EU Energy Policy To Be Reconsidered
March 11th, 2010 by Jean-Michel Glachant, European University InstituteEU energy policy is a basket of a number of policies that are concerned with energy markets and energy issues. Since the 2007 Spring Council, the basket is based on three pillars: climate change, competitiveness and supply security. Let’s look separately and then jointly at the Kyoto, Lisbon and Moscow summits of this magic EU triangle.
On Kyoto, the green issue. It was build upon the fact that energy related environmental issues became in the late 1980’s a truly European domain to fight acid rains and save migrant birds and fish. When Kyoto happened, it was adopted by the EU, as earlier attempts to start an EU carbon tax failed dramatically. Two surprises were coming from the EU leaderships, one to translate Kyoto rather overnight into a market based system, i.e. the ETS and another one, rather as “a gift from heaven”, to formulate political results with long term (i.e. burdening successors) non-binding common targets in the Triple Twenties for 2020.
On Lisbon, the market issue. Lisbon was born in 1986 when the 1992 Project was created. The Single Act for the Internal Market, core business for the EEC, the Economic Community. Market based economies with no internal barriers to trade and a centralized monitoring system to review progress and to solve ongoing discrepancies. Energy was included in the plans, but brought very slow progress as national monopolies with their strong national government ties and behaviors (including with strategic national interests, rightly or wrongly) and many cross-subsidizations throughout value chains were starting battles with the UK market lead Thatcherite approaches. Two steps were made in 1990/91 on cross border transits in gas and electricity, followed in 1996/98 with a first liberalization package, gaining momentum in 2003 with a more comprehensive second one and a third one in 2009 that was probably not “singing the right song”.
On Moscow, the security of supplies. Russian energy (gas) supplies played an increasingly important role for the EU since the early 1980’s. The peaceful dissolution of the Soviet empire gave opportunities for energy cooperation that were coming from some national capitals and hence not applauded in Brussels. How to react, without having a formal role? The foreign policy dimension was very political and energy was not on the radar screens. Selling the internal market paradigm to the East was then the Berlaymont reaction, which was not unsuccessful, except for Moscow. Market opening to EU was not in the Russian leaders’ interest, whereas maximizing producer rents in the value chain was. Realizing that the Commission made several attempts from the 1960’s onwards to start “une politique communautaire d’approvisionnement énergetique”, including the severely defeated attempts by its VP Loyola de Palacio in 2003, the 2005 “winter energy panicking” in London and the 2006 Ukrainian gas crisis suddenly permitted the creation of an EU Energy Policy combining Kyoto, Lisbon and Moscow.
Looking somewhat closer to the three cornerstones, Lisbon, Kyoto and Moscow, and their interrelations:
The Lisbon dimension:
A competitive energy market asks per definition for pro-competitive regulation and pro-competitive industry structures. Although directives have been agreed upon and stringent compliance policy is developing with respect to national implementation, member states are free to go further than the requirements in the directives or to come with further details and refinements. This is putting further pressures on the harmonization process as devils are always in the details. The same applies to the role of the NRA’s (national regulatory authorities) that basically have a national focus, not always allowing to look at cross-border issues in the wider EU interest. The more concrete and important actions for border-crossing are found in the EU Regulations. They are however still under control of the member states due to the time consuming and complicated Comitology-process with their qualified majority loading. Industry restructuring can only take place in the context of the EU’s Competition Policy when M&As are on the table or when antitrust cases (“smoking guns”) are at stake.
Lisbon and Moscow, yes, the Competitive Internal Energy Market is the core of the existing EU external SoS policy! There is no doubt on that. But beyond that statement there is silence, lacking concrete visions and strategies. Do we really believe that international open & friendly markets will deliver timely and sufficient upstream infrastructures to ship the gas we think we need? And how about LNG terminals or storages? And how about our internal needs for expanding infrastructures in gas and electricity, including the wider dimensions of “ring” concepts and super-grids? And therefore, asking for a full rethink and an entirely redefined approach? Similar thoughts are coming up for Lisbon and Kyoto, where we see already right now that heavily subsidized RES is complicating and even damaging grid operation and market operation. Will further massive RES-deployment put more strongly pressurize the rest of the EU energy markets and grid management?
The Kyoto dimension
The CO2 market needs to be tightened and EU harmonized to be effective. This calls for a strong and centrally regulated EC-role, including effective monitoring and a centralized auctioning process. This is probably (?) unfeasible with MS comitology, as at least one argument relates to the fiscal sovereignty paradigm. Further calls for a carbon tax or even emission performance standards are adding to the debate. Massive RES requires strong effort to “squeeze” actual EU RES potentials, which can only deliver when there is open access to all EU RES-resources and an open and integrated EU RES market. Today’s RES policy is still however 110% nationalized and politicized by national capitals. The twenties require strong EU deployment of advanced low/zero carbon technologies, on the road towards “2050” strong innovation push & pull programs are necessary, not only requiring massive investments but more so stable and effective regulatory regimes.
Kyoto and Lisbon. Basically the CO2 market is OK, but uncertainties remain as to the longer term assurances of the price of carbon in relation to massive investment needs in RES, Energy Efficiency and low/zero carbon technologies. RES policy is anti-OK, national dreams prevail and are blindly subsidized, pushing efficient RES-deployment out of the market. Kyoto is frustrating Moscow as RES is discouraging upstream investment in gas that is still needed for decades to come. Supply security is therefore not well coordinated with demand security. RES and “clean development mechanisms” could be frankly used as a lever in EU foreign policy. Is that an option, and if so how ?
The Moscow dimension
Our external SoS policy is focussed on “sinking” foreign economies in the large peaceful EU internal market. But what happens if Foreigners do not jump in it? What is the EU reaction. Is there a “No policy” EU policy? EU External SoS policy has NO infrastructure development plan and NO energy long term contracting frame to make deals with foreigners. We are good in words, but lacking concrete means and instruments.
Moscow and Lisbon. EU external SoS policy is so internal market friendly! No doubt! Successful notably by suppressing gas destination clauses. But today the content is mainly “blabla” and the Barosso-group does not sign contracts. Having no clear vision on infrastructure development and long term contracting policy does not help the internal market. And where we have something, we tend to play the wrong game (Nabucco?). Moscow and Kyoto may be moving in directions of making solar-RES and CDM a core part of EU SoS with Mediterranean countries.
Jean-Michel Glachant (FSR), Manfred Hafner (FEEM) and Jacques de Jong (CIEP)
P.S This post is derived from a report on Smart EU Energy Policy. You can download it here.