The Netherlands’ Effort to Phase Out and Rationalise its Fossil-Fuel Subsidies
An OECD/IEA review of fossil-fuel subsidies in the Netherlands
IEA (2020), The Netherlands 2020, IEA, Paris https://www.iea.org/reports/the-netherlands-2020
The Netherlands is aiming for a rapid transition to a low-carbon economy and has placed ambitious greenhouse gas (GHG) reduction targets at the centre of energy and climate policy. The 2019 Climate Act sets targets to reduce GHG emissions by 49% by 2030 and by 95% by 2050 (versus 1990 levels). The Netherlands has developed a detailed policy framework to drive the achievement of these targets. The core of this framework is the 2019 Climate Agreement, which was developed using the collaborative Dutch Polder system. Over 100 stakeholders from across society contributed to developing the 2019 Climate Agreement, which contains emissions reductions targets and measures in five sectors: electricity, industry, the built environment, mobility, and agriculture and the natural environment.
From 2008 to 2018, the population of the Netherlands increased by 5% and gross domestic product (GDP) grew by 9%. Over the same period, energy demand declined by 5% thanks in part to a 15% improvement in the energy efficiency of the economy. The Netherlands has also achieved notable reductions in GHG emissions. In 2018, GHG emissions were down 15% from 1990 levels. The Netherlands is home to a large concentration of energy and emission-intensive industries and remains heavily reliant on fossil fuels. From 2008 to 2018, the share of fossil fuels in total primary energy supply (TPES) declined only slightly, from 92% to 90%. As a result, a recent increase in economic activity has caused emissions reductions to stall. In 2018, energy-related GHG emissions were slightly higher than in 2014.
The Netherlands is also facing new energy security challenges. Natural gas is the largest source of domestic energy production and a key fuel for industry and for building heating. The Groningen gas field, located in the northeast of the Netherlands, is one of the largest gas fields in the world and was historically the main source of domestic gas production. In January 2018 and May 2019, natural gas production activities in the Groningen field cuased eathquakes that damaged over 10 000 buildings and resulted in strong public and political pressure to end gas production from Groningen as soon as possible. In response, the Dutch Cabinet issued decisions in March 2018 and September 2019 that aim to end gas production from Groningen by mid‑2022, while ensuring security of gas supply by reducing gas demand and increasing the availablitiy of gas from sources other than Groningen. From 2013 to 2018, domestic gas production fell by 55% and energy import dependency increased from 29% to 72%. Because of steady demand for natural gas and falling domestic gas supply, the Netherlands became a net gas importer for the first time in 2018.
Analysis conducted in November 2019 by the Netherlands Environmental Assessment Agency (PBL) indicates that the Netherlands is not on track to meet the 2030 target of a 49% reduction in GHG emissions. An updated estimate of emissions reductions covering the impact of all of the Climate Agreement’s measures as well as additional measures implemented in 2019 and 2020 is expected in October 2020. As the Netherlands implements the 2019 Climate Agreement and other policy initiatives, the government should closely track progress on emissions reductions and other energy sector targets and be ready to adjust policy as needed to keep the country on the path to a robust low-carbon economy while ensuring energy security.
Natural gas and oil are the most important fuels in the Dutch energy supply. In 2018, TPES came from natural gas (42%), oil (37%), coal (11%), biofuels and waste (5%), and small shares from nuclear, wind, solar, hydropower and geothermal. The Netherlands is still one of the largest gas producers in Europe; however, domestic gas supply and gas exports are rapidly declining as production from Groningen is being phased out. Domestic oil supply is small, especially in comparison to the large oil demand. All coal is imported and is used primarily for electricity generation and steel production. The electricity supply is also heavily reliant on fossil fuels. In 2018, electricity generation came primarily from gas (52%) and coal (27%).
Fossil fuels also dominate Dutch energy demand. In 2018, oil and gas covered 77% of total final consumption (TFC), while electricity covered just 16%, the second-lowest share among IEA member countries. The dominance of oil and gas and the low level of electrification are driven by the large industry sector concentrated on refining and chemicals production and the high level of natural gas heating. In 2018, oil and gas covered 80% of industry demand, while natural gas covered 71% of residential demand and 48% of service sector demand, mainly for heating. Greenhouses in the large agricultural sector are also a major source of gas demand for heating.
Dutch energy demand is driven primarily by industry demand, which varies with economic activity and accounted for 44-47% of TFC between 2008 and 2018. Heating demand has a major impact on Dutch energy demand. The highest level of energy demand in recent history occurred in 2010 and was driven by unusually cold weather. As with most IEA countries, Dutch transport demand is dominated by oil. However, the Netherlands has an extensive rail network that is almost completely electrified and is a global leader in electric vehicle (EV) deployment and EV charging infrastructure, with around 200 000 registered EVs and over 50 000 EV charging stations in 2019.
Energy from renewable sources accounted for only 7.4% of total final energy consumption (TFEC) in 2018, the third-lowest share among IEA member countries and well below the IEA median of 12.1%. However, renewable energy deployment is progressing rapidly. The renewable contribution to TFEC increased by 50% between 2008 and 2018. Bioenergy is the primary source of renewable energy and includes transportation biofuels and direct use of biomass in heating and electricity. The share of renewable electricity generation from wind and PV has grown quickly in recent years. It is expected that increasing generation from renewables will shift the Netherlands from its historic status as a net importer to a net exporter of electricity in the early 2020s.
The Netherlands is an important transit and trade hub for natural gas, oil, electricity and coal and has extensive cross-border and subsea oil and gas pipelines and electrical interconnections. Dutch ports play a key role in global and regional energy trade and have one of the largest concentrations of oil refining and marine bunkering fuels in Europe and a major liquefied natural gas (LNG) terminal. The Netherlands is also home to the Title Transfer Facility (TTF), the largest gas-trading hub in Europe.
The Climate Act sets targets to reduce GHG emissions by 49% by 2030 and by 95% by 2050 (versus 1990 levels). The 2019 Climate Agreement and other initiatives define a broad framework of supporting policies and measures focused on achieving these targets. A new framework for research and innovation is being implemented under the Integral Knowledge and Innovation Agenda (IKIA), which defines 13 Multiannual Mission-Driven Innovation Programmes (MMIP) that focus research on driving emissions reductions across all sectors. One of the most important instruments to drive emissions reductions is the Stimulation of Sustainable Energy Production (SDE+) support scheme, which uses competitive auctions to award operational subsidies to renewable energy projects. From 2011 to 2020, SDE+ allocated EUR 60 billion of subsidies, which are paid out over a period of up to 15 years based on the amount of renewable energy generated. In 2020, SDE+ was expanded into the Sustainable Energy Transition Incentive Scheme (SDE++), which uses a similar auction process to award subsidies to a wider set of technologies based on avoided CO2 emissions, including carbon capture and storage (CCS) and low-carbon hydrogen.
To encourage industrial emissions reductions, a carbon levy will be introduced in 2021. The levy will be paid for emissions above a certain threshold, which will be reduced annually through at least 2030 in line with 2019 Climate Agreement targets. To allow domestic industry to stay competitive globally while strongly reducing emissions, the government aims to balance the cost of the levy with financial support from SDE++, especially for CCS, which is expected to deliver the majority of emissions reductions in industry. Industry also has obligations to increase energy efficiency and reduce natural gas demand.
The largest electricity emissions reductions are expected to come from a ban on coal-fired generation, which requires coal plants to cease operating, or convert to alternative fuels, by 2030. Major reductions are expected from an accelerated deployment of renewable generation supported by SDE+, SDE++ and other measures. An effective offshore wind policy framework is driving rapid deployment and aims for 49 TWh of generation by 2030. Net-metering for small-scale PV has contributed to strong residential PV deployment.
Regional Energy Strategies aim to drive emissions reductions by supporting 35 TWh of onshore renewable electricity and a transition to low-carbon heating. Local governments, in co-operation with network operators, the private sector and social organisations, are developing these strategies to resolve barriers related to costs, spatial planning, social acceptance, cost impacts and integration of renewables. The government provides technical and financial assistance for the development and execution of the strategies.
Support measures for reducing transport sector emissions include policies pushing for the adoption of zero-emission vehicles (battery electric and hydrogen fuel cell vehicles) for personal, public and freight transport. These include tax incentives that encourage zero‑emission vehicle purchases and measures supporting the development of infrastructure for EV charging and hydrogen fuelling stations. The Netherlands also aims for a broader shift to a more efficient and diverse mobility sector that supports walking, biking, mobility services and other measures to reduce emissions.
As a European Union (EU) member state, the Netherlands is subject to numerous energy sector targets based on EU directives. The Dutch National Energy and Climate Plan (NECP) defines measures to support the achievement of 2030 targets for GHG emissions reductions, renewable energy and energy efficiency set under the EU Clean Energy Package. The measures in the NECP are based primarily on the 2019 Climate Agreement.
Natural gas is arguably the most important energy source in the Netherlands. In 2018, natural gas accounted for 90% of residential heating demand, 76% of domestic energy production, 51% of electricity generation, 43% of TPES and 34% of TFC. However, Dutch energy policy is pushing to rapidly reduce the role of gas in the energy system to support the transition to a low-carbon economy and to protect public safety in relation to earthquakes caused by gas production.
The government foresees that natural gas will be an important part of the energy system through at least 2030 and that low-carbon gases will play a critical role in transitioning to a carbon-neutral energy system, especially in industry and other hard-to-decarbonise sectors. To ensure reduced emissions from natural gas while maintaining energy security, the Netherlands is executing a broad policy agenda to reduce natural gas demand and accelerate the production and use of low-carbon gases. At the same time, the government aims to leverage existing gas infrastructure to support the transport and use of low-carbon gases and to enable CCS by supporting transport and storage of CO2.
Several major policy measures have been implemented to reduce gas demand. The Natural-gas Free Districts Programme supports the transition of 1.5 million homes from gas to low-carbon heating by 2030. The Gas Act was amended in 2018 to change the existing obligation to connect new homes and buildings to the gas network into a ban on new gas connections. Numerous support programmes and requirements aim to reduce gas demand through energy efficiency or the deployment of renewables, particularly in the built environment and industry.
The Dutch Hydrogen Strategy and Green Gas Roadmap define plans to accelerate large‑scale production and use of low-carbon hydrogen, and a variety of bioenergy-based gases, including biomethane. These strategies support the use of low-carbon gases across all sectors and aim to increase Dutch expertise in low-carbon gases as the country transfers away from natural gas. Biomethane production and injection into the gas grid has been expanding and several large-scale low-carbon hydrogen projects are being planned. The government is supporting accelerated deployment of low-carbon gases through dedicated research and demonstration funding. Low-carbon hydrogen and biomethane projects are also eligible for SDE++ funding.
The phase-out of Groningen gas production has notable impacts in relation to energy security. Groningen produces low calorific gas (L-gas), which covers a significant share of gas demand in the Netherlands, Belgium, and bordering regions of France and Germany, and is particularly important for meeting seasonal heating demand. The Netherlands has several policy measures specifically targeted at ensuring L-gas supply in the near term, while working to quickly reduce L-gas demand, including through regional co-operation.
The Netherlands sees flexible and interconnected energy systems as essential to achieving a cost-effective transition to a low-carbon economy. Implementation of the 2019 Climate Agreement measures would result in at least 70% of electricity generation coming from renewables (mainly variable wind and PV) by 2030. The Climate Agreement also calls for 1.9 million vehicles powered by electricity or low-carbon hydrogen, broad electrification of heating and industrial processes, and large-scale production and use of low-carbon gases. This represents a major transition from the current energy system. In 2018, only 16.5% of electricity came from renewables, the level of electrification was low in most sectors and low-carbon gases met only 0.4% of energy demand.
To address these transformative challenges, the government is supporting the development of a digitalised energy system that enables high shares of variable renewable generation, broad electrification of end-uses, co-ordination between networks for electricity and low-carbon gases, and innovative new energy services. The new Energy Law planned for 2022 aims to support demand-side response (DSR), energy services and aggregators, and other measures to create more flexible and efficient energy systems and markets. To lay the foundation for flexible energy systems, the Netherlands is aiming for 80% of households to have a smart meter by the end of 2020. The Netherlands is also supporting the development of a market for energy management services. In 2018, around 1 million households had installed systems allowing them to manage their electricity consumption.
Steps towards flexible energy systems are being taking in many areas. Electricity system operators are co-operating with research centres to determine how smart charging can limit the impact of EVs on the electricity grid and how EVs can act as resources. System operators are also conducting pilot projects showing that distributed resources such as renewable generation, energy storage and DSR can support more efficient grid operations, for example, by providing ancillary services. The Hydrogen Strategy aims to support flexible energy systems by developing hydrogen production, transport and storage to support the integration of variable renewables and seasonal energy storage. To ensure continued progress towards flexible energy systems, the government needs to develop a clear approach to energy sector data, including data ownership and how data can be easily accessed while addressing issues of privacy and cybersecurity.
In support of the transition to a low-carbon economy, the Netherlands conducted a review of fossil fuels subsidies (FFS), jointly led by the Ministry of Economic Affairs and Climate Policy and the Ministry of Finance. At the request of the government, the Organisation for Economic Co-operation and Development (OECD) and the IEA facilitated the FFS review as part of this IEA review of Dutch energy policies. Based on consultations with the government, energy sector stakeholders and FFS experts, the OECD and IEA developed a FFS report highlighting policy measures which could be considered for reform and providing insights on how existing policy and budget processes could be adjusted to better identify and address issues relating to fossil fuels and the energy transition. The report was delivered to the government in April 2020 and will be used to inform the government response to questions from parliament concerning FFS and the potential need for energy policy, subsidy and tax reforms.
The government of the Netherlands should:
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