Thursday, November 27, 2014

What should an energy union cover?

The events of the last year, and in particular the risk that the fighting in Ukraine could jeopardise Russian energy supplies to Europe, have highlighted the absence of a co-ordinated European energy policy. Donald Tusk, the incoming president of the European Council, has talked of the need for an ‘energy union’. What kind of policy co-ordination should European leaders undertake?

The basic facts are clear. The European Union is importing an increasing proportion of its energy, as output from mature oil and gas fields in the North Sea declines. Oil can be bought on the international market, but the EU has become dependent on imports of Russian gas, which now meet a quarter of our daily consumption. The gas reaches Europe through a series of pipelines, two of which run through Ukraine.

Securing gas supplies is not, of course, the only issue at stake in the European energy market. There are Europe-wide targets to reduce emissions, improve efficiency and increase the share of renewables, which were recently extended to 2030. The European Union also aims to keep energy affordable. However, European competence in the area of energy is limited. There is no common energy policy and the pattern of supply and demand is the product of 28 distinct national policies. So what might an energy union mean and how might it advance the three goals of security, cost competitiveness and environmental protection?

It is important to start with a dose of realism. Countries’ choices about energy supply often transcend rational economic calculations. Attitudes to one form of supply or another can owe more to emotion and history than to economics. No European directive is going to make Germany reverse its decision to close its nuclear power stations by 2022, or remove the overwhelming opposition to the technology of ‘fracking’, which can produce oil and gas from shale rocks, in France and Bulgaria. Nor are we likely to see common European energy prices, not least because energy taxation is such an important source of national government revenue. In the UK 80 per cent of the price of every litre of petrol goes to the government in taxes.

In addition, different countries hold different natural resources, and widely varying requirements for imports. The United Kingdom is still a significant producer of oil and gas, even if the volumes have fallen. Poland is still a major coal producer. Many of the other countries in Central and Eastern Europe have limited local energy supplies and rely on imports, often imports of gas and electricity from Russia. Donald Tusk, when Polish prime minister, argued that Europe should create a single buyer to match the market power of Russian exporters. But the pattern of trade across Europe is too complex for that. If the European Union created another centralised structure, it would not change that reality.

An energy union will therefore have limitations but could still be valuable. In at least three ways, a rational co-ordination of policy could give us all a more secure, cleaner and lower-cost energy supply system.

The first role is to link what we have already. Most of the energy systems across Europe, along with patterns of ownership and regulation, remain strictly national in scope. The most recent European Council set an objective that, by 2030, 15 per cent of the installed electricity production should be linked across borders. The scale of the aspiration seems limited compared to the potential. Last May the European Commission published a long list of potential projects that could usefully develop cross-border links. These included physical projects such as linking the southern Italian grid to the north of the country and onward, or a link over the Pyrenees between Spain and France. Under a working energy union, such links should be the norm rather than the exception.

An integrated distribution network, combined with a diversity of sources of supply, is clearly the most effective means of achieving energy security. If we had that, European countries could continue to trade with Russia – if it made economic and political sense – but would know that, if things did go wrong, alternative sources of gas and alternative pipeline networks were always available.

The second role is to establish a new pan-European grid with the capacity to transmit power across the continent from multiple sources. A so-called ‘super grid’ would enhance security but also enable us to better use power from areas in surplus. It cannot be efficient or cost effective for every one of the 28 member-states to maintain their capacity at the level necessary to meet peak demand. A super grid, which has in the past been backed by the German government, could be built step by step, starting with the plans for a new grid around the North Sea. A super grid would help to open markets to competition and to keep prices down. If European leaders are really serious about the notion of using infrastructure investment to drive economic recovery, a modernised grid would be a good place to start.

The third role for an energy union is to invest in the research necessary to transform the system as a whole. The EU’s plans for reducing emissions by means of carbon pricing and emissions trading, conceived six years ago, have not succeeded. The carbon price (the cost of having the right to emit one tonne of carbon dioxide) is proving insufficient to prevent a resurgence of  low cost, but high carbon  coal use. Renewables may be growing in scale – at a high cost – but their benefit in terms of reducing emissions is being offset by increasing use of coal.

An energy union could be a very useful way of focusing collective funds on the important research objective of finding a source of power which is both low cost and low carbon. One option, on which some initial work is being done in the United States, is to find a way of storing electricity efficiently. If successful, that would transform the economics of renewables – allowing much more power generated from the sun and the winds to be captured and used. Effective storage would also remove the problem of intermittency, which at the moment means that expensive back-up systems have to be in place to provide cover when wind and solar are unavailable. Why should Europe, with its extensive scientific base, wait for the US to find the answer?

An energy union should not mean centralisation and uniformity. Different countries will continue to pursue various policies. Such diversity is a good thing, not a problem. The EU’s role should be to enhance security, cost competitiveness and emissions reductions in ways which individual countries cannot achieve on their own.

Nick Butler
Visiting professor and chair, King's Policy Institute, King's College London

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