The UK in the EU

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The EU and Energy Policy


Energy has always been of importance to the EU but in recent years three major issues – set out below - propelled it to the top of EU leaders’ concerns. At the Hampton Court summit in October 2005, EU leaders decided that the EU needed a new initiative on energy policy. This led to a European Commission Green Paper in March 2006 and broad agreement on a new policy approach at the Spring European Council that year.

With the publication of the Commission’s Strategic Energy Review the following year, the foundations were laid of the European Energy Action Plan. This milestone in EU energy policy – giving the organisation the basis for a broad EU energy policy for the first time – addresses the three issues that have made energy such an important issue: security of supply; the development of a single market in energy; and climate change.

Security of supply

The first concern is the growing dependence on imported fuel, much of it from unstable and unreliable countries. Over half of the EU’s fuel needs are imported and that figure could rise to 70 per cent by 2030. Experience of the oil price shocks of the 1970s has made many EU members wary of being dependent on imported energy and as stocks of oil and natural gas in the North Sea run down, the need for alternative energy sources is clear.

A Single Market in Energy

The cost of energy is a crucial element in business costs; industry and transport are the two largest users of energy. Liberalising energy markets has long been seen as an important step towards improving EU competitiveness but with energy utilities often in the hands of state monopolies, this has proved a controversial and difficult ambition and is not yet fully realised.

Climate change

Growing concern about climate change has put the balance between fossil fuels and others form of energy on the agenda. About 80 per cent of the energy consumed in EU Member States comes from fossil fuels – coal, natural gas and oil. The EU needs to reduce its carbon emissions in order to cut the emissions that drive global warming.

Security of Supply

The EU imports over half of its overall fuel needs (in fact the figures are far higher for oil and for gas). This raises questions about the security of its supply, particularly the EU’s reliance on oil and gas from unstable and unreliable countries. With 42 per cent of EU natural gas and 33 per cent of EU oil coming from Russia (2006 figures), it makes sense for Russia and the EU to develop a long-term dialogue and co-operation over energy issues. No easy task given that the Russians have made no secret of their intention to use their oil and gas as an instrument of their foreign policy.

The EU has sought from the end of the Cold War to create a level playing field for trade and investment in the energy sector. The Energy Charter Treaty, signed in 1994 and in force since 1998, aimed to create such a level playing field through a legally binding treaty that ensures that foreign investments in energy operate in a stable and transparent climate in the host country, that countries accept the freedom of transit of energy flows through their country and try to minimise the impact of energy industries on the environment. It has been signed by 51 states but although Russia has signed the Treaty, she has failed to ratify it.

The problem of energy imports is made by more acute by the EU’s dependence on a relatively small number of countries; for gas for example, over 80 per cent of the EU’s imports come from three countries, Russia, Norway and Algeria. While the EU has close ties to Norway, the political and economic situation is clearly less stable in Russia and Algeria. This dependency is likely to worsen with the gas imports potentially rising further over the next 25 years.

Over-reliance on imports can be tackled in a number of ways. Making the energy market more efficient will help by reducing demand but also that there needs to be greater diversity of supply, new generation capacity and better interconnectors between national grids to increase competition and reduce the need for spare capacity. Policy on new generating capacity, particularly nuclear power, is a sensitive issue in many Member States and although it is primarily a matter for them to decide, decisions on it will affect other countries. Sixteen Member States either have or are developing nuclear power; this generating capacity will help the EU to meet its targets.

New pipelines that take oil or gas around Russia would also be valuable. The Nabucco project would bring natural gas from Azerbaijan to Austria; the first such pipeline that would not be routed via Russia. Over 3,000 kilometres in length, the pipeline would be linked to the planned Trans-Caspian Gas Pipeline, which will carry natural gas from Turkmenistan to Azerbaijan. The pipeline is being financed through the EU Trans- European Energy Network programme. UK Government has now indicated its support for Nabucco.

The key question for Member States is whether they can reach agreement on an external energy policy for the EU, so that they work together with powerful energy suppliers like Russia to create a stable and law-based market. At European Councils, Heads of State and Government have repeatedly emphasised their desire to reach agreement with Russia on energy issues; the problem is partly divisions within the EU in the absence of a single energy market but also the rather different ambitions of Russia.

The internal market in energy

The EU has in recent years pursued a programme to open up energy markets to competition; this forms part of the Lisbon agenda for economic reform. The establishment of a full internal market in energy would not only bring benefits to consumers in businesses within the EU, the absence of such a market means that the EU is less able to develop a coherent policy for dealing with difficult external partners such as Russia.

The process of opening up markets began with electricity from February 1999 for large and medium consumers and gas from August 2000. The process has been faster in some countries than others – the UK and most Scandinavian countries were early pioneers. The intention was that by 2007 suppliers from one EU country should be able to supply businesses and households in any other EU country.

Opening the energy market is not just about reducing prices for consumers. The EU believes that by adopting this approach, there will be greater incentive for utilities to invest in new generation capacity, greater efficiency and the development of more interconnectors between national grids.

Market liberalisation is in its early stages. There are still many barriers that stand in the way of a truly single market in energy, such as the presence of national regulators with differing powers, the dominance of national markets by large companies, grid rules and gas storage regimes. For that reason, the Commission proposed in September 2007 a package of measures designed to further liberalise energy markets (the "third liberalisation package"). Although the Commission had already been using its competition powers to force the opening of energy markets, the continuing existence of large suppliers in some EU countries had in practice reduced competition. The Commission’s proposals to separate production and distribution (known as "unbundling") were highly controversial and opposed by eight countries, including France and Germany. Other countries, including the UK - and also the European Parliament - supported this separation.

The opposition from France and Germany led the Commission to put forward fresh proposals on unbundling with a reduced requirement for separation between production and distribution. This change in approach contributed to agreement in principle on the liberalisation package at the June 2008 Energy Council. Legislation will now have to be agreed.

Climate Change & Renewables

A key aim of EU policy is to tackle the causes as well as the consequences of global warming. The EU has pioneered the use of a carbon emissions trading scheme; this and other measures to tackle climate change are described in a separate briefing note. There is also a note on the related question of biofuels.

There are three proposed elements to the Commission’s agenda for energy and climate change. The first is to improve energy efficiency. A green paper on energy efficiency published by the Commission in 2005 showed that as much as 20 per cent of EU energy use could be saved.

Increasing the amount of renewable energy generated is the second key element. Renewables are already a significant factor in the EU, with 300,000 people now working in a sector that, for example, in terms of wind energy has installed capacity equivalent to 50 coal-fired power stations (although in practice wind turbines operate at 27-30 per cent of their installed capacity). But the EU has fallen behind in reaching its already agreed target of making the share of electricity from renewable sources 21 per cent by 2010. .

The final element is capturing carbon and then storing it so it cannot be released into the atmosphere is one potential way of reducing harmful emissions. This is already being examined in some near-depleted oilfields in the North Sea where CO2 is being pumped underground. The concept needs further development and for that, greater research and investment is needed as it is not, at present, a viable technology. The European Parliament has voted for 10 pilot projects to be funded. Carbon capture and storage will be crucial to the EU meeting its climate change targets.

At the 2007 Spring European Council Member States agreed to a number of targets for reducing greenhouse gas emissions and also to source 20 per cent of the EU’s energy needs from renewables by 2020 (a major step-up from the actual performance of 8.5 per cent in 2005). The draft Renewable Energy Directive – to implement this last obligation – is now under consideration.

The draft Directive proposes national targets that would meet the overall binding target of 20 per cent by 2020. It also includes a requirement that a minimum 10 per cent of transport fuels be biofuels in each Member State (see the briefing note on biofuels for further details). The UK country target for energy from renewables is 15 per cent; this will be difficult to reach given that we only achieved 1.3 per cent in 2005. The UK’s target is lower than those for France, Germany or Spain, reflecting the fact that UK is behind many other EU countries in the development of renewable energy.

Reaching agreement on the Renewable Energy Directive will require a consensus on the use of biofuels and on the implications for renewables of the EU’s already operating emissions trading scheme.

July 2006; revised October 2008

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