The Bing Bang- Energy and EU Enlargement

EURELECTRIC Annual Conference- Prague 23 & 24 June 2003,
Enlargement and the energy market

When Paul Bulteel invited me to address this conference I was not only pleased, I felt honoured and accepted without hesitation. It was one of my objectives in the European Parliament to contribute to the enlargement process, to overcome the historic divide of Europe, this unbearable heritage Hitler's war left for Europe.

Much more important people than myself will comment or have already commented on the European reunification. Let me simply say that I have visited Prague many times, my first visit going back to the early sixties and I could not believe that one day we would be able to cross the border without difficulties, that one day we would be united in a Common Union of values, that the Czech language would become one of our official languages in the European parliament, and that we would speak about such technical problems as the integration of our energy markets. But sometimes miracles happen. Let's grasp this extraordinary opportunity and let's do what we have to do.

Energy policy is a major part of our internal market. Two of the founding treaties of the EU dealt with energy - the Coal and Steel Community which expired last year and the EURATOM Treaty, which is still in force, although very much criticised for its democratic deficit. Nowadays we mainly focus on issues like the internal market and the environment, two areas of exclusive European competence. In practical terms, it means that the European Commission has the right and the duty to propose legally binding directives and then Parliament decides together with the Council of Ministers. This process is called co-decision and makes decision making a democratic and transparent process.

At the moment we are focusing on three major issues: environment, including climate change and nuclear safety, the completion of the energy market and the security of supply. Let me shortly comment on these three subjects. 

Since the Maastricht Treaty, environment has become a major area of European concern. Pollution and industrial risks are by their very nature cross border issues. Hence, environment policy falls by definition under European jurisdiction; it is genuine European policy. Our safety and emission standards apply to all Member States and as a result emissions of SO2, NOx, CO and dust were reduced to very low levels. Nuclear safety and waste standards fall under the Euratom treaty, which leaves nuclear safety and waste issues to the competence of the Member States. Consequently, they were so far excluded from European legislation. As no one can explain anymore the rationale behind this bizarre rule, the Commission has launched an initiative which we call the nuclear package. The Commission profits from a decision of the European Court of Justice, which confirmed the right of the Commission  to intervene in nuclear safety and waste.

With the ratification of the Kyoto protocol, which foresees a mitigation of our greenhouse gas emissions by 8%, the EU as a whole has committed itself in the two decades from 1990 to 2010 to an ambitious and common objective. Every Member State got a quota for its emissions and the transgression of the permitted amount of emissions will be penalised. At present we are working on a directive on emissions trading which introduces common rules concerning the buying and selling of emissions rights. In the future electricity companies will not only sell electrons, they will also trade with every ton of CO2 they emit or avoid to emit.

Emissions trading is also part of our internal market. In another directive that the Commission will propose in short we will include Joint Implementation and the Clean Development Mechanism into the scheme of emissions trading. I presume this will be advantageous for the accession countries, because it is in general still cheaper to save on CO2 in the East than in the West.

Our climate policy is based on the recommendations of the International Panel of Climate Change - IPCC. They believe that greenhouse gases will likely cause the earth to heat up over the next century. To be very clear: this is a scientific hypothesis, and although it sounds reasonable it is not ultimately proven and will perhaps never be proven. Anyhow, we behave as if it were true because we apply the cautionary principle which says nothing more than you have to behave as if the worst scenario would happen.

How the earth's climate reacts, however, depends on more factors than just greenhouse gases. Solar radiation may affect our climate much more than greenhouse gases. But there are still many uncertainties in solar measurements. One of their biggest obstacles has been technology. Because even the smallest shifts in solar energy can affect climate drastically, measurements of solar radiation have to be extremely precise. From a NASA research satellite, the Solar Radiation and Climate Experiment, which carries instruments designed to do just that, we will soon get more information. The result may well be that we have to throw off climate models of global warming and scientist's understanding of convection in the atmosphere. But it may as well confirm the climatologist's view.

This is the uncertainty for energy policy, for investments, for the legislator. The only answer to such an uncertainty is absolute transparency and a policy driven by science, not by superstition.

Concerning the energy market stricto sensu we have just agreed to open the electricity and gas markets to industrial consumers in 2004 and to households in 2007. No Member State is prevented from opening its market to competition earlier than foreseen, but nobody can avoid competition beyond that period. A regulatory authority will supervise the access to the grid so that real competition is made possible. Labelling of electricity will be compulsory so that every single client is informed about the origin of their electricity. And the Commission will publish yearly reports on the reserve funds for decommissioning of nuclear power plants in order to avoid distortion of the market.

The consequences of competition can already be felt. Electricity and gas prices fell, sometimes considerably, and made our economy more competitive. In the meantime they have gone up again although part of this increase is due to the additional tax burden on energy caused by our climate policy.

In principle we do not subsidise energy. In principle - but in reality there are still exceptions like the coal sector in some countries, particularly Germany, renewables and co-generation. We committed ourselves to double the share of renewables until 2010; we will considerably increase the share of co-generation- and the respective directives allow a digressive subsidy. There are still different national schemes to subsidise renewables but in a few years time we have to decide on a common European policy on renewables.

The basic idea of a market driven energy policy is competition over prices. Price signals are expected from the market not from the bureaucrats. And companies will be forced to reduce the costs and innovate more quickly. And the consumer has a choice. He decides on his supplier and not vice versa.

So far, the theory. It may well happen and we wish it would happen this way. But we cannot overlook the complexity of the energy market. Enormous investments are needed, the decisions have to be taken for the next 40 or 50 years, long term contracts in the gas sector need to be respected - in short, there is a need for a stable and foreseeable legal framework. Competition, on the other hand, favours short-term behaviour, the shareholders want to see their money now and not in the future. We therefore have to reconcile competition with long term investments- a requirement, which is easily spelled out, but difficult to implement.

One of the consequences of liberalisation is that only a few companies dominate the market. Some experts predict that at the end only five big companies will remain- the others will be absorbed by these giants. Personally I am not that pessimistic, because the access to the grid allows newcomers to enter the market; new energy services and technologies are much more rapidly used and introduced in the market. This process is now beginning and if competition works well we will have a coexistence of many small and a few big companies.

Particularly big, but also small firms benefit from the common market. Transnational companies are created with a new culture and a new mission. And they replace the former monopolies.

Liberalisation very often implies privatisation although the directives don't require it. But in a competitive market state intervention doesn't make sense anymore, governments loose their interest in a state owned electricity company and sell their shares. But I repeat: privatisation may be a convenient strategy for companies to become more competitive, however this is not required by our legislation.

Our directives also allow the maintenance of public service obligation. The Member States are free to impose rules to the companies so that they comply with the obligations in the general interest of the public. Social, regional or environmental aspects can be reconciled with competition.

Competition in the electricity sector has the desired consequences on the prices. In general prices fall, as I already mentioned. However, prices may also go up because in a competitive environment prices reflect the costs. Therefore, in some of the accession countries liberalisation leads to an increase in the price and is therefore unpopular. In others it may be the contrary.

What is the special situation of the accession countries? First of all they are very different because they rely on different energy sources. Apart from Latvia and Lithuania most countries rely heavily on coal as their primary energy source. If we add gas and coal, the fossile energies are by far the dominant primary energy sources. Nuclear energy provides roughly between 10 and 20% of the primary energy in five of the ten accession countries. The rest stems from renewables and a small amount form hydropower.

The high share of fossile, particularly coal-fired power stations poses an environmental problem, although much has already been done. The biggest success has been achieved in the Czech Republic where emissions have been reduced considerably. But, also the other countries reduced their emissions and are nearly on track with the EU requirements.

However, in the long term fossile fuels will be facing problems under our CO2 mitigation policy, if we do not succeed to replace older coal-fired power plants by new and cleaner ones. The accession of the central and eastern European countries to the European Union increases the pressure to develop and build a clean power plant with high efficiency and sequestration of CO2. I, therefore, repeat my request for an ambitious European research and demonstration project called clean coal in order to give coal and lignite a future, even under our Kyoto and post-Kyoto requirements. At the end we might be able to burn coal without any emissions, producing hydrogen and sequestrating CO2 by 100%.

Concerning nuclear power, we face the problem of security and waste. Security is not only a technical, but also a human challenge. People have to be constantly trained, a task that the European Union facilitates with its research and exchange programmes. Waste is another problem. We need a final waste disposal in every country or- what is perhaps even more reasonable from an economic point of view- a common waste disposal shared by several countries, although this seems to look extremely unlikely as things stand at the moment. Nobody wants its neighbour's waste. But new technologies including  reprocessing and transmutation will help us reduce the volume of radioactive waste- we simply have to develop them. And the reduction of the waste volume will perhaps bridge the gap between public acceptance and economic needs. Coal and nuclear energy offer two areas for a challenging common research. Renewable energies and energy saving methods are other examples where we have to co-operate and where the EU offers its support under the 6th framework programme.

Our future energy co-operation depends on the markets as a major driving force, but it also depends on research to solve actual and future problems.

The liberalisation of the energy markets in the accession States is rather slow, although there is a clear commitment to open the markets as soon as possible. But one should not underestimate the difficulties and the different historical backgrounds of the energy industry in Central and Eastern Europe.

Even in the west, it took us nearly two decades to open our markets to competition of gas and electricity.

The transposition of our directives into national laws is one thing. The other one is how the companies put these laws into practice and the rationale involved behind this. Competition demands a new entrepreneurial culture. It is no longer the engineer who decides, but the salesman who counts. Thanks to liberalisation companies enter into a new relation with their clients. The client becomes the main actor, he decides where he wants to buy his electricity and labelling enables him to know the origin of his electric current.

Liberalisation also puts an end to national monopolies. Electricity may have a quality and a price, but it has lost its nationality.

Therefore, companies have to change as well. We will have more and more transnational companies, big and small ones, and we will have new start-ups particularly in the service sector.

Liberalisation means rationalisation. And rationalisation translates into job losses. In the west we lost between 200.000 and 300.000 jobs in the traditional energy sector. This is of particular concern especially in difficult economic times.

On the other hand, liberalisation creates new jobs. When electricity or gas prices fall the consumer or the industrial user saves money that can be spent elsewhere. And new service providers, new companies who enter the market create new and competitive jobs. At the end we might well have a job compensation for the losses in the traditional companies. At a macroeconomic level this sounds good and reasonable, at the microeconomic level, at the level of the individual, it is sometimes hard to understand. I, therefore, accept the hesitations, sometimes even the trade unions or the employee's refusal to liberalise, but nevertheless there is no point of return.

My last comment refers to the security of supply.

As regards gas, we still need long term contracts with our external suppliers, mainly Russia and Norway. We also have to diversify and multiply our suppliers. In short, we will have a big conference in Brussels with the heads of State of all neighbouring countries of the Caspian sea region. Central Asia will become one of our main oil and gas suppliers in a foreseeable future. We, therefore, need new pipelines. The more we diversify, the more we are sure to be on the safe side. And the more competition we have, the lower the oil and gas prices will be.

The European Union actually discusses with its neighbours in North Africa, Central Asia, Ukraine and Russia a free trade area for energy. We think it should be possible to integrate their and our energy markets without joining them the European Union. If we succeeded we would not only create a big market but we would also increase our security of supply. Such an agreement would be a milestone in our foreign and security policy. It therefore deserves all our attention.

But we also need investment in our own countries. The electricity and gas prices must be high enough to encourage companies to invest in the future of our power stations and our networks. This will be the main task of the regulation. And we, the European legislators, have to provide the companies with a reliable legal framework, so that they know about their financial risks and possible profits. This is not easy particularly in the sector that deals with climate change.

Climate change and its consequences for the energy sector will probably cause the biggest insecurity for the future. Because Kyoto will be followed by a post-Kyoto agreement. We will, therefore, be obliged to reduce the emission of greenhouse gases by 50% or more until 2050. If this were the case, it will have painful consequences for your investment, for the technologies you choose, for your risks. Nuclear and renewables will be favoured as much as revolutionary new coal, gas and oil technologies.

Let me conclude by stating that energy is a test case for our will to integrate the European markets. It has undeniable advantages, but the risks cannot be denied. If we tackle the risks courageously, we will be among the winners. But it requires a new way of thinking and a new behaviour. And it forces us to think European and no longer national.