The key objectives of this Co-ordination Action are:

  1. To compile coherent and detailed estimates of both external and internal costs of energy production for different energy sources at the national level for the EU-25 Countries and for some non-EU Countries under energy scenarios to 2030; »
  2. To evaluate policy options for improving the efficiency of energy use, taking account of the full cost data; »
  3. To disseminate research findings to energy sector producers and users and to the policy making community. »

Objective I

The first task is to take the different studies within each area and develop as consistent a set of cost estimates as possible. Naturally, differences in estimates exist between countries, sources of energy, and technology used in the generation of the energy. But the present state of knowledge is disparate and some gains can be made by clarifying when and where particular estimates can be applied. This will involve a detailed assessment of primary studies and a careful evaluation of the techniques used by them in arriving at the estimates of costs. Based on these, expert judgment will be required to arrive at agreed ranges of estimates for different countries of the full cost of each energy source. The full cost includes the external cost, plus the private cost.

External Costs of Energy. A great deal of effort has been devoted in recent years to the estimation of the external costs of energy (see e.g. the results of projects like ExternE, NewExt, ExternE-Pol, DIEM, ECOSIT, INDES; and the ongoing projects like MAXIMA). Recently, attention has also been paid to the examination of both the private and external costs in one framework (e.g. the NEEDS project). For policy-makers, both sets of numbers are important and they are aware that the dividing line between the two is not always clear. Moreover, both costs are dynamic - they are changing with time, as technologies develop, knowledge about impacts of energy use on the environment increases and individual preferences for certain environmental and other values change. Hence, a major part of this project has to build on the integration of private and external costs within one dynamic framework. This requires active collaboration between 'public' sector energy specialists and firms involved in the generation and use of energy - something that has been a weakness of previous projects in this area.

Lack of homogeneity across countries. The other major gap in the comparative cost assessment lies across countries. The 'old' EU group has, more or less, agreed ranges of external costs for most energy sources. But these values do not always match those used in other OECD countries; and they do not extend to the new and aspiring Member States. Nor are they directly relevant to developing countries where energy use has significant external costs. Although work has been done in these other countries on external costs as well, a full assessment of the comparative state of knowledge and the gaps that need to be filled still has to be carried out.

Costs of energy insecurity. Perhaps, the least well and least systematically covered area of external cost is that related to energy security. Even within one country estimates of the energy security costs of different types of energy remain somewhat elusive. A common methodology has not been applied to derive estimates for a range of countries. Yet, this is a major area of policy debate and key decisions are being taken to increase energy security and reduce dependence on foreign sources. Therefore, without undertaking primary research in terms of data collection, the project devotes significant resources in applying existing models across a range of countries to arrive at a common set of estimates of the costs of energy insecurity, as defined by a common set of parameters.

Research questions under the full costs estimation objective.

The work related to this objective will generate answers to the following types of questions:
  • What are the best predictions about the evolution of the private costs of major technologies for generating energy from different sources over the next 25 years?
  • What are the best estimates of the major environmental external costs of different types of energy in different countries and how will these change in the next 25 years?
  • What are the best estimates of the major energy security-related external costs of different types of energy in different countries and how will these change in the next 25 years?
  • What are the best estimates of the likely prices of major sources of energy over the next 25 years (taking account of policy changes in the areas of environmental control, energy security and climate change)?
  • Where are there the greatest uncertainties and where should future research effort be concentrated?
In order to answer these questions, the project needs to make a set of projections of energy demand by energy source and country. To this aim, it uses existing models for estimating such demand and adapt them so they are responsive to different projections about prices that suppliers receive and prices that users pay. These are critical to the policy analysis, which is the second major objective of the CA.

Objective II
The policy analysis part of the CA uses the comparative cost data in a concerted effort to address a set of clearly defined goals. The policy arena is not a static one; new ideas are being developed all the time and the lessons of applying different options are continually enriching our understanding of the policy framework. The project contributes to these debates in a serious fashion. The innovative aspects it offers are to look at the policy issue in a dynamic context, and to provide a comparative analysis of the policy analysis across different countries. The major areas of investigation are:

  • Comparative assessment of investment and operational costs of different energy options taking account of only private costs and taking account of private plus external costs. This assessment is dynamic and will provide the implications of different levels of internalisation on the investment decisions and on key social indicators.
  • Impact of the use of different methods of decision-making on the selection of projects - e.g. cost-benefit analysis with 'externality adders' versus multi-criteria decision analysis tools.
  • Implications of different taxes/charges on energy and/or on emissions on (a) the degree of internalisation and (b) the comparative cost comparisons, now and in the future.
  • Implications of different policies to reduce energy insecurity on (a) the degree to which energy security concerns are internalised and (b) the comparative costs of different energy sources, now and over time.
  • Comparison of the effectiveness of emissions trading instruments for internalising externalities versus the use of externality based taxes.
  • Comparison of different instruments to promote renewable energy sources, in terms of the degree to which they internalise the positive externalities associated with renewable energy use.

In addition to looking at how much of the external costs each policy option internalises, the project looks at a broad set of variables of interest. Beside the environmental impact, it poses some questions: what impact will the policy have on the use of different types of energy? What social and fiscal implications will such measures have, especially on poor and vulnerable groups? How the policy instruments can be modified in order to address the externality issue?

For this activity to be of practical benefit, the assessment is carried out with energy suppliers as part of the team, so that real world problems of applying the different instruments are reflected in the evaluation. This means that the hidden costs of implementation of policy - the adoption of new rules and regulations by the different actors - is reflected in the analysis.

Objective III

The third part of the CA is devoted to dissemination. There is a tremendous amount of good and useful material out there; once it has been evaluated and brought into a coherent framework, the results of the different components of the project are of great interest to the energy sector producers and users, as well as the policy-making community. Dissemination consists of a set of activities ranging from publication of articles in the peer reviewed literature (more policy-oriented rather than purely scientific); project workshops and conferences involving key stakeholders and policy makers; seminars and presentation of key results at additional meetings, including presentation at meetings organised by the European Commission; presentations and open discussions with energy producers and user organisations; and of course the setting up this web site.

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