OXFORDPROSPECT - Searching for common ground

Oil, gas and coal account for 80 per cent of EU energy consumption, with European demand for energy growing by 1 to 2 per cent per annum.

In addition, the role of improving energy efficiency, renewable energy sources, new technology and nuclear power, combined with climate change, raises new challenges that are centre stage in international political, economic and business considerations. This is particularly the case given the extremely long lead times, often two to three decades, required for investment and development in the energy sector.

Europe imports 50 per cent of its energy needs and, barring significant changes, the EU expects this to rise to 65 per cent by 2030. Such growing dependency on imports makes the EU increasingly vulnerable to the damaging effects of dramatic changes in world energy prices.

About half of Europe's gas imports and 30 per cent of its imported oil come from Russia. Moscow's energy giant Gazprom plans to build two new gas pipelines, the Nordstream and Sudstream projects, to supply the EU from its natural gas fields in Siberia. Some analysts are concerned that Gazprom's schemes will damage the EU's energy security by making Europe even more dependent on Russian natural gas. In an effort to counteract this, Brussels is supporting a scheme, led by Austrian energy giant OMV AG, to build the Nabucco pipeline project to link Europe with the gas fields of the Caspian Sea and the Middle East.

Traditionally, energy policy has been seen as a domestic matter, not a European issue. Many would agree that the present situation, where each member state tends to have its own energy separate policy, is ridiculous. A culmination of recent events has made Europe recognise that energy is now an EU issue, and realise that each nation state can no longer, by itself, deal with the energy challenges that face Europe. It has been realised that in order for the EU to achieve its goal of creating a united European economy, integrating its energy sectors is vital in achieving this long-term EU ambition. Member states have to work together, if they are to implement ambitious targets concerned with climate change, promoting domestic sources of energy, improving energy security and opening up Europe's energy markets to free market competition

For Europe not to have a common energy policy means the EU does not have control of its energy destiny and that the present situation is no longer sustainable.

In addition, in formulating an Energy Policy the EU must take into account the effect of energy security issues of potential disruption, both in the long- and short-term, by sabotage, political instability, and speculation by traders on the world's stock markets.

The EU's Common Energy Policy

The launch of the EU's Common Energy Policy in 2007 was a substantial step in the development towards an integrated European energy policy and energy strategy that aims to achieve goals on sustainability, security of supply, competitiveness and provide a framework of policies that will enable European states to coordinate and implement energy policies for the mutual benefit of all. The package of measures necessary to achieve this objective can be divided into three central policies. The first is the creation of a foreign energy policy; the second is a policy promoting indigenous energy supplies and the last objective is the development of an internal energy market.

The development of a foreign energy policy is necessary to provide a more equal relationship between Europe and its suppliers in negotiations, investment and the development of resources. Having a single voice means the EU will have a stronger negotiating position in talks with non-EU suppliers like Russia and OPEC.

The second objective is to promote an indigenous supplies and energy distribution infrastructure. To do this, the EU, working with its member governments, is creating a favourable investment climate that will encourage investors to raise capital and direct investment in EU domestic power supplies that meet European Common Energy objectives.

The third policy is the creation of an internal Europe-wide energy market through integration and liberalisation of member state's electricity and gas markets, together with the development of TENs (Trans-European Energy Networks) designed to link domestic grids together, in order to improve energy security and ideally reduce costs to the consumer.

How we got here?

Between the 1950s and 2007, the EU had a bundle of energy policies. The first were the Treaties involved in setting up the Coal and Steel Community and Euroatom, when Europe imported 20 per cent of its energy, compared with its present 50 per cent. Apart from regular statements by EU political leaders, there was little genuine progress in development towards a comprehensive EU energy policy. It was only in 2007, with the prospect the EU importing 66 per cent of its energy by 2030, that Brussels finally launched a comprehensive and realistic Common Energy Policy.

Achievements

European energy policy has made unequal progress on different fronts. Take liberalisation, European legislation has seen the privatisation of Belgium's Electrabel and the unbundling of Britain's energy suppliers and distribution networks. EU investment in research and development has helped Europe's engineers lead in many aspects of energy technology including nuclear, solar and wind technologies.

As for the task of physically integrating Europe's energy distribution networks, Brussels is implementing an ongoing program of linking member state's energy grids through the construction of new gas and electric grids. We are seeing a Europeanisation of the energy supply industry and its regulation.

For the English consumer, the electricity supplied is just as likely to come from a Welsh wind farm or a French nuclear power station, due to these countries being linked by the TENs. European consumers will eventually see the benefits of the opening up of energy markets, with consumers in some countries able to have a degree of choice of suppliers. As for the players in the market, they are increasingly operating under a European regulatory regime.

What issues does the CEP raise?

Though Europe saw the launch of the Common Energy Policy last year, a great deal of the fine detail has still to be ironed out and issues to be resolved.

For example, politicians deciding on the right degree of liberalisation raises many problems. The aim is to get the balance right between creating the right business climate to encourage investment and yet protect consumer and state interests.

Deciding on the degree of regulation to ensure competitive behaviour is important, as Britain has learnt.

Consumer lobbyist, Alan Asher, CEO Energywatch argues that, in Britain, the businesses have been too much in favour. He observes that over the last decade, since the UK privatised and broke up its energy industry, the level of competition in the UK has declined. Asher argues the British energy market is dominated by the top six suppliers, who behave as a 'comfortable oligopoly'. He sees little incentive for them to compete and as a result only 10 per cent of the UK's electricity is openly traded. The very same question applies to regulators in other European states.

In fact, Britain is not alone in efforts by energy companies to undermine the liberalisation of markets by the EU to competition, often with the collusion of member states governments.

The European Commission is targeting the uncompetitive practices of energy firms, including the operation of illegal cartels, the practice of 15-year contracts that make it unfair for new entrants to enter the market and lastly the active resistance of firms to the separation of production facilities from the distribution networks.

For example, some German and French companies have been actively lobbying against efforts by Brussels to separate their supplier operations from their distribution activities.

However, energy liberalisation is seen by some critics as a threat to improving energy security. It could make it more difficult for investors to raise the required capital needed to build a modern European energy supply industry fit to meet the needs of the EU.

Another related liberalisation problem is national security fears that EU energy assets could fall under the control of hostile non-EU interests who could sabotage the EU's energy industry. There are demands that non-EU businesses, like Gazprom, can only be permitted to own EU energy assets if they meet tough new conditions, including reciprocal access for EU energy companies to operate in their countries.

Concerns have also been raised over issues of economic nationalism and the need to preserve national technological skills. France see its powerful nuclear power industry as a great national achievement, which the French government will do everything in its power to protect from foreign takeover. In Britain, fears have been raised that if France's EDF takes over British Energy, the UK's civil nuclear skills base will be eroded as EDF will seek to award construction contracts to French firms at the expense of UK contractors.

Another issue that concerns EU energy policy makers is the difficult and emotive problem of balancing supply security issues with meeting climate change objectives. Permitting the market, to decide on which type of energy source should be prioritised, can result in solutions contrary to Europe's long-term ambitions. One example is the recent dash for gas-powered stations that worsened the EU dependency on gas imports, making Europe increasingly vulnerable to supply disruption, as the Ukraine experienced, in 2006.

It is very difficult for policy makers to implement decisions when aspects of energy policy have been based on emotional arguments, and not on a rational basis. This would perhaps explain the setting of some very ambitious targets by EU politicians. Hard economic realities are increasingly forcing policy makers to overcome their ideological objections to the use of civil nuclear power as one of the main energy source solutions for achieving the goals set out in the Common Energy Policy.

Currently, rising gas prices combined with supply security concerns are encouraging energy companies located in countries with access to cheap domestically-mined coal to opt for new coal power stations, despite the environmental problems. Already, two-thirds of Germany's new capacity will come from 20 planned coal-powered stations.

What lies ahead for the CEP?

One of the spurs for the Common Energy Policy is the role it plays in aiding the EU's ambitions to fully integrate the economies of the EU.

However, the recent major changes in economic realities, particularly the increases in the price of oil, together with security of supply concerns, appear to be adding to the political pressure for Europe to speed integration of its energy sector, and rebalance the implementation of the Common Energy Policy towards more long-established solutions.

This has led to renewed interest in development of new nuclear and coal-powered stations to mitigate such threats, though as a result of the CEP, such projects tend to be joint European concerns rather than national schemes.

Clearly EU politicians have to take some tough decisions in implementing the CEP. Many compromises will have to be made in the years ahead at the various negotiating tables of EU forums.

Brussels proposes - EDF disposes?

Irrespective of EU energy policy discussions in Brussels, a transformation in Europe's energy financing and the structure is taking place this summer. This is led by France's EDF, the EU's largest nuclear power generator and energy group which, with 85 per cent of its shares owned by the French government, is immune to takeover. Having been frustrated in Italy, EDF has turned to Spain and Britain to expand its dominant position. In April, Spain's Prime Minister Zapatero, said he wanted two Spanish energy companies, Iberola and Gas Natural, to merge in order to prevent a takeover by EDF. Iberola is the world's leader in wind farm technology and has turned to the Spanish courts in an attempt to block the French bid.

In the UK, EDF is one of many suitors eyeing British Energy which has eight operating nuclear power stations and one coal-fired plant. The UK government recently announced it wanted to sell off its 35.2 per cent stake in British Energy to potential buyers including EDF, Germany's RWE, the UK's Centrica and Spain's Iberola. RWE and EDF are reported to have each made bids of around $11bn. A massive amount of capital is required to build a nuclear power station; EDF, with revenues of £40.8bn, can afford to build a demonstration plant to attract further investment from the financial markets, while Centrica, with revenues of only £16.3bn, will find it much harder to raise the required capital.

The UK government has concerns for energy security, and competition is thought to favour a consortium of bids to avoid too much nuclear energy production being in foreign control. The potential bidders are likely to be more interested in new sites, owned by British Energy. Energywatch's Alan Asher is concerned that letting EDF buy British Energy would further reduce the low levels of competition in the energy market. The UK government has indicated it would prefer not to provide guaranteed revenue from regulated prices from new plants and no government subsidy.

Analysts, including Oxford Institute of Energy Studies Malcolm Keay, has suggested that compromises will have to be made and a UK and European consortium will be building the UK's new nuclear power stations to benefit from economies of scales and maintain the UK's civil nuclear skills base. It seems the bidders might be advised to apply for planning permission for new sites rather than existing sites owned by British Energy. Whatever the outcome, the next few months are likely to see great changes in
the energy map of Europe.

Europe's targets - the art of the possible?

Europe has set itself a series of ambitious targets to be achieved by 2020. The first is a 20 per cent reduction in EU greenhouse gas emissions, as compared with 1990 levels. The second is an increase in the use of renewable energy, from the present 7 per cent to 20 per cent of all energy consumed. However, the plan allows flexibility in how each country contributes to the target. The third target is a 20 per cent increase in energy efficiency and, lastly, an increase in the use of biofuels to 10 per cent of all fuel used in transport, from the current 2 per cent.

However, given the political and economic realities, such targets will have to be refined to deal with, for example, growing concerns about biofuel's impact on food prices and the environment. Employer lobbyist, Business Europe, has raised doubts in Brussels about the potential negative economic impact these targets could have on its members unless modified, and concerns about potential redundancies have led the German Chancellor Angela Merkel, to demand that compromises are made on targets on industrial pollution.

In addition, the French government feels that the targets take too little credence of the low carbon emissions produced by the French nuclear power industry that generates 75 per cent of its electricity.

Poland produces 96 per cent of its electricity from domestic coal and Warsaw is concerned that, when power companies have to pay the full price for carbon permits in 2013, this will result in politically unpopular price increases.

In effect, analysts are suggesting that some of the targets set are unrealistic and not viable both politically and economically. The Confederation of British Industry supports the setting of targets for reducing emissions, in part because they like certainty that they can plan for. However, they disagree over the setting of renewable targets because this prejudges the best and most cost-effective means for cutting carbon emissions. The CBI argues that investment in the insulation of buildings, better heating controls and the construction of a new generation of nuclear power stations is a more viable solution.

Many problems will need to be resolved but the EU has made substantial progress. Perhaps the future looks bright?