1. Energy in Europe A necessity for all economic and human activity

2. Energy and other EU policies Energy EnvironmentSEMTransportTENsCompetition3 rd countriesEnlargementTaxR&D

3. Three pillars of EU energy policy COMPETITIVENESS complete single energy market cut Europe’s energy bill create jobs boost R&D and create markets in which EU can become a global leader SECURITY OF SUPPLY reduce Europe’s dependence on energy imports help balance trade SUSTAINABILITY reduce environmental degradation and greenhouse gas emissions increase energy efficiency increase role for renewables

4. Shifting Priorities 1951–73: balanced supplies and competition 1973–85: security issues dominant 1985– : market-led but increasingly complicated by emerging environmental concerns 21 st - security resurgence? Environmental issues strong. Competition to be completed

5. Medium term objectives: 20/20/20 By 2020 o European greenhouse gas emissions (GHG) 20% below 1990 levels o Renewable share to increase to 20% of EU energy consumption (currently about 13% but varies across member states) o EU energy efficiency to increase 20% By 2030 o GHG emissions 40% below 1990 levels by 2030 o Minimum 27% of renewables in energy consumption o Increased energy efficiency of 27% Long term objectives: Energy Roadmap for 2050 o GHG emissions to be 80–95% below 1990 levels

6. The competitive pillar: the case of the single electricity market

7. “Electricity should, as far as possible, flow between Member States as easily as it flows within Member States ” European Commission, ‘Medium Term Vision for the Internal Electricity Market’, 2004

8. Why electricity (1)? Key inputs for many businesses – costs, competitiveness Fracking has given US business an advantage Source: International Energy Agency

9. Why electricity (2)? Traditionally, a very regulated market An example of potential transformative power of liberalisation but results disappointing EU electricity market worth approximately 5% of EU GDP – an important sector in its own right Big integrationist role → TENs and deregulation General and sectoral specific aspects to liberalisation – some highly technical

10. Problems with liberalising electricity A strategic sector Markets closed and heavily regulated pre-SEM o regional or national monopolies o mostly state – some private monopolies Resistance of incumbents Public service obligations End of long term contracts? investment impact? All stages of electricity production seen as ‘natural monopoly’ – i.e. from generation through to supply

12. Why liberalisation breakthrough? ‘Natural monopolies’ view eroded via disaggregation of activities and liberalisation in some states – e.g. electricity: o generation (production) o transmission (long distance, high voltage transport) – tends to remain monopoly activity o distribution (last stage, low voltage transport to end user) o supply (trading) – e.g. sales, metering, etc.

13. Three electricity packages Classical SEM/liberalisation rationale o end of closed national markets → competition, choice, competitiveness and lower prices

14. First two Electricity Directives Stage 1: 1996 Directive – ⅓ market to be open by 2003 By 2001 – 66% of EU market open o from 100% in UK, Finland, Sweden, Germany etc. to less than 5% in France, Ireland, Portugal, Greece Stage 2: 2003 Directive Deadlines for full opening of market o 1 July 2004 for all business customers o 1 July 2007 for households Other technical measures to help market operate more effectively

15. Stage 3 Response to poor results from first two stages and 2007 Commission inquiry into competition in gas and electricity markets: o overly concentrated markets – 3 biggest generators had >60% of market in 20 member states o insufficient integration between member states – infrastructure and regulation o lack of transparent market information – not enough switching o inadequate unbundling between network and supply interests o customers tied to suppliers via long term downstream contracts

16. Key features of 3 rd package 3 March 11 – target date for transposing of package into member state law (not met) 5 highly technical legal acts 1.Unbundling – separation of transmission networks from supply and generation o solves conflicts of interest – prevents network operators favouring their own energy production and supply companies o 3rd country aspect – 3 rd country wishing to acquire interest in or control over an EU network will have to comply with same unbundling requirements as EU companies – aimed at Gazprom?

17. 2.Regulation: o must be truly independent from industry and government o statutory powers and duties to be strengthened: decisions will be binding on companies and will have power to impose penalties o will be required to co-operate with regulators from other member states 3.Agency for the Co-operation of Energy Regulators (ACER) set up o not a European regulator but provides framework for co- operation among national regulators o some powers for cross-border issues  e.g. exemption requests for infrastructure projects involving more than 1 member state

18. 4.new European network for Transmission System Operators (TSOs) o to develop common commercial and technical codes and security standards 5.Consumer protection o to strengthen and increase transparency of retail markets Commission also showing increased willingness to use competition policy instruments to prise open energy markets  e.g. 2008 investigation into E.On’s alleged restrictive practices

19. Need to increase trade Electricity trade exists but constrained by inadequate interconnections – reduces competition possibilities o Matter of physical infrastructure o Question of regulation of cross-border trade Import capacity less than 10% of installed capacity – France, Greece, Ireland, Italy, Portugal, Spain, UK (Germany – 11%)

20. Competition – the future? More Commission legal challenges to open markets properly Utilities – one of least internationalised sectors – liberalisation is changing this M&A activity and restructuring to continue – has been intense and can raise competition issues Electricity changes to be mirrored by gas – more slowly Cannot be separated from other energy policy concerns – environment and security

21. Security of supply

22. What is energy security? – an umbrella term Source: Cambridge Energy Research Associates

23. Energy security? Stakeholder perspectives o Consumers: enough supply to meet demand at reasonable prices without interruption o Producing countries: security of demand and revenue o Oil and gas companies: access to new reserves ability to develop new infrastructure; stable investment regimes o Policy makers: supply disruption risks; security of infrastructure; geopolitical concerns

24. Energy insecurity growing Declining indigenous production – all fuels Increased demand from China, India, etc. EU dependence on energy imports steadily increasing for decades 19902000201020202030 Solid fuels – e.g. coal17.430.137.450.865.7 Oil and oil products80.976.581.486.188.5 Natural gas47.649.561.475.381.4 Total44.847.153.362.167.5 Source: European Commission Energy and transport outlook to 2030

25. Energy import dependency by member state, 2013 Source: Eurostat energy database % Wide variation in import dependency among member states

26. European import dependency Europe’s dependence on energy imports to increase further in next 10–20 years Increasing dependency on Middle East (oil) and Russia (gas) potential for commercial/political blackmail  Ukraine gas: 2006, 08 and 2009  Belarus gas: 2010 political instability/conflict – e.g. Russia–Ukraine conflict and turmoil in Middle East

27. What is the energy security problem? Will Europe become more and more dependent on countries it does not trust for its energy supplies? Will Europe be able to obtain oil and gas supplies? Will the carbon emitted in the burning of these fuels create unsustainable global climatic trends?

28. Policy response: 1. Promote essential infrastructure Baltic interconnection Develop Southern Gas Corridor from Caspian and Middle East – (i.e. bypass Russia) Develop LNG capacity – important for member states dependent on one supplier Mediterranean energy ring – link Europe with southern Mediterranean Vast solar and wind potential North–South gas and electricity links with Central and South-East Europe North Sea offshore grid – connect national grids and plug in offshore wind projects

29. Policy response: 2. Greater focus on international relations Improve physical, commercial and political links with key external suppliers: o Norway o Russia o Caspian countries o OPEC 2006 European Energy Community – extend SEM and other energy initiatives to Balkans Recognise common producer and consumer interests

30. Examples of EU–Russia tension: interplay between economics and geopolitics Earlier Ukrainian and Belarusian gas crises have hardened Western attitudes Tensions between Moscow and Estonia, Lithuania, Poland and others Russian reluctance to ratify the Energy Charter has sparked interest in alternative transport routes Forced sale/renegotiation of license held by Western firms Fears of Russia’s supply chain Ukraine – impact of sanctions and uncertain long term outcome of the dispute

31. Policy response: 3. Promotion of energy efficiency Improve efficiency – reduce consumption – helps security and shows interaction of 3 pillars Myriad of initiatives o Buildings o Labelling o R&D o Finance 20:20:20 and 2050 Energy Roadmap

32. Policy response: 4. Greater use of indigenous supply Role of coal and nuclear? Future of fracking in Europe? Greatest potential = renewables o Currently c. 10–13% EU final energy consumption o 20% of total energy consumption by 2020 and 27% by 2030

33. Environment

34. Sustainability Helps security of supply Energy central to many environmental issues and the subject of key initiatives o Emissions trading schemes o Promotion of energy efficiency o Carbon capture and storage o Energy technology innovation o Increased use of renewables

35. Renewable energy as % of total consumption

36. Benefits of 20% energy savings target by 2020 Source: European Commission estimates