EU Energy Union: A Realistic Possibility?

EU Energy Union: A Realistic Possibility? Introduction In February 11 the European Council set 14 as the deadline for achieving a single market in energy in the EU. Despite this commitment, and some progress being made on different parts of the energy agenda, this target date was missed. In the Strategic Agenda for the next five years adopted by EU heads of state and government in June 14, there was a renewed commitment to what is now described as energy union. 1 The new European Commission, which took office in November 14, includes a Vice President for Energy Union, Mr Maroš Šefčovič, the first time such a role has existed, as well as a Climate Change & Energy Commissioner, Mr Miguel Arias Cañete. 2 The renewed enthusiasm for this policy ambition reflects the major changes in the energy market, such as the development of fracking and the fall in the price of oil, and the serious risks to energy security in Europe both over the last decade and in the future (brought to the fore by the Ukraine crisis). The European Council agreed that a firm proposal for Energy Union should be tabled for discussion by the time of its March 15 meeting. This paper, which looks at the EU s role in energy policy, its policy approach in recent years and what its ambition to achieve energy union means, was prepared for a joint seminar between the Senior European Experts group and the Institute of Contemporary European Studies, Regent s University London, in April 15. The Role of the EU in Energy Policy The role of the EU in energy policy has always been a limited one as energy was not an EU competence in the founding treaties and was only clearly established as a shared competence (i.e. with Member States) in the Lisbon Treaty. Article 194 of that Treaty gave the EU a role in energy policy but restricted it to: ensuring the functioning of the energy market; security of energy supply in the EU; promoting energy efficiency and renewables; and promoting the interconnection of energy networks. 3 The Article specifically excludes: Member States development of their own energy resources, their choice of energy mix, and the general structure of energy supply in Member States, 1 European Council conclusions, June 14, p.14 et seq: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/143478.pdf 2 Mission letter to the new Vice President from the President of the Commission setting out his responsibilities: http://ec.europa.eu/commission/sites/cwt/files/commissioner_mission_letters/sefcovic_en.pdf 3 Article 194 of the Treaty on the Functioning of the European Union; treaty text available at: http://europa.eu/eu-law/decisionmaking/treaties/pdf/consolidated_versions_of_the_treaty_on_european_union_12/consolidated_versions_of_the_treaty_o n_european_union_12_en.pdf 1

from the scope of the treaties. In addition, any fiscal measures concerning energy require unanimity in the Council before they can be adopted. The marked tendency towards short-termism in some Member States for example, in the absence of a coherent energy policy in the UK in the later 1990s and in Germany over the rapid decision to phase out nuclear power after the Fukushima disaster has frustrated EU energy collaboration and by doing so reduced the EU s influence in energy markets. Some single market legislation is relevant to the energy sector (for example, electricity and gas supply) and the competition powers of the Commission have been (and remain) very important in breaking up national monopolies. 4 The EU s competence in environment policy is also relevant because of the close linkage between energy policy and environment policy. This is seen most obviously in the EU s policies on tackling climate change, including its leading role in the UN-sponsored negotiations on international measures to address the issue. 5 40 While many Member States have expressed support for the use of the word solidarity in Article 194, primary responsibility for energy policy remains with Member States. There are in any case markedly different views between the Member States about what solidarity means in the context of EU energy policy, with one study identifying 11 different interpretations of it. 6 While some Member States see it as a form of charity, others judge it to be the basis for EU budgetary spending in this field, and yet others see it as an exercise in pooling resources and influence to ensure security of supply. These differences of view reflect the diversity of Member States policies in the energy field, which, while understandable given the different issues faced by Member States, have hampered (and still do) the adoption of the kind of long-term approach to energy policy needed to ensure both security of supply and affordable energy for Europe s citizens and businesses. EU involvement in energy policy in a significant way is a relatively recent phenomenon really since 05 and it is a consequence of global changes in the energy market that have posed common challenges to Member States, making the need for them to work together more urgent. Security of Supply The level of security of supply depends on a country s national energy resources, the likely duration of such resources, the reliability and affordability of energy imports and the availability of alternative supplies if there is an interruption in delivery. The EU is vulnerable in terms of security of supply because it is a region of the world with relatively high energy 4 The effects of EU competition policy on the electricity supply market are discussed at: What Has Been The Role Of EC Competition Law In The Liberalisation Of The European Electricity Sector? Babatunde O. Adekoya, car6_tunde_997154157.pdf 5 The EU s competence is set out in Article 191; the Article specifically refers to the EU s competence in international climate change negotiations. 6 Energy Solidarity in Europe: From Independence to Interdependence, Sami Andoura, Notre Europe, July 13, p.31: http://www.institutdelors.eu/media/energysolidarity-andoura-ne-ijd-july13.pdf?pdf=ok 2

demand, heavily dependent on imports and where existing energy resources have been exploited extensively already. Measuring demand for energy in the EU is technically challenging as Member States are at different states of economic development and have different levels of energy consumption. One of the complicating factors in measuring demand is the impact of the energy efficiency measures that the EU has promoted for several years and which are intended to reduce energy demand as part of the EU meeting its greenhouse gas emission reduction targets. Long-term studies for the EU suggest that some Member States with advanced economies, such as Denmark, France and the UK, will see a fall in energy demand by, while other less-developed economies, such as those of Greece, Lithuania, and Slovakia, will see an increase. 7 The energy resources of Member States are already being exploited (e.g. the UK s North Sea oil and gas fields) but some Member States have little, if any, energy resources they can exploit. In some cases they are likely to run out (the UK is now a net importer of oil and gas) or there are major policy questions about they wish to develop those resources available to them (e.g. fracking and nuclear power). In making their national policy decisions, Member States have to take into account the EU s climate change policies, which seek to reduce the dependence on coal for the generation of electricity because it is a major generator of greenhouse gas emissions. The EU Member States are over-reliant on imported energy, both as a share of energy consumption and in terms of the small number of countries who are suppliers. Russia is the EU s largest supplier of crude oil, natural gas and coal with shares of total imports at 31.72 per cent for oil, 39 per cent for natural gas and 26 per cent for solid fuels (including coal). 8 Six Member States are entirely reliant on Russia for their natural gas supply. 9 This level of dependence on non-eu suppliers creates energy security risks, as the recent turmoil in the Middle East and tensions with Russia have shown. The two interruptions to gas supplies from Russia, in 06 and 09 and the price dispute with Ukraine in June 14 have raised concerns about security of supply to a higher level. This is not entirely new there were concerns during the Cold War about the dependence of Western European countries on gas from the Soviet Union. It is important to note however, that Russia is heavily dependent on energy being bought by EU Member States to ensure the solvency of its economy. For example, if Member States were not prepared to pay the current price of $4 per thousand cubic metre for gas from the Russian state-owned supplier, Gazprom, it would no longer be able to subsidise gas supplies in Russia (it sells 7 Energy Demand in the EU: A Comparison of Forecasts & Ambitions, European Climate Foundation, 09: http://roadmap50.eu/attachments/files/energydemandintheeu-acomparisionofforecastsandambitions.pdf 8 Figures from the European Parliament: http://www.europarl.europa.eu/news/en/news-room/content/140718sto532/html/the-eu's-energy-dependence-factsand-figures 9 Bulgaria, Estonia, Finland, Latvia, Lithuania & Sweden. See US Congressional Research Service chart at: http://business.financialpost.com/14/03/18/how-europe-is-turning-to-north-america-to-wean-itself-off-russian-energyexports/? lsa=9b2b-957c Reducing European Dependence on Russian Gas, Ralf Dickel et al, The Oxford Institute for Energy Studies, October 14: http://www.oxfordenergy.org/wpcms/wp-content/uploads/14//ng-92.pdf 3

there at $7 per thousand cubic metre) or to former Soviet states, such as Belarus (at $224). 11 The dependence on imports has kept energy prices high in the EU. On average, household electricity prices in the EU rose by four per cent a year between 08 and 12 and industrial electricity prices went up by about 3.5 per cent per year over the same period. 12 These averages disguise far higher increases in some Member States and, conversely, reductions in others. For gas prices, increases have been lower an average of over three per cent a year between 08 and 12, with industry paying about one per cent more per year. Again, these averages disguise some far higher rises in several Member States, notably in those dependent on imports of gas from Russia (such as Estonia and Lithuania). 13 The over reliance on imports has been magnified by other factors, these include: the decline of existing generating capacity (particularly nuclear in the UK), the decision to close all nuclear power stations in Germany in the s and the switch from coal as part of climate change policies [see below]. To some extent these developments have been offset by the growth in renewables [see also below]. In response to these security of supply problems, the EU has developed an Energy Security Strategy. 14 Adopted in June 14, it led to stress tests for 38 European countries, including all Member States, to judge how they would cope if Russian gas supplies were disrupted. These tests showed that the EU Member States could cope with the loss of Russian gas, either temporarily or more long-term provided they used the various tools at their disposal, including free trading in natural gas across borders and the development of storage and interconnectors. 15 The EU has established a gas monitoring group as part of its security of supply programme of work. Other measures to tackle security of supply problems include: building new pipelines and interconnectors; increasing gas storage capacity; and building more liquefied natural gas (LNG) terminals so that it can be imported. The EU has made some progress in developing all of these but although these measures mitigate the risks for individual Member States, they do not increase as yet the overall supply of energy from more reliable sources. The exploitation of new sources of energy is happening in some Member States, for example through the construction of new nuclear power stations, the development of fracking, and the further development of renewables. 11 Stress tests conclude that Europe can call Putin s bluff and win, Forbes [online], 22..14: http://www.forbes.com/sites/paulroderickgregory/14//22/stress-tests-conclude-that-europe-can-call-putins-energy-bluffand-win 12 Energy prices and costs report, European Commission staff working document, SWD (14) final/2, p.9 17.03.14: http://register.consilium.europa.eu/doc/srv?l=en&t=pdf&f=st+5599+14+add+3+rev+1 13 Part II of the report referred to in note 11, p.71: http://register.consilium.europa.eu/doc/srv?l=en&t=pdf&f=st+5599+14+add+4+rev+1 14 http://eur-lex.europa.eu/legal-content/en/txt/pdf/?uri=celex:514dc03&from=en 15 Stress tests conclude that Europe can call Putin s bluff and win, Forbes [online], op cit. 4

Climate Change & Renewables The EU has been a leader in global policy to tackle climate change. Its energy and climate policies seek to prevent damaging climate change as well as to mitigate its consequences. In particular, the EU has committed to reducing Europe s contribution to greenhouse gas emissions (GGE) through energy policies that are intended to reduce energy inefficiency, increase the share of energy produced from renewables and to phase out coal-fired power stations across the EU. In October 14, EU leaders reached agreement on a new set of targets for reducing GGE by. First agreed for, these new targets cover the same three priorities as the previous targets but are more demanding than the -- targets previously adopted. The new targets are: for the overall reduction in GGE in the EU (now to be at least 40 per cent below 1990 levels); a non-binding target for energy efficiency (27 per cent to be reviewed in with the intention of moving it up to per cent then); and a target for the share of energy from renewable sources (27 per cent but with no binding targets at national level). The adoption of the targets was important for setting the EU s position ahead of UN climate talks in Paris in December this year. Each Member State will present their own individual target for reducing GGE emissions to below 1990 levels and some may be more ambitious than the 40 per cent target adopted for the EU as a whole. Promoting greater energy efficiency in order to reduce demand has been EU policy for several years. As already mentioned, setting a tougher target for energy efficiency forms part of the EU s strategy but there have been disagreements within the EU about whether such targets should be binding on each Member State. When the European Council reached agreement in October 14 on their new targets, they adopted a non-binding target for energy efficiency, reflecting the range of views on the issue. Nonetheless, the EU Member States have already achieved significant reform so that new buildings must have higher insulation standards; insulating older properties is heavily promoted by energy companies (and often subsidised by them); and property purchasers must be told a building s energy rating. Working to reduce the consumption of energy by domestic appliances is also underway, which has the additional benefit of reducing consumers bills. The share of renewables in electricity generation has now reached 24 per cent and is on a rising trend. 16 Overall, low carbon generation has produced the majority of electricity in the last two years but that includes generation from nuclear power, a sector in decline in part of the EU because of the German decision to close down its nuclear power stations and the delays in replacement nuclear power stations in the UK coming on stream. 40 A Single Market in Energy There is no coherent energy market in the EU, a legacy of state-owned national power generators, the absence of interconnectors between Member States and because former Warsaw Pact countries were expected to buy oil and gas from Russia. In addition, several Member States have little or no energy resources themselves and so must purchase energy supplies from overseas (e.g. France and Spain import all their gas). For many years 16 A Sector in Transition: Electricity Industry Trends & Figures, Eurlectric, January 15, p.12: http://www.eurelectric.org/media/161808/electricityindustrytrendsandfigures15_lr-15-0-0064-01-e.pdf 5

protectionist national policies prevented competition in energy supply, both within Member States and between Member States. The consequence of this lack of a single market in energy is that businesses and consumers pay more for their energy prices in the EU than (for example) their counterparts in the United States. This is damaging both to industry and to ordinary consumers as it inflates prices, undermines economic growth and contributes to the over-reliance on energy imports. Achieving a single energy market has been a goal of the EU for several years. Major steps forward include the Electricity Directive, which laid down a common regulatory framework for the generation, transmission and distribution of electricity. 17 Similar legislation has brought a degree of competition to the retail supply of gas in recent years. But many obstacles remain and the pace of change has been very slow. The 09 third package of energy market reforms was designed to help the market develop a stage further. A crucial element was unbundling, that is separating energy supply from energy transmission in order to open up markets. Some energy infrastructure projects are under way there have been 59 EU-funded projects so far, including 44 that concern gas or electricity infrastructure, nine offshore wind generation projects and six that concern carbon capture and storage (the latter is designed to make future coal-based energy products less damaging to the environment). 18 The creation of the European Fund for Strategic Investments in 14 as part of Commission President Juncker s strategy for creating growth and jobs has provided a major new opportunity to deliver some of the key infrastructure improvements necessary for a genuine single energy market. But despite the large number of projects put forward for the new fund, only eight per cent include energy efficiency and the Member States most dependent on Russian gas have proposed the least investments in energy projects. 19 It maybe that the release of further funds through the European Central Bank, as part of its quantitative easing programme, will improve the situation. The Energy Union Policy The concept of energy union means bringing together the EU s energy and climate change policies to form a coherent and comprehensive policy for all 28 Member States. The elements that would be likely to make up the energy union are: 40 further reform of the Single Market in energy to stimulate greater competition, lower prices to the consumer and to stimulate innovation; more co-operation between Member States on energy policy, so that national decisions on energy mix are considered in an EU context; support for new infrastructure to help create a proper market, for example new electricity interconnectors, including adding the Baltic States to the existing grid by 17 Directive 96/92. 18 http://ec.europa.eu/energy/eepr/ 19 Europe s Choice: Low Carbon Growth or High Carbon Risks? ERG, January 15: http://www.e3g.org/docs/e3g_efsi_fact_sheet_and_qa_28_jan_15_final.pdf 6

16; and pipelines to enable the import of gas from the Caucasus and to facilitate transport of gas between Member States by routes avoiding Russia; action to protect the security of supply of gas, including establishing new links between Member States and emergency planning to deal with future interruptions to supply building on the gas monitoring group that the EU now operates; and international co-operation to improve energy supply in the whole of Europe but also co-operation with countries outside the EU to make existing supplies more secure and to open up new markets (e.g. being able to purchase energy from the USA). When the Vice President for Energy Union was questioned by the European Parliament before his appointment was confirmed, he suggested that the EU should consider becoming a common purchaser of gas. This comment, reflecting a view shared by the President of the European Council (Donald Tusk, who suggested the idea when he was Polish Prime Minister), raises questions about what an energy union should not seek to include. The following areas are commonly suggested: interference in commercial decisions on energy supply, i.e. the single purchaser/negotiator idea Mr Tusk has advocated; regulation of energy prices an issue for national regulators; and national choices of energy mix, i.e. some will have nuclear, others not, some will encourage fracking, others will forbid it. Future Developments Detailed proposals are expected from the European Commission in March 15, prior to the European Council meeting that month. That will be the beginning of a process that is likely to take some time. The timetable is, however, constrained by the need for the EU to have a coherent position in time for the UN climate change conference in November and December 15. 40 This policy process takes place against a challenging regional and global backdrop. The Russian decision in January 15 to cancel the proposed South Stream gas pipeline (which would have brought Russian gas into southern Europe without passing through Ukraine) is an example of how an already complex situation can quickly change. 21 There are many uncertainties too over what will happen to the oil price; the recent fall in the oil price is unlikely to affect the economics of renewable energy in the EU in the short-term (because so little generation in the EU is oil-fired) but the longer-term position is less certain. There could also be an impact on the development of fracking. 22 The new President of the European Council, Donald Tusk, has a personal commitment to the concept of energy union. His support, and that of the Commissioner responsible, will be vital as there are substantial divisions among the Member States. The difficulties over the South Stream project demonstrate these divisions. The EU had never regarded the proposed South Energy Post 21..14: http://www.energypost.eu/brussels-gives-first-glimpse-means-energy-union/ 21 BBC report on the South Stream cancellation: http://www.bbc.co.uk/news/world-europe-283571 22 Carbon Brief, 06.01.15: http://www.carbonbrief.org/blog/15/01/what-falling-oil-prices-may-mean-for-the-future-of-renewable-energyinvestment/ 7

Stream pipeline as particularly useful because it would have simply brought Russian gas to the EU by a different route, rather than open up supply from new markets. Nonetheless it was strongly supported by several Member States who stood to gain from it. This is one demonstration of how persuading Member States to co-operate with one another in this very sensitive policy area will continue to be far from easy. February 15 8