Friday, February 27, 2015

The Commission’s energy union ‘strategy’: A rebranded work programme

The European Commission’s grandly-titled ‘Framework strategy for a resilient energy union with a forward-looking climate change policy’ was published on February 25th. It contains sensible proposals. If all were enacted, EU energy and climate policies would be significantly improved. But they will not all be enacted – at least not in the lifetime of this Commission. A credible strategy needs priorities, resources and a clear timetable. This publication identifies only one very general priority (‘obey the rules’) and one very specific one (extend the energy market in South-East Europe). A forward-looking climate policy initiative would contain some new proposals: this paper does not. This paper is essentially a restatement of the Commission’s existing work programme, now rebranded as an energy union.

European integration has always been rules-based. Yet the Commission identifies “the implementation and enforcement of existing EU legislation” as the first priority of its new strategy. Specifically, it promises to insist that member-states implement the third energy market package. This is sensible, but not new: the Commission has been insisting that national governments implement this package ever since it was adopted in 2009.

The paper reiterates the Commission’s desire to centralise regulation. “Today, the European Union has energy rules set at the European level, but in practice it has 28 national regulatory frameworks. This cannot continue.” Whatever the Commission thinks, this will continue. In the late 1980s the Commission proposed a European Environment Agency to regulate Europe-wide. When the agency was created in 1990, national governments had changed its role to one of collection and dissemination of information: more of an environmental Eurostat than a green policeman.

The Commission’s attempts to centralise energy regulation face the same strong opposition in the Council. In 2009, as part of the third energy package, the EU set up the Agency for the Co-operation of Energy Regulators (ACER). As the name suggests, this is a forum for discussion between national regulators, not a body that actually regulates EU markets. In the Energy Union paper the Commission says that ACER should “carry out regulatory functions at the European level”. The Council is not likely to agree.

Apart from the statement that obeying existing rules is its first concern, the Commission identifies only one other priority: the integration of Central and South-Eastern European energy markets into the wider European market. It promises that it “will take concrete initiatives in this regard as an urgent priority” – though does not reveal what these might be. Central and South-Eastern European countries are indeed very important for Europe’s energy and climate policies: CER will publish a paper on this subject next month. But a credible strategy for an energy union would have set priorities for shaping the whole of Europe’s energy market, not simply identified how that market should be enlarged. The strategy paper ends with a section called “the Energy Union in 15 action points”. Several of these have bullet points, so in total there are 27 items on the Commission’s ‘to do’ list. President Jean-Claude Juncker and his team have not said which of these it considers to be the most important. It is very unlikely to be able to do all of them.

So what should be the priorities for building an energy union? First should be energy efficiency. The Commission should propose that most new power stations must be combined heat and power. Heat that is produced when anything is burnt should be used rather than being wasted up cooling towers. The Commission suggested this as part of the 2012 ‘energy efficiency directive’, but the Council rejected the proposal. The Commission should try again.

The second priority should be the construction of an efficient Europe-wide electricity grid. An improved and extended grid would enable member-states to harness much more renewable energy, so increasing energy security and reducing carbon emissions. With a Europe-wide grid, the EU could generate wind and tidal power in the north of the continent, and wind and solar power in the south. Electricity could be transmitted north to south during nights, when solar panels do not generate, and south to north during days when the wind is not blowing. (However good the grid, it cannot cater for all scenarios. Electricity storage or gas power stations as back up capacity will be required to ensure that the lights stay on during calm nights.)

The third priority should be energy subsidy reform. In 2009 the G20 promised to end inefficient fossil fuel subsidies. Little progress has been made since then. The paper notes that “collectively, the EU spent over €120 billion per year – directly or indirectly – on energy subsidies, often not justified”. It declares that “environmentally harmful subsidies need to be phased out altogether”. But all it proposes to do on energy subsidies is an “analysis of energy prices and costs (including taxes and subsidies)”. This is just a delaying tactic. The International Energy Agency and the International Monetary Fund have both conducted this analysis, and published the results, in the last two years. There is no need for more analysis. There is a need for action. The Commission should use its state aid powers to reduce existing subsidies to coal power stations, and prevent new subsidies to coal (other than for carbon capture and storage demonstration projects). In July 2014, the Barroso Commission gave state aid clearance to the UK for new subsidies to existing coal fired power stations. London argued that this was necessary to provide a back up for intermittent renewables. Gas power stations are more economically efficient in this role, and much less polluting. The Juncker Commission should reverse the state aid clearance for new subsidies to old coal.

The fourth priority should be diversification of gas suppliers. On the day that the Commission published its paper, Russian president Vladimir Putin threatened to cut off gas supplies to Ukraine. This was predictable. The paper stresses the need for Europe to reduce energy imports and dependence on single suppliers of hydrocarbons. (Russia is not named in this context; it does not need to be named.) The suggestion that Council President Donald Tusk made when he was Polish prime minister – that member-states should club together to become single gas buyers when negotiating with the Kremlin – is given a polite nod but nothing more: it will be “assessed”.

Instead, the paper stresses the need to find alternative suppliers of gas. The Commission promises to work on gas interconnectors within the EU. These are necessary, particularly for countries which import most or all of their gas from Russia, and are likely to receive EU funds. The Commission will also work on the Southern Gas Corridor to bring gas from Central Asia to Europe. And it will “encourage” Central and Eastern European and Mediterranean countries to build liquefied natural gas (LNG) facilities, as Northern European countries have done. More LNG facilities would be good for energy security. They would also be good for climate action. The greenhouse gas footprint of LNG is higher than that of piped gas, because of the energy used during its transformation. But even when turned into liquid and then back into gas, natural gas is less bad for the climate than coal is. 

So, the energy union priorities should be energy efficiency through combined heat and power, an improved and expanded electricity grid, reform of energy subsidies and diversification of gas suppliers. What proposals should be added to achieve forward-looking climate policies? First, the Commission should propose an Emissions Performance Standard (EPS), to limit the amount of carbon dioxide that power stations and industrial plants are allowed to emit. The European Parliament tried to include an EPS in the 2010 ‘industrial emissions directive’. The Barroso Commission blocked Parliament’s effort on the grounds that a regulatory approach was inconsistent with the market-based approach of the Emissions Trading System (ETS). This line of reasoning is not convincing. It is perfectly possible to combine an EPS with emissions trading, as the Californian government shows. What is more, emissions trading in Europe has not delivered a significant or predictable carbon price, which is needed to channel investment into low-carbon energy. Rejecting a new measure because it is (allegedly) inconsistent with an unsuccessful existing policy is not sensible. Last month, the Juncker Commission agreed to consider an EPS. But the Energy Union strategy does not mention it.

Second, the Commission should propose financial support for modern nuclear power technologies which will be even safer than existing nuclear stations and which can use radioactive waste and plutonium (of which the UK and France have large stockpiles) as fuel. The Commission accepts that the EU should maintain technological leadership “in the nuclear domain”, but argues that this should include the International Thermonuclear Experimental Reactor (ITER), the nuclear fusion project in France. ITER is a partnership between the EU, China, India, Japan, Russia, South Korea and the United States. The EU is ‘leading’ in the sense that the money from the EU Budget covers 45 per cent of the total; the other six partners cover just 9 per cent each. Billions have already been spent, but the earliest date that nuclear fusion could generate electricity commercially is 2050. ITER is a waste of money, and should be abandoned. The EU should instead invest the money in nuclear technologies which could contribute to energy security and decarbonisation in the 2020s.

Third, the Commission should spend more of the EU Budget on innovative renewable energy technologies. Wave and tidal power could make a major contribution to European electricity. But these technologies are still at the development or demonstration stage, so need significant grants. The Commission should transfer money from the transport part of its Connecting Europe facility into research and development of new renewables. 

Fourth, the Commission should promote a price floor for the ETS. Carbon trading has two objectives: cap the total amount of greenhouse gas pollution, and put a price on carbon so that more investment goes into low-carbon energy sources and less into dirty coal. Greenhouse gas levels are below the cap which the ETS sets – though this is due more to the economic downturn than to the ETS. But the current carbon price (around €7 per tonne of carbon dioxide emitted) is far too low to have any significant impact on investment decisions. The Commission should propose a minimum price at which allowances can be traded. The price floor should be introduced at €30, and go up each year.

Juncker’s Commissioners regard energy as an issue on which ‘more Europe’ is needed. They are not alone in thinking this: Finnish prime minister Alexander Stubb made the same point at a CER event in October 2014. The energy union paper says that national policies provide insufficient predictability for potential investors. EU regulations are more stable than national regulations are, because they are difficult to change once agreed. However, attempts to alter the tier of government at which policy is made – from member-state to EU level or vice-versa – cause more unpredictability and so increase the cost of capital. The Commission estimates that “over €1 trillion needs to be invested into the energy sector in the EU by 2020”. This at a time when the European economy is weak. The Commission, Parliament and national governments must not allow inter-institutional arguments to increase the price tag. They should focus on energy and climate issues, not on constitutional squabbles.

President Juncker promised to lead a more political Commission. Sadly, the energy union framework strategy is not political enough. It is too bureaucratic and too timid, and needs more focus.

Stephen Tindale is a research fellow at the Centre for European Reform.

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