IEA Asks: Can the Netherlands Square the Circle of Strong Environmental Protection and Free Markets?

The International Energy Agency (IEA) commends the Netherlands for its efforts to create both a clean environment and a competitive energy market. This is not an easy task. Low prices are one of the main objectives of competition, whereas many strategies for improving the environment call for higher energy prices. But the government of the Netherlands is determined to square this circle. By 2010, it intends to raise the share of energy derived from renewable sources to 10% and to improve energy efficiency by one third. Under the 1997 Kyoto Protocol, the country must reduce its carbon emissions by 6 per cent by 2008-2012. Yet the Netherlands has also put the opening of the gas and electricity markets on a fast-track schedule. Full competition, originally planned for 2007, is now scheduled for 2004 in both markets. This is ahead of European Union requirements. The government’s main tool to reconcile free energy markets and the environment is taxation, the revenues of which are recycled to taxpayers. The IEA’s favourable assessment of these policies appears in a report released today in The Hague, Energy Policies of IEA Countries – the Netherlands 2000 Review.

Environmental protection has a long tradition in the Netherlands, and environmental issues carry much weight in energy policy making. The government aims to raise the share of renewable energies in its total primary energy supply from 1 per cent in 1995 to 5 per cent in 2010 and 10 per cent in 2020. In the same time period, energy efficiency is to be improved by one third.

Past energy-efficiency improvements have fallen somewhat short of the objectives set in 1995. This was mainly due to a period of low energy prices. Recent prices rises are likely to favour energy efficiency improvements. Government forecasts show that with the policy instruments currently in place, the share of renewables will be closer to 3 per cent than to 5 per cent in 2010.

Under the Kyoto Protocol and the EU Burden Sharing mechanism, the Netherlands needs to reduce its emissions of greenhouse gases by 6% by the period 2008-2012. This amounts to 50 million tonnes per year. The government intends to achieve half of the target through domestic action and half of it abroad, through the flexibility instruments provided in the Kyoto Protocol. The Dutch government has developed a detailed plan to reduce carbon dioxide emissions. This plan consists of a basic package of measures, a reserve package that will be phased in if the basic package does not yield the required results, and a long-term package that sets climate policy for the period after 2010.

In 2002 and again in 2005, the government is to evaluate whether the objectives have been met. If this is not the case, the reserve package can be phased in. This package includes the “next-best” measures in terms of cost-effectiveness and political acceptability, and focuses much more than the basic package on non-energy greenhouse gases.

Dutch policy in the area of climate change, energy efficiency and renewables is very ambitious, and results may fall short of the objectives. In the past, the government has reacted to shortfalls by trying harder or by taking a broader perspective. When it became clear in the mid-1990s that an exclusive CO2 target would be difficult to reach, the government extended its response plan to greenhouse gases other than CO2, which offer limited but less costly opportunities to reduce emissions. The IEA welcomes this determined, prudent and yet flexible approach.

In the Netherlands, environmental issues have sometimes carried more weight in energy policy-making than have competitive and efficient energy markets. An example of this is the support that combined heat and power production (CHP) has enjoyed in the Netherlands. As a consequence, CHP capacity increased rapidly to the desired interim level – but in the power market, the new CHP displaced some existing, cheap, and comparatively efficient generating capacity. To redress the balance, the government has phased out many support measures and suspending the objective of further increases in CHP capacity.

Another example of such prudent re-balancing is the green certificates trading system which the government intends to install in the electricity and gas markets. It was initially planned to make the purchase of green certificates compulsory for every customer. But government surveys have revealed that sufficient numbers of Dutch consumers would be happy to pay extra for clean energy to guarantee that the renewables target will be met or even exceeded by 40 to 50 per cent. The government has, accordingly, transformed the certificates scheme into a voluntary programme, a fact that IEA commends.

Through this re-balancing, the imperatives of the market are now better reflected in the government’s policy, alongside the imperatives of the environment. Free markets and environmental protection have been shown to be compatible – provided that the appropriate policy instruments are chosen.

Indeed, the introduction of competition for all electricity and gas consumers has been brought forward from 2007 to 2004. The IEA welcomes this initiative, which makes the Netherlands one of the most advanced countries in terms of competition.

In order to protect against the risk that falling electricity and gas prices might slow down the anticipated energy-efficiency growth, the government is increasing the Regulatory Energy Tax from f 3.4 billion 1998 to f 6.8 billion in 2001. The tax revenues will be recycled to taxpayers in the form of relief from other taxes, especially income tax. The IEA approves of this approach, but calls on the government to consider carefully what part of the price reductions from competition should be “taxed away” for environmental purposes.

Energy security gets somewhat less attention in the Netherlands than economic efficiency and environmental protection. The vast Groningen gas field has brought secure gas supplies and swing capacity to the Netherlands and to the wider European market. Gas is the source of almost 60 per cent of all electricity in the Netherlands. This is the highest share in the IEA, and it is set to increase. Although Dutch resources will last for a while, pressure has begun to decline in Groningen, and the Netherlands is now importing gas from Russia.

Over recent years, the Dutch government has increasingly looked to the market for security of supply. It now intends to seek for long-term supply security in the wider European context. This is in principle the right strategy – given the liberalisation and integration of the EU gas market. The Netherlands will need to take the initiative and work actively to ensure that the European solution emerges. Also, the government should decide whether an 80 per cent or 90 per cent share of gas in power generation is too much. The last year has shown that the international market for hydrocarbons has by no means become more stable or predictable. Energy security is not to be neglected.