages inefficient uses of renewables in buildings.
It incentivises the use of less-efficient technologies, such as biomass boilers, and does not consider
the use of electricity for heating and cooling. The European Parliament and Council are currently
considering revisions to the RED, which may consider counting the electricity used to run heat
pumps towards the target. If adopted, this could provide another boost to heat pumps as countries use
them to increase their shares of renewables in heating and cooling.
By Jan Rosenow, director of European programmes at the Regulatory Assistance Project.
Duncan Gibb, senior adviser at the Regulatory Assistance Project.
Republished from Carbon Brief under CC licence.
5. Policy support needed to boost
sustainable aviation fuels in China
China's aviation sector needs sustainable fuels to lower its carbon
footprint, but support is needed to reduce costs and increase production.
Used cooking oil (left) and aviation fuel derived from cooking oil (right) as shown by a scientist from
SINOPEC Research Institute of Petroleum Processing (Image: Alamy)
The aviation sector must overcome some major challenges in the coming
decades if it’s to reach its 2050 net zero target. By then, the International
Air Transport Association (IATA) estimates airlines will be carrying 10
billion passengers a year, more than double the pre-pandemic high of 4
billion in 2019. The industry is pinning its hopes largely on the
development of sustainable aviation fuels (SAFs) to reach the net zero
target, with IATA expecting such fuels to provide 65% of the sector’s
carbon reductions by 2050.
China’s aviation market is second in size only to that of the US. According
to analysis published by the International Council on Clean Transportation
(ICCT), Chinese flights emitted 103 million tonnes of CO2 in 2019 – 13%
of the global aviation total. Although aviation accounts for 1% of the
country’s total emissions, its share is expected to grow as emissions from
heavy industries, such as steel and cement making, fall in the next decade.
A research paper published before the pandemic predicted that China’s civil
aviation emissions will reach 516 million tonnes by 2050 – five times the
2019 amount.
China’s production of SAFs is just getting started. In late 2022, the Institute
of Energy at Peking University published a report finding huge potential for
sustainable fuel production in China, with significant feedstocks available,
such as used cooking oil, forestry waste and food waste from cities. But
there is no top-level policy to develop the sector nor functioning market to
promote SAF production. Meanwhile, there are significant obstacles to
investment and expansion of capacity, commercialisation of SAF
production technologies, and reduction of costs.
What is sustainable aviation fuel?
SAFs are liquid fuels produced from sustainable feedstocks (biological or
synthetic) that can replace fossil fuels in commercial aircraft. They can
reduce emissions by 80% or more compared to conventional fossil fuels,
depending on the technology and feedstock, and how the SAF is
transported. Currently, SAFs are mixed with conventional fuels (usually at a
ratio of no more than 50%), although there is no technical barrier to the
exclusive use of SAFs. No major changes to airport infrastructure or aircraft
are needed to enable fuel switching.
Standing-setting body the American Society for Testing and Materials
International (ASTM) has approved nine SAF production processes.
Existing and planned production in China uses the well-established
hydroprocessed esters and fatty acids (HEFA) method, which refines animal
and plant oils and recycled oils into an aviation fuel. This is how most of
the world’s SAF is produced.