After all the hype and expectation the European Commission has published its long-awaited Strategic Energy Review and the results of its investigation into market competition. But thanks in part to the numerous briefings by the both the energy and competition commissioners last year and the leaking of the major proposals contained in the reports prior to their publication there were no surprises when the reports were finally unveiled on 10 January.
The Review addresses the three areas perceived as essential to the medium and long-term future of Europe’s geographically expanding energy market: climate change; supply security and competition. On climate change the Review recommends a cut of 20% in emissions below 1990 levels by 2020, new coal-fired power stations to include carbon capture and storage by 2020 with existing coal plant progressively converted to include CCS, also by 2020, and a target for 20% of EU energy to be sourced from renewables by 2020.
From the Review it is clear that the Commission has identified 2020 as a key target year yet apart from being the start of a new decade the year holds little significance. It is likely that a second Kyoto commitment period would only last five years, ending in 2017, while the Large Combustion Plant Directive entering into force next year would also have run its course. Moreover it seems the significance of 2020 is due more to the fact that the deadline is perceived as being far enough in the future for the Commission to achieve its targets.
But even allowing for a long-off deadline it is likely that the targets will be challenging. With the EU25 likely to struggle to achieve its meagre 8% emissions cut target by 2012, particularly with an underperforming Emissions Trading Scheme, there will need to be a more concerted effort across all member states to achieve the 20% target. The Commission obviously believes this target can be achieved through the increase in renewables to 20% of generation and the adoption of CCS, but both these targets are equally challenging, and more so that of CCS.
With CCS being such a new and still largely unproven technology there will be a race to sufficiently develop the technology to meet the deadline, and if this development process is delayed it could restrict new coal fired plant and inject a supply security risk. And the increasing reliance on renewables could also impair supply security, particularly if most of this renewable investment is in the intermittent generation technology of wind power.
As such it is surprising that the Review does not provide any support for nuclear. Although last November’s IEA World Energy Outlook advocated nuclear energy as valuable in meeting supply security and mitigating emissions the Commission seems strangely content to sit on the fence, saying nuclear is a decision for individual member states. But while the generation mix should rightly be the decision of member states the Commission has still set member states a renewables target and set the parameters for new coal-fired investment. If the Commission wants to be seen as driving the energy and emissions market forward it has to take an unequivocal stand on nuclear. To do otherwise will only raise questions about its integrity and its authority.
On security the Review recommends a series of priority interconnections to enhance internal supply security, but it is external supply security that poses the greatest risks. If the external threat was not clear enough the publication of the review coincided with another energy rift involving Russia, this time leading Moscow to cut off oil exports to Europe through the Druzhba pipeline after Moscow accused Belarus of siphoning off oil from the pipeline. As with last January’s gas dispute with Ukraine an agreement between Moscow and Minsk was quickly achieved, but the fact that Moscow was so trigger happy to cut exports should cause concerns in Brussels. With the EU facing increased oil and gas dependence on Russia over the coming years it surely has to change its approach away from reliance on Russia and towards more diverse external energy supplies.
Aside from the key issues of climate change and supply security it was the address of competition, both in the Review and competition commissioner Neelie Kroes report, that really caught the headlines. The Review recommends a single EU energy regulator or a network of national regulators to meet Europe’s energy requirements, yet it is difficult to see what benefit a central (or de facto federal) energy regulator would achieve. Aside from the fact that the recommendation would not pass a vote of member states it shows a level of näivety towards market regulation. While it is accepted, as the Review notes, that there are some weak energy regulators the Commission should work to remedy this weakness and not remove regulation to Brussels.
But it is the comments of Kroes that really underline the weakness of the Commission in directing and managing Europe’s energy market. Kroes believes that unbundling of market infrastructure ownership is key to developing a competitive market. While she is right the question to be asked is why the Commission is only now identifying this issue. Unbundling provisions already exist in the competition directives yet these have never been enforced. It is difficult to see what will change now.
The problems with energy market competition, or the lack of it, have been painfully transparent for years, yet it has seemingly taken Kroes and her team 16 months to reach this conclusion. Why? Kroes argues there is too much market concentration, which she says is adversely affecting competition, yet this is the same person who last year argued in favour of European champion utilities as the best route to a competitive market. But European champions are evolved through market concentration.
Since Kroes took office there has been a number of mergers and acquisitions, which she has personally sanctioned, and while the Commission acquired the power to break up companies that violate competition rules in 2004 these powers have never been used. It is all very well Kroes proclaiming she will use these competition powers in future but most of the major consolidation in the EU-15 energy market has already been concluded.
It used to be the case that the Commission published its benchmarking report in January to assess the development of market competition. Last year this was abandoned in favour of the Review. Since then competition has stagnated and there is little chance of the Commission’s full gas and electricity competition deadline of July this year being met.
The recommendations outlined in the report are not flawed, and if fully enacted would benefit Europe’s sprawling energy market in all three of its objectives, but they are too idealistic. Markets are best developed through market forces, not through idealistic targets. But perhaps the comfort zone for this Commission is that by the time of the 2020 deadlines a new Commission will have been elected, together with a raft of new heads of EU member states. There is nothing wrong with long-term targets providing they are supplemented by interim targets and in this respect the Commission’s Review is sadly lacking.
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