The European Energy Policy – Reality or Fiction

Some 15 years ago when we Parliamentarians started our discussions about the liberalisation of the European energy market I was admonished by the CEO of a leading German energy company: „Keep your hands off the energy business. You don´t understand it. We manage it better than you.“

What he – as many others – overlooked was the simple fact that energy is a commodity or a service that falls under the rules of our competition policy. And under these rules every single citizen has the right to buy his or her electricity or gas where he or she wants. If the European Institutions – Commission, Council and Parliament -  hadn't acted, the European Court of Justice would have decided on its own. And the market would have been opened by a decision of the European judges, not by a political process.

It took us nevertheless nearly 15 years to open the energy market for competition. But now it is done. In 2007 by the latest every single consumer will be able to buy electricity or gas from whatever European producer he or she wants. The consumer has even the right to know where his energy comes from. He will be able to choose between so-called green or whatever electricity. Electricity and gas get a label. Electricity preferably from renewable energy sources or cogeneration must be fed into the grid. Public service obligations are allowed. E.g. Finland can oblige a utility not to cut off a consumer from the grid in winter even if he cannot pay his bill.

The opening of the market to competition changes the pattern of the energy sector. National monopolies disappear, new mergers create transeuropean companies, a new concentration process can be observed, but also new services are offered. Contracting becomes a new business opportunity. Local or regional suppliers get a new chance. In a nutshell, a new era of energy policy appears on the economic horizon.

The legal background is our rules based on competition. Our energy policy is so far deduced from economic principles.

The protection of the environment is the second principle that rules our energy policy. When energy is used gases of greater or lesser toxicity are emitted. We voted a series of directives with the objective of reducing the emissions of SO2, Nox, CO2 or dust. Our air quality has therefore improved considerably. The same happened with radioactive emissions. Strict European standards rule how much radioactive liquids or gases can be released into the environment. Under the same policy workers are protected from radioactive emissions.

In the meantime a new element has been added to our environmental protection policy. It is our commitment under the Kyoto protocol. In the period between 1990 and 2010 the European Union wants to reduce the emission of greenhouse gases by 8%. In order to comply with this commitment we distributed binding quotas among the member states. Germany has to reduce its emissions by 21%.

Kyoto has not yet been ratified. We are waiting for Russia and the United States. Hopefully one or the other, or both will ratify in the near future although the prospects seem to be not too positive. But Europe, like Canada or Japan, remains firmly committed to its climate mitigation policy. Acording to all opinion polls European citizens seem to be backing our climate policy.

But climate mitigation policy is expensive. Pessimists say it will cost us up to 1% of our gross national product, optimists estimate that the burden will be much less. In order to reduce the costs we recently introduced two directives on emissions trading. From 2005 onwards the menber states have to allocate emission rights to the energy consuming sector, e.g. the utilities, the cement industry, the steel industry and so forth. The companies have to reduce their emissions by a factor x. If they fall below their obligation, they will be free to sell emission rights, if they are unable to comply with their obligations, they have to buy emission rights. As a consequence a market for emission rights will be created.

The economic reasoning behind this scheme is the assumption that a price for CO2 will create a mechanism which brings new money into those sectors where investment to reduce emissions is cheap. In order to reduce the costs even further we allow companies to buy emission credits in third countries and transform them into emission rights. These mechanisms are known under the label of clean development mechanism (CDM) and joint implementation (JI). CDM applies to developing countries, JI to industrialised countries.

You don't need to be a nobel prize winner in economics to understand that the price tag for greenhouse gases will influence our future energy policy. In the future fossil fuels will be penalized, renewables and nuclear have a clear advantage. The higher the price of CO2, the more the CO2-emitting technologies are disadvantaged. Lignite and hard coal are the first to be affected, gas will follow sooner or later.

For the moment the price of CO2 is low. There are plenty of emission rights available, a  fact that prevents the creation of a real market. A market will only be created if emission rights become scarce. But if this happens the impact of our climate policy on  energy investments will be crucial.

This does not make life for investors any easier. As power stations have a lifetime of 40 or more years you have to predict the market for electricity, the price of the fuel as well as the market for emission rights.

CDM and JI projects also alter our relations with third countries, particularly the developing countries. In the future they will sell us carbon credits and we shall pay with investments. A new trade relationship is just around the corner and the amounts involved will soon reach the dimension of billions of Euros.

Apart from the binding obligations of the Kyoto Protocol there are indicative targets like the promotion of Renewables and Cogeneration. The share of renewables in our electricity basket is to be doubled by the year 2010 from 6 to 12%. We want to increase the share of biofuels to nearly 6% in 2010, Energy efficiency is to be increased by 1.5% every year. Cogeneration is to be nearly doubled. Energy has to be used in an intelligent way. In short, the European Union is obliging member states to increase their efforts to save energy as much as possible.

One of the reasons for reducing energy consumption is the fear of becoming too dependent on energy imports. Currently we import roughly 50% of our energy needs. In 20 years time this dependence might easily become 70%. Security of supply and the price of imported fuel might become a threat to our economy. To reduce our imports is therefore a must for our energy policy.

A further element of our energy policy is research. Under the 6th framework programme of research we spend roughly one billion € on research in non-nuclear energy technologies and 1,2 billion € in nuclear technologies, mainly in nuclear safety and fusion research. Another 100 million € is spent on nuclear safety in the independent states of the former Soviet Union.

Coming back to the title of my contribution „the European energy policy – reality or fiction“  I can confirm that it is a reality. In the future constitution of the European Union you will find an article that describes exactly what I referred to. Under this article the Union has the obligation to guarantee the functioning of the market, to secure the energy supply and to fund research in new and renewable energy technologies. Climate policy is covered by the respective articles of our environmental policy.

Where are the problems?

First of all we are falling short of our Kyoto obligations. Europe of the 15 member states produces today more CO2 than in 1990. If we take all greenhouse gases together, we emit perhaps 2% less than in 1990. Countries like Spain which is allowed to emit 15% more than in 1990 currently emits 40% more greenhouse gases. The same applies to Austria and other EU countries. Only Germany, Britain and Luxembourg are on track. But if we had higher economic growth we would also fall  behind on our obligations.

It seems that it is much easier to change our habits on paper than in reality. To comply with our Kyoto obligations is proving to be a much bigger challenge than many politicians believed. And if we phase out nuclear it may soon become impossible.

One way out could be the purchase of many more carbon credits via JI or CDM. Spain and others e.g. want to transform the investments in Latin America and elsewhere into carbon credits. If ENDESA invests in Argentina and saves CO2 emissions by applying better technology they would then hope to transform that CO2 gain into a carbon credit which would then be granted to Spain and transformed into emission rights. Ireland, Austria, but also Germany have similar intentions with their respective carbon funds.

Therefore our climate policy could trigger a much more intensive technology transfer to developing countries than hitherto thought. Russia too could become a partner, provided they ratify Kyoto, an act that seemed not so unrealistic after the last Ministerial meeting EU-Russia a week ago.

Other problems arise from the observation that we will not comply with our voluntary agreements to increase the share of renewables in our energy basket. We shall probably reach 8%, perhaps 10% but not 12% in 2010 as we foresaw. Within a few days the European Commission will publish a communication on our renewables' policy and explain where the difficulties are. But whatever they say we have to make a bigger effort to promote renewable energy resources.

So far we support renewables mainly by national programmes. We have different support schemes: fixed prices in Germany, Spain, Austria, etc., certificates and quotas elsewhere. The fixed price system is by far the most generous and therefore efficient scheme, but it lacks competition. But the biggest drawback in Europe is that the national support systems are not always compatible with one other. We therefore don`t have a common market of renewable energy systems, a weakness the European Court of Justice has already criticized. 

The next European Comission will therefore have to act and present – not later than 2006 – a new proposal for a directive on Renewables in order to make the different systems compatible with one other. It must be possible to build your photovoltaic power station in places where the sun shines most in the EU, not only within your national boundaries.

Our nuclear policy is another, very contentious issue. On nuclear we are completely divided. But contary to those who want to phase out nuclear energy we are seeing a new wave of investment in nuclear installations. Finland is building a new 1600 MW power station, France has practically decided to do the same. France is investing in addition in a new isotope enrichment plant in Marcoule at a cost of 3000 Mio €. Bulgaria wants to build a 1000 MW reactor, the Czechs are near to a decision to do the same. And even where no new reactors are built, the old ones will live longer. This is the case in Switzerland, France and possibly other nuclear countries. As a consequence they save CO2 more cheaply and sell their electricity at a lower price.

On the other hand there are countries like Germany, Belgium or Sweden, who are committed to phasing out their nuclear reactors although at a very slow pace.

One of the consequences of these different energy strategies is a price differential.  Countries like Germany will certainly have to pay a higher electricity price in the future than the Swiss, the Czechs or the French. But as we live in an open and common market, we in Germany might buy part of our electricity in the neighbouring countries simply because their electricity is cheaper than ours. In other words, the open market will practically undermine the autonomy of the member states to decide on their own energy policy although they have the legal right to do so.

One could even imagine a massive capital transfer. Nobody can forbid you from investing in a nuclear power station in a neighbouring country if you wish to do so and if you pay for the investment with electricity. Such a deal could be done with countries where public opinion is indifferent or in favour of nuclear energy.

But there remain some questions. What about European nuclear standards? Do we want a common safety standard or do we prefer to leave it in the hands of the member states as was recently agreed by Council and Parliament? What about nuclear waste disposal? To what extent do we need a common approach or again, do we leave the responsibility in the hands of the member states?

It is astonishing that although nuclear contamination has undoubtedly a transborder characteristic, in other words in case of an accident it affects all of us, the member states including the European Parliament rejected a European responsibility. They distrust the Commission and prefer a coordinated, but at the end national responsibility.

Fossil fuels are another problem. As we produce a large quantity of our electricity from hard coal which is very often imported and lignite which is still a largely available indigenous energy resource, we have to develop a coherent European fossil fuel policy. The main problem ahead is related to CO2. If we peg a price tag on CO2 we penalise  fossil fuel technology. It is therefore of utmost importance to improve the efficiency of fossil fuel power stations and to sequester the CO2 emissions.

Nothing easier said than that. But in reality we are confronted with two problems. One is that sequestration, even if we master it, will make electricity from coal more expensive. And secondly, we have to replace half of our coal fired power stations in the next 10 or 15 years because the old ones will be coming to the end of their lifetime. But the new technology is not yet available. Sequestration is the technology of the next-but-one generation of coal fired power stations.

So what might be the consequence? More and more companies might switch to natural gas. But one of the consequences could be a rapid depletion of the current gas fields and the price will go up. Another consequence will certainly be that Russia will sell more of its own gas to the west and will replace gas in the power sector by coal and nuclear, a plan that by the way was already agreed last year by the Russian government. Because at the moment Russian gas sold to us is 4 times more expensive than in Russia. Even if it were only 2 times more expensive it would still be profitable to follow that line.

So if you ask me whether Europe has an energy policy I would say yes. But it does not have an energy strategy. We have some visions, we have some instruments, but we are far from having a coherent energy strategy.

A strategic question e.g. is: are we prepared for the world after oil? What are we going to do if the oil price remains as high as today? Or how do we comply with our climate obligations? After Kyoto comes post-Kyoto, that means another reduction of emissions by perhaps 20%. What will we do?

We need some new strategic thinking. And some realistic steps. Personally I think that it is wrong to phase out nuclear. We also need more energy research. And research in new materials. And why don't we replace part of the oil in the transport sector by gas and in a nearer future by biofuels, a technology that might become competitive if we succeed in transforming cellulose into glucose economically? And we could replace gas in the base load by nuclear. Such a strategy has the beauty of being reasonable. But it has the disadvantage of being politically incorrect.

But whatever we do we we cannot avoid developing a common responsibility for our European energy policy if we want it to be sustainable, economic, less vulnerable and secure. That is the challenge that lies ahead.