This report discusses the extent to which key climate policies in the European Union (EU) such as the EU Emission Trading System (ETS) and renewable electricity support policies have influenced the development of the EU’s power sector. Therefore, this paper assesses the impact of the EU ETS, Renewable Electricity Directive and Renewable Energy Directive on various aspects of the power sector (Electricity Generation, Electricity Capacity, Electricity Prices, Electricity Trading, and Emissions Abatement) in the EU and selected member states.

The report begins by discussing the development of the EU power sector from 1990 to the present day, including overall trends in generation, capacity and primary energy source, along with development in electricity markets. The influence of the three key EU climate change mitigation policies concerning the power sector - the EU ETS, the Renewable Electricity Directive (RES-E Directive) and the subsequent Renewable Energy Directive (RED) - on power sector developments, are then assessed - first individually and then by their interaction. Developments in two member states (Germany and Spain) due to national renewable support policies are also described in detail. Other influences on power sector development, such as non-climate policies and international influences are briefly assessed throughout this report and are summarised in the ‘Other Drivers’ section.

In summary, the EU ETS thus far is likely to have relatively little impact on the development of the EU power sector since its introduction in 2005. This appears to be due to a combination of low and volatile prices, leading to a lack of future certainty upon which to base investments, and the practice of free permit allocation preventing the imposition of a ‘real’ cost to the power sector in Phases One and Two. The Renewables Directives appear to have had a larger impact, and facilitated the significant expansion in RES-E experienced since 2000.

However, the report also finds that other factors play a much more decisive role on the development of the EU power system, and in differences across member states. Such factors include fuel prices, domestic resource availability, political and public acceptability, and the general economic climate – which significantly impacts electricity demand, the availability and cost of capital for investment in capacity and infrastructure, and political and public priorities. Similarly, other policy measures with a direct or indirect impact on the power sector, such as the Ecodesign Directive, the Energy Performance of Building Directive and Large Combustion Plant Directive, also play influential roles.